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EX-10.6 - EXHIBIT 10.6 - Federal Home Loan Bank of Topekaex123115106.htm
EX-3.2 - EXHIBIT 3.2 - Federal Home Loan Bank of Topekaexhibit12311532.htm
EX-31.1 - EXHIBIT 31.1 - Federal Home Loan Bank of Topekaex123115311.htm
EX-99.3 - EXHIBIT 99.3 - Federal Home Loan Bank of Topekaex123115993.htm
EX-32 - EXHIBIT 32 - Federal Home Loan Bank of Topekaex12311532.htm
EX-12.1 - EXHIBIT 12.1 - Federal Home Loan Bank of Topekaex123115121.htm
EX-99.2 - EXHIBIT 99.2 - Federal Home Loan Bank of Topekaex123115992.htm
EX-24.1 - EXHIBIT 24.1 - Federal Home Loan Bank of Topekaex123115241.htm
EX-14.1 - EXHIBIT 14.1 - Federal Home Loan Bank of Topekaex123115141.htm
EX-31.2 - EXHIBIT 31.2 - Federal Home Loan Bank of Topekaex123115312.htm
EX-10.16 - EXHIBIT 10.16 - Federal Home Loan Bank of Topekaex1231151016.htm
EX-99.1 - EXHIBIT 99.1 - Federal Home Loan Bank of Topekaex123115991.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-K
 
x      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $100 per share par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ¨ Yes  x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  ¨ Yes  x No

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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
March 8, 2016
Class A Stock, par value $100 per share
1,818,364
Class B Stock, par value $100 per share
12,682,961

Registrant’s common stock is not publicly traded and is only issued to members of the registrant. Such stock is issued, redeemed and repurchased at par value, $100 per share, with all issuances, redemptions and repurchases subject to the registrant’s capital plan as well as certain statutory and regulatory requirements. As of June 30, 2015, the aggregate par value of stock held by current and former members of the registrant was $1,307,770,500, and 13,077,705 total shares were outstanding as of that date.

Documents incorporated by reference:  None





.FEDERAL HOME LOAN BANK OF TOPEKA
TABLE OF CONTENTS
PART I 
 
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
PART IV
 
 
Item 15.
Exhibits, Financial Statement Schedules




Important Notice about Information in this Annual Report

In this annual report, unless the context suggests otherwise, references to the “FHLBank,” “FHLBank Topeka,” “we,” “us” and “our” mean the Federal Home Loan Bank of Topeka, and “FHLBanks” mean all the Federal Home Loan Banks, including the FHLBank Topeka.

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

The product and service names used in this annual 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 annual report are the property of their respective owners.

Special Cautionary Notice Regarding Forward-looking Statements

The information in this Form 10-K 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 U.S. and global economy as well as the mortgage, housing and capital markets;
Changes in demand for FHLBank products and services or consolidated obligations of the FHLBank System;
Effects of derivative accounting treatment and other accounting rule requirements, or changes in such requirements;
The effects of amortization/accretion;
Gains/losses on derivatives or on trading investments and the ability to enter into effective derivative instruments on acceptable terms;
Volatility of market prices, interest rates and indices and the timing and volume of market activity;
Membership changes, including changes resulting from member failures or mergers, changes in the principal place of business of members or changes in the Federal Housing Finance Agency (Finance Agency) regulations on membership standards;
Our ability to declare dividends or to pay dividends at rates consistent with past practices;
Soundness of other financial institutions, including FHLBank members, non-member borrowers, counterparties, and the other FHLBanks;
Changes in the value or liquidity of collateral underlying advances to FHLBank members or non-member borrowers or collateral pledged by reverse repurchase and derivative counterparties;
Competitive forces, including competition for loan demand, purchases of mortgage loans and access to funding;
The ability of the FHLBank to introduce new products and services to meet market demand and to manage successfully the risks associated with all products and services;
The ability of the FHLBank to keep pace with technological changes and the ability to develop and support technology and information systems, including the ability to securely access the internet and internet-based systems and services, sufficient to effectively manage the risks of the FHLBank’s business;
The ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the FHLBank has joint and several liability;
Changes in the U.S. government’s long-term debt rating and the long-term credit rating of the senior unsecured debt issues of the FHLBank System;
Changes in the fair value and economic value of, impairments of, and risks associated with, the FHLBank’s investments in mortgage loans and mortgage-backed securities (MBS) 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®) Program). “Mortgage Partnership Finance,” “MPF,” and “MPF Xtra” are registered trademarks of the FHLBank of Chicago.

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.”


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All forward-looking statements contained in this Form 10-K 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: Business

General
One of 11 FHLBanks, FHLBank Topeka is a federally chartered corporation organized on October 13, 1932 under the authority of the Federal Home Loan Bank Act of 1932, as amended (Bank Act). Our primary business is making collateralized loans and providing other banking services to member institutions (members) and certain qualifying non-members (housing associates). We are a cooperative owned by our members and are generally limited to providing products and services only to those members. Each FHLBank operates as a separate corporate entity with its own management, employees, and board of directors. We are exempt from federal, state, and local taxation, except for real property taxes. We do not have any wholly- or partially-owned subsidiaries and do not have an equity position in any partnerships, corporations, or off-balance sheet special purpose entities.

We 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.

Any federally insured depository institution, insurance company, or community development financial institution (CDFI) certified by the CDFI fund, whose principal place of business is located in Colorado, Kansas, Nebraska, or Oklahoma is eligible to become one of our members. Except for community financial institutions (CFIs), applicants for membership must demonstrate they are engaged in residential housing finance or otherwise support our housing mission, and have a significant business presence in our district. CFIs are defined in the Housing and Economic Recovery Act of 2008 (Recovery Act) as those institutions that have, as of the date of the transaction at issue, less than a specified amount of average total assets over the three years preceding that date (subject to annual adjustment by the Finance Agency director based on the consumer price index). For 2015, this asset cap was $1.1 billion.

Our members are required to purchase and hold our capital stock as a condition of membership, and only members are permitted to purchase capital stock. All capital stock transactions are governed by our capital plan, which was developed under, is subject to, and operates within specific regulatory and statutory requirements.

Member institutions own nearly all of our outstanding capital stock and may receive dividends on that stock. Former members own capital stock as long as they have outstanding business transactions with us. A member must own capital stock in the FHLBank based on the member’s total assets, and each member may be required to purchase activity-based capital stock as it engages in certain business activities with the FHLBank, including advances and Acquired Member Assets (AMA). As a result of these stock purchase requirements, we conduct business with related parties in the normal course of business. For disclosure purposes, we include in our definition of a related party any member institution (or successor) that is known to be the beneficial owner of more than five percent of any class of our voting stock and any person who is, or at any time since the beginning of our last fiscal year (January 1 for the FHLBanks) was, one of our directors or executive officers, among others. Information on business activities with related parties is provided in Tables 85 and 86 under Item 12 – “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

Our business activities include providing collateralized loans, known as advances, to members and housing associates, and acquiring residential mortgage loans from members. By law, only certain general categories of collateral are eligible to secure FHLBank obligations. We also provide members and housing associates with letters of credit and certain correspondent services, such as safekeeping, wire transfers, derivative intermediation, and cash management.

Finance Agency regulations require that our strategic business plan describes how our business activities will achieve our mission, consistent with the Finance Agency’s core mission asset (CMA) guidance. Our strategic business plan includes a balance sheet management strategy consistent with this guidance, which includes emphasis on the issuance of advances and acquisition of member mortgage loans through the MPF Program. Our ratio of average advances and average mortgage loans to average consolidated obligations (CMA ratio) utilizing net balances as outlined in our strategic plan was 79 percent as of December 31, 2015. We generally intend to maintain the CMA ratio within the range of 70 to 80 percent, which exceeds the Finance Agency's recommended minimum ratio of 70 percent utilizing par balances. 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 may be unable to maintain the ratio at this level indefinitely.


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See “Legislative and Regulatory Developments” under this Item 1 for further information on benchmarks suggested by the Finance Agency.

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 viewed the FHLBanks’ consolidated obligations as “Federal agency” debt. As a result, the FHLBanks have historically 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.

Standard & Poor’s (S&P) and Moody’s Investor Service (Moody’s) base their ratings of the FHLBanks and the debt issues of the FHLBank System in part on the FHLBanks’ relationship with the U.S. government. S&P currently rates the long-term credit ratings on the senior unsecured debt issues of the FHLBank System and all 11 FHLBanks (including FHLB Topeka) at AA+. S&P rates all FHLBanks and the FHLBank System’s short-term debt issues at A-1+. S&P’s rating outlook for the FHLBank System’s senior unsecured debt and all 11 FHLBanks is stable. Moody’s has affirmed the long-term Aaa rating on the senior unsecured debt issues of the FHLBank System and the 11 FHLBanks and a short-term issuer rating of P-1, with a rating outlook of stable for senior unsecured debt.

On May 31, 2015, the FHLBank of Des Moines and the FHLBank of Seattle completed the merger that was announced on July 31, 2014. As a result of this merger, there are now 11 district FHLBanks in the FHLBank System.

Business Segments
We do not currently manage or segregate our operations by business or geographical segment.

Advances
We make advances to members and housing associates based on the security of their residential mortgages and other eligible collateral. A brief description of our standard advance product offerings is as follows:
Line of credit advances are variable rate, non-amortizing, prepayable, revolving line products that provide an alternative to the purchase of Federal funds, brokered deposits or repurchase agreement borrowings;
Short-term fixed rate advances are non-amortizing, non-prepayable loans with terms to maturity from 3 to 93 days;
Regular fixed rate advances are non-amortizing loans, prepayable potentially with a fee, with terms to maturity from 94 days to 360 months;
Symmetrical fixed rate advances are non-amortizing loans with terms to maturity from 94 days to 360 months, prepayable with a fee but the borrower also has the contractual ability to realize a gain from the market movement of interest rates upon prepayment;
Adjustable rate advances are non-amortizing loans with terms to maturity from 4 to 180 months, which are: (1) prepayable with a fee on interest rate reset dates, if the variable interest rate is tied to any one of a number of standard indices including the London Interbank Offered Rate (LIBOR), Treasury bills, Federal funds, or Prime; or (2) prepayable without a fee if the variable interest rate is tied to one of our short-term fixed rate advance products;
Callable advances can have a fixed or variable rate of interest for the term of the advance and contain an option(s) that allows for the prepayment of the advance without a fee on specified dates, with terms to maturity of 12 to 360 months for fixed rate loans or terms to maturity of 4 to 180 months for variable rate loans;
Amortizing advances are fixed rate loans with terms to maturity of 12 to 360 months, prepayable with a fee, that contain a set of predetermined principal payments to be made during the life of the advance;
Convertible advances are non-amortizing, fixed rate loans with terms to maturity of 12 to 180 months that contain an option(s) that allows us to convert the fixed rate advance to a prepayable, adjustable rate advance that re-prices monthly based upon our one-month short-term, fixed rate advance product. Once we exercise our option to convert the advance, it can be prepaid without a fee on the initial conversion date or on any interest rate reset date thereafter;
Forward settling advance commitments lock in the rate and term of future funding of regular and amortizing fixed rate advances up to 24 months in advance;
Member option advances are fixed rate advances that provide the member with an option to prepay without a fee at specific intervals throughout the life of the advance and are issued at a discount to reflect the cost of that option;
Structured advances are advances with an embedded cap, floor, or collar; and
Standby credit facilities are variable rate, non-amortizing, prepayable, revolving standby credit lines that provide the ability to draw advances after normal cutoff times.


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Customized advances may be created on request, including advances with embedded floors and caps. All embedded derivatives in customized advances are evaluated to determine whether they are clearly and closely related to the advances. See Notes 1 and 8 in the Notes to Financial Statements under Item 8 for information on accounting for embedded derivatives. The types of derivatives used to hedge risks embedded in our advance products are indicated in Tables 61 and 62 under Item 7A – “Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk Management.”

We also offer a variety of specialized advance products to address housing and community development needs. The products include advances priced at our cost of funds plus reasonable administrative expenses. These advance products address needs for low-cost funding to create affordable rental and homeownership opportunities, and for commercial and economic development activities, including those that benefit low- and moderate-income neighborhoods. Refer to Item 1 – “Business – Other Mission-Related Activities” for more details.

In addition to members, we also make advances to housing associates. To qualify as a housing associate, the applicant must: (1) be approved under Title II of the National Housing Act of 1934; (2) be a chartered institution having succession; (3) be subject to the inspection and supervision of some governmental agency; (4) lend its own funds as its principal activity in the mortgage field; and (5) have a financial condition that demonstrates that advances may be safely made. Housing associates are not subject to certain provisions of the Bank Act that are applicable to members, such as the capital stock purchase requirements, but the same regulatory lending requirements generally apply to them as apply to members. Restrictive collateral provisions apply if the housing associate does not qualify as a state housing finance agency (HFA). We currently have three housing associates as customers and all three are state HFAs.

At the time an advance is originated, we are required to obtain and maintain a security interest in sufficient collateral of the borrower eligible in one or more of the following categories:
Fully disbursed, whole first mortgages on 1-4 family residential property or securities representing a whole interest in such mortgages;
Securities issued, insured or guaranteed by the U.S. government, U.S. government agencies and mortgage GSEs including, without limitation, MBS issued or guaranteed by Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) or Government National Mortgage Association (Ginnie Mae);
Cash or deposits in an FHLBank;
Other acceptable real estate-related collateral, provided such collateral has a readily ascertainable market value and we can perfect a security interest in such property (e.g., privately issued collateralized mortgage obligations (CMOs), mortgages on multifamily residential real property, second mortgages on 1-4 family residential property, mortgages on commercial real estate); or
In the case of any CFI, secured loans to small business, small farm and small agri‑business or securities representing a whole interest in such secured loans.

As additional security for a member’s indebtedness, we have a statutory lien upon that member’s FHLBank stock. Additional collateral may be required to secure a member’s or housing associate’s outstanding credit obligations at any time (whether or not such collateral would be eligible to originate an advance), at our discretion.

The Bank Act affords any security interest granted to us by any of our members, or any affiliate of any such member, priority over the claims and rights of any party, including any receiver, conservator, trustee, or similar party having rights of a lien creditor. The only exceptions are claims and rights held by actual bona fide purchasers for value or by parties that are secured by actual perfected security interests, and provided that such claims and rights would otherwise be entitled to priority under applicable law. In addition, our claims are given certain preferences pursuant to the receivership provisions in the Federal Deposit Insurance Act. Most members provide us a blanket lien covering substantially all of the member’s assets and consent for us to file a financing statement evidencing the blanket lien. Based on the blanket lien, the financing statement and the statutory preferences, we normally do not take control of collateral, other than securities collateral, pledged by blanket lien borrowers. We take control of all securities collateral through delivery of the securities to us or to an approved third‑party custodian. With respect to non‑blanket lien borrowers (typically insurance companies, CDFIs, and housing associates), we take control of all collateral. In the event that the financial condition of a blanket lien member warrants such action because of the deterioration of the member’s financial condition, regulatory concerns about the member or other factors, we will take control of sufficient collateral to fully collateralize the member’s indebtedness to us.

Table 11 under Item 7 – "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations" presents the amount of total interest income contributed by our advance products. Tables 25 and 26 under Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” present information on our five largest borrowers as of December 31, 2015 and 2014 and the accrued interest income associated with the five borrowers providing the highest amount of interest income for the years ended December 31, 2015 and 2014.


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Mortgage Loans
We purchase various residential mortgage loan products from participating financial institutions (PFIs) under the MPF Program, a secondary mortgage market structure created and maintained by FHLBank of Chicago. Under the MPF Program, we invest in qualifying 5‑ to 30‑year conventional conforming and government‑insured or guaranteed (by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), the Rural Housing Service of the Department of Agriculture (RHS) and the Department of Housing and Urban Development (HUD)) fixed rate mortgage loans on 1-4 family residential properties. These portfolio mortgage products, along with residential loans sold under the MPF Xtra product, where the PFI sells a loan under the MPF Program structure to Fannie Mae, collectively provide our members an opportunity to further their cooperative partnership with us.

The MPF Program helps fulfill our housing mission and provides an additional source of liquidity to FHLBank members that choose to sell mortgage loans into the secondary market rather than holding them in their own portfolios. MPF Program portfolio mortgage loans are considered AMAs, a core mission activity of the FHLBanks, as defined by Finance Agency regulations.

Allocation of Risk: The MPF Program is designed to allocate risks associated with residential mortgage loans between us and the PFIs. PFIs have direct knowledge of their mortgage markets and have developed expertise in underwriting and servicing residential mortgage loans. By allowing PFIs to originate residential mortgage loans, whether through retail or wholesale operations, and to retain or sell servicing rights of residential mortgage loans, the MPF Program gives control of those functions that mostly impact credit quality to PFIs. We are responsible for managing the interest rate, prepayment and liquidity risks associated with holding residential mortgage loans in portfolio.

Under the Finance Agency’s AMA regulation, the PFI must “bear the economic consequences” of certain losses with respect to a master commitment based upon the MPF product and other criteria. To comply with these regulations, MPF purchases and fundings are structured so the credit risk associated with MPF loans is shared with PFIs (excluding the MPF Xtra product). The master commitment defines the pool of MPF loans for which the CE obligation is set so the risk associated with investing in such a pool of MPF loans is equivalent to investing in an AA-rated asset. As a part of our methodology to determine the amount of CE obligation necessary, we analyze the risk characteristics of each residential mortgage loan using a model licensed from a Nationally Recognized Statistical Rating Organization (NRSRO). We use the model to evaluate loan data provided by the PFI as well as other relevant information.

For MPF portfolio products involving conventional mortgage loans, PFIs assume or retain a portion of the credit risk. Subsequent to any private mortgage insurance (PMI), we share in the credit risk of the loans with the PFI. We assume the first layer of loss coverage as defined by the First Loss Account (FLA). If losses beyond the FLA layer are incurred for a pool, the PFI assumes the loan losses up to the amount of the CE obligation, or supplemental mortgage insurance (SMI) policy purchased to replace a CE obligation or to reduce the amount of the CE obligation to some degree, as specified in a master commitment agreement for each pool of conventional mortgage loans purchased from the PFI. The CE obligation provided by the PFI ensures they retain a credit stake in the loans they sell and PFIs are paid a CE fee for managing this credit risk. In some instances, depending on the MPF product type (see Table 1), all or a portion of the CE fee may be performance‑based. Any losses in excess of our responsibility under the FLA and the member’s CE obligation or SMI policy for a pool of MPF loans are our responsibility. All loss allocations among us and our PFIs are based upon formulas specific to pools of loans covered by a specific MPF product and master commitment (see Table 2). PFIs’ CE obligations must be fully collateralized with assets considered eligible under our collateral policy. See Item 1 – “Business – Advances” for a discussion of eligible collateral.

There are four MPF portfolio products from which PFIs currently may choose (see Table 1). MPF Original, MPF 125, and MPF Government are closed loan products in which we purchase loans acquired or closed by the PFI. Under these MPF portfolio products, the PFI performs all traditional retail loan origination functions. As mentioned above, the fourth product, MPF Xtra product is essentially a loan sale from the PFI to FHLBank of Chicago (Fannie Mae seller‑servicer), and simultaneously to Fannie Mae. We collect a counterparty fee for our PFI participating in the MPF Xtra product.

The MPF portfolio products involving conventional mortgage loans are termed credit‑enhanced products, because we share in the credit risk of the loans (as described above) with the PFIs. The MPF Government and Xtra products do not have a first loss and/or credit enhancement structure.

Table 11 under Item 7 – "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations" presents the amount of total interest income contributed by our mortgage loan products. Table 27 under Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” presents the outstanding balances of mortgage loans sold to us, net of participations, from our top five PFIs and the percentage of those loans to total mortgage loans outstanding.


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PFI Eligibility: Members and housing associates may apply to become PFIs. We review the general eligibility of the member, its servicing qualifications, and its ability to supply documents, data, and reports required to be delivered by PFIs under the MPF Program. A Participating Financial Institution Agreement provides the terms and conditions for the sale or funding of MPF loans by PFIs, including required CE obligations, and establishes the terms and conditions for servicing MPF loans. All of the PFI’s CE obligations under this agreement are secured in the same manner as the other obligations of the PFI under its regular advances agreement with us. We have the right under the advances agreement to request additional collateral to secure the PFI’s MPF CE obligations and cover repurchase risk.
 
MPF Provider: FHLBank of Chicago serves as the MPF Provider for the MPF Program. They maintain the structure of MPF residential loan products and the eligibility rules for MPF loans, including MPF Xtra loans, which primarily fall under the rules and guidelines provided by Fannie Mae. In addition, the MPF Provider manages the pricing and delivery mechanism for MPF loans and the back‑office processing of MPF loans in its role as master servicer and program custodian. The MPF Provider has engaged Wells Fargo Bank N.A. as the vendor for master servicing and as the primary custodian for the MPF Program. We utilize the capability under the individual FHLBank pricing option to change the pricing offered to our PFIs for all MPF products, but any pricing changes made affect all delivery commitment terms and loan note rates in the same amount for all PFIs.
 
The MPF Provider publishes and maintains the MPF Origination, Underwriting, and Servicing Guides and the MPF Xtra Guide, all of which detail the requirements PFIs must follow in originating, underwriting or selling and servicing MPF loans. As indicated, under the MPF Xtra product, we are a conduit that PFIs use to sell loans to FHLBank of Chicago, then simultaneously to Fannie Mae. We began offering the MPF Xtra product in 2012, primarily to expand our use of balance sheet management tools available to us. The MPF Xtra product allows our PFIs to take advantage of the differences between the risk‑based capital costs associated with the CE feature on MPF portfolio products compared to loan level price adjustments that exist with MPF Xtra. The MPF Provider maintains the infrastructure through which we can fund or purchase MPF loans through our PFIs. In exchange for providing these services, we pay the MPF Provider a transaction services fee, which is based upon the unpaid principal balances (UPB) before any charge-offs of MPF loans funded since January 1, 2004. Beginning in 2016, we will also pay a fixed service cost on a quarterly basis.

MPF Servicing: PFIs selling residential mortgage loans under the MPF Program may either retain the servicing function or transfer it and the servicing rights to an approved PFI servicer. If a PFI chooses to retain the servicing function, they receive a servicing fee. PFIs may utilize approved subservicers to perform the servicing duties. If the PFI chooses to transfer servicing rights to an approved third‑party provider, the servicing is transferred concurrently with the sale of the residential mortgage loan with the PFI receiving a servicing‑released premium. The servicing fee is paid to the third‑party servicer. All servicing‑retained and servicing‑released PFIs are subject to the rules and requirements set forth in the MPF Servicing Guide. Throughout the servicing process, the master servicer monitors PFI compliance with MPF Program requirements and makes periodic reports to the MPF Provider.

Mortgage Standards: The MPF Program has adopted ability‑to‑repay and safe harbor qualified mortgage requirements for all mortgages with loan application dates on or after January 10, 2014. PFIs are required to deliver residential mortgage loans that meet the eligibility requirements in the MPF Guides. The eligibility guidelines in the MPF Guides applicable to the conventional mortgage loans in our portfolio are broadly summarized as follows:
Mortgage characteristics: MPF loans must be qualifying 5‑ to 30‑year conforming conventional, fixed rate, fully amortizing mortgage loans, secured by first liens on owner-occupied 1- to 4-unit single-family residential properties and single-unit second homes.
Loan-to-value (LTV) ratio and PMI: The maximum LTV for conventional MPF loans is 95 percent, though Affordable Housing Program (AHP) MPF mortgage loans may have LTVs up to 100 percent. Conventional MPF mortgage loans with LTVs greater than 80 percent are insured by PMI from a mortgage guaranty insurance company that has successfully passed an internal credit review and is approved under the MPF Program.
Documentation and compliance: Mortgage documents and transactions are required to comply with all applicable laws. MPF mortgage loans are documented using standard Fannie Mae/Freddie Mac uniform instruments.
Government loans: Government mortgage loans sold under the MPF Program have substantially the same parameters as conventional MPF mortgage loans except that their LTVs may not exceed the LTV limits set by the applicable government agency and they must meet all requirements to be insured or guaranteed by the applicable government agency.
Ineligible mortgage loans: Loans not eligible for sale under the MPF Program include residential mortgage loans unable to be rated by S&P, loans not meeting eligibility requirements, loans classified as high cost, high rate, high risk, Home Ownership and Equity Protection Act loans or loans in similar categories defined under predatory or abusive lending laws, or subprime, non-traditional, or higher-priced mortgage loans.


8


Loss Calculations: Losses under the FLA for conventional mortgage loans are defined differently than losses for financial reporting purposes. The differences reside in the timing of the recognition of the loss and how the components of the loss are recognized. Under the FLA, a loss is the difference between the recorded loan value and the total proceeds received from the sale of a residential mortgage property after paying any associated expenses, not to exceed the amount of the FLA. The loss is recognized upon sale of the mortgaged property. For financial reporting purposes, when a mortgage loan is deemed a loss, the difference between the recorded loan value and the appraised value of the property securing the loan (fair market value) less the estimated costs to sell is recognized as a charge to the Allowance for Credit Losses on Mortgage Loans in the period the loss status is assigned to the loan. After foreclosure, any expenses associated with carrying the loan until sale are recognized as Real Estate Owned (REO) expenses in the current period.

A majority of the states, and some municipalities, have enacted laws against mortgage loans considered predatory or abusive. Some of these laws impose liability for violations not only on the originator, but also upon purchasers and assignees of mortgage loans. We take measures that we consider reasonable and appropriate to reduce our exposure to potential liability under these laws and are not aware of any potential or pending claim, action, or proceeding asserting that we are liable under these laws. However, there can be no assurance that we will never have any liability under predatory or abusive lending laws.

Table 1 presents a comparison of the different characteristics for each of the MPF products held on our balance sheet as of December 31, 2015:

Table 1
Product Name
Size of the FHLBank’s FLA
PFI CE Obligation Description
CE Fee
Paid to PFI
CE Fee Offset1
Servicing Fee
to PFI
MPF Original
4 basis points (bps) per year against unpaid balance, accrued monthly
Aggregate sum of the loan level credit enhancements (LLCEs)
10 bps per year, paid monthly based on remaining UPB; guaranteed
No
25 bps per year, paid monthly
MPF 1002
100 bps fixed based on gross fundings at closing
Aggregate sum of the LLCEs less FLA

7 to 10 bps per year, paid monthly based on remaining UPB; performance-based after 3 years
Yes; after first 3 years, to the extent recoverable in future periods
25 bps per year, paid monthly
MPF 125
100 bps fixed based on gross fundings at closing
Aggregate sum of the LLCEs less FLA
7 to 10 bps per year, paid monthly based on remaining UPB; performance-based
Yes; to the extent recoverable in future periods
25 bps per year, paid monthly
MPF Plus3
Sized to equal expected losses
0 to 20 bps after FLA and SMI
7 bps per year plus 6 to 7 bps per year, performance-based (delayed for 1 year); all fees paid monthly based on remaining UPB
Yes; to the extent recoverable in future periods
25 bps per year, paid monthly
MPF Xtra
N/A
N/A
N/A
N/A
25 bps per year, paid monthly
MPF Government
N/A
N/A (unreimbursed servicing expenses only)
N/A4
N/A
44 bps per year, paid monthly
                   
1 
Future payouts of performance-based CE fees are reduced when losses are allocated to the FLA. The offset is limited to fees payable in a given year but could be reduced in subsequent years. The overall reduction is limited to the FLA amount for the life of the pool of loans covered by a master commitment agreement.
2 
The MPF 100 product is currently inactive due to regulatory requirements relating to loan originator compensation under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
3 
Due to higher costs associated with the acquisition of supplemental insurance policies, the MPF Plus product is currently not active.
4 
Two government master commitments have been grandfathered and paid 2 bps/year. All other government master commitments are not paid a CE fee.


9


Table 2 presents an illustration of the FLA and CE obligation calculation for each conventional MPF product type listed as of December 31, 2015:

Table 2
Product Name
FLA
CE Obligation Calculation
MPF Original
4 bps x unpaid principal, annually1
(LLCE2 x PSF3) x Gross Fundings
MPF 100
100 bps x loan funded amount
((LLCE x PSF) - FLA) x Gross Fundings
MPF 125
100 bps x loan funded amount
((LLCE x PSF) - FLA) x Gross Fundings
MPF Plus
5 x variable CE Fee
AA equivalent - FLA-SMI4 = PCE5
                   
1 
Starts at zero and increases monthly over the life of the master commitment.
2 
LLCE represents the weighted average loan level credit enhancement score of the loans sold into the pool of loans covered by the master commitment agreement.
3 
The S&P Level’s Pool Size Factor (PSF) is applied at the MPF FHLBank level against the total of loans in portfolio. A PSF is greater than one if the number of loans in portfolio is less than 300 in total.
4 
SMI represents the coverage obtained from the supplemental mortgage insurer. The initial premium for the insurance is determined based on a sample $100 million loan pool. The final premium determination is made during the 13th month of the master commitment agreement, at which time any premium adjustment is determined based on actual characteristics of loans submitted. The SMI generally covers a portion of the PFI’s CE obligation, which typically ranges from 200 to 250 bps of the dollar amount of loans delivered into a mortgage pool, but the PFI may purchase an additional level of coverage to completely cover the PFI’s CE obligation. The CE fees paid to PFIs for this program are capped at a maximum of 14 bps, which is broken into two components, fixed and variable. The fixed portion of the CE fee is paid to the SMI insurer for the coverage discussed above and is a negotiated rate depending on the level of SMI coverage, ranging from 6 to 8 bps. The variable portion is paid to the PFI, and ranges from 6 to 8 bps, with payments commencing the 13th month following initial loan purchase under the master commitment agreement.
5 
PCE represents the CE obligation that the PFI elects to retain rather than covering with SMI. Under this MPF product, the retained amount can range from 0 to 20 bps.

Investments
A portfolio of investments is maintained for liquidity and asset/liability management purposes. We maintain a portfolio of short-term investments in highly-rated institutions, including overnight Federal funds, term Federal funds, interest-bearing certificates of deposit, commercial paper, and securities purchased under agreements to resell (i.e., reverse repurchase agreements). A longer-term investment portfolio is also maintained, which includes securities issued or guaranteed by the U.S. government, U.S. government agencies and GSEs, as well as MBS that are issued by U.S. government agencies and housing GSEs (GSE securities are not explicitly guaranteed by the U.S. government) or privately issued MBS/or asset-backed securities (ABS) that carried the highest ratings from Moody’s, Fitch Ratings (Fitch) or S&P at the date of acquisition. We no longer purchase private-label MBS/ABS, although we continue to hold a small percentage of private-label MBS in our investment portfolio.

Under Finance Agency regulations, we are prohibited from investing in certain types of securities including:
Instruments, such as common stock, that represent an ownership in an entity, other than stock in small business investment companies or certain investments targeted to low-income persons or communities;
Instruments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks;
Non-investment-grade debt instruments other than certain investments targeted to low-income persons or communities, and instruments that were downgraded after purchase;
Whole mortgages or other whole loans other than: (1) those acquired under our MPF Program; (2) certain investments targeted to low-income persons or communities; (3) certain marketable direct obligations of state, local, or tribal government units or agencies, having at least the second highest credit rating from an NRSRO; (4) MBS or ABS backed by manufactured housing loans or home equity loans; and (5) certain foreign housing loans authorized under section 12(b) of the Bank Act;
Non-U.S. dollar denominated securities;
Interest-only or principal-only stripped MBS, CMOs, real estate mortgage investment conduits (REMICs) and eligible ABS;
Residual-interest or interest-accrual classes of CMOs, REMICs and eligible ABS; and
Fixed rate MBS, CMOs, REMICs and eligible ABS, or floating rate MBS, CMOs, REMICs and eligible ABS that on the trade date are at rates equal to their contractual cap or that have average lives which vary by more than six years under an assumed instantaneous interest rate change of 300 bps.

In addition to the above limitations on allowable types of MBS investments, the Finance Agency limits our total investment in MBS by requiring that the total amortized cost of MBS owned not exceed 300 percent of our month-end total regulatory capital, as most recently reported to the Finance Agency, on the day we purchase the securities. We generally utilize our MBS authority to maintain a portfolio of MBS investments approximating 300 percent of our total regulatory capital. As of December 31, 2015, the amortized cost of our MBS/CMO portfolio represented 329 percent of our regulatory capital due to some capital stock repurchases that occurred prior to year end.


10


Debt Financing – Consolidated Obligations
Consolidated obligations, consisting of bonds and discount notes, are our primary liabilities and represent the principal source of funding for advances, traditional mortgage products, and investments. Consolidated obligations are the joint and several obligations of the FHLBanks, backed only by the financial resources of the FHLBanks. Consolidated obligations are not obligations of the U.S. government, and the U.S. government does not guarantee them; however, the capital markets have traditionally viewed the FHLBanks’ obligations as “Federal agency” debt. As such, the FHLBanks historically have had reasonably stable access to funding at relatively favorable spreads to U.S. Treasuries. Our ability to access the capital markets through the sale of consolidated obligations, across the maturity spectrum and through a variety of debt structures, assists us in managing our balance sheet effectively and efficiently. Moody’s currently rates the FHLBanks’ consolidated obligations Aaa/P-1, and S&P currently rates them AA+/A-1+. These ratings measure the likelihood of timely payment of principal and interest on consolidated obligations and also reflect the FHLBanks’ status as GSEs, which generally implies the expectation of a high degree of support by the U.S. government even though their obligations are not guaranteed by the U.S. government.

Finance Agency regulations govern the issuance of debt on behalf of the FHLBanks and related activities, and authorize the FHLBanks to issue consolidated obligations, through the Office of Finance as their agent, under the authority of Section 11(a) of the Bank Act. No FHLBank is permitted to issue individual debt under Section 11(a) without Finance Agency approval. We are primarily and directly liable for the portion of consolidated 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 under Section 11(a). The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations for which the FHLBank is not the primary obligor. Although it has never occurred, to the extent that an FHLBank would be required to make a payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank would be entitled to reimbursement from the non-complying FHLBank. However, if the Finance Agency determines that the non-complying FHLBank is unable to satisfy its obligations, then the Finance Agency may allocate the non-complying FHLBank’s outstanding consolidated obligation debt 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 the Finance Agency may determine. If the principal or interest on any consolidated obligation issued on behalf of a specific FHLBank is not paid in full when due, the FHLBank may not pay dividends to, or redeem or repurchase shares of stock from, any member of that specific FHLBank.

Table 3 presents the par value of our consolidated obligations and the combined consolidated obligations of the FHLBanks as of December 31, 2015 and 2014 (in millions):

Table 3
 
12/31/2015
12/31/2014
Par value of consolidated obligations of the FHLBank
$
41,645

$
34,381

 
 
 
Par value of consolidated obligations of all FHLBanks
$
905,202

$
847,175


Finance Agency regulations provide that we must maintain aggregate assets of the following types, free from any lien or pledge, in an amount at least equal to the amount of consolidated obligations outstanding:
Cash;
Obligations of, or fully guaranteed by, the U.S government;
Secured advances;
Mortgages that have any guaranty, insurance or commitment from the U.S. government or any agency of the U.S. government; and
Investments described in Section 16(a) of the Bank Act, which, among other items, includes securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located.

Table 4 illustrates our compliance with the Finance Agency’s regulations for maintaining aggregate assets at least equal to the amount of consolidated obligations outstanding as of December 31, 2015 and 2014 (dollar amounts in thousands):

Table 4
 
12/31/2015
12/31/2014
Total non-pledged assets
$
44,336,631

$
36,767,405

Total carrying value of consolidated obligations
$
41,689,001

$
34,440,614

Ratio of non-pledged assets to consolidated obligations
1.06

1.07



11


The Office of Finance has responsibility for facilitating and executing the issuance of the consolidated obligations on behalf of the FHLBanks. It also prepares the FHLBanks’ Combined Quarterly and Annual Financial Reports, services all outstanding debt, serves as a source of information for the FHLBanks on capital market developments and manages the FHLBanks’ relationship with the NRSROs with respect to ratings on consolidated obligations. In addition, the Office of Finance administers two tax-exempt government corporations, the Resolution Funding Corporation (REFCORP) and the Financing Corporation (FICO), which were established as a result of the savings and loan crisis of the 1980s.

Consolidated Obligation Bonds: Consolidated obligation bonds are primarily used to satisfy our term funding needs. Typically, the maturities of these bonds range from less than one year to 30 years, but the maturities are not subject to any statutory or regulatory limit. Consolidated obligation bonds can be issued and distributed through negotiated or competitively bid transactions with approved underwriters or selling group members.

Consolidated obligation bonds generally are issued with either fixed or variable rate payment terms that use a variety of standardized indices for interest rate resets including, but not limited to, LIBOR, Constant Maturity Swap (CMS), Prime and Three Month Treasury Bill Auction Yield. In addition, to meet the specific needs of certain investors in consolidated obligations, both fixed and variable rate bonds may also contain certain embedded features, which result in complex coupon payment terms and call features. Normally, when such a complex consolidated obligation bond is issued, we simultaneously enter into a derivative containing mirror or offsetting features to synthetically convert the terms of the complex bond to a simple variable rate callable bond tied to one of the standardized indices. We also simultaneously enter into derivatives containing offsetting features to synthetically convert the terms of some of our fixed rate callable and bullet bonds and floating rate bonds to a simple variable rate callable or bullet bond tied to one of the standardized indices.

Consolidated Obligation Discount Notes: The Office of Finance also sells consolidated obligation discount notes on behalf of the FHLBanks that generally are used to meet short-term funding needs. These securities have maturities up to one year and are offered daily through certain securities dealers in a discount note selling group. In addition to the daily offerings of discount notes, the FHLBanks auction specific amounts of discount notes with fixed maturity dates ranging from 4 to 26 weeks through competitive auctions held twice a week utilizing the discount note selling group. The amount of discount notes sold through the auctions varies based upon market conditions and/or on the funding needs of the FHLBanks. Discount notes are generally sold at a discount and mature at par.

Use of Derivatives
The FHLBank’s Risk Management Policy (RMP) establishes guidelines for our use of derivatives. Interest rate swaps, swaptions, interest rate cap and floor agreements, calls, puts, futures, forward contracts, and other derivatives can be used as part of our interest rate risk management and funding strategies. This policy, along with Finance Agency regulations, prohibits trading in or the speculative use of derivatives and limits credit risk to counterparties that arises from derivatives. In general, we have the ability to use derivatives to reduce funding costs for consolidated obligations and to manage other risk elements such as interest rate risk, mortgage prepayment risk, unsecured credit risk, and foreign currency risk.

We use derivatives in three general ways: (1) by designating them as either a fair value or cash flow hedge of an underlying financial instrument, firm commitment, or forecasted transaction; (2) in asset/liability management (i.e. economic hedge); or (3) by acting as an intermediary between members and the capital markets. Economic hedges are defined as derivatives hedging specific or non-specific underlying assets, liabilities, or firm commitments that do not qualify for hedge accounting, but are acceptable hedging strategies under our RMP. For example, we use derivatives in our overall interest rate risk management to adjust the interest rate sensitivity of consolidated obligations to approximate more closely the interest rate sensitivity of assets, including advances, investments and mortgage loans, and/or to adjust the interest rate sensitivity of advances, investments, and mortgage loans to approximate more closely the interest rate sensitivity of liabilities. We also use derivatives to manage embedded options in assets and liabilities, to hedge the market value of existing assets, liabilities, and anticipated transactions, to hedge the duration risk of prepayable instruments, to mitigate adverse impacts to earnings from the contraction or extension of certain assets (e.g., advances or mortgage assets) and liabilities, and to reduce funding costs as discussed below.

We often execute derivatives concurrently with the issuance of consolidated obligation bonds (collectively referred to as swapped consolidated obligation bond transactions) to reduce funding costs or to alter the characteristics of our liabilities to more closely match the characteristics of our assets. At times, we also execute derivatives concurrently with the issuance of consolidated obligation discount notes in order to create synthetic variable rate debt at a cost that is often lower than funding alternatives and comparable variable rate cash instruments issued directly by us. This strategy of issuing consolidated obligations while simultaneously entering into derivatives enables us to more effectively fund our variable rate and short-term fixed rate assets. It also allows us, in some instances, to offer a wider range of advances at more attractive prices than would otherwise be possible. Swapped consolidated obligation transactions depend on price relationships in both the FHLBank consolidated obligation market and the derivatives market, primarily the interest rate swap market. If conditions in these markets change, we may adjust the types or terms of the consolidated obligations issued and derivatives utilized to better match assets, meet customer needs, and/or improve our funding costs.


12


We frequently purchase interest rate caps with various terms and strike rates to manage embedded interest rate cap risk associated with our variable rate MBS and CMO portfolios. Although these derivatives are valid economic hedges against the prepayment and option risk of our portfolio of MBS and CMOs, they are not specifically linked to individual investment securities and therefore do not receive fair value or cash flow hedge accounting. The derivatives are marked to fair value through earnings. We may also use interest rate caps and floors, swaptions, and callable swaps to manage and hedge prepayment and option risk on MBS, CMOs and mortgage loans.

See Item 7A – “Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk Management” for further information on derivatives.

Deposits
The Bank Act allows us to accept deposits from our members, housing associates, any institution for which we are providing correspondent services, other FHLBanks, and other government instrumentalities. We offer several types of deposit programs, including demand, overnight, and term deposits.

Liquidity Requirements: To support deposits, Finance Agency regulations require us to have at least an amount equal to current deposits invested in obligations of the U.S. government, deposits in eligible banks or trust companies, or advances with maturities not exceeding five years. In addition, we must meet the additional liquidity policies and guidelines outlined in our RMP. See Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Liquidity Risk Management” for further discussion of our liquidity requirements.

Capital, Capital Rules and Dividends
FHLBank Capital Adequacy and Form Rules: The Gramm-Leach-Bliley Act (GLB Act) allows us to have two classes of stock, and each class may have sub-classes. Class A Common Stock is conditionally redeemable on six months’ written notice from the member, and Class B Common Stock is conditionally redeemable on five years’ written notice from the member, subject in each case to certain conditions and limitations that may restrict the ability of the FHLBanks to effectuate such redemptions. Membership is voluntary. However, other than non-member housing associates (see Item 1 – “Business – Advances”), membership is required in order to utilize our credit and mortgage finance products. Members that withdraw from membership may not reapply for membership for five years.

The GLB Act and the Finance Agency rules and regulations define total capital for regulatory capital adequacy purposes as the sum of an FHLBank’s permanent capital, plus the amounts paid in by its stockholders for Class A stock; any general loss allowance, if consistent with U.S. generally accepted accounting principles (GAAP) and not established for specific assets; and other amounts from sources determined by the Finance Agency as available to absorb losses. The GLB Act and Finance Agency regulations define permanent capital for the FHLBanks as the amount paid in for Class B stock plus the amount of an FHLBank’s retained earnings, as determined in accordance with GAAP.

Under the GLB Act and the Finance Agency rules and regulations, we are subject to risk-based capital rules. Only permanent capital can satisfy our risk-based capital requirement. In addition, the GLB Act specifies a five percent minimum leverage capital requirement based on total FHLBank capital, which includes a 1.5 weighting factor applicable to permanent capital, and a four percent minimum total capital requirement that does not include the 1.5 weighting factor applicable to permanent capital. We may not redeem or repurchase any of our capital stock without Finance Agency approval if the Finance Agency or our Board of Directors determines that we have incurred, or are likely to incur, losses that result in, or are likely to result in, charges against our capital, even if we are in compliance with our minimum regulatory capital requirements. Therefore, a member’s right to have its excess shares of capital stock redeemed is conditional on, among other factors, the FHLBank maintaining compliance with the three regulatory capital requirements: risk-based, leverage, and total capital.

See Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources - Capital” for additional information regarding our capital plan.

Dividends: We may pay dividends from unrestricted retained earnings and current income. (For a discussion regarding restricted retained earnings, please see Joint Capital Enhancement Agreement under this Item 1.) Our Board of Directors may declare and pay dividends in either cash or capital stock. Under our capital plan, all dividends that are payable in capital stock must be paid in the form of Class B Common Stock, regardless of the class upon which the dividend is being paid.


13


Consistent with Finance Agency guidance in Advisory Bulletin (AB) 2003-AB-08, Capital Management and Retained Earnings, we adopted a retained earnings policy, which provides guidelines to establish a minimum or threshold level for our retained earnings in light of alternative possible future financial and economic scenarios. Our minimum (threshold) level of retained earnings is calculated quarterly and re-evaluated by the Board of Directors as part of each quarterly dividend declaration. The retained earnings policy effective for the period ending December 31, 2015 includes detailed calculations of four components:
Market risk, which is calculated using a Monte Carlo simulation where the 99 percent confidence level result over a 90-day simulation horizon will represent the minimum market risk exposure level. For periods presented prior to December 31, 2015, the market risk component was a value-at-risk calculation at a 95 percent confidence level for a 60 business day or three calendar month period;
Credit risk, which requires that retained earnings be sufficient to credit-enhance all of our assets from their actual rating levels to the equivalent of triple-A ratings (where advances are considered to be triple-A rated);
Operations risk, which is calculated using a combination of: (1) the Basel II standardized approach; and (2) our operational risk event loss history, taking into consideration operational loss events reported by the FHLBank System that could impact us in the future. For periods presented prior to December 31, 2015, operations risk was equal to 30 percent of the total of the market and credit risk amounts, subject to a $10 million floor; and
Net income volatility (formerly referred to as "derivative hedging volatility"), which is calculated using: (1) the largest net loss on derivative hedging activities under 100-basis-point interest rate shock scenarios (maximum derivative hedging loss under up or down shocks); and (2) dividend payment risk, computed as four times the dollar amount of dividends paid on all stock for the most recently paid quarterly dividend. For periods presented prior to December 31, 2015, this component was the projected income impact of derivative hedging activities under 100-basis-point shocks in interest rates (maximum derivative hedging loss under up or down shocks).

The retained earnings policy was considered by the Board of Directors when dividends were declared during the last two years, but the retained earnings threshold calculated in accordance with the policy did not significantly affect the level of dividends declared and paid. Tables 5 and 6 reflect the quarterly retained earnings threshold calculations utilized during 2015 and 2014 (in thousands), respectively, compared to the actual amount of retained earnings at the end of each quarter:

Table 5
Retained Earnings Component (based upon prior quarter end)
12/31/2015
09/30/2015
06/30/2015
03/31/2015
Market Risk
$
53,793

$
28,934

$
31,288

$
35,534

Credit Risk
51,731

49,914

57,064

54,139

Operations Risk
26,201

23,654

26,506

26,902

Net Income Volatility
84,232

10,178

5,499

9,019

Total Retained Earnings Threshold
215,957

112,680

120,357

125,594

Actual Retained Earnings as of End of Quarter
651,782

650,029

653,617

643,567

Overage
$
435,825

$
537,349

$
533,260

$
517,973


Table 6
 
 
 
 
 
Retained Earnings Component (based upon prior quarter end)
12/31/2014
09/30/2014
06/30/2014
03/31/2014
Market Risk (dividend paying capacity)
$
34,441

$
32,528

$
42,053

$
34,414

Credit Risk
53,375

52,782

55,746

53,214

Operations Risk
26,345

25,593

29,340

26,288

Derivative Hedging Volatility
13,807

19,212

18,950

23,729

Total Retained Earnings Threshold
127,968

130,115

146,089

137,645

Actual Retained Earnings as of End of Quarter
627,133

615,192

599,999

581,425

Overage
$
499,165

$
485,077

$
453,910

$
443,780


Under our retained earnings policy, any shortage of actual retained earnings with respect to the retained earnings threshold is to be met over a period generally not to exceed one year from the quarter-end calculation. The policy also provides that meeting the established retained earnings threshold shall have priority over the payment of dividends, but that the Board of Directors must balance dividends on capital stock against the period over which the retained earnings threshold is met. The retained earnings threshold level fluctuates from period to period because it is a function of the size and composition of our balance sheet and the risks contained therein at that point in time.


14


Joint Capital Enhancement Agreement (JCE Agreement) – Effective February 28, 2011, we, along with the other FHLBanks, entered into a JCE Agreement intended to enhance the capital position of each FHLBank. On August 5, 2011, the FHLBanks also amended the JCE Agreement to reflect differences between the original agreement and capital plan amendments.

The intent of the JCE Agreement is to allocate that portion of each FHLBank’s earnings historically paid to satisfy its REFCORP obligation to a Separate Restricted Retained Earnings Account (RRE Account) at that FHLBank. Each FHLBank was required to contribute 20 percent of its earnings toward payment of the interest on REFCORP bonds until the REFCORP obligation was satisfied. The Finance Agency certified on August 5, 2011 that the FHLBanks’ payments to the U.S. Department of the Treasury for the second quarter of 2011 resulted in full satisfaction of the FHLBanks’ REFCORP obligation.

Thus, in accordance with the JCE Agreement, starting in the third quarter of 2011, each FHLBank began allocating 20 percent of its net income to an RRE Account and will do so until the balance of the account equals at least one percent of that FHLBank’s average balance of outstanding consolidated obligations for the previous quarter.

Key provisions under the JCE Agreement are as follows:
Under the JCE Agreement, each FHLBank will build its RRE Account to a minimum of one percent of its total outstanding consolidated obligations through the 20 percent allocation. For this purpose, total outstanding consolidated obligations is based on the most recent quarter's average carrying value of all consolidated obligations for which an FHLBank is the primary obligor, excluding hedging adjustments (Total Consolidated Obligations). Under the JCE Agreement, an FHLBank may make voluntary allocations above 20 percent of its net income and/or above the targeted balance of one percent of its Total Consolidated Obligations.
The JCE Agreement provides that any quarterly net losses of an FHLBank may be netted against its net income, if any, for other quarters during the same calendar year to determine the minimum required year-to-date or annual allocation to its RRE Account. Any year-to-date or annual losses must first be allocated to the unrestricted retained earnings of an FHLBank until such retained earnings are reduced to a zero balance. Thereafter, any remaining losses may be applied to reduce the balance of an FHLBank’s RRE Account, but not below a zero balance. In the event an FHLBank incurs a net loss for a cumulative year-to-date or annual period that results in a decrease to the balance of its RRE Account below the balance of the RRE Account as of the beginning of that calendar year, such FHLBank’s quarterly allocation requirement will thereafter increase to 50 percent of quarterly net income until the cumulative difference between the allocations made at the 50 percent rate and the allocations that would have been made at the regular 20 percent rate is equal to the amount of the decrease to the balance of its RRE Account at the beginning of that calendar year.
If the size of an FHLBank’s balance sheet would decrease and consequently, Total Consolidated Obligations would decline, the percent allocated could exceed the targeted one percent of Total Consolidated Obligations. The JCE Agreement provides that if an FHLBank's RRE Account exceeds 1.5 percent of its Total Consolidated Obligations, such FHLBank may transfer amounts from its RRE Account to the unrestricted retained earnings account, but only to the extent that the balance of its RRE Account remains at least equal to 1.5 percent of the FHLBank’s Total Consolidated Obligations immediately following such transfer. Finally, the JCE Agreement provides that during periods in which an FHLBank’s RRE Account is less than one percent of its Total Consolidated Obligations, such FHLBank may pay dividends only from unrestricted retained earnings or from the portion of quarterly net income not required to be allocated to its RRE Account.
The JCE Agreement can be voluntarily terminated by an affirmative vote of two-thirds of the boards of directors of the FHLBanks, or automatically after the occurrence of a certain event after following certain proscribed procedures (Automatic Termination Event). An Automatic Termination Event means: (1) a change in the FHLBank Act, or another applicable statute, that will have the effect of creating a new, or higher, assessment or taxation on net income or capital of the FHLBanks; or (2) a change in the FHLBank Act, or another applicable statute, or relevant regulations that will result in a higher mandatory allocation of an FHLBank’s quarterly net income to any retained earnings account other than the annual amount, or total amount, specified in an FHLBank’s capital plan. An FHLBank’s obligation to make allocations to the RRE Account terminates after it has been determined that an Automatic Termination Event has occurred and one year thereafter the restrictions on paying dividends out of the RRE Account, or otherwise reallocating funds from the RRE Account, are also terminated. Upon the voluntary termination of the JCE Agreement, an FHLBank’s obligation to make allocations to the RRE Account is terminated on the date written notice of termination is delivered to the Finance Agency, and restrictions on paying dividends out of the RRE Account, or otherwise reallocating funds from the RRE Account, terminate one year thereafter.

Tax Status
We are exempt from all federal, state and local taxation except for real property taxes.


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Assessments
We are subject to regulatory assessments based on a percentage of our earnings. We were obligated to make payments to REFCORP in the amount of 20 percent of net earnings after operating expenses and AHP expenses through June 30, 2011. The Finance Agency certified on August 5, 2011 that the FHLBanks’ payments to the U.S. Department of the Treasury for the second quarter of 2011 resulted in full satisfaction of the FHLBanks’ REFCORP obligation. Starting in the third quarter of 2011, we began allocating 20 percent of our net income to a separate RRE Account as described in “Capital, Capital Rules and Dividends” under this Item 1. In addition to the RECORP obligation, the FHLBanks were required to set aside annually the greater of an aggregate of $100 million or 10 percent of their current year’s income before charges for AHP (but after assessments for REFCORP). In accordance with Finance Agency guidance for the calculation of AHP expense, interest expense on mandatorily redeemable capital stock is added back to income before charges for AHP (but after assessments for REFCORP). Assessments for REFCORP and AHP through June 30, 2011 were the equivalent to an effective minimum income tax rate of 26.5 percent. After June 30, 2011, required assessments for AHP are equivalent to an effective minimum income tax rate of 10 percent.

Other Mission-Related Activities
In addition to supporting residential mortgage lending, one of our core missions is to support related housing and community development. We administer and fund a number of targeted programs specifically designed to fulfill that mission. These programs provide housing opportunities for thousands of very low-, low- and moderate-income households and strengthen communities primarily in Colorado, Kansas, Nebraska, and Oklahoma.

Affordable Housing Program: Amounts specified by the AHP requirements described in Item 1 – “Business – Assessments” are reserved for this program. AHP provides cash grants to members to finance the purchase, construction, or rehabilitation of very low-, low-, and moderate-income owner occupied or rental housing. In addition to the competitive AHP program funds, a customized homeownership set-aside program called the Homeownership Set-aside Program (HSP) was offered during 2015 under the AHP. The HSP provides down payment, closing cost, and purchase-related repair assistance to first-time homebuyers in Colorado, Kansas, Nebraska, and Oklahoma.

Community Investment Cash Advance (CICA) Program. CICA loans to members specifically target underserved markets in both rural and urban areas. CICA loans represented 3.9 percent, 4.8 percent and 5.0 percent of total advances outstanding as of December 31, 2015, 2014, and 2013, respectively. Programs offered during 2015 under the CICA Program, which is not funded through the AHP, include:
Community Housing Program (CHP) – CHP makes loans available to members for financing the construction, acquisition, rehabilitation, and refinancing of owner-occupied housing for households whose incomes do not exceed 115 percent of the area’s median income and rental housing occupied by or affordable for households whose incomes do not exceed 115 percent of the area’s median income. For rental projects, at least 51 percent of the units must have tenants that meet the income guidelines, or at least 51 percent of the units must have rents affordable to tenants that meet the income guidelines. We provide advances for CHP-based loans to members at our estimated cost of funds for a comparable maturity plus a mark-up for administrative costs; and
Community Development Program (CDP) – CDP provides advances to members to finance CDP-qualified member financing including loans to small businesses, farms, agri-businesses, public or private utilities, schools, medical and health facilities, churches, day care centers, or for other community development purposes that meet one of the following criteria: (1) loans to firms that meet the Small Business Administration’s definition of a qualified small business concern; (2) financing for businesses or projects located in an urban neighborhood, census tract or other area with a median income at or below 100 percent of the area median; (3) financing for businesses, farms, ranches, agri-businesses, or projects located in a rural community, neighborhood, census tract, or unincorporated area with a median income at or below 115 percent of the area median; (4) firms or projects located in a Federal Empowerment Zone, Enterprise Community or Champion Community, Native American Area, Brownfield Area, Federally Declared Disaster Area, Military Base Closing Area, or Community Adjustment and Investment Program Area; (5) businesses in urban areas in which at least 51 percent of the employees of the business earn at or below 100 percent of the area median; or (6) businesses in rural areas in which at least 51 percent of the employees of the business earn at or below 115 percent of the area median. We provide advances for CDP-based loans to members at our estimated cost of funds for a comparable maturity plus a mark-up for administrative costs.


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Other Housing and Community Development Programs. A number of other voluntary housing and community development programs have also been established. These programs are not funded through the AHP and include the following:
Joint Opportunities for Building Success (JOBS) – We distributed $1.0 million in JOBS funds in 2015, 2014 and 2013, to assist members in promoting employment growth in their communities. A charitable grant program, JOBS funds have been allocated annually to support economic development projects. The following are elements of the JOBS program: (1) funds made available to projects only through our members; (2) $25,000 maximum funding per member ($25,000 per project) annually; (3) loan pools and similar funding mechanisms are eligible to receive more than one JOBS award annually provided there is an eligible project in the pool for each JOBS application funded; (4) members and project participants agree to participate in publicity highlighting their roles as well as the FHLBank’s contribution to the project and community/region; (5) projects that appear to be “bail outs” are not eligible; (6) members cannot use JOBS funds for their own direct benefit (e.g., infrastructure improvements to facilitate a new branch location) or any affiliate of the member; (7) projects can only be located in FHLBank Topeka’s District (Colorado, Kansas, Nebraska, and Oklahoma); (8) applications of a political nature will not be accepted (JOBS funds cannot be used for any lobbying activity at the local, state or national level); and (9) FHLBank directors, employees, members of their households, and any for-profit entity owned by FHLBank directors, employees, or members of their households, are not eligible for JOBS grants. Nonprofit entities at which FHLBank directors, employees, and members of their households volunteer or are employed remain eligible for JOBS grants. For 2016, the Board of Directors has suspended the JOBS program, during which time it will evaluate historical usage of JOBS and consider alternative programs; and
Rural First-time Homebuyer Education Program – We provide up to $75,000 annually to support rural homeownership education and counseling while actively encouraging participating organizations to seek supplemental funding from other sources. The goal of the program is to support rural education and counseling in all four states in the district, especially in those areas with HSP-participating members.

Competition
Advances: Demand for advances is affected by, among other things, the cost of alternative sources of liquidity available to our members, including deposits from members’ customers and other sources of liquidity that are available to members. Members mostly access alternative funding other than advances through the brokered deposit market and through repurchase agreements with commercial customers. Large members may have broader access to funding through repurchase agreements with investment banks and commercial banks as well as access to the national and global credit markets. While the availability of alternative funding sources to members can influence member demand for advances, the cost of the alternative funding relative to advances is the primary consideration when accessing alternative funding. Other considerations include product availability through the FHLBank, the member’s creditworthiness, ease of execution, level of diversification, and availability of member collateral for other types of borrowings.

Mortgage Loans: We are subject to competition in purchasing conventional, conforming fixed rate residential mortgage loans and government-guaranteed residential mortgage loans. We face competition in customer service, the prices paid for these assets, and in ancillary services such as automated underwriting. The most direct competition for purchasing residential mortgage loans comes from the other housing GSEs, which also purchase conventional, conforming fixed rate mortgage loans, specifically Fannie Mae and Freddie Mac. To a lesser extent, we also compete with regional and national financial institutions that buy and/or invest in mortgage loans. Depending on market conditions, these investors may seek to hold, securitize, or sell conventional, conforming fixed rate mortgage loans. We continuously reassess our potential for success in attracting and retaining members for our mortgage loan products and services, just as we do with our advance products. We compete for the purchase of mortgage loans primarily on the basis of price, products, and services offered.

Debt Issuance: We compete with the U.S. government (including debt programs explicitly guaranteed by the U.S. government), U.S. government agencies, Fannie Mae, Freddie Mac, and other GSEs, as well as corporate, sovereign, and supranational entities for funds raised through the issuance of unsecured debt in the national and global capital markets. Collectively, Fannie Mae, Freddie Mac, and the FHLBanks are generally referred to as the housing GSEs, and the cost of the debt of each can be positively or negatively affected by political, financial, or other news that reflects upon any of the three housing GSEs. If the supply of competing debt products increases without a corresponding increase in demand, our debt costs may increase, or less debt may be issued. We compete for the issuance of debt primarily on the basis of rate, term, structure, and perceived risk of the issuer.

Derivatives: The sale of callable debt and the simultaneous execution of callable interest rate swaps with options that mirror the options in the debt have been an important source of competitive funding for us. As such, the depth of the markets for callable debt and mirror-image derivatives is an important determinant of our relative cost of funds. There is considerable competition among high-credit-quality issuers, especially among the three housing GSEs, for callable debt and for derivatives. There can be no assurance that the current breadth and depth of these markets will be sustained.


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Regulatory Oversight, Audits and Examinations
General: We are supervised and regulated by the Finance Agency, which is an independent agency in the executive branch of the U.S. government. The Finance Agency is responsible for providing supervision, regulation and housing mission oversight of the FHLBanks to promote their safety and soundness so they serve as a reliable source of liquidity and funding for housing finance and community investment. The Finance Agency is headed by a Director appointed by the President of the United States for a five-year term, with the advice and consent of the Senate. The Federal Housing Finance Oversight Board advises the Director with respect to overall strategies and policies in carrying out the duties of the Director. The Federal Housing Finance Oversight Board is comprised of the Secretary of the Treasury, Secretary of HUD, Chairman of the Securities and Exchange Commission (SEC), and the Director, who serves as the Chairperson of the Board. The Finance Agency is funded in part through assessments from the FHLBanks, with the remainder of its funding provided by Fannie Mae and Freddie Mac; no tax dollars or other appropriations support the operations of the Finance Agency or the FHLBanks. To assess our safety and soundness, the Finance Agency conducts annual, on-site examinations, as well as periodic on-site and off-site reviews. Additionally, we are required to submit monthly information on our financial condition and results of operations to the Finance Agency. This information is available to all FHLBanks.

Before a government corporation issues and offers obligations to the public, the Government Corporation Control Act provides that the Secretary of the Treasury shall prescribe the form, denomination, maturity, interest rate, and conditions of the obligations; the manner and time issued; and the selling price. The Bank Act also authorizes the Secretary of the Treasury, at his or her discretion, to purchase consolidated obligations up to an aggregate principal amount of $4 billion. No borrowings under this authority have been outstanding since 1977. The U.S. Treasury receives the Finance Agency’s annual report to Congress, monthly reports reflecting securities transactions of the FHLBanks, and other reports reflecting the operations of the FHLBanks.

Audits and Examinations: We have an internal audit department and our Board of Directors has an audit committee. The Chief Internal Audit Officer reports directly to the audit committee. In addition, an independent registered public accounting firm audits our annual financial statements and effectiveness of internal controls over financial reporting. The independent registered public accounting firm conducts these audits following standards of the Public Company Accounting Oversight Board (United States) and Government Auditing Standards issued by the Comptroller General of the United States. The FHLBanks, the Finance Agency, and Congress all receive the audit reports. We must submit annual management reports to Congress, the President of the United States, the Office of Management and Budget, and the Comptroller General. These reports include a statement of financial condition, a statement of operations, a statement of cash flows, a statement of internal accounting and administrative control systems, and the report of the independent public accounting firm on the financial statements.

The Comptroller General has authority under the Bank Act to audit or examine the Finance Agency and the individual FHLBanks and to decide the extent to which they fairly and effectively fulfill the purposes of the Bank Act. Furthermore, the Government Corporation Control Act provides that the Comptroller General may review any audit of the financial statements conducted by an independent registered public accounting firm. If the Comptroller General conducts such a review, then he or she must report the results and provide his or her recommendations to Congress, the Office of Management and Budget, and the applicable FHLBank. The Comptroller General may also conduct his or her own audit of any financial statements of any individual FHLBank.

Personnel
As of March 8, 2016, we had 218 employees. The employees are not represented by a collective bargaining unit, and we have a good relationship with our employees.

Legislative and Regulatory Developments
Finance Agency Final Rule on FHLBank Membership. On January 20, 2016, the Finance Agency issued a rule effective on February 19, 2016 that, among other things:
makes captive insurance companies ineligible for FHLBank membership; and
defines the “principal place of business” of an institution eligible for FHLBank membership to be the state in which it maintains its home office and from which the institution conducts business operations.

The rule defines a captive insurance company as a company that is authorized under state law to conduct an insurance business but whose primary business is the underwriting of insurance for affiliated persons or entities.

Captive insurance company members that were admitted as FHLBank members prior to September 12, 2014 (the date the Finance Agency proposed this rule) will have their memberships terminated by February 18, 2021. Captive insurance company members that were admitted as FHLBank members after September 12, 2014 will have their memberships terminated by February 18, 2017. There are restrictions on the level and maturity of advances that FHLBanks can make to these members during the sunset periods.

We continue to study the rule but do not expect it to have a material impact on our financial condition or results of operations at this time.


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Finance Agency Final Rule on Responsibilities of Boards of Directors, Corporate Practices and Corporate Governance Matters. On November 19, 2015, the Finance Agency issued a rule effective on December 21, 2015 that, among other things, requires each FHLBank to:
operate an enterprise wide risk management program and assign its chief risk officer certain enumerated responsibilities;
maintain a compliance program headed by a compliance officer who reports directly to the chief executive officer and must regularly report to the board of directors (or a board committee);
maintain board committees specifically responsible for risk management, audit, compensation and corporate governance; and
designate in its bylaws a body of law to follow for its corporate governance and indemnification practices and procedures, choosing from the law of the jurisdiction in which the FHLBank maintains its principal office, the Delaware General Corporation Law, or the Revised Model Business Corporation Act. The final rule requires each FHLBank to make this designation by March 18, 2016.

Additionally, the rule provides that the Finance Agency has the authority to review a regulated entity’s indemnification policies, procedures and practices to ensure that they are conducted in a safe and sound manner, and that they are consistent with the body of law adopted by the board of directors of the FHLBank.

We do not expect this rule to materially impact our financial condition or results of operations.

Amendment of FHLBank Act to Make Privately-Insured Credit Unions Eligible for FHLBank Membership. On December 4, 2015, President Obama signed a bill known as the Fixing America’s Surface Transportation Act (FAST Act), which includes a provision that amends the FHLBank Act to allow privately-insured credit unions to be eligible for FHLBank membership. The FAST Act requires privately-insured credit unions to satisfy certain initial and ongoing eligibility and reporting requirements. The Finance Agency has indicated that it is reviewing the relevant portions of the FAST Act and that the FHLBanks should consult with the Finance Agency before acting on the membership application of any privately-insured credit union.

Joint Final Rule on Margin and Capital Requirements for Covered Swap Entities. In October 2015, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the Finance Agency (each an “Agency” and, collectively, the “Agencies”) jointly adopted final rules to establish minimum margin and capital requirements for registered swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants (Swap Entities) that are subject to the jurisdiction of one of the Agencies (such entities, “Covered Swap Entities,” and the joint final rules, the “Final Margin Rules”). On January 6, 2016, the Commodity Futures Trading Commission (CFTC) published its own version of the Final Margin Rules that generally mirrors the Final Margin Rules. The CFTC’s rules apply only to a limited number of registered swap dealers, security-based swap dealers, major swap participants, and major security-based swap participants that are not subject to the jurisdiction of one of the Agencies.

When they take effect, the Final Margin Rules will subject uncleared swaps and uncleared security-based swaps between Covered Swap Entities and Swap Entities and between Covered Swap Entities and financial end users that have material swap exposure (i.e., an average daily aggregate notional of $8 billion or more in uncleared swaps), to a mandatory two-way initial margin requirement. The amount of the initial margin required to be posted or collected would be either the amount calculated by the Covered Swap Entity using a standardized schedule set forth as an appendix to the Final Margin Rules, which provides the gross initial margin (as a percentage of total notional exposure) for certain asset classes, or an internal margin model of the Covered Swap Entity conforming to the requirements of the Final Margin Rules that is approved by the Agency having jurisdiction over the particular Covered Swap Entity. The Final Margin Rules specify the types of collateral that may be posted or collected as initial margin (generally, cash, certain government securities, certain liquid debt, certain equity securities, certain eligible publicly traded debt and gold); and sets forth haircuts for certain collateral asset classes. Initial margin must be segregated with an independent, third-party custodian and, generally, may not be rehypothecated, except that, cash funds may be placed with a custodian bank in return for a general deposit obligation under certain specified circumstances.

The Final Margin Rules will require variation margin to be exchanged daily for uncleared swaps and uncleared security-based swaps between Covered Swap Entities and Swap Entities and between Covered Swap Entities and all financial end-users (without regard to the swap exposure of the particular financial end-user). The variation margin amount is the daily mark-to-market change in the value of the swap to the Covered Swap Entity, taking into account variation margin previously paid or collected. For uncleared swaps and security-based swaps between Covered Swap Entities and financial end-users, variation margin may be paid or collected in cash or non-cash collateral that is considered eligible for initial margin purposes. Variation margin is not subject to segregation with an independent, third-party custodian, and may, if permitted by contract, be rehypothecated.

The variation margin requirement under the Final Margin Rules will become effective for us on March 1, 2017, and the initial margin requirements under the Final Margin Rules are expected to become effective for us on September 1, 2020.


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We are not a Covered Swap Entity under the Final Margin Rules. Rather, we are a financial end-user under the Final Margin Rules, and would likely have material swap exposure when the initial margin requirements under the Final Margin Rules become effective.

Since we are currently posting and collecting variation margin on uncleared swaps, it is not anticipated that the variation margin requirement under the Final Margin Rules will have a material impact on our costs. However, when the initial margin requirements under the Final Margin Rules become effective, we anticipate that our cost of engaging in uncleared swaps will increase.

Finance Agency Core Mission Achievement Advisory Bulletin 2015-05. On July 14, 2015, the Finance Agency issued an advisory bulletin that provides guidance relating to a core mission asset ratio by which the Finance Agency will assess each FHLBank’s core mission achievement. The Finance Agency plans to assess core mission achievement by using a ratio of primary mission assets, which includes advances and mortgage loans acquired from members (also referred to as acquired member assets), to consolidated obligations. The core mission asset ratio will be calculated annually at year-end as part of the Finance Agency’s examination process, using annual average par values.
 
The advisory bulletin provides the Finance Agency’s expectations for each FHLBank’s strategic plan based on its ratio, which are:
when the ratio is at least 70 percent or higher, the strategic plan should include an assessment of the FHLBank’s prospects for maintaining this level;
when the ratio is between 55 percent and 70 percent, the strategic plan should explain the FHLBank’s plan to increase the ratio; and
when the ratio is below 55 percent, the strategic plan should include an explanation of the circumstances that caused the ratio to be at that level and detailed plans to increase the ratio. The advisory bulletin provides that if an FHLBank maintains a ratio below 55 percent over the course of several consecutive reviews, then the FHLBank’s board of directors should consider possible strategic alternatives.

Our core mission activities primarily include the issuance of advances. In addition, we acquire member assets through the MPF program. Our core mission achievement ratio at December 31, 2015 was 79 percent.

Finance Agency Proposed Rule on Acquired Member Assets. On December 17, 2015, the Finance Agency published a proposed rule that would amend the current AMA rule, which governs an FHLBank’s ability to purchase and hold certain types of mortgage loans from its members. The proposed rule would allow an FHLBank to utilize its own model in lieu of an NRSRO ratings model to determine the credit rating for AMA loan assets and loan pools. The proposed rule would also eliminate the use of pool level insurance, such as SMI, as part of the required credit risk-sharing structure for AMA products; however, we are not currently acquiring AMA loans using this structure.

It is not possible to predict whether the proposed rule (if adopted) would have a negative impact on the volume of AMA loan assets or on our costs of operation.

Comments on the proposed rule are due on April 15, 2016.

Where to Find Additional Information
We file our annual, quarterly, and current reports and related information with the SEC. You may read and copy such material at the public reference facilities maintained by the SEC at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-732-0330 for more information on the public reference room. You can also find our SEC filings at the SEC’s website at www.sec.gov. Additionally, on our website at www.fhlbtopeka.com, you can find a link to the SEC’s website which can be used to access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (Exchange Act), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

Item 1A: Risk Factors
 
Our business has been and may continue to be adversely impacted by legislation and other ongoing actions by the U. S. government in response to disruptions in the financial markets. In response to the economic downturn and the recession that ended in 2010, the U.S. government established certain governmental lending programs that adversely impacted our business. Despite an improvement in the housing and mortgage markets, there continue to be challenges to the ongoing economic recovery due to uncertainty about the U.S. fiscal situation, including the potential impact of global economic conditions on the U.S. economy, and the U.S. housing market due to the general lack of real wage growth and tight credit standards. Although previous government lending programs are no longer active, future governmental programs could create increased funding costs for consolidated obligations and decreased borrowing activity from our members that could have a material adverse impact on our financial condition and results of operations.


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Key legislation in response to disruptions in the financial markets includes the Dodd-Frank Act, which was signed into law in July 2010. The Dodd-Frank Act, among other things: (1) created an inter-agency oversight council that identifies and regulates systemically important financial institutions; (2) regulates the over-the-counter derivatives market; and (3) establishes new requirements, including a risk-retention requirement, for MBS. Our business operations, funding costs, rights, obligations, and/or the manner in which we carry out our housing-finance mission may be adversely affected by provisions contained in the Dodd-Frank Act.

The Dodd-Frank Act also requires federal regulatory agencies to establish regulations to implement the legislation. For example, regulations on the over-the-counter derivatives market issued under the Dodd-Frank Act could materially adversely affect our ability to hedge our interest rate risk exposure from advances and mortgage loan purchases, achieve our risk management objectives, and act as an intermediary between our members and counterparties. Regulatory actions taken by the Commodity Futures Trading Commission (CFTC) have subjected us to increased regulatory requirements which have made and will continue to make derivative transactions more costly and less attractive as risk management tools. Such regulatory actions also have the potential to impact the costs of certain transactions between us and our members.

Our primary regulator, the Finance Agency, also continues to issue proposed and final regulatory and other requirements as a result of the Recovery Act, the Dodd-Frank Act and other mandates. We cannot predict the effect of any new regulations or other regulatory guidance on our operations. Changes in regulatory requirements could result in, among other things, an increase in our cost of funding or overall cost of doing business, or a decrease in the size, scope or nature of our membership base, lending or investments, which could negatively affect our financial condition and results of operations.
 
The U.S. Congress is also considering broad legislation for reform of GSEs as a result of the disruptions in the financial and housing markets and the conservatorships of Fannie Mae and Freddie Mac. A report released by the U.S. Treasury Department and HUD on February 11, 2011, outlines possible GSE reforms, including potential reforms to the business models of Fannie Mae, Freddie Mac and the FHLBanks. Both the U.S. House and Senate considered legislation in 2015 that would reform the GSEs. We do not know how, when, or to what extent GSE reform legislation will impact the business or operations of the FHLBank or the FHLBank System.

To the extent that any actions by the U.S. government in response to an economic downturn or recession cause a significant decrease in the aggregate amount of advances or increase our operating costs, our financial condition and results of operations may be adversely affected. See Item 1 – “Business – Legislative and Regulatory Developments” for more information on potential future legislation and other regulatory activity affecting us.

We are subject to a complex body of laws and regulatory and other requirements that could change in a manner detrimental to our operations. The FHLBanks are GSEs organized under the authority of the Bank Act, and, as such, are governed by federal laws and regulatory or other requirements or other guidance adopted and applied by the Finance Agency. In addition, Congress may amend the Bank Act or pass other legislation that significantly affects the rights, obligations, and permissible activities of the FHLBanks and the manner in which the FHLBanks carry out their housing-finance and liquidity missions and business operations. We are, or may also become, subject to further regulations promulgated by the SEC, CFTC, Federal Reserve Board, Financial Crimes Enforcement Network, or other regulatory agencies.
 
We cannot predict whether new regulatory or other requirements will be promulgated by the Finance Agency or other regulatory agencies, or whether Congress will enact new legislation, and we cannot predict the effect of any new regulatory requirements or legislation on our operations. Changes in regulatory, statutory or other requirements could result in, among other things, an increase in our cost of funding and the cost of operating our business, a change in our permissible business activities, or a decrease in the size, scope or nature of our membership or our lending, investment or mortgage loan activities, which could negatively affect our financial condition and results of operations.

We share a regulator with Fannie Mae and Freddie Mac. The Finance Agency currently serves as the federal regulator of the FHLBanks and the Office of Finance, Fannie Mae, and Freddie Mac. Because the business models of Fannie Mae and Freddie Mac are significantly different from that of the FHLBanks, there is a risk that actions by the Finance Agency toward Fannie Mae and Freddie Mac may have an unfavorable impact on the FHLBanks’ operations and/or financial condition. In addition, there is a risk that our funding costs and access to funds could be adversely affected by changes in investors’ perception of the systemic risks associated with Fannie Mae and Freddie Mac.
 

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Changes to our balance sheet management strategies could adversely impact our results of operations. In 2015, the Finance Agency issued an advisory bulletin establishing a core mission asset ratio by which the Finance Agency will assess each FHLBank’s core mission achievement. Core mission achievement is determined using a ratio of primary mission assets, which includes the average par balances of advances and mortgage loans acquired from members, to the average par balance of consolidated obligations. Any adjustments to our balance sheet to meet and/or maintain core mission asset ratios may result in lower net income and, therefore, adversely impact our financial condition and results of operations as we implement and maintain a core mission asset balance sheet.

An increase in required AHP contributions could adversely affect our results of operations, our ability to pay dividends, or our ability to redeem or repurchase capital stock. The FHLBank Act requires each FHLBank to contribute to its AHP the greater of: (1) 10 percent of the FHLBank’s net earnings for the previous year; or (2) that FHLBank’s pro rata share of an aggregate of $100 million, the proration of which is made on the basis of the net earnings of the FHLBanks for the previous year. A failure of the FHLBanks to make the minimum $100 million annual AHP contribution in a given year could result in an increase in our required AHP contribution, which could adversely affect our results of operations, our ability to pay dividends, or our ability to redeem or repurchase capital stock. 

We may not be able to pay dividends at rates consistent with past practices. Our Board of Directors may only declare dividends on our capital stock, payable to members, from our unrestricted retained earnings and current net income. Our ability to pay dividends also is subject to statutory and regulatory requirements, including meeting all regulatory capital requirements. For example, the potential promulgation of regulations or other requirements by the Finance Agency that would require higher levels of required or restricted retained earnings could lead to higher levels of retained earnings, and thus, lower amounts of unrestricted retained earnings available to be paid out to our members as dividends. Failure to meet any of our regulatory capital requirements would prevent us from paying any dividend.

Events such as changes in our market risk profile, credit quality of assets held, and increased volatility of net income caused by the application of certain GAAP accounting guidance may affect the adequacy of our retained earnings and may require us to increase our threshold level of retained earnings and correspondingly reduce our dividends from historical payout ratios in order to achieve and maintain the threshold amounts of retained earnings under our RMP. Additionally, Finance Agency regulations on capital classifications could restrict our ability to pay dividends. Further, our ability to pay dividends at historical rates is impacted directly by our net income, so a decline in net income could result in a decline in dividend rates.

The application of new accounting standards relevant to us, especially those related to the accounting for derivatives, could materially increase earnings volatility. We are subject to earnings volatility because of our use of derivatives and the application of GAAP accounting guidance for those derivatives. This earnings volatility is caused primarily by the changes in the fair values of derivatives that do not qualify for hedge accounting (referred to as economic hedges where the change in fair value of the derivative is not offset by any change in fair value on a hedged item) and to a much lesser degree by hedge ineffectiveness, which is the difference in the amounts recognized in our earnings for the changes in fair value of a derivative and the related hedged item. If there were a change in standards and we were unable to apply hedge accounting, the result could be an increase in volatility of our earnings from period to period. Such increases in earnings volatility could affect our ability to pay dividends, our ability to meet our retained earnings threshold, and our members’ willingness to hold the capital stock necessary for membership and/or lending activities with us.

The government support for the home mortgage market could have an adverse impact on our mortgage loans held for portfolio. Government policy and actions by the U.S. Treasury, the Federal Reserve, Fannie Mae, Freddie Mac, the Finance Agency, and the Federal Deposit Insurance Corporation (FDIC) have been focused on maintaining home mortgage rates at relatively low levels. These actions may increase the rate of mortgage prepayments which may adversely affect the earnings on our mortgage investments.

Changes in our credit ratings may adversely affect our business operations. As of March 8, 2016, we are rated Aaa with a stable outlook by Moody’s and AA+ with a stable outlook by S&P. Adverse revisions to or the withdrawal of our credit ratings could adversely affect us in a number of ways. It could require the posting of additional collateral for uncleared derivatives transactions and might influence counterparties to limit the types of transactions they would be willing to enter into with us or cause counterparties to cease doing business with us. We have issued letters of credit to support deposits of public unit funds with our members. In some circumstances, loss of our current rating could result in our letters of credit no longer being acceptable to collateralize public unit deposits or other transactions. We have also executed various standby bond purchase agreements in which we provide a liquidity facility for bonds issued by the HFAs by agreeing to purchase the bonds in the event they are tendered and cannot be remarketed in accordance with specified terms and conditions. If our current short-term ratings are reduced, suspended, or withdrawn, the issuers will have the right to terminate these standby bond purchase agreements, resulting in the loss of future fees that would be payable to us under these agreements.
 

22


Changes in the credit standing of the U.S. Government or other FHLBanks, including the credit ratings assigned to the U.S. Government or those FHLBanks, could adversely affect us. Pursuant to criteria used by S&P and Moody’s, the FHLBank System’s debt is linked closely to the U.S. sovereign rating because of the FHLBanks’ status as GSEs and the public perception that the FHLBank System would be likely to receive U.S. government support in the event of a crisis. The U.S. government’s fiscal challenges could impact the credit standing or credit rating of the U.S. government, which could in turn result in a revision of the rating assigned to us or the consolidated obligations of the FHLBank System.

The FHLBanks issue consolidated obligations that are the joint and several liability of all FHLBanks. Significant developments affecting the credit standing of one or more of the other FHLBanks, including revisions in the credit ratings of one or more of the other FHLBanks, could adversely affect the cost of consolidated obligations. An increase in the cost of consolidated obligations would adversely affect our cost of funds and negatively affect our financial condition. As of March 8, 2016, the consolidated obligations of the FHLBanks are rated Aaa/P-1 by Moody’s and AA+/A-1+ by S&P. All of the FHLBanks are rated Aaa with a stable outlook by Moody’s and AA+ with a stable outlook by S&P. Changes in the credit standing or credit ratings of one or more of the other FHLBanks could result in a revision or withdrawal of the ratings of the consolidated obligations by the rating agencies at any time, which may negatively affect our cost of funds and our ability to issue consolidated obligations for our benefit.

We may become liable for all or a portion of the consolidated obligations of one or more of the other FHLBanks. We are jointly and severally liable with the other FHLBanks for all consolidated obligations issued on behalf of all FHLBanks through the Office of Finance. We cannot pay any dividends to members or redeem or repurchase any shares of our capital stock unless the principal and interest due on all our consolidated obligations have been paid in full. If another FHLBank were to default on its obligation to pay principal or interest on any consolidated obligation, the Finance Agency may allocate the outstanding liability among one or more of the remaining FHLBanks on a pro rata basis or on any other basis the Finance Agency may determine. As a result, our ability to pay dividends to our members or to redeem or repurchase shares of our capital stock could be affected not only by our own financial condition, but also by the financial condition of one or more of the other FHLBanks.

The yield on or value of our MBS investments may be adversely affected by increased delinquency rates and credit losses related to mortgage loans that back our MBS investments. Trends in unemployment, home price growth, and foreclosure inventory have been moving in a positive direction for the past several years, which has supported the underlying health of our MBS investments. However, if one or more of these macroeconomic variables deteriorates noticeably, delinquency and/or default rates on the underlying collateral supporting these investments will likely increase, and we could experience reduced yields or losses on our MBS investments. Any increase in delinquency rates and credit losses related to mortgage loans pooled into MBS/CMO and HFA securities, which are insured by one of the monoline mortgage insurance companies, could adversely affect the yield on or value of our MBS/CMO and HFA investments. The magnitude of potential losses in the home mortgage loan market could potentially overwhelm one or more of the monoline mortgage insurance companies resulting in such company’s failure to perform. If collateral losses exceed the coverage ability of the insurance company, the MBS/CMO or HFA bondholders could experience losses of principal. Furthermore, market illiquidity has, from time to time, increased the amount of management judgment required to value private-label MBS and certain other securities. Subsequent valuations may result in significant changes in the value of private-label MBS and other investment securities. If we decide to sell securities due to credit deterioration, the price we may ultimately realize will depend on the demand and liquidity in the market at that time and may be materially lower than the fair value reflected in our financial statements.
 
Loan modification and liquidation programs could have an adverse impact on the value of our MBS investments. Efforts of mortgage servicers to modify delinquent loans in order to mitigate losses may include reductions in interest rates and/or principal on these loans. Losses from such loan modifications may be allocated to investors in MBS backed by these loans in the form of lower interest payments and/or reductions in future principal amounts received. In addition, efforts by the U.S. government to address delinquent mortgage loans could result in reductions in interest rates and/or principal and may also result in additional foreclosures that could result in an adverse impact on the value of our MBS investments.
 
Many servicers are contractually required to advance principal and interest payments on delinquent loans backing MBS investments, regardless of whether the servicer has received payment from the borrower, provided that the servicer believes it will be able to recoup the advanced funds from the underlying property securing the mortgage loan. Once the related property is liquidated, the servicer is entitled to reimbursement for these advances and other expenses incurred while the loan was delinquent. Such reimbursements may result in higher losses than we may have expected or experienced to date being allocated to our MBS investments backed by such loans, which may have an adverse impact on our results of operations and financial condition.
 
Counterparty credit risk could adversely affect us. We assume unsecured credit risk when entering into money market transactions and uncleared financial derivatives transactions with counterparties. The insolvency or other inability of a significant counterparty to perform on its obligations under such transactions or other agreements could have an adverse effect on our financial condition and results of operations.
 

23


Defaults by one or more of our institutional counterparties on its obligations to us could adversely affect our results of operations or financial condition. We have a high concentration of credit risk exposure to financial institutions as counterparties, the majority of which are located within the United States, Canada, Australia, and Europe. Our primary exposures to institutional counterparty risk are with: (1) obligations of mortgage servicers that service the loans we have as collateral on our credit obligations; (2) third-party providers of credit enhancements on the MBS that we hold in our investment portfolio, including mortgage insurers, bond insurers, and financial guarantors; (3) third-party providers of private and supplemental mortgage insurance for mortgage loans purchased under the MPF Program; (4) uncleared derivative counterparties; (5) third-party custodians and futures commission merchants associated with cleared derivatives; and (6) unsecured money market and Federal funds investment transactions. A default by a counterparty with significant obligations to us could adversely affect our ability to conduct operations efficiently and at cost-effective rates, which in turn could adversely affect our results of operations and financial condition.

Default by a derivatives clearinghouse on its obligations could adversely affect our results of operations or financial condition. The Dodd-Frank Act and implementing CFTC regulations require all clearable derivatives transactions to be cleared through a derivatives clearinghouse. As a result of such statutes and regulations, we are required to centralize our risk with the derivatives clearinghouses as opposed to the pre-Dodd-Frank Act methods of entering into derivatives transactions that allowed us to distribute our risk among various counterparties. A default by a derivatives clearinghouse: (1) could adversely affect our financial condition in the event the derivatives clearinghouse is unable to make payments owed to us or return our posted initial and/or variation margin; (2) jeopardize the effectiveness of derivatives hedging transactions; and (3) adversely affect our operations as we may be unable to enter into certain derivatives transactions or do so at cost-effective rates.

Securities or mortgage loans pledged as collateral by our members could be adversely affected by the devaluation or inability to liquidate the collateral in the event of a default by the member. Although we seek to obtain sufficient collateral on our credit obligations to protect ourselves from credit losses, changes in market conditions or other factors may cause the collateral to deteriorate in value, which could lead to a credit loss in the event of a default by a member and adversely affect our financial condition and results of operations. A reduction in liquidity in the financial markets or otherwise could have the same effect.
 
Our funding depends upon our ability to access the capital markets. Our primary source of funds is the sale of consolidated obligations in the capital markets, including the short-term discount note market. Our ability to obtain funds through the sale of consolidated obligations depends in part on prevailing conditions in the capital markets (including investor demand) at the time. Our counterparties in the capital markets are also subject to additional regulation following the financial crisis that ended in 2010. These regulations could alter the balance sheet composition, market activities, and behavior of our counterparties in a way that could be detrimental to our access to the capital markets and overall financial market liquidity, which could have a negative impact on our funding costs and results of operations. Further, we rely on the Office of Finance for the issuance of consolidated obligations, and a failure or interruption of services provided by the Office of Finance could hinder our ability to access the capital markets. Accordingly, we cannot make any assurance that we will be able to obtain funding on terms acceptable to us in the future, if we are able to obtain funding at all in the case of another severe financial, economic, or other disruption. If we cannot access funding when needed, our ability to support and continue our operations would be adversely affected, negatively affecting our financial condition and results of operations.
 
Changes in interest rates could significantly affect our earnings. Changes in interest rates that are detrimental to our investment and debt positions could negatively affect our financial condition and results of operations. Like many financial institutions, we realize income primarily from earnings on our invested capital as well as the spread between interest earned on our outstanding advances, mortgage loans, and investments and interest paid on our borrowings and other liabilities. Although we use various methods and procedures to monitor and manage our exposures to risk due to changes in interest rates, we may experience instances when our interest-bearing liabilities will be more sensitive to changes in interest rates than our interest-earning assets, or vice versa. These impacts could be exacerbated by prepayment and extension risk, which is the risk that mortgage-related assets will be refinanced in low interest-rate environments or will remain outstanding at below-market yields when interest rates increase.


24


We rely on derivatives to lower our cost of funds and reduce our interest-rate, option and prepayment risk, and we may not be able to enter into effective derivative instruments on acceptable terms. We use derivatives to: (1) obtain funding at more favorable rates; and (2) reduce our interest rate risk, option risk and mortgage prepayment risk. Management determines the nature and quantity of hedging transactions using derivatives based on various factors, including market conditions and the expected volume and terms of advances or other transactions. As a result, our effective use of derivatives depends upon management’s ability to determine the appropriate hedging positions in light of: (1) our assets and liabilities; and (2) prevailing and anticipated market conditions. In addition, the effectiveness of our hedging strategies depends upon our ability to enter into derivatives with acceptable counterparties or through derivative clearinghouses, on terms desirable to us and in the quantities necessary to hedge our corresponding obligations, interest rate risk or other risks. The cost of entering into derivative instruments has increased as a result of: (1) consolidations, mergers and bankruptcy or insolvency of financial institutions, which have led to fewer counterparties, resulting in less liquidity in the derivatives market; and (2) increased uncertainty related to the potential changes in legislation and regulations regarding over-the-counter derivatives including increased margin and capital requirements, and increased regulatory costs and transaction fees associated with clearing and custodial arrangements. If we are unable to manage our hedging positions properly, or are unable to enter into derivative hedging instruments on desirable terms or at all, we may incur higher funding costs, be required to limit certain advance product offerings, and be unable to effectively manage our interest rate risk and other risks, which could negatively affect our financial condition and results of operations.

Lack of a public market and restrictions on transferring our stock could result in an illiquid investment for the holder. Under the GLB Act, Finance Agency regulations and our capital plan, our Class A Common Stock may be redeemed upon the expiration of a six-month redemption period and our Class B Common Stock after a five-year redemption period following our receipt of a redemption request. Only capital stock in excess of a member’s minimum investment requirement, capital stock held by a member that has submitted a notice to withdraw from membership, or capital stock held by a member whose membership has been terminated may be redeemed at the end of the redemption period. Further, we may elect to repurchase excess capital stock of a member at any time at our sole discretion.
 
We cannot guarantee, however, that we will be able to redeem capital stock even at the end of the redemption periods. The redemption or repurchase of our capital stock is prohibited by Finance Agency regulations and our capital plan if the redemption or repurchase of the capital stock would cause us to fail to meet our minimum regulatory capital requirements. Likewise, under such regulations and the terms of our capital plan, we could not honor a member’s capital stock redemption request if the redemption would cause the member to fail to maintain its minimum capital stock investment requirement. Moreover, since our capital stock may only be owned by our members (or, under certain circumstances, former members and certain successor institutions), and our capital plan requires our approval before a member may transfer any of its capital stock to another member, we can provide no assurance that a member would be allowed to sell or transfer any excess capital stock to another member at any point in time.
 
We may also suspend the redemption of capital stock if we reasonably believe that the redemption would prevent us from maintaining adequate capital against a potential risk, or would otherwise prevent us from operating in a safe and sound manner. In addition, approval from the Finance Agency for redemptions or repurchases is required if the Finance Agency or our Board of Directors were to determine that we have incurred, or are likely to incur, losses that result in, or are likely to result in, charges against our capital. Under such circumstances, we cannot guarantee that the Finance Agency would grant such approval or, if it did, upon what terms it might do so. We may also be prohibited from repurchasing or redeeming our capital stock if the principal and interest due on any consolidated obligations that we issued through the Office of Finance has not been paid in full or if we become unable to comply with regulatory liquidity requirements to satisfy our current obligations.
 
Accordingly, there are a variety of circumstances that would preclude us from redeeming or repurchasing our capital stock that is held by a member. Since there is no public market for our capital stock and transfers require our approval, we cannot guarantee that a member’s purchase of our capital stock would not effectively become an illiquid investment.

We may not be able to meet our obligations as they come due or meet the credit and liquidity needs of our members in a timely and cost-effective manner. We seek to be in a position to meet our members’ credit and liquidity needs and to pay our obligations without maintaining excessive holdings of low-yielding liquid investments or being forced to incur unnecessarily high borrowing costs. In addition, in accordance with the Finance Agency’s requirement to maintain five calendar days of contingent liquidity, we maintain a contingency liquidity plan designed to protect against temporary disruptions in access to the FHLBank debt markets in response to a rise in capital market volatility. Our efforts to manage our liquidity position, including carrying out our contingency liquidity plan, may not enable us to meet our obligations and the credit and liquidity needs of our members, which could have an adverse effect on our net interest income, and thereby, our financial condition and results of operations.
 

25


We rely on financial models to manage our market and credit risk, to make business decisions, and for financial accounting and reporting purposes. The impact of financial models and the underlying assumptions used to value financial instruments may have an adverse impact on our financial condition and results of operations. We make significant use of financial models for managing risk. For example, we use models to measure and monitor exposures to interest rate and other market risks, including prepayment risk, as well as credit risk. We also use models in determining the fair value of financial instruments for which independent price quotations are not available or reliable. The degree of management judgment in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that are actively traded and have quoted market prices or parameters readily available, there is little to no subjectivity in determining fair value. If market quotes are not available, fair values are based on discounted cash flows using market estimates of interest rates and volatility or on dealer prices or prices of similar instruments. Pricing models and their underlying assumptions are based on management's best estimates for discount rates, prepayments, market volatility, and other factors. These assumptions may have a significant effect on the reported fair values of assets and liabilities, including derivatives, the related income and expense, and the expected future behavior of assets and liabilities. While the models we use to value instruments and measure risk exposures are subject to regular validation by independent parties, rapid changes in market conditions could impact the value of our instruments. The use of different models and assumptions, as well as changes in market conditions, could impact our financial condition and results of operations.
 
The information provided by these models is also used in making business decisions relating to strategies, initiatives, transactions, and products, and in financial statement reporting. We have adopted policies, procedures, and controls to monitor and manage assumptions used in these models. However, models are inherently imperfect predictors of actual results because they are based on assumptions about future performance. Changes in any models or in any of the assumptions, judgments, or estimates used in the models may cause the results generated by the model to be materially different. If the results are not reliable due to inaccurate assumptions, judgments, or estimates, we could make poor business decisions, including asset and liability management, or other decisions, which could result in an adverse financial impact. Furthermore, any strategies that we employ to attempt to manage the risks associated with the use of models may not be effective.
 
We rely heavily on information systems and other technology. We rely heavily on information systems and other technology to conduct and manage our business. If key technology platforms become obsolete, or if we experience disruptions, including difficulties in our ability to process transactions, our revenue and results of operations could be materially adversely affected. To the extent that we experience a failure or interruption in any of these systems or other technology, we may be unable to conduct and manage our business effectively, including, without limitation, our funding, hedging, and advance activities. Additionally, a failure in or breach of our operational or security systems or infrastructure, or those of third parties with which we do business, including as a result of cyber attacks, could disrupt our systems or data necessary for the operation of our business and/or result in the disclosure or misuse of confidential or proprietary information, or the unavailability of systems or data that are necessary for the operation of our business. While we have implemented disaster recovery, business continuity, and legacy software reduction plans, we can make no assurance that these plans will be able to prevent, timely and adequately address, or mitigate the negative effects of any such failure or interruption. A failure to maintain current technology, systems, and facilities or an operational failure or interruption could significantly harm our customer relations, risk management, and profitability, which could negatively affect our financial condition and results of operations.

Our controls and procedures may fail or be circumvented, and risk management policies and procedures may be inadequate. We may fail to identify and manage risks related to a variety of aspects of our business, including without limitation, operational risk, legal and compliance risk, human capital risk, liquidity risk, market risk, and credit risk. We have adopted controls, procedures, policies, and systems to monitor and manage these risks. Our management cannot provide complete assurance that such controls, procedures, policies, and systems are adequate to identify and manage the risks inherent in our business and because our business continues to evolve, we may fail to fully understand the implications of changes in our business, and therefore, we may fail to enhance our risk governance framework to timely or adequately address those changes. Failed or inadequate controls and risk management practices could have an adverse effect on our financial condition, results of operations or reputation.

Reliance on FHLBank of Chicago as MPF Provider could have a negative impact on our business if FHLBank of Chicago were to default on its contractual obligations owed to us. As part of our business, we participate in the MPF Program with FHLBank of Chicago. In its role as MPF Provider, FHLBank of Chicago provides the infrastructure, operational support, and maintenance of investor relations for the MPF Program and is also responsible for publishing and maintaining the MPF Guides, which include the requirements PFIs must follow in originating or selling and servicing MPF mortgage loans. If FHLBank of Chicago changes its MPF Provider role, ceases to operate the MPF Program, or experiences a failure or interruption in its information systems and other technology, our mortgage loan assets could be adversely affected, and we could experience a related decrease in our net interest margin and profitability. In the same way, we could be adversely affected if any of FHLBank of Chicago's third-party vendors engaged in the operation of the MPF Program, or investors that purchase mortgages under the MPF Program, were to experience operational or other difficulties that prevent the fulfillment of their contractual obligations.


26


We face competition for loan demand, purchases of mortgage loans and access to funding, which could adversely affect our earnings. Our primary business is making advances to our members. We compete with other suppliers of wholesale funding, both secured and unsecured, including investment banks, commercial banks, and, in certain circumstances, other FHLBanks. Our members have access to alternative funding sources, which may offer more favorable terms on their loans than we offer on our advances, including more flexible credit or collateral standards. In addition, many of our competitors are not subject to the same regulations that are applicable to us. This enables those competitors to offer products and terms that we are not able to offer.
 
The availability of alternative funding sources to our members, such as an increase in brokered deposits, may significantly decrease the demand for our advances. Any change we might make in pricing our advances, in order to compete more effectively with competitive funding sources, may decrease our profitability on advances. A decrease in the demand for our advances or a decrease in our profitability on advances, would negatively affect our financial condition and results of operations.
 
Likewise, our acquisition of mortgage loans is subject to competition. The most direct competition for purchases of mortgage loans comes from other buyers of conventional, conforming, fixed rate mortgage loans, such as Fannie Mae and Freddie Mac. Increased competition can result in the acquisition of a smaller market share of the mortgage loans available for purchase and, therefore, lower income from this business activity.
 
We also compete in the capital markets with Fannie Mae, Freddie Mac, and other GSEs, as well as corporate, sovereign, and supranational entities for funds raised through the issuance of consolidated obligations and other debt instruments. Our ability to obtain funds through the issuance of debt depends in part on prevailing market conditions in the capital markets (including investor demand), such as effects on the reduction in liquidity in financial markets, which are beyond our control. Accordingly, we may not be able to obtain funding on terms that are acceptable to us. Increases in the supply of competing debt products in the capital markets may, in the absence of increases in demand, result in higher debt costs to us or lesser amounts of debt issued at the same cost than otherwise would be the case. Although our supply of funds through issuance of consolidated obligations has always kept pace with our funding needs, we cannot guarantee that this will continue in the future, especially in the case of financial market disruptions when the demand for advances by our members typically increases.
 
Member mergers or consolidations, failures, or other changes in member business with us may adversely affect our financial condition and results of operations. The financial services industry periodically experiences consolidation, which may occur as a result of various factors including adjustments in business strategies and increasing expense and compliance burdens. If future consolidation occurs within our district, it may reduce the number of current and potential members in our district, resulting in a loss of business to us and a potential reduction in our profitability. Member failures and out-of-district consolidations also can reduce the number of current and potential members in our district. The resulting loss of business could negatively impact our financial condition and the results of operations, as well as our operations generally. If our advances are concentrated in a smaller number of members, our risk of loss resulting from a single event (such as the loss of a member’s business due to the member’s acquisition by a non-member) would become proportionately greater.

Further, while member failures may cause us to liquidate pledged collateral if the outstanding advances are not repaid, historically, failures have been resolved either through repayment directly from the FDIC or through the purchase and assumption of the advances by another surviving financial institution. Liquidation of pledged collateral by us may cause financial statement losses. Additionally, as members become financially distressed, we may, at the request of their regulators, decrease lending limits or, in certain circumstances, cease lending activities to certain members if they do not have adequate eligible collateral to support additional borrowings. If members are unable to obtain sufficient liquidity from us, further deterioration of that member institution may continue. This may negatively impact our reputation and, therefore, negatively impact our financial condition and results of operations.

A high proportion of advances and capital is concentrated with a few members, and a loss of, or change in business activities with, such institutions could adversely affect us. We have a high concentration of advances (see Table 25) and capital with a few institutions. A reduction in advances by such institutions, or the loss of membership by such institutions, whether through merger, consolidation, withdrawal, or other action, may result in a reduction in our total assets and a possible reduction of capital as a result of the repurchase or redemption of capital stock. The reduction in assets and capital may also reduce our net income.

Item 1B: Unresolved Staff Comments
 
Not applicable.
 

27


Item 2: Properties
 
We occupy approximately 62,796 square feet of leased office space at One Security Benefit Place, Suite 100, Topeka, Kansas. We also maintain in Topeka a leased off-site back-up facility with approximately 3,000 square feet. We have also acquired 942,578 square feet of land in Topeka, Kansas to be utilized as a building site for a new complex to house our operations.
 
Item 3: 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 4: Mine Safety Disclosures

Not applicable.

PART II
 
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
As a cooperative, members own almost all of our Class A Common Stock and Class B Common Stock with the remainder of the capital stock held by former members that are required to retain capital stock ownership to support outstanding advance and mortgage loan activity the former members executed while they were members. Note, however, that the portion of our capital stock subject to mandatory redemption is treated as a liability and not as capital, including the capital stock of former members. There is no public trading market for our capital stock.
 
All of our member directors are elected by and from the membership, and we conduct our business in advances and mortgage loan acquisitions almost exclusively with our members. Depending on the class of capital stock, it may be redeemed at par value either six months (Class A Common Stock) or five years (Class B Common Stock) after we receive a written request by a member, subject to regulatory limits and to the satisfaction of any ongoing stock investment requirements applying to the member under our capital plan. We may repurchase shares held by members in excess of the members’ required stock holdings at our discretion at any time at par value. Par value of all common stock is $100 per share. As of March 8, 2016, we had 777 stockholders of record and 1,818,364 shares of Class A Common Stock and 12,682,961 shares of Class B Common Stock outstanding, including 20,627 shares of Class A Common Stock and no shares of Class B Common Stock subject to mandatory redemption by members or former members. "Classes" of stock are not registered under the Securities Act of 1933 (as amended). The Recovery Act amended the Exchange Act to require the registration of a class of common stock of each FHLBank under Section 12(g) and for each FHLBank to maintain such registration and to be treated as an “issuer” under the Exchange Act, regardless of the number of members holding such a class of stock at any given time. Pursuant to a Finance Agency regulation, we voluntarily registered one of our classes of stock pursuant to section 12(g)(1) of the Exchange Act.
 

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We paid quarterly stock dividends during the years ended December 31, 2015 and 2014, which excludes dividends treated as interest expense for mandatorily redeemable shares. Dividends paid on capital stock are outlined in Table 7 (dollar amounts in thousands):
 
Table 7
 
Class A Common Stock
Class B Common Stock
 
Percent
Dividends Paid in Cash1
Dividends Paid in Class B Common Stock
Total Dividends Paid2
Percent
Dividends Paid in Cash1
Dividends Paid in Class B Common Stock
Total Dividends Paid2
12/31/2015
1.00
%
$
40

$
455

$
495

6.00
%
$
34

$
18,391

$
18,425

09/30/2015
1.00

39

455

494

6.00

35

18,065

18,100

06/30/2015
1.00

40

449

489

6.00

34

15,987

16,021

03/31/2015
1.00

40

412

452

6.00

34

14,201

14,235

12/31/2014
1.00

40

431

471

6.00

34

14,087

14,121

09/30/2014
1.00

41

398

439

6.00

34

12,958

12,992

06/30/2014
1.00

39

436

475

5.00

32

9,498

9,530

03/31/2014
0.25

39

256

295

4.00

40

7,840

7,880

                   
1 
The cash dividends listed are cash dividends paid for partial shares and dividends paid to former members. Stock dividends are paid in whole shares.
2 
Excludes dividends paid on mandatorily redeemable capital stock classified as interest expense.

Dividends may be paid in cash or shares of Class B Common Stock as authorized under our capital plan and approved by our Board of Directors. Finance Agency regulation prohibits any FHLBank from paying a stock dividend if excess stock outstanding will exceed one percent of its total assets after payment of the stock dividend. We were able to manage our excess capital stock position in the past two years in order to pay stock dividends.

We anticipate paying a 1.00 percent dividend on Class A Common Stock and a 6.00 percent dividend on Class B Common Stock for the first quarter of 2016. Historically, dividend levels have been influenced by several factors, including: (1) an objective of moving dividend rates gradually over time; (2) an objective of having dividends reflective of the level of current short‑term interest rates; and (3) an objective of managing the balance of retained earnings to appropriate levels as set forth in the retained earnings policy. See Item 1 – “Business – Capital, Capital Rules and Dividends” for more information regarding our retained earnings policy, and also see Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources - Capital” for a discussion of restrictions on dividend payments in the form of capital stock.

Our retained earnings balances have been significantly above the threshold set forth in the retained earnings policy and were not a factor in determining dividend declarations in 2015 and 2014. There is a possibility that the retained earnings threshold level could change and be a greater consideration for dividend levels in the future because the threshold is a function of the size and composition of our balance sheet.

Item 6: Selected Financial Data

Table 8 presents Selected Financial Data for the periods indicated (dollar amounts in thousands):


29


Table 8
 
12/31/2015
12/31/2014
12/31/2013
12/31/2012
12/31/2011
Statement of Condition (as of period end):
 
 
 
 
 
Total assets
$
44,435,654

$
36,853,977

$
33,950,304

$
33,818,627

$
33,190,182

Investments1
13,606,080

9,620,399

8,704,552

10,774,411

10,576,537

Advances
23,580,371

18,302,950

17,425,487

16,573,348

17,394,399

Mortgage loans, net2
6,390,708

6,230,172

5,949,480

5,940,517

4,933,332

Total liabilities
42,593,902

35,268,710

32,149,084

32,098,146

31,488,735

Deposits
759,366

595,775

961,888

1,181,957

997,371

Consolidated obligation bonds, net3
19,875,255

20,221,002

20,056,964

21,973,902

19,894,483

Consolidated obligation discount notes, net3
21,813,746

14,219,612

10,889,565

8,669,059

10,251,108

Total consolidated obligations, net3
41,689,001

34,440,614

30,946,529

30,642,961

30,145,591

Mandatorily redeemable capital stock
2,739

4,187

4,764

5,665

8,369

Total capital
1,841,752

1,585,267

1,801,220

1,720,481

1,701,447

Capital stock
1,208,947

974,041

1,252,249

1,264,456

1,327,827

Total retained earnings
651,782

627,133

567,332

481,282

401,461

Accumulated other comprehensive income (loss) (AOCI)
(18,977
)
(15,907
)
(18,361
)
(25,257
)
(27,841
)
Statement of Income (for the year ended):
 
 
 
 
 
Net interest income
239,680

225,165

217,773

219,680

230,926

(Reversal) provision for credit losses on mortgage loans
(1,909
)
(1,615
)
1,926

2,496

1,058

Other income (loss)
(80,089
)
(55,850
)
(30,818
)
(42,916
)
(78,328
)
Other expenses
57,762

53,143

52,762

51,696

53,781

Income before assessments
103,738

117,787

132,267

122,572

97,759

AHP and REFCORP assessments
10,378

11,783

13,229

12,261

20,433

Net income
93,360

106,004

119,038

110,311

77,326

Selected Financial Ratios and Other Financial Data (for the year ended):
 
 
 
 
 
Dividends paid in cash4
296

299

291

285

362

Dividends paid in stock4
68,415

45,904

32,697

30,205

27,257

Weighted average dividend rate5
5.26
%
4.22
%
2.42
%
2.26
%
1.99
%
Dividend payout ratio6
73.60
%
43.59
%
27.71
%
27.64
%
35.72
%
Return on average equity
4.78
%
6.29
%
6.37
%
6.23
%
4.43
%
Return on average assets
0.21
%
0.30
%
0.33
%
0.32
%
0.21
%
Average equity to average assets
4.45
%
4.82
%
5.24
%
5.13
%
4.73
%
Net interest margin7
0.55
%
0.64
%
0.61
%
0.64
%
0.63
%
Total capital ratio8
4.14
%
4.30
%
5.31
%
5.09
%
5.13
%
Regulatory capital ratio9
4.19
%
4.36
%
5.37
%
5.18
%
5.24
%
Ratio of earnings to fixed charges10
1.46

1.58

1.59

1.45

1.31

                   
1 
Includes trading securities, available-for-sale 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 $1,972,000, $4,550,000, $6,748,000, $5,416,000, and $3,473,000 as of December 31, 2015, 2014, 2013, 2012, and 2011, respectively.
3 
Consolidated obligations are bonds and discount notes that we are primarily liable to repay. See Note 17 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 $39,000, $40,000, $25,000, $41,000, and $174,000 for the years ended December 31, 2015, 2014, 2013, 2012, and 2011, 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).


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Item 7: 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 audited financial statements and related notes presented under Item 8 of this annual report on Form 10-K. 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; and
Recently Issued Accounting Standards.

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 members. The FHLBanks, together with the Office of Finance, a joint office of the FHLBanks, make up the FHLBank System, which consists of 11 district FHLBanks. 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.

On May 31, 2015, the FHLBank of Des Moines and the FHLBank of Seattle completed the merger that was announced on July 31, 2014. As a result of this merger, there are now 11 district FHLBanks in the FHLBank System.

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 viewed the FHLBanks’ consolidated obligations as “Federal agency” debt. As a result, the FHLBanks have historically 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, a member is 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 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 their 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 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 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) periodically repurchase excess capital stock in order to appropriately manage the size of our balance sheet; and (3) pay stable dividends.


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Net income for the year ended December 31, 2015 was $93.4 million compared to $106.0 million for the year ended December 31, 2014. The $12.6 million decrease in net income was driven by fair value net losses on trading securities and derivatives and hedging activities, which resulted in a net decrease of $23.9 million, partially offset by a $14.5 million increase in net interest income. The increase in fair value net losses were largely due to a significant widening in mortgage rates relative to the interest rate swap curve in the latter half of 2015 that negatively impacted the values of both our economic interest rate swaps and the hedged multi-family GSE MBS. Additionally, interest rates increased during the last quarter of 2015, which resulted in unrealized net losses on our non-MBS trading investments. The increase in rates resulted in unrealized net gains on the derivatives associated with the non-MBS trading investments, although to a lesser extent. Furthermore, we had a significant decline in unrealized losses on our economic interest rate caps that helped to offset the increase in unrealized losses on the derivatives associated with our multi-family MBS. The increase in net interest income for the year ended December 31, 2015 was largely a result of advance growth, primarily in our lower-yielding line of credit advances, increases in higher-yielding investments, and a decrease in average funding cost driven by a shift in composition to lower-cost discount notes to fund the growth in short-term advances. New counterparty relationships have also provided us with more options for utilizing reverse repurchase agreements for overnight investments during 2015. Detailed discussion relating to the fluctuations in net interest income, net gain (loss) on derivatives and hedging activities, and net gain (loss) on trading securities can be found under this Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.”

Total assets increased $7.6 billion, or 20.6 percent, from December 31, 2014 to December 31, 2015. The FHLBank has been actively promoting the impact of the dividend on the effective borrowing cost of advances to increase member awareness of the benefit of higher dividends, which has resulted in increased utilization of advances, especially the line of credit product. Net advances increased $5.3 billion, or 28.8 percent, from December 31, 2014. Investments increased $4.0 billion, or 41.4 percent, from December 31, 2014, as a result of the increase in advances and related capital. We strive to maintain a ratio of average advances and average mortgage loans to average consolidated obligations (core mission asset ratio) of 70 to 80 percent, so increases in the average balance of both advances and mortgages allows for growth in non-mission assets while maintaining our desired core mission asset ratio. Although our investments represent non-mission assets, they are utilized to provide liquidity and primary and secondary market support for the U.S. housing securities market.

Total liabilities increased $7.3 billion, or 20.8 percent, from December 31, 2014 to December 31, 2015. This increase was attributable to the $7.6 billion increase in consolidated obligation discount notes, partially offset by a decrease in consolidated obligation bonds. The increase in discount notes from December 31, 2014 to December 31, 2015 was a result of a shift from longer term bonds to shorter term discount notes to fund the increase in short-term advances during that time period. For additional information, see Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition.”

Dividends paid to members totaled $68.7 million for the year ended December 31, 2015 compared to $46.2 million for the same period in the prior year. The dividend rate for Class A Common Stock remained at 1.00 percent from December 31, 2014 to December 31, 2015, and the dividend rate for Class B Common Stock remained at 6.00 percent for the same period. Capital management changes that have allowed us to maintain this level of dividends include: (1) a reduction in our membership capital stock (Class A) purchase requirement in 2012; (2) a reduction in our activity stock (Class B) requirement for AMA in 2013; (3) a reduction of our activity stock (Class B) requirement for advances in 2014; (4) weekly exchanges of excess Class B stock to Class A; and (5) periodic repurchases of excess Class A stock.

Our strategic business plan is structured in such a way that our business activities will achieve our mission consistent with the Finance Agency’s core mission asset guidance. Our ratio of average advances and average mortgage loans to average consolidated obligations (core mission assets ratio) was 79 percent for 2015. 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 2016. However, this ratio is dependent on several variables such as member demand for our advance and mortgage loan products, so it is possible that we will be unable to maintain this level indefinitely.

We have also made changes to our management of capital levels, which included reducing our activity-based stock purchase requirement (see “Liquidity and Capital Resources - Capital under this Item 7), making periodic repurchases of some or all of our excess stock, and increasing our dividend payout ratio, among other practices (see Item 5 – “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”), while maintaining sufficient levels of liquidity to fulfill our mission.


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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 9 presents selected market interest rates as of the dates or for the periods shown.

Table 9
Market Instrument
Average Rate for
Average Rate for
12/31/2015
12/31/2014
2015
2014
Ending Rate
Ending Rate
Overnight Federal funds effective/target rate1
0.13
%
0.09
%
0.25 to 0.50%
0.0 to 0.25%
Federal Open Market Committee (FOMC) target rate for overnight Federal funds1
0.25 to 0.50

0.0 to 0.25

0.25 to 0.50
0.0 to 0.25
3-month U.S. Treasury bill1
0.04

0.03

0.16
0.04
3-month LIBOR1
0.32

0.23

0.61
0.26
2-year U.S. Treasury note1
0.68

0.45

1.06
0.67
5-year U.S. Treasury note1
1.53

1.63

1.78
1.65
10-year U.S. Treasury note1
2.13

2.53

2.29
2.17
30-year residential mortgage note rate2
4.04

4.35

4.19
4.04
                   
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.

Through much of 2015, the cost of FHLBank consolidated obligations as measured by the spread to comparative U.S. Treasury rates has remained relatively stable; however, the spread to three-month LIBOR deteriorated in the last half of 2015 as a result of actions taken by foreign central banks to support their currencies and also due to heavy issuance of term corporate debt that is swapped to LIBOR. These conditions have increased the cost of consolidated obligations swapped or indexed to LIBOR, and are expected to persist into the first half of 2016. As a result of weakening spreads, we anticipate funding a larger portion of our balance sheet with discount notes during 2016. At the end of 2015, the FOMC raised the target rate for overnight Federal funds for the first time in nearly a decade and emphasized a plan to raise rates gradually for the next three years. The statement from the January 2016 meeting indicates that overseas challenges and a global slowdown in general are very much a part of policy considerations, so additional rate increases are expected to be minimal for the foreseeable future. The FOMC concluded the asset purchase program in October 2014 but is maintaining its existing policy of reinvesting principal payments from its holdings of GSE debt and GSE MBS and of rolling over maturing U.S. Treasury securities at auction. The rates on U.S. Treasuries and GSE 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. For further discussion see this Item 7 – “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. This has allowed the overall cost to issue short-term consolidated obligations to remain relatively low throughout 2015. Several market events continue to have the potential to impact the demand for our consolidated obligations including geopolitical events and/or disruptions, including recent concern over China's markets, economy, and currency; the upcoming presidential election; changes in interest rates and the shape of the yield curve as the FOMC contemplates increasing short-term interest rates; and a decline in dealer demand due to regulatory changes.

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 and hedging activities;
Fair value determinations;
Accounting for deferred premium/discount associated with MBS; and
Determining the adequacy of the allowance for credit losses.


33


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 condition and results of operations and require complex management judgment are described below.
 
Accounting for Derivatives and Hedging Activities: Derivative instruments are carried at fair value on the Statements of Condition. Any change in the fair value of a derivative is recorded each period in current period earnings or other comprehensive income (OCI), depending upon whether the derivative is designated as part of a hedging relationship and, if it is, the type of hedging relationship. A majority of our derivatives are structured to offset some or all of the risk exposure inherent in our lending, mortgage purchase, investment, and funding activities. We are required to recognize unrealized gains or losses on derivative positions, regardless of whether offsetting gains or losses on the hedged assets or liabilities are recognized simultaneously. Therefore, the accounting framework introduces the potential for considerable income variability from period to period. Specifically, a mismatch can exist between the timing of income and expense recognition from assets or liabilities and the income effects of derivative instruments positioned to mitigate market risk and cash flow variability. Therefore, during periods of significant changes in interest rates and other market factors, reported earnings may exhibit considerable variability. We seek to utilize hedging techniques that are effective under the hedge accounting requirements; however, in some cases, we have elected to enter into derivatives that are economically effective at reducing risk but do not meet hedge accounting requirements, either because it was more cost effective to use a derivative hedge compared to a non-derivative hedging alternative, or because a non-derivative hedging alternative was not available. As required by Finance Agency regulation and our RMP, derivative instruments that do not qualify as hedging instruments may be used only if we document a non-speculative purpose at the inception of the derivative transaction.
 
A hedging relationship is created from the designation of a derivative financial instrument as either hedging our exposure to changes in the fair value of a financial instrument or changes in future cash flows attributable to a balance sheet financial instrument or anticipated transaction. 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. Highly effective hedges that use interest rate swaps as the hedging instrument and that meet certain stringent criteria can qualify for “shortcut” fair value hedge accounting. Shortcut hedge accounting allows for the assumption of no ineffectiveness, which means that the change in fair value of the hedged item can be assumed to be equal to the change in fair value of the derivative. If the hedge is not designated for shortcut hedge accounting, it is treated as a “long haul” fair value hedge, where the change in fair value of the hedged item must be measured separately from the derivative, and for which effectiveness testing must be performed regularly with results falling within established tolerances. If the hedge fails effectiveness testing, the hedge no longer qualifies for hedge accounting and the derivative is marked to estimated fair value through current period earnings without any offsetting change in estimated fair value related to the hedged item. Although we still have a small number of derivative transactions designated as shortcut hedges outstanding, we discontinued using shortcut hedge accounting for all derivative transactions entered into on or after July 1, 2008.
 
For derivative transactions that potentially qualify for long haul fair value hedge accounting treatment, management must assess how effective the derivatives have been, and are expected to be, in hedging offsetting changes in the estimated fair values attributable to the risks being hedged in the hedged items. Hedge effectiveness testing is performed at the inception of the hedging relationship and on an ongoing basis for long haul fair value hedges. We perform testing at hedge inception based on regression analysis of the hypothetical performance of the hedging relationship using historical market data. We then perform regression testing on an ongoing basis using accumulated actual values in conjunction with hypothetical values. Specifically, each month we use a consistently applied statistical methodology that employs a sample of 30 historical interest rate environments and includes an R-squared test (commonly used statistic to measure correlation of the data), a slope test, and an F-statistic test (commonly used statistic to measure how well the regression model describes the collection of data). These tests measure the degree of correlation of movements in estimated fair values between the derivative and the related hedged item. For the hedging relationship to be considered effective, results must fall within established tolerances.
 
Given that a derivative qualifies for long haul fair value hedge accounting treatment, the most important element of effectiveness testing is the price sensitivity of the derivative and the hedged item in response to changes in interest rates and volatility as expressed by their effective durations. The effective duration will be influenced mostly by the final maturity and any option characteristics. In general, the shorter the effective duration, the more likely it is that effectiveness testing would fail because of the impact of the short-term LIBOR side of the interest rate swap. In this circumstance, the slope criterion is the more likely factor to cause the effectiveness test to fail.
 
The estimated fair values of the derivatives and hedged items do not have any cumulative economic effect if the derivative and the hedged item are held to maturity, or contain mutual optional termination provisions at par. Since these fair values fluctuate throughout the hedge period and eventually return to zero (derivative) or par value (hedged item) on the maturity or option exercise date, the earnings impact of fair value changes is only a timing issue for hedging relationships that remain outstanding to maturity or the call termination date.
 

34


For derivative instruments and hedged items that meet the requirements as described above, we do not anticipate any significant impact on our financial condition or operating performance. For derivative instruments where no identified hedged item qualifies for hedge accounting, changes in the market value of the derivative are reflected in income. As of December 31, 2015 and 2014, we held a portfolio of derivatives that are marked to market with no offsetting qualifying hedged item. This portfolio of economic derivatives consisted primarily of: (1) interest rate swaps hedging fixed rate MBS and non-MBS trading investments; (2) interest rate caps hedging adjustable rate MBS with embedded caps; (3) interest rate swaps hedging variable rate consolidated obligation bonds; and (4) interest rate swaps hedging fixed rate consolidated obligation discount notes. While the fair value of these derivative instruments, with no offsetting qualifying hedged item, will fluctuate with changes in interest rates and the impact on our earnings can be material, the change in fair value of trading securities being hedged by economic hedges is expected to partially offset that impact. The change in fair value of the derivatives classified as economic hedges is only partially offset by the change in the fair value of trading securities being hedged by economic hedges because the amount of economic hedges exceeds the amount of swapped trading securities and because of the relationship between mortgage rates relative to the interest rate swap curve for the swapped MBS trading securities. See Tables 61 and 62 under Item 7A – "Quantitative and Qualitative Disclosures About Market Risk," which 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. The total par value of non-MBS and MBS classified as trading securities related to economic hedges was $1.3 billion and $0.9 billion, respectively, as of December 31, 2015, which matches the notional amount of interest rate swaps hedging the GSE debentures and MBS in trading securities on that date. For asset/liability management purposes, our fixed rate GSE debentures and MBS currently classified as trading are matched to interest rate swaps that effectively convert the securities from fixed rate investments to variable rate instruments. See Tables 14 through 16 under this Item 7, which show the relationship of gains/losses on economic hedges and gains/losses on the trading securities being hedged by economic derivatives. Our projections of changes in fair value of the derivatives have been consistent with actual results.
 
Fair Value: As of December 31, 2015 and 2014, certain assets and liabilities, including investments classified as trading or available-for-sale, and all derivatives, were presented in the Statements of Condition at fair value. Under GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair values play an important role in the valuation of certain assets, liabilities and derivative transactions. The fair values we generate directly impact the Statements of Condition, Statements of Income, Statements of Comprehensive Income, Statements of Capital, and Statements of Cash Flows as well as risk-based capital, duration of equity (DOE), and market value of equity (MVE) disclosures. Management also estimates the fair value of collateral that borrowers pledge against advance borrowings and other credit obligations to confirm that we have sufficient collateral to meet regulatory requirements and to protect ourselves from a credit loss.
 
Fair value measurement under GAAP uses a three-level fair value hierarchy to reflect the level of judgment involved in estimating fair value. Fair values are based on market prices when they are available (generally considered a Level 1 or Level 2 valuation under GAAP). If market quotes are not available, fair values are based on discounted cash flows using market estimates of interest rates and volatility, or on prices of similar instruments (generally considered a Level 3 valuation under GAAP). Pricing models and their underlying assumptions are based on our best estimates for discount rates, prepayment speeds, market volatility and other factors. We validate our financial models at least annually and the models are calibrated to values from outside sources on a monthly basis. We validate modeled values to outside valuation services routinely to determine if the values generated from discounted cash flows are reasonable. Additionally, due diligence procedures are completed for third-party pricing vendors. The assumptions used by third-party pricing vendors or within our models may have a significant effect on the reported fair values of assets and liabilities, including derivatives, and the related income and expense. See Note 16 of the Notes to Financial Statements under Item 8 – “Financial Statements and Supplementary Data” for a detailed discussion of the assumptions used to calculate fair values and the due diligence procedures completed. The use of different assumptions as well as changes in market conditions could result in materially different net income and retained earnings.

As of December 31, 2015, we had no fair values that were classified as level 3 valuations for financial instruments that are measured on a recurring basis at fair value. However, we have impaired mortgage loans and REO, which were written down to their fair values and considered level 3 valuations as of year-end. Based on the validation of our inputs and assumptions with other market participant data, we have concluded that the pricing derived should be considered level 3 valuations. We record private-label MBS at fair value at the time it is determined to have OTTI. Due to a general lack of trades in the market for these securities, we have concluded that the pricing derived should be considered level 3 valuations.
 

35


Deferred Premium/Discount Associated with MBS: When we purchase MBS, we often pay an amount that is different than the UPB. The difference between the purchase price and the contractual note amount is a premium if the purchase price is higher and a discount if the purchase price is lower. Accounting guidance permits us to amortize (or accrete) the premiums (or discounts) in a manner such that the yield recognized on the underlying asset is constant over the asset’s estimated life. We typically pay more than the UPBs when the interest rates on the MBS are greater than prevailing market rates for similar MBS on the transaction date. The net purchase premiums paid are then amortized using the level-yield method over the expected lives of the MBS as a reduction in yield (decreases interest income). Similarly, if we pay less than the UPB because interest rates on the MBS are lower than prevailing market rates on similar MBS on the transaction date, the net discounts are accreted in the same manner as the premiums, resulting in an increase in yield (increases interest income). The level‑yield amortization method is applied using expected cash flows that incorporate prepayment projections that are based on mathematical models which describe the likely rate of consumer mortgage loan refinancing activity in response to incentives created (or removed) by changes in interest rates. Changes in interest rates have the greatest effect on the extent to which mortgage loans may prepay, although, during the recent disruption in the financial market, tight credit and declining home prices, consumer mortgage refinancing behavior has also been significantly affected by the borrower’s credit score and the value of the home in relation to the outstanding loan value. Generally, however, when interest rates decline, mortgage loan prepayment speeds are likely to increase, which accelerates the amortization of premiums and the accretion of discounts. The opposite occurs when interest rates rise. We use a third‑party data service that provides estimates of cash flows, from which we determine expected asset lives for the MBS. The level‑yield method uses actual prepayments received and projected future mortgage prepayment speeds, as well as scheduled principal payments, to determine the amount of premium/discount that must be recognized and will result in a constant monthly yield until maturity. Amortization of MBS premiums could accelerate in falling interest-rate environments or decelerate in rising interest-rate environments. Exact trends will depend on the relationship between market interest rates and coupon rates on outstanding MBS, the historical evolution of mortgage interest rates, the age of the underlying mortgage loans, demographic and population trends, and other market factors such as increased foreclosure activity, falling home prices, tightening credit standards by mortgage lenders and the other housing GSEs, and other repercussions from the financial market conditions.
 
Allowance for Credit Losses: We have established an allowance methodology for each of our portfolio segments to estimate the allowance for credit losses, if necessary, to provide for probable losses inherent in our portfolio segments.

Mortgage Loans - We estimate the allowance for loan loss on homogeneous pools of mortgage loans or on an individual mortgage loan basis to assess the credit losses that are inherent in our conventional mortgage loan portfolio but have not been realized.
Collectively Evaluated Mortgage Loans - The assessment of loan loss for the pools of loans entails segmenting the loan pool into strata based on each of the current classifications of each loan (i.e., current, delinquent, non-performing, referred to foreclosure). We perform a migration analysis to determine the probability of default for each stratum of loans based on a short- and mid-term horizon utilizing historical statistics. In addition, we determine the pool’s historical loss statistics based on a short- and mid-term horizon to determine the loss severity. Loan balances, probability of default, and loss severity are then utilized to determine the expected loan loss for the pool.
Individually Evaluated Mortgage Loans - We calculate an allowance for loan loss on individual loans if events or circumstances make it probable that we will not be able to collect all amounts due according to the contractual terms for a subset of the mortgage loans. We have determined that all mortgage loans held in our mortgage loan portfolio are considered collateral dependent and have elected to measure individual loan impairment based on collateral value less estimated cost to sell. Collateral value is based on appraisals, if available, or estimated property values using an automated valuation model or housing pricing index. If the collateral value less cost to sell is less than the recorded investment in the loan, the loan is considered impaired. Beginning in January 2015, the excess of the recorded investment in the loan over the loan’s collateral value less cost to sell is charged off if the loan is over 180 days delinquent or in bankruptcy. If a loan has been individually evaluated for impairment, it is excluded from the loan population for which a collective allowance is estimated.

Once the collectively evaluated and individually evaluated assessments are completed, the total estimates of loan losses are accumulated to the master commitment level to determine if, and by how much, the estimated loan losses exceed the FLA. The estimated loan losses in excess of the FLA by master commitment may be covered up to the PFI’s CE obligation amount (provided directly by the PFI or through the PFI’s purchase of SMI). We are responsible for any estimated loan losses in excess of the PFI’s CE obligation for each master commitment. For additional information on the loss allocation rules for each traditional MPF product, see Item 1 – “Business – Mortgage Loans.” The estimated losses that will be allocated to us (i.e., excluding estimated losses covered by CE obligations) are recorded as the balance in the allowance for loan loss with the resulting offset being presented as the provision for credit losses on mortgage loans.


36


Credit products - We have never experienced a credit loss on an advance. Based upon the collateral held as security, our credit extension and collateral policies, credit analysis and repayment history, we currently do not anticipate any credit losses on advances and have not recorded an allowance for losses on advances. We are required by statute to obtain and maintain security interests in sufficient collateral on advances to protect against losses, and to accept as collateral on such advances only certain qualified types of collateral, which are primarily U.S. government, U.S. obligation or GSE securities, certain residential mortgage loans, deposits in the FHLBank, and other real estate related assets. See Item 1 – “Business – Advances” for a more detailed discussion of collateral.

Direct financing lease receivable - We have a recorded investment in a direct financing lease receivable with a member for a building complex and property. Under the office complex agreement, we have 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, we can apply any excess collateral securing credit products to any shortfall in the leasing arrangement.

Term Federal Funds Sold and Term Securities Purchased Under Agreements to Resell - There were no investments in term Federal funds sold or in term securities purchased under agreements to resell outstanding as of December 31, 2015 and 2014, and any such investments acquired during the years ended December 31, 2015 and 2014 were repaid according to their contractual terms.

The process of determining the allowance for credit losses requires a high degree of judgment. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions. Because of variability in the data underlying the assumptions made in the process of determining the allowance for credit losses, estimates of the portfolio’s inherent risks will change as warranted by changes in the economy. The degree to which any particular change would affect the allowance for credit losses would depend on the severity of the change.
 
For additional information regarding allowances for credit losses, see Note 7 of the Notes to Financial Statements under Item 8 – “Financial Statements and Supplementary Data.”

Results of Operations
Earnings Analysis: Table 10 presents changes in the major components of our net income (dollar amounts in thousands):

Table 10
 
Increase (Decrease) in Earnings Components
 
2015 vs. 2014
2014 vs. 2013
 
Dollar Change
Percentage Change
Dollar Change
Percentage Change
Total interest income
$
37,129

8.7
 %
$
(14,764
)
(3.3
)%
Total interest expense
22,614

11.1

(22,156
)
(9.8
)
Net interest income
14,515

6.4

7,392

3.4

(Reversal) provision for credit losses on mortgage loans
(294
)
(18.2
)
(3,541
)
(183.9
)
Net interest income after mortgage loan loss provision
14,809

6.5

10,933

5.1

Net gain (loss) on trading securities
(19,292
)
(67.2
)
22,286

43.7

Net gain (loss) on derivatives and hedging activities
(4,613
)
(12.1
)
(48,337
)
(478.3
)
Other non-interest income
(334
)
(3.0
)
1,019

10.1

Total other income (loss)
(24,239
)
(43.4
)
(25,032
)
(81.2
)
Operating expenses
4,498

10.2

775

1.8

Other non-interest expenses
121

1.3

(394
)
(4.1
)
Total other expenses
4,619

8.7

381

0.7

AHP assessments
(1,405
)
(11.9
)
(1,446
)
(10.9
)
NET INCOME
$
(12,644
)
(11.9
)%
$
(13,034
)
(10.9
)%


37


Table 11 presents the amounts contributed by our principal sources of interest income (dollar amounts in thousands):

Table 11
 
Year Ended December 31,
 
2015
2014
2013
 
Interest Income
Percent of Total
Interest Income
Percent of Total
Interest Income
Percent of Total
Investments1
$
113,578

24.4
%
$
98,492

23.0
%
$
117,327

26.5
%
Advances
145,689

31.3

123,748

28.9

128,441

29.0

Mortgage loans held for portfolio
204,778

44.0

204,547

47.7

195,644

44.1

Other
1,385

0.3

1,514

0.4

1,653

0.4

TOTAL INTEREST INCOME
$
465,430

100.0
%
$
428,301

100.0
%
$
443,065

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

Net income for the year ended December 31, 2015 was $93.4 million compared to $106.0 million for the year ended December 31, 2014. The $12.6 million decrease in net income was driven by fair value net losses on trading securities and derivatives and hedging activities, which resulted in a net decrease of $23.9 million, partially offset by a $14.5 million increase in net interest income. The increase in fair value net losses were largely due to a significant widening in mortgage rates relative to the interest rate swap curve in the latter half of 2015 that negatively impacted the values of both our economic interest rate swaps and the multi-family GSE MBS being hedged. Additionally, interest rates increased during the fourth quarter of 2015, which resulted in unrealized losses on our non-MBS trading investments. The increase in rates resulted in unrealized gains on the derivatives associated with the non-MBS investments, although to a lesser extent. Furthermore, we had a significant decline in unrealized losses on our economic interest rate caps that helped to offset the increase in unrealized losses on the derivatives associated with our multi-family MBS. The increase in net interest income for the year ended December 31, 2015 was largely a result of advance growth, primarily in our lower-yielding line of credit advances, increases in higher-yielding investments, and a decrease in average funding cost driven by a shift in composition to lower-cost discount notes to fund the growth in short-term advances. New counterparty relationships have also provided us with more options for utilizing reverse repurchase agreements for overnight investments during 2015. Return on equity (ROE) was 4.78 percent and 6.29 percent for the years ended December 31, 2015 and 2014, respectively. The decline in net income coupled with the growth in advances and associated capital was dilutive to ROE for the periods. Dividends paid to members totaled $68.7 million for the year ended December 31, 2015 compared to $46.2 million for the same period in the prior year.

Net income for the year ended December 31, 2014 was $106.0 million compared to $119.0 million for the year ended December 31, 2013. The $13.0 million decrease was due to an increase in losses on derivative and hedging activities, partially offset by a decrease in negative fair value changes on trading securities, an increase in net interest income, and a decrease in the provision/reversal for credit losses on mortgage loans. The increase in net interest income was due primarily to a decrease in the overall cost of borrowing compared to 2012 and an increase in the average yield on mortgage loans. The decrease in the provision/reversal for credit losses on mortgage loans was a result of continued improvement in the housing market, along with refinements to our allowance for credit loss technique. ROE was 6.29 percent and 6.37 percent for the years ended December 31, 2014 and 2013, respectively. Dividends paid to members totaled $46.2 million for the year ended December 31, 2014 compared to $33.0 million for the prior year.
 
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 year ended December 31, 2015 compared to 2014 was largely a result of advance growth, primarily in our lower-yielding line of credit advances, and a decrease in average funding cost driven by a shift in composition to lower-cost discount notes to fund the growth in short-term advances (see Table 12). The increase in net interest income for the year ended December 31, 2014 compared to 2013 was due to an increase in our net interest spread and margin despite a decrease in the average balance and average yield on interest-earning assets. The increases in net interest spread and margin in 2014 were driven primarily by an overall decrease in the cost of borrowing and also by an increase in the average yield on mortgage loans, which are discussed in greater detail below.


38


The average yield on total investments, which consist of interest-bearing deposits, Federal funds sold, reverse repurchase agreements, and investment securities, decreased from 1.05 percent for the year ended December 31, 2014 to 1.00 percent for the year ended December 31, 2015, despite increases in average yields across all instruments in the portfolio, due to the highest yielding investment securities comprising a lower percentage of the total portfolio. The average yield on investment securities increased 12 basis points between December 31, 2014 and 2015, due to purchases of higher yielding fixed rate multi-family GSE MBS. The average yield on reverse repurchase agreements increased due to new counterparty relationships that provided us with more options for utilizing reverse repurchase agreements for overnight investments during 2015. The average yield on total investments remained flat, at 1.05 percent for the years ended December 31, 2013 and 2014, despite the compositional changes in the portfolio, including a lower concentration of higher yielding MBS, and increases in the average balance of Federal funds sold, which had a lower average yield during 2014. 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.

The average yield on advances decreased eight basis points, from 0.64 percent for the year ended December 31, 2014 to 0.56 percent for the year ended December 31, 2015. The average yield on advances decreased six basis points, from 0.70 percent for the year ended December 31, 2013 to 0.64 percent for the year ended December 31, 2014. The decrease in the average yield on advances for the past two years was due to a continued shift in composition that began in 2012 and has resulted in an increase in our lowest yielding advance product. The decrease was partially offset during 2015 as a result of a 12.0 percent increase in prepayment fees.

The average yield on mortgage loans decreased 12 basis points, from 3.36 percent for the year ended December 31, 2014 to 3.24 percent for the year ended December 31, 2015. The decrease in yield is due to a 26.2 percent increase in premium amortization as average mortgage rates decreased in 2015 and prepayments on higher coupon loans increased (yields on interest earning assets decline as premiums are amortized; amortization accelerates as prepayments increase). Mortgage rates are not expected to increase substantially in 2016, so premium amortization is likely to remain near current levels, although prepayments tend to slow during periods of relatively stable rates, as borrowers who are able to refinance their mortgages have already done so. The seven basis point increase in yield between 2013 and 2014 was due primarily to slower prepayments of higher yielding mortgages and the associated premium amortization.

The average cost of total consolidated obligations (bonds and discount notes) decreased eight basis points, from 0.63 percent for the year ended December 31, 2014 to 0.55 percent for the current period. This decrease was largely a result of a compositional shift from bonds to lower-costing discount notes, primarily reflecting the increase in short-term assets. We expect short-term interest rates to remain relatively low for the near term, and we anticipate being able to call some higher rate long-term debt in 2016, so we expect our total interest bearing liability cost to remain relatively stable over the next few quarters. For further discussion of how we use bonds and discount notes, see Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Consolidated Obligations.”

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 14 through 16 under this Item 7), which distorts yields, especially for fixed rate trading investments that are swapped to a variable rate.


39


Table 12 presents average balances and yields of major earning asset categories and the sources funding those earning assets (dollar amounts in thousands):

Table 12
 
2015
2014
2013
 
Average
Balance
Interest
Income/
Expense
Yield
Average
Balance
Interest
Income/
Expense
Yield
Average
Balance
Interest
Income/Expense
Yield
Interest-earning assets:
 

 

 

 

 

 

 
 
 
Interest-bearing deposits
$
229,611

$
241

0.10
%
$
204,708

$
169

0.08
%
$
272,385

$
311

0.11
%
Securities purchased under agreements to resell
2,271,557

4,371

0.19

446,233

575

0.13

847,010

1,027

0.12

Federal funds sold
1,656,091

2,131

0.13

1,619,589

1,368

0.08

1,259,512

1,346

0.11

Investment securities1,2
7,217,004

106,835

1.48

7,073,094

96,380

1.36

8,839,549

114,643

1.30

Advances2,3
26,108,222

145,689

0.56

19,467,171

123,748

0.64

18,278,197

128,441

0.70

Mortgage loans2,4,5
6,314,880

204,778

3.24

6,087,417

204,547

3.36

5,947,390

195,644

3.29

Other interest-earning assets
22,796

1,385

6.07

23,182

1,514

6.53

26,170

1,653

6.32

Total earning assets
43,820,161

465,430

1.06

34,921,394

428,301

1.23

35,470,213

443,065

1.25

Other non-interest-earning assets
28,810

 

 

83,523

 

 

153,265

 
 
Total assets
$
43,848,971

 

 

$
35,004,917

 

 

$
35,623,478

 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 

 

 

 

 

 

 
 
 
Deposits
$
681,316

590

0.09

$
878,016

770

0.09

$
1,070,135

983

0.09

Consolidated obligations2:
 

 

 

 

 

 

 

 

 

Discount Notes
20,067,007

21,585

0.11

12,155,756

9,242

0.08

10,751,832

8,884

0.08

Bonds
20,741,913

203,283

0.98

19,896,561

192,910

0.97

21,233,465

215,239

1.01

Other borrowings
13,352

292

2.18

10,377

214

2.06

21,600

186

0.87

Total interest-bearing liabilities
41,503,588

225,750

0.54

32,940,710

203,136

0.62

33,077,032

225,292

0.68

Capital and other non-interest-bearing funds
2,345,383

 

 

2,064,207

 

 

2,546,446

 
 
Total funding
$
43,848,971

 

 

$
35,004,917

 

 

$
35,623,478

 
 
 
 
 
 
 
 
 
 
 
 
Net interest income and net interest spread6
 

$
239,680

0.52
%
 

$
225,165

0.61
%
 
$
217,773

0.57
%
 
 
 
 
 
 
 
 
 
 
Net interest margin7
 

 

0.55
%
 

 

0.64
%
 
 
0.61
%
                   
1 
The non-credit portion of the OTTI discount on held-to-maturity securities and the fair value adjustment on available-for-sale securities are excluded from the average balance for calculations of yield since the changes are adjustments to equity.
2 
Interest income/expense and average rates include the effect of associated derivatives that qualify for hedge accounting treatment.
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 $5.1 million, $4.9 million and $4.7 million for the years ended December 31, 2015, 2014, and 2013, 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.


40


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 13 summarizes changes in interest income and interest expense (in thousands):

Table 13
 
2015 vs. 2014
2014 vs. 2013
 
Increase (Decrease) Due to
Increase (Decrease) Due to
 
Volume1,2
Rate1,2
Total
Volume1,2
Rate1,2
Total
Interest Income:
 

 

 

 
 
 
Interest-bearing deposits
$
22

$
50

$
72

$
(67
)
$
(75
)
$
(142
)
Securities purchased under agreements to resell
3,387

409

3,796

(513
)
61

(452
)
Federal funds sold
31

732

763

338

(316
)
22

Investment securities
1,993

8,462

10,455

(23,835
)
5,572

(18,263
)
Advances
38,418

(16,477
)
21,941

8,032

(12,725
)
(4,693
)
Mortgage loans
7,505

(7,274
)
231

4,658

4,245

8,903

Other assets
(24
)
(105
)
(129
)
(194
)
55

(139
)
Total earning assets
51,332

(14,203
)
37,129

(11,581
)
(3,183
)
(14,764
)
Interest Expense:
 

 

 

 
 
 
Deposits
(170
)
(10
)
(180
)
(171
)
(42
)
(213
)
Consolidated obligations:
 

 

 

 

 

 

Discount notes
7,538

4,805

12,343

1,103

(745
)
358

Bonds
8,266

2,107

10,373

(13,204
)
(9,125
)
(22,329
)
Other borrowings
65

13

78

(133
)
161

28

Total interest-bearing liabilities
15,699

6,915

22,614

(12,405
)
(9,751
)
(22,156
)
Change in net interest income
$
35,633

$
(21,118
)
$
14,515

$
824

$
6,568

$
7,392

                   
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 net gains (losses) 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 14 through 16, the majority of the derivative net unrealized gains and losses are related to economic hedges, such as interest rate swaps matched to GSE debentures or MBS 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 14 through 16. Ineffectiveness on fair value hedges contributes to unrealized gains and losses on derivatives, but to a much lesser degree. In the past, we generally recorded net unrealized gains on derivatives when the overall level of interest rates would rise over the period and recorded net unrealized losses when the overall level of interest rates would fall over the period, due to the mix of the economic hedges. However, the mix of our economic hedges changed mid-2015, so the general level of interest rates will no longer be the primary factor impacting the net unrealized gains (losses) on derivatives. Net unrealized gains or losses on derivatives will continue to be a function of the general level of LIBOR swap rates and the spread between the LIBOR swap curve and the GSE interest rate curve (interest rates swaps that are economic hedges of GSE debentures held in trading), but will also be affected by the spread between the LIBOR swap curve and mortgage rates (interest rates swaps that are economic hedges of fixed rate GSE MBS held in trading).


41


For the year ended December 31, 2015, the significant reduction in losses on our interest rate caps were partially offset by a reduction in gains on derivatives associated with our swapped trading investments and an increase in net interest settlements (i.e. net interest paid on economic interest rate swaps) compared to the year ended December 31, 2014. For the year ended December 31, 2015, net unrealized gains and losses on derivatives and hedging activities decreased net income by $42.8 million. Net interest paid on economic interest rate swaps represented the majority of the net losses on derivatives and hedging activities for the year ended December 31, 2015, increasing as a result of the increase in the notional amount of economic interest rate swaps from the prior year. 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, such as GSE debentures, MBS or consolidated obligations, is recorded in interest income or expense. Increases in swap spreads towards the end of 2015 caused fair value decreases for many of our derivatives, but especially interest rate swaps economically hedging multi-family GSE MBS recorded as trading securities. The fair values of the swapped MBS investments decreased as a result of an increase in interest rates resulting in unrealized losses of $4.6 million, which are recorded in net gain (loss) on trading securities and the fair values of the associated interest rate swaps declined as well resulting in unrealized losses of $23.2 million. All of these multi-family GSE MBS and associated interest rate swaps were purchased or entered into after May 2015 and are expected to create more income statement volatility than the interest rate swaps and related trading GSE debentures due to the relatively long length of the contracts and their relationship with mortgage rates, which tend to be more volatile than rates on GSE debentures. Unrealized gains of $35.5 million were attributable to the fair value changes 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) and increases in the three-month LIBOR (receive variable rate swap), but these increases were offset by unrealized losses of $43.0 million attributable to the swapped GSE debentures, which are recorded in net gain (loss) on trading securities. As noted previously, rates were up compared to the prior year but volatility was down so we still experienced losses on our interest rate caps but to a much smaller extent than in 2014. See Tables 61 and 62 under Item 7A – “Quantitative and Qualitative Disclosures About Market Risk” for additional detail regarding notional and fair value amounts of derivative instruments.

Tables 14 through 16 categorize the earnings impact by product for hedging activities (in thousands):

Table 14
 
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
$
(8,267
)
$

$
(2,128
)
$

$
(9
)
$
(10,404
)
Net interest received (paid)
(117,079
)
(1,657
)

215

69,222

(49,299
)
Subtotal
(125,346
)
(1,657
)
(2,128
)
215

69,213

(59,703
)
Net gain (loss) on derivatives and hedging activities:
 

 

 

 
 

 

Fair value hedges:
 
 
 
 
 
 
Interest rate swaps
(779
)
636


306

(3,041
)
(2,878
)
Economic hedges – unrealized gain (loss) due to fair value changes:
 
 
 
 
 
 
Interest rate swaps

12,239


4

(1,446
)
10,797

Interest rate caps

(4,159
)



(4,159
)
Mortgage delivery commitments


1,067



1,067

Economic hedges – net interest received (paid)

(56,455
)

44

8,741

(47,670
)
Subtotal
(779
)
(47,739
)
1,067

354

4,254

(42,843
)
Net impact of derivatives and hedging activities
(126,125
)
(49,396
)
(1,061
)
569

73,467

(102,546
)
Net gain (loss) on trading securities hedged on an economic basis with derivatives

(47,577
)



(47,577
)
TOTAL
$
(126,125
)
$
(96,973
)
$
(1,061
)
$
569

$
73,467

$
(150,123
)

42


Table 15
 
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
$
(11,529
)
$

$
(1,914
)
$
203

$
(13,240
)
Net interest received (paid)
(131,093
)


89,873

(41,220
)
Subtotal
(142,622
)

(1,914
)
90,076

(54,460
)
Net gain (loss) on derivatives and hedging activities:
 

 

 

 

 

Fair value hedges:
 

 

 

 

 

Interest rate swaps
540



(2,977
)
(2,437
)
Economic hedges – unrealized gain (loss) due to fair value changes:
 

 

 

 

 
Interest rate swaps

30,231


1,679

31,910

Interest rate caps/floors

(32,767
)


(32,767
)
Mortgage delivery commitments


4,272


4,272

Economic hedges – net interest received (paid)

(44,264
)

5,056

(39,208
)
Subtotal
540

(46,800
)
4,272

3,758

(38,230
)
Net impact of derivatives and hedging activities
(142,082
)
(46,800
)
2,358

93,834

(92,690
)
Net gain (loss) on trading securities hedged on an economic basis with derivatives

(28,517
)


(28,517
)
TOTAL
$
(142,082
)
$
(75,317
)
$
2,358

$
93,834

$
(121,207
)


43


Table 16
 
2013
 
Advances
Investments
Mortgage Loans
Consolidated
Obligation Bonds
Intermediary
Positions
Total
Impact of derivatives and hedging activities in net interest income:
 
 
 
 
 
 
Net amortization/accretion of hedging activities
$
(12,288
)
$

$
(2,149
)
$
(408
)
$

$
(14,845
)
Net interest received (paid)
(146,463
)


102,125


(44,338
)
Subtotal
(158,751
)

(2,149
)
101,717


(59,183
)
Net gain (loss) on derivatives and hedging activities:
 
 
 
 
 
 
Fair value hedges:
 
 
 
 
 


Interest rate swaps
3,348



(5,682
)

(2,334
)
Economic hedges – unrealized gain (loss) due to fair value changes:
 
 
 
 
 
 
Interest rate swaps

50,328


(6,981
)
(17
)
43,330

Interest rate caps/floors

11,682




11,682

Mortgage delivery commitments


(4,052
)


(4,052
)
Economic hedges – net interest received (paid)

(45,901
)

7,379

3

(38,519
)
Subtotal
3,348

16,109

(4,052
)
(5,284
)
(14
)
10,107

Net impact of derivatives and hedging activities
(155,403
)
16,109

(6,201
)
96,433

(14
)
(49,076
)
Net gain (loss) on trading securities hedged on an economic basis with derivatives

(50,203
)



(50,203
)
TOTAL
$
(155,403
)
$
(34,094
)
$
(6,201
)
$
96,433

$
(14
)
$
(99,279
)

Net Gain (Loss) on Trading Securities: All unrealized 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 14 through 16. 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 17 presents the major components of the net gain (loss) on trading securities (in thousands):

Table 17
 
2015
2014
2013
GSE debentures
$
(43,100
)
$
(28,987
)
$
(50,671
)
U.S. Treasury note
(16
)
4

43

U.S. obligation and GSE MBS
(4,865
)
293

(351
)
Short-term money market securities
(10
)
(9
)
(6
)
TOTAL
$
(47,991
)
$
(28,699
)
$
(50,985
)


44


Our trading portfolio is comprised primarily of fixed rate GSE debentures and fixed rate multi-family GSE MBS, with a small percentage of variable rate GSE debentures and variable rate GSE MBS. In general, the fixed rate securities are related to economic hedges in the form of interest rate swaps that convert fixed rates to variable rates. The fair values of the 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. The fair values of the multi-family GSE MBS are affected by changes in mortgage rates and the fixed rate securities are swapped to one-month LIBOR. During 2014, interest rates in the one- to three-year range increased, resulting in additional unrealized losses on the GSE debentures, but the decrease in GSE credit spreads reduced the magnitude of those losses. An increase in intermediate interest rates at the end of 2015 resulted in additional unrealized losses on the GSE debentures for 2015 that were partially mitigated by improvement in some GSE credit spreads. Increases in mortgage interest rates resulted in unrealized losses on our fixed rate multi-family GSE MBS, but to a relatively small degree compared to the GSE debentures, as we began purchasing the multi-family GSE MBS during the last half of 2015. In addition to interest rates and credit spreads, the value of these securities is affected by time decay. The 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.

Controllable Operating Expenses: Controllable operating expenses include compensation and benefits and other operating expenses as presented in the Statements of Income included under Item 8 – “Financial Statements and Supplementary Data.” As noted in Table 18, approximately two-thirds of our operating expenses consist of compensation and benefits expense, which has been increasing due to the hiring of additional employees and related incentive compensation. We anticipate an increase in compensation and benefits expense during 2016 due to an expected increase in the number of employees primarily to meet our increasing technology needs. Occupancy expense for 2015 includes a one-time lease termination fee, but we do not expect other material increases to occupancy expense as a result of the construction of and relocation to our new headquarters, which is expected to happen in 2018. Increases in other operating expense are primarily related to new software, so we expect to maintain this level of expense through 2016. Table 18 presents operating expenses for the last three years (dollar amounts in thousands):

Table 18
 
For the Year Ended December 31,
Percent Increase (Decrease)
 
2015
2014
2013
2015 vs. 2014
2014 vs. 2013
Compensation and benefits
$
33,175

$
30,282

$
29,541

9.6
%
2.5
 %
Occupancy cost
2,092

1,754

1,622

19.3

8.1

Other operating expense
13,183

11,916

12,014

10.6

(0.8
)
TOTAL CONTROLLABLE OPERATING EXPENSES
$
48,450

$
43,952

$
43,177

10.2
%
1.8
 %

Finance Agency and Office of Finance Expenses: We, together with the other FHLBanks, are charged for the cost of operating the Finance Agency and the Office of Finance. The Finance Agency’s operating costs are also shared by Fannie Mae and Freddie Mac, and the Recovery Act prohibits assessments on the FHLBanks for operating costs in excess of the costs and expenses related to the FHLBanks. The merger between the FHLBanks of Des Moines and Seattle will cause some incremental increases in these expenses because some assessments are being split equally between the remaining FHLBanks, effective May 31, 2015. However, we do not anticipate the increases to be significant.
 
AHP Assessments: AHP expense is based on a percentage of net income and fluctuates accordingly. Each FHLBank is required to establish, fund and administer an AHP. As part of our AHP, we provide subsidies in the form of direct grants or below-market interest rate advances to members which use the funds to assist in the purchase, construction or rehabilitation of housing for very low-, low- and moderate-income households (see Item 1 – “Business – Other Mission-Related Activities” for the specific programs funded through the AHP). The required annual AHP funding is charged to earnings and an offsetting liability is established.


45


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 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 measures are frequently used by FHLBank’s stakeholders in the evaluation of our performance, but they have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.

Adjusted net income increased slightly for the year ended December 31, 2015 compared to the prior year (see Table 19). The increase was due to an increase in adjusted net interest income, including net interest settlements on derivatives not qualifying for hedge accounting, that was mostly offset by higher compensation and benefits and an increase in other operating expenses. For the year ended December 31, 2014, the increase in adjusted net income compared to the prior year paralleled the increase in GAAP net interest income after provision/reversal for credit losses on mortgage loans. Table 19 presents a reconciliation of GAAP net income to adjusted income (in thousands):

Table 19
 
2015
2014
2013
Net income, as reported under GAAP
$
93,360

$
106,004

$
119,038

AHP assessments
10,378

11,783

13,229

Income before AHP assessments
103,738

117,787

132,267

Derivative (gains) losses1
(4,827
)
(979
)
(48,625
)
Trading (gains) losses
47,991

28,699

50,985

Prepayment fees on terminated advances
(2,410
)
(2,151
)
(4,109
)
Net (gain) loss on sale of held-to-maturity securities
(390
)


Net (gain) loss on sale of mortgage loans


(109
)
Total excluded items
40,364

25,569

(1,858
)
Adjusted income (a non-GAAP measure)
$
144,102

$
143,356

$
130,409

                   
1 
Consists of fair value changes on derivatives and hedging activities excluding net interest settlements on derivatives not qualifying for hedge accounting.


46


Table 20 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. The decrease in adjusted ROE between 2015 and 2014 is mostly a function of increases in average capital as a result of increased advances at lower yields for the current year period, combined with the increase in operating expenses. Further, 2015 reflected an increase to our typical average leverage compared to lower than average leverage in 2014. The increase in adjusted ROE between 2014 and 2013 was a result of the decrease in capital stock activity requirements for advances and other capital management practices that went into effect during 2014 to reduce the amount of excess capital stock. Adjusted ROE spread for the years ended December 31, 2015, 2014, and 2013 is calculated as follows (dollar amounts in thousands):

Table 20
 
2015
2014
2013
Average GAAP total capital for the period
$
1,951,708

$
1,686,110

$
1,868,255

ROE, based upon GAAP net income
4.78
%
6.29
%
6.37
%
Adjusted ROE, based upon adjusted income
7.38
%
8.50
%
6.98
%
Average overnight Federal funds effective rate
0.13
%
0.09
%
0.11
%
Adjusted ROE as a spread to average overnight Federal funds effective rate
7.25
%
8.41
%
6.87
%

As part of evaluating our financial performance, we adjust net income reported in accordance with GAAP for the impact of: (1) AHP assessments (equivalent to an effective minimum income tax rate of 10 percent); (2) fair value changes on derivatives and hedging activities (excludes net interest settlements related to derivatives not qualifying for hedge accounting); and (3) other items excluded because they are not considered a part of our routine operations or ongoing business model, such as prepayment fees, gain/loss on retirement of debt, gain/loss on mortgage loans held for sale, and gain/loss on securities. The result is referred to as “adjusted income,” which is a non-GAAP measure of income. Adjusted income is used to compute an adjusted ROE that is then compared to the average overnight Federal funds effective rate, with the difference referred to as adjusted ROE spread. Components of adjusted income and adjusted ROE spread are used: (1) to measure performance under our incentive compensation plans; (2) as a measure in determining the level of quarterly dividends; and (3) in strategic planning. While we utilize adjusted income as a key measure in determining the level of dividends, we consider GAAP net income volatility caused by gain (loss) on derivatives and hedging activities and trading securities in determining the adequacy of our retained earnings as determined under GAAP. Because the adequacy of GAAP retained earnings is considered in setting the level of our quarterly dividends, gain (loss) on derivatives and hedging activities and trading securities can come into consideration when setting the level of our quarterly dividends. Because we are primarily a “hold-to-maturity” investor and do not trade derivatives, we believe that adjusted income, adjusted ROE and adjusted ROE spread are helpful in understanding our operating results and provide a meaningful period-to-period comparison. In contrast, GAAP net income, ROE based on GAAP net income and ROE spread based on GAAP net income can vary significantly from period to period because of fair value changes on derivatives and certain other items that management excludes when evaluating operational performance. Management believes such volatility prevents a consistent measurement analysis.

Derivative and hedge accounting affects the timing of income or expense from derivatives. However, when the derivatives are held to maturity or call dates, there is no economic income or expense impact from these derivatives. For example, interest rate caps are purchased with an upfront fixed cost to provide protection against the risk of rising interest rates. Under derivative accounting guidance, these instruments are then marked to fair value each month, which can result in having to recognize significant gains and losses from year to year, producing volatility in our GAAP net income. However, if held to maturity, the sum of such gains and losses over the term of a derivative will equal its original purchase price.

In addition to impacting the timing of income and expense from derivatives, derivative accounting also impacts the presentation of net interest settlements on derivatives and hedging activities. This presentation differs under GAAP for economic hedges when compared to hedges that qualify for hedge accounting. Net interest settlements on economic hedges are included with the economic derivative fair value changes and are recorded in net gain (loss) on derivatives and hedging activities while the net interest settlements on qualifying fair value or cash flow hedges are included in net interest margin. Therefore, only the economic derivative fair value changes and the ineffectiveness for qualifying hedges included in the net gain (loss) on derivatives and hedging activities are removed to arrive at adjusted income (i.e., net interest settlements on economic hedges, which represent actual cash inflows or outflows and do not create fair value volatility, are not removed).




47


Financial Condition

Overall: Total assets increased $7.6 billion, or 20.6 percent, from December 31, 2014 to December 31, 2015. This increase was due primarily to a $5.3 billion, or 28.8 percent, increase in advances, a $1.2 billion, or 19.6 percent, increase in investment securities (investments classified as trading, available-for-sale, or held-to-maturity), and a $2.7 billion, or 83.1 percent, increase in short-term investments, excluding cash. The increase in advances was largely due to an increase in short-term advances, which can be attributed to the increase in dividend rates that effectively reduces the cost of our advances to our members and increases the members' 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 since 2014. Changes in interest rates could reduce the benefit of these short-term advances to our members, which could cause a significant decline in advances, although the most recent move by the FOMC to increase interest rates did not impact our level of advances. Increases in the balances of total consolidated obligations and total capital between 2014 and 2015 also reflect increased advance utilization.

As a percentage of assets at December 31, 2015 compared to December 31, 2014, short-term investments and advances increased while cash and mortgage loans decreased. Investment securities remained relatively flat as a percentage of assets, despite the growth in the balance year over year. The composition change between cash and short-term investments reflects our participation in the Federal Reserve Bank of New York's overnight reverse repurchase agreement program that began mid-2015, which provides more options to invest the influx of cash from advance repayments that usually occurs on the last business day of a reporting period. The increase in reverse repurchase agreements is also a result of new counterparty relationships that have provided us with more options for utilizing reverse repurchase agreements. Our mortgage loan portfolio grew by 2.6 percent but declined as a percentage of assets because of the 28.8 percent growth in advances. The distribution between discount notes and consolidated obligation bonds is generally driven by asset composition; thus, the percentage increase in discount notes and the corresponding percentage decline in consolidated obligation bonds for the current period is the result of an increase in our line of credit advance product balance and short-term advances, which are generally funded by discount notes. Table 21 presents the percentage concentration of the major components of our Statements of Condition:

Table 21
 
Component Concentration
 
12/31/2015
12/31/2014
Assets:
 
 
Cash and due from banks
1.5
%
6.9
%
Interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold
13.6

9.0

Investment securities
17.0

17.1

Advances
53.1

49.7

Mortgage loans, net
14.4

16.9

Other assets
0.4

0.4

Total assets
100.0
%
100.0
%
 
 
 
Liabilities:
 
 
Deposits
1.7
%
1.6
%
Consolidated obligation discount notes, net
49.1

38.6

Consolidated obligation bonds, net
44.7

54.9

Other liabilities
0.3

0.6

Total liabilities
95.8

95.7

 
 
 
Capital:
 
 
Capital stock outstanding
2.7

2.6

Retained earnings
1.5

1.7

Accumulated other comprehensive income (loss)


Total capital
4.2

4.3

Total liabilities and capital
100.0
%
100.0
%


48


Table 22 presents changes in the major components of our Statements of Condition (dollar amounts in thousands):

Table 22
 
Increase (Decrease)
in Components
 
12/31/2015 vs. 12/31/2014
 
Dollar
Change
Percent
Change
Assets:
 
 
Cash and due from banks
$
(1,862,641
)
(73.2
)%
Investments1
3,985,681

41.4

Advances
5,277,421

28.8

Mortgage loans, net
160,536

2.6

Derivative assets, net
18,608

56.4

Other assets
2,072

1.7

Total assets
$
7,581,677

20.6
 %
 
 
 
Liabilities:
 

 

Deposits
$
163,591

27.5
 %
Consolidated obligations, net
7,248,387

21.0

Derivative liabilities, net
(3,800
)
(10.8
)
Other liabilities
(82,986
)
(42.1
)
Total liabilities
7,325,192

20.8

 
 
 
Capital:
 
 
Capital stock outstanding
234,906

24.1

Retained earnings
24,649

3.9

Accumulated other comprehensive income (loss)
(3,070
)
(19.3
)
Total capital
256,485

16.2

Total liabilities and capital
$
7,581,677

20.6
 %
                   
1    Investments also include interest-bearing deposits, Federal funds sold and securities purchased under agreements to resell.

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.


49


Table 23 summarizes advances outstanding by product (dollar amounts in thousands):
 
Table 23
 
12/31/2015
12/31/2014
 
Dollar
Percent
Dollar
Percent
Adjustable rate:
 

 

 

 

Standard advance products:
 

 

 

 

Line of credit
$
8,464,599

36.1
%
$
5,349,579

29.5
%
Regular adjustable rate advances
140,000

0.6

22,943

0.1

Adjustable rate callable advances
6,125,760

26.1

4,615,227

25.4

Customized advances:
 

 

 

 

Adjustable rate advances with embedded caps or floors
30,000

0.1

97,000

0.5

Standard housing and community development advances:
 

 

 

 

Adjustable rate callable advances
87,533

0.4

81,818

0.5

Total adjustable rate advances
14,847,892

63.3

10,166,567

56.0

Fixed rate:
 

 

 

 

Standard advance products:
 

 

 

 

Short-term fixed rate advances
408,126

1.7

67,052

0.4

Regular fixed rate advances
5,392,625

23.0

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
378,044

1.6

327,015

1.8

Fixed rate callable advances
2,000


2,000


Total fixed rate advances
6,256,240

26.6

5,436,147

30.0

Convertible:
 

 

 

 

Standard advance products:
 

 

 

 

Fixed rate convertible advances
1,472,842

6.3

1,586,242

8.7

Amortizing:
 

 

 

 

Standard advance products:
 

 

 

 

Fixed rate amortizing advances
429,440

1.8

452,517

2.5

Fixed rate callable amortizing advances
28,796

0.1

33,651

0.2

Standard housing and community development advances:
 

 

 

 
Fixed rate amortizing advances
431,251

1.9

458,644

2.5

Fixed rate callable amortizing advances
7,213

0.0

7,113

0.1

Total amortizing advances
896,700

3.8

951,925

5.3

TOTAL PAR VALUE
$
23,473,674

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).


50


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 December 31, 2015 and 2014. The 29.4 percent increase in advance par value (see Table 23) 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 and regular 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 rates paid on member capital stock supporting advances into consideration. Changes in interest rates could reduce the benefit of these short-term advances to our members, which could cause a significant decline in advances. We expect advances as a percent of total assets to continue to increase as part of our core mission asset focus and continued efforts to promote awareness of the benefits of higher dividends (see “Executive Level Overview  under this Item 7), but we cannot predict member demand for our advance products.

As of December 31, 2015 and 2014, 65.9 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 during 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 during 2015.

Rather than match funding long-term, fixed rate, 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 84.7 percent and 84.1 percent of our total advance portfolio as of December 31, 2015 and 2014, respectively.

Our potential credit risk from advances is concentrated in commercial banks, thrift institutions and insurance companies in our four-state district, but also includes potential credit risk exposure to credit unions, housing associates and a small number of non-members. Table 24 presents advances outstanding by borrower type (in thousands):

Table 24
 
12/31/2015
12/31/2014
Member advances:
 
 
Commercial banks
$
11,812,775

$
8,507,046

Thrift institutions
7,010,208

6,136,072

Insurance companies
3,409,474

2,253,528

Credit unions
1,142,632

1,136,980

CDFI
2,400

1,500

Total member advances
23,377,489

18,035,126

 
 
 
Non-member advances:
 
 
Housing associates
77,505

61,805

Non-member borrowers1
18,680

43,950

Total non-member advances
96,185

105,755

 
 
 
TOTAL PAR VALUE
$
23,473,674

$
18,140,881

                   
1 
Includes former members that have merged into or were acquired by non-members.


51


Table 25 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 25
 
12/31/2015
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
$
4,800,000

20.5
%
$
2,103,400

11.6
%
MidFirst Bank
3,779,000

16.1

2,736,500

15.1

Capitol Federal Savings Bank
2,475,000

10.5

2,575,000

14.2

Security Benefit Life Insurance Co.
1,081,500

4.6





United of Omaha Life Insurance Co.
735,909

3.1

591,818

3.2

American Fidelity Assurance Co.




521,500

2.9

TOTAL
$
12,871,409

54.8
%
$
8,528,218

47.0
%

Table 26 presents the accrued interest income associated with the five borrowers providing the highest amount of interest income for the periods presented (dollar amounts in thousands). If the borrower was not one of our five borrowers for whom we accrued the highest amount of interest income for one of the periods presented, the applicable columns are left blank.

Table 26
 
2015
2014
Borrower Name
Advance Income
Percent of Total
Advance Income1
Advance Income
Percent of Total
Advance Income1
Capitol Federal Savings Bank
$
63,336

24.3
%
$
57,985

22.9
%
American Fidelity Assurance Co.
17,154

6.6

17,867

7.1

MidFirst Bank
12,335

4.7

7,266

2.9

Bank of Oklahoma, NA
11,888

4.6





United of Omaha Life Insurance Co.
6,422

2.5

6,560

2.6

Security Benefit Life Insurance Co.
 
 
9,269

3.7

TOTAL
$
111,135

42.7
%
$
98,947

39.2
%
                   
1 
Total advance income by borrower excludes net interest settlements on derivatives hedging the advances. Total advance income for all borrowers was $143.3 million for 2015 and $121.6 million for 2014, net of interest receipts/(payments) on derivatives hedging advances of $(117.1) million in 2015 and $(131.1) million in 2014.

Table 11 presents the amount of interest income on advances as a percentage of total interest income for the years ended December 31, 2015, 2014, and 2013.

Prepayment Fees - Advances are priced based on our marginal cost of issuing matched-maturity funding while considering our related administrative and operating costs, pricing on other funding alternatives available to members, and desired profitability targets. Advances with a maturity or repricing period greater than three months that do not include call features that can be exercised at the option of the member generally incorporate a fee sufficient to make us financially indifferent should the borrower decide to prepay the advance.
 
Letters of Credit - We also issue letters of credit for members. Members must collateralize letters of credit in accordance with the same requirements as for advances. Letters of credit are generally issued or confirmed on behalf of a member to: (1) facilitate residential housing finance; or (2) facilitate community lending that may also be secured by state and local government securities. Outstanding letters of credit balances totaled $2.8 billion and $2.6 billion as of December 31, 2015 and 2014, respectively.
 

52


Housing Associates - We are permitted under the Bank Act to make advances to housing associates, which are non-members that are approved mortgagees under Title II of the National Housing Act. All outstanding advances to housing associates are to state housing finance authorities. Totals as of December 31, 2015 and 2014, which are noted in Table 24, represent less than one percent of total advance par values for each period presented.

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 our PFIs during the year ended December 31, 2015 was $1.2 billion. These new originations and acquisitions, net of loan payments received, resulted in an increase of 2.6 percent in the outstanding net balance of our mortgage loan portfolio from December 31, 2014 to December 31, 2015. Net mortgage loans as a percentage of total assets decreased from 16.9 percent as of December 31, 2014 to 14.4 percent as of December 31, 2015. Table 11 presents the amount of interest income on mortgage loans held for portfolio as a percentage of total interest income for the years ended December 31, 2015, 2014, and 2013.

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 PFI's 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 including 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 December 31, 2015.

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. During 2014 and 2015 we had MPF Xtra loan volume of $131.4 million and $293.3 million, respectively.

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. 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. When this product becomes available, it may further enhance our ability to manage the size of our mortgage loan portfolio in the future.


53


The number of approved PFIs decreased from 281 as of December 31, 2014 to 279 as of December 31, 2015. During the year ended December 31, 2015, we purchased loans from 183 PFIs with no one PFI accounting for more than 5.5 percent of the total dollar volume purchased. Although there is no guarantee, we anticipate that the number of PFIs delivering loans will increase during 2016 as we continue to educate our members about the improved execution and relative ease of use associated with the MPF Program. Table 27 presents the outstanding balances of mortgage loans sold to us, net of participations, from our top five PFIs and the percentage of those loans to total mortgage loans outstanding (dollar amounts in thousands). If the member was not one of our top five PFIs for one of the periods presented, the applicable columns are left blank.

Table 27
 
12/31/2015
12/31/2014
 
Mortgage
Loan Balance
Percent of Total
Mortgage Loans
Mortgage
Loan Balance
Percent of Total
Mortgage Loans
FirstBank of Colorado
$
245,842

3.9
%
$
209,593

3.4
%
Tulsa Teachers Credit Union
206,081

3.3

167,449

2.7

Mutual of Omaha Bank
194,606

3.1

246,851

4.0

SAC Federal Credit Union
146,228

2.3

135,909

2.2

Girard National Bank
120,846

1.9





Farmers Bank & Trust N.A.
 
 
122,898

2.0

TOTAL
$
913,603

14.5
%
$
882,700

14.3
%

Table 28 presents information regarding the asset quality of our mortgage loan portfolio (in thousands):
 
Table 28
 
2015
2014
2013
2012
2011
Nonaccrual, past due and restructured loans:
 
 
 
 
 
Nonaccrual loans, UPB1
$
15,878

$
20,045

$
21,142

$
25,139

$
25,772

Loans past due 90 days or more and still accruing interest, UPB
7,637

6,367

8,290

7,798

11,397

 
 
 
 
 
 
Allowance for credit losses on mortgage loans:
 
 
 
 
 
Beginning balance
$
4,550

$
6,748

$
5,416

$
3,473

$
2,911

Charge-offs/recoveries2
(669
)
(583
)
(594
)
(553
)
(496
)
Provision (reversal) for mortgage loan losses
(1,909
)
(1,615
)
1,926

2,496

1,058

Ending balance
$
1,972

$
4,550

$
6,748

$
5,416

$
3,473

 
 
 
 
 
 
Interest income shortfall for nonaccrual loans:
 
 
 
 
 
Gross amount of interest income that would have been recorded based on original terms
$
1,017

$
1,304

$
1,372

$
1,580

$
1,669

Interest actually recognized in income during the period
(813
)
(957
)
(1,016
)
(1,155
)
(1,168
)
Shortfall
$
204

$
347

$
356

$
425

$
501

                   
1 
Conventional residential mortgage loans are classified as nonaccrual when they are contractually past due 90 days or more at which time interest is no longer accrued. Interest continues to accrue on government-insured residential mortgage loans (e.g., FHA, VA, HUD and RHS loans) that are contractually past due 90 days or more. Nonaccrual loans include troubled debt restructurings of $1.4 million, $1.5 million, $1.5 million, $1.3 million, and $0.5 million as of December 31, 2015, 2014, 2013, 2012, and 2011, respectively. Troubled debt restructurings are restructurings in which we, for economic or legal reasons related to the debtor’s financial difficulties, grant a concession to the debtor that it would not otherwise consider.
2 
The ratio of net charge-offs/recoveries to average loans outstanding was approximately one basis point or less for the periods ending December 31, 2015, 2014, 2013, 2012, and 2011.


54


The serious delinquency rate of the mortgage loan portfolio decreased from December 31, 2014 to December 31, 2015 (see Table 29). According to the December 31, 2015 Mortgage Bankers Association National Delinquency survey, the weighted average of all conventional residential mortgage loans 90 days or more past due was 1.4 percent. This is approximately seven times the level of seriously delinquent loans in our mortgage loan portfolio. Table 29 presents delinquency information for the unpaid principal of conventional mortgage loans (dollar amounts in thousands):
 
Table 29
 
12/31/2015
12/31/2014
30 to 59 days delinquent and not in foreclosure
$
38,015

$
36,204

60 to 89 days delinquent and not in foreclosure
6,979

8,035

90 days or more delinquent and not in foreclosure1
9,787

10,838

In process of foreclosure2
3,644

6,182

Total conventional mortgage loans delinquent or in process of foreclosure
$
58,425

$
61,259

 
 
 
Real estate owned (carrying value)
$
3,922

$
4,628

 
 
 
Serious delinquency rate3
0.2
%
0.3
%
                   
1 
Includes all troubled debt restructurings regardless of delinquency status not classified as in process of foreclosure. Troubled debt restructurings are restructurings in which we, for economic or legal reasons related to the debtor's financial difficulties, grant a concession to the debtor that we would not otherwise consider.
2 
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported.
3 
Conventional loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total conventional loan portfolio principal balance. Only fixed rate prime conventional mortgage loans are held in the MPF portfolio.

Two indications of credit quality are FICO scores and 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. In February 2010, the MPF Program instituted a minimum FICO score of 620 for all conventional loans. Table 30 provides the percentage distribution of FICO scores at origination for conventional mortgage loans outstanding in our traditional MPF products:
 
Table 30
FICO Score1
12/31/2015
12/31/2014
< 620
0.8
%
0.9
%
620 to < 660
4.0

4.0

660 to < 700
11.9

11.3

700 to < 740
19.1

18.8

>= 740
64.2

65.0

 
100.0
%
100.0
%
 
 
 
Weighted average
750

751

                   
1 
Represents the original FICO score of the lowest-scoring borrower for the related loan.


55


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. Table 31 provides LTV ratios at origination for conventional mortgage loans outstanding in our traditional MPF products:
 
Table 31
LTV
12/31/2015
12/31/2014
<= 60%
15.7
%
16.6
%
> 60% to 70%
14.4

14.5

> 70% to 80%
55.1

54.9

> 80% to 90%
7.9

7.5

> 90% to < 100%
6.9

6.5

 
100.0
%
100.0
%
 
 
 
Weighted average
73.5
%
73.1
%

Our mortgage loans held in portfolio were dispersed across all 50 states and the District of Columbia as of December 31, 2015 and 2014. Table 32 is a summary of the geographic concentration percentage of our conventional mortgage loan portfolio by state:
 
Table 32
 
12/31/2015
12/31/2014
Kansas
35.7
%
34.8
%
Nebraska
23.2

23.8

Oklahoma
15.7

15.0

Colorado
14.2

13.6

California
1.7

2.2

All other
9.5

10.6

TOTAL
100.0
%
100.0
%

The credit risk of conventional mortgage loans sold under the traditional MPF products is managed by structuring potential credit losses into certain layers. As is customary for conventional mortgage loans, PMI is required for MPF loans with LTVs greater than 80 percent. Losses beyond the PMI layer are absorbed by an FLA established for each pool of mortgage loans sold by a PFI up to the maximum amount of the remaining FLA net of credit losses.

If losses beyond our FLA layer are incurred for any given pool of conventional mortgage loans, they are then absorbed through a CE obligation of the PFI that sold the mortgage loans to us, limited to the remaining CE obligation (see Item 1 – “Business – Mortgage Loans” for additional information). For additional information regarding the layers of loss protection, see Note 7 of the Notes to Financial Statements under Item 8 – “Financial Statements and Supplementary Data.” Table 33 presents the outstanding principal balance before charge-offs and average CE obligation by traditional MPF product for our residential mortgage loan portfolio (dollar amounts in thousands):
 
Table 33
 
12/31/2015
12/31/2014
 
Outstanding Balance
Average CE Obligation
Outstanding Balance
Average CE Obligation
MPF Original
$
3,884,633

8.5
%
$
3,790,051

7.8
%
MPF 125
1,653,559

5.9

1,535,897

5.0

MPF Plus1,2
71,073

4.6

97,511

4.4

MPF 1002
54,687

12.1

73,542

12.5

MPF Government
622,788

 
631,142

 
TOTAL PAR VALUE
$
6,286,740

 
$
6,128,143

 
                   
1 
Average CE obligation for MPF Plus loans represents SMI coverage obtained.
2 
Product is currently inactive. See Table 1 under Item 1 – “Business – Mortgage Loans.”

56



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.

The decrease in the allowance for credit losses during 2015 and the decrease in the allowance balance as a percent of UPB as of December 31, 2015 were primarily attributable to improvements in credit quality during the period, increases in property values, and a decline in the historical loss factor. The historical loss factor decreases as larger losses realized in older periods roll off or are offset by gains in more current periods in the historical average calculation. We believe that policies and procedures are in place to effectively manage the credit risk on mortgage loans held in portfolio. See Note 7 of the Notes to Financial Statements under Item 8 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 primary and secondary market support for the U.S. housing securities market. Total investments increased 41.4 percent from December 31, 2014 to December 31, 2015 largely due to an increase in reverse repurchase agreements and an increase in MBS. Increases in reverse repurchase agreements were due to our participation in the Federal Reserve Bank of New York's overnight reverse repurchase agreement programs. New counterparty relationships have also provided us with more options for utilizing reverse repurchase agreements for overnight investments during 2015. Increases in MBS coincided with 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. 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. With the increase in our core mission assets, we were able to reinvest MBS prepayments and increase that portfolio during 2015 at what we consider to be acceptable spreads. Investment securities acquired are generally issued by GSEs and large financial institutions that we consider to be of investment quality. Consistent with Finance Agency guidance, we define 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 adopted additional liquidity policies. In addition, we maintain a contingency liquidity plan in the event of financial market disruptions. See “Risk Management – Liquidity Risk Management” under this Item 7 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.


57


Table 34 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 34
 
12/31/2015
12/31/2014
Interest-bearing deposits
$
100,000

$
63

Federal funds sold
2,000,000

2,075,000

TOTAL UNSECURED INVESTMENT CREDIT EXPOSURE1
$
2,100,000

$
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.

Finance Agency regulations include limits on the amount of unsecured credit an individual FHLBank may extend to a counterparty or to a group of affiliated counterparties. This limit is based on a percentage of eligible regulatory capital and the counterparty’s overall credit rating. Under these regulations, the level of eligible regulatory capital is determined as the lesser of an individual FHLBank’s total regulatory capital or the eligible amount of regulatory capital of the counterparty. The eligible amount of regulatory capital is then multiplied by a stated percentage. The percentage that an FHLBank may offer for term extensions of unsecured credit ranges from 1 percent to 15 percent based on the counterparty’s long-term credit rating. The calculation of term extensions of unsecured credit includes on-balance sheet transactions, off-balance sheet commitments and derivative transactions. See “Risk Management – Credit Risk Management” under this Item 7 for additional information related to derivative exposure.

Finance Agency regulation also permits us to extend additional unsecured credit for overnight extensions of credit. Our total overnight unsecured exposure to a counterparty may not exceed twice the regulatory limit for term exposures, or a total of 2 percent to 30 percent of the eligible amount of regulatory capital, based on the counterparty’s credit rating. We, however, generally limit our unsecured exposure to any private counterparty to no more than the balance of our retained earnings, even if the counterparty limit under the previously discussed calculation would be higher. As of December 31, 2015, we were in compliance with the regulatory limits established for unsecured credit, and our unsecured credit exposure to any individual non-member private counterparty (excluding government-sponsored enterprises) did not exceed the balance of our retained earnings on that date.

We are prohibited by Finance Agency regulation 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. Our unsecured credit exposures to U.S. branches and agency offices of foreign commercial banks include the risk that, as a result of political or economic conditions in a country, the counterparty may be unable to meet its contractual repayment obligations. Our unsecured credit exposures to domestic counterparties and U.S. subsidiaries of foreign commercial banks include the risk that these counterparties have extended credit to foreign counterparties. We are in compliance with the regulation and did not own any financial instruments issued by foreign sovereign governments, including those countries that are members of the European Union, as of and for the year ended December 31, 2015.

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 December 31, 2015, all unsecured term investments were rated as investment grade based on NRSROs (see Table 38).


58


Table 35 presents the amount of our unsecured investment credit exposure 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 December 31, 2015 (in thousands). We also mitigate the credit risk on investments by generally investing in investments that have short-term maturities.

Table 35
Domicile of Counterparty
Overnight
Domestic
$
600,000

U.S. subsidiaries of foreign commercial banks
240,000

Total domestic and U.S. subsidiaries of foreign commercial banks
840,000

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

Germany
360,000

Canada
350,000

Netherlands
350,000

Norway
200,000

Total U.S. Branches and agency offices of foreign commercial banks
1,260,000

TOTAL UNSECURED INVESTMENT CREDIT EXPOSURE1
$
2,100,000

                   
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, Germany, Canada, 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 GSE debentures, MBS, and state housing finance agency securities. Our RMP restricts the acquisition of investments to highly rated long-term securities. The majority of these long-term securities are GSE MBS/CMOs, which provide an alternative means to promote liquidity in the mortgage finance markets while providing acceptable returns. GSE debentures are the other significant investment class that we hold in our long-term investment portfolio. The majority of our unsecured GSE debentures are fixed rate bonds, which are swapped from fixed to variable rates. They provide attractive returns, can serve as excellent collateral (e.g., repurchase agreements and net derivatives exposure), and are generally classified as trading securities and carried at fair value, either to enhance our liquidity position, for asset/liability management purposes, or to provide a fair value offset to the gains or losses on the interest rate swaps tied to these securities. The interest rate 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.

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 December 31, 2015, the amortized cost of our MBS/CMO portfolio represented 329 percent of our regulatory capital. As of December 31, 2015, we held $962.2 million of par value in MBS/CMOs in our trading portfolio and $498.9 million of par value in MBS/CMOs in our available-for-sale portfolio. The majority of the MBS/CMOs in both portfolios are fixed rate GSE securities, which are swapped from fixed to variable rates.


59


We provide standby bond purchase agreements (SBPA) to two state HFAs within the Tenth District. We also provide SBPAs to one out-of-district HFA and have participation interests in SBPAs between another FHLBank and an HFA in its district. For a predetermined fee, we accept an obligation to purchase the authorities’ bonds if the remarketing agent is unable to resell the bonds to suitable investors, and to hold the bonds until: (1) the designated remarketing agent can find a suitable investor; (2) we successfully exercise our right to sell the bonds; or (3) the HFA repurchases the bonds according to a schedule established by the SBPA. The standby bond purchase commitments executed and outstanding as of December 31, 2015 expire no later than 2018 though they are renewable upon request of the HFA and at our option. Total commitments for bond purchases under the SBPAs were $1.4 billion and $1.5 billion as of December 31, 2015 and 2014, respectively. We were not required to purchase any bonds under these agreements during 2015 or 2014. We plan to continue to support the state HFAs in our district by continuing to execute SBPAs where appropriate and when allowed by our RMP. In the future, we may continue to acquire participation interests in SBPAs with other FHLBanks and/or directly enter into SBPAs with out-of-district HFAs with the permission of the in-district FHLBank.

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 or available-for-sale securities and carry them at fair value. 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 trading or available-for-sale securities. Changes in the fair values of investments classified as trading are recorded through other income and original premiums/discounts on these investments are not amortized. We do not actively trade any of these securities with the intent of realizing gains; most often, they are held until maturity or call date.


60


Traditionally, if fixed rate securities were hedged with interest rate swaps, we would classify the securities as trading investments so that the changes in fair values of both the derivatives hedging the securities and the hedged securities are recorded in other income. However, during the third quarter of 2015, we began classifying our swapped fixed rate multi-family GSE MBS as available-for-sale and designating the corresponding interest rate swaps as fair value benchmark hedges. See Note 4 of the Notes to Financial Statements under Item 8 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 36 (in thousands).

Table 36
 
12/31/2015
12/31/2014
12/31/2013
Trading securities:
 
 
 
Certificates of deposit
$

$

$
260,009

U.S. Treasury obligations

25,016

25,012

GSE debentures
1,338,639

1,299,979

2,247,966

Mortgage-backed securities:
 
 
 
U.S. obligation MBS
801

963

1,090

GSE MBS
955,166

136,091

170,700

Total trading securities
2,294,606

1,462,049

2,704,777

Available-for-sale securities:
 
 
 
GSE MBS
495,063



Total available-for-sale securities
495,063



Held-to-maturity securities:
 
 
 
State or local housing agency obligations
111,655

126,105

63,472

Mortgage-backed or asset-backed securities:
 
 
 
U.S. obligation MBS
47,234

57,562

68,977

GSE MBS
4,452,533

4,441,487

4,974,649

Private-label residential MBS
159,395

231,259

315,333

Home equity loan ABS

774

1,228

Total held-to-maturity securities
4,770,817

4,857,187

5,423,659

Total securities
7,560,486

6,319,236

8,128,436

 
 
 
 
Interest-bearing deposits
100,594

1,163

1,116

 
 
 
 
Federal funds sold
2,000,000

2,075,000

575,000

 
 
 
 
Securities purchased under agreements to resell
3,945,000

1,225,000


TOTAL INVESTMENTS
$
13,606,080

$
9,620,399

$
8,704,552



61


The contractual maturities of our investments are summarized by security type in Table 37 (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 37
 
12/31/2015
 
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:
 

 

 

 

 

GSE debentures
$
661,269

$
269,544

$
407,826

$

$
1,338,639

Mortgage-backed securities:
 
 
 
 
 

U.S. obligation MBS



801

801

GSE MBS


630,106

325,060

955,166

Total trading securities
661,269

269,544

1,037,932

325,861

2,294,606

Yield on trading securities
5.14
%
4.42
%
2.85
%
2.68
%
 

Available-for-sale securities:
 
 
 
 
 
GSE MBS


294,176

200,887

495,063

Total available-for-sale securities


294,176

200,887

495,063

Yield on available-for-sale securities
%
%
2.57
%
2.98
%
 
Held-to-maturity securities:
 

 

 

 

 

State or local housing agency obligations

3,260

12,375

96,020

111,655

Mortgage-backed securities:
 

 

 

 

 

U.S. obligation MBS



47,234

47,234

GSE MBS

202,735

1,811,830

2,437,968

4,452,533

Private-label residential MBS

12,813

6,411

140,171

159,395

Total held-to-maturity securities

218,808

1,830,616

2,721,393

4,770,817

Yield on held-to-maturity securities
%
1.65
%
1.79
%
1.67
%
 

 
 
 
 
 
 
Total securities
661,269

488,352

3,162,724

3,248,141

7,560,486

Yield on total securities
5.14
%
3.14
%
2.21
%
1.85
%
 

 
 
 
 
 
 
Interest-bearing deposits
100,594




100,594

 
 
 
 
 
 
Federal funds sold
2,000,000




2,000,000

 
 
 
 
 
 
Securities purchased under agreements to resell
3,945,000




3,945,000

TOTAL INVESTMENTS
$
6,706,863

$
488,352

$
3,162,724

$
3,248,141

$
13,606,080



62


Securities Ratings – Tables 38 and 39 present the carrying value of our investments by rating as of December 31, 2015 and 2014 (in thousands). The ratings presented are the lowest ratings available for the security or the issuer based on NRSROs, where available. Some counterparties for collateralized overnight borrowing are not rated by an NRSRO because they are not issuers of debt or are otherwise not required to be rated by an NRSRO. 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 38
 
12/31/2015
 
Carrying Value1
 
Investment Grade
Below Triple-B
Unrated
Total
 
Triple-A
Double-A
Single-A
Triple-B
Interest-bearing deposits2
$

$
594

$
100,000

$

$

$

$
100,594

 
 
 
 
 
 
 
 
Federal funds sold2

500,000

1,500,000




2,000,000

 
 
 
 
 
 
 
 
Securities purchased under agreements to resell3

1,000,000




2,945,000

3,945,000

 
 
 
 
 
 
 
 
Investment securities:
 

 

 

 

 

 

 

Non-mortgage-backed securities:
 

 

 

 

 

 

 

GSE debentures

1,338,639





1,338,639

State or local housing agency obligations
69,280

30,000

12,375




111,655

Total non-mortgage-backed securities
69,280

1,368,639

12,375




1,450,294

Mortgage-backed or asset-backed securities:
 

 

 

 

 

 

 

U.S. obligation MBS

48,035





48,035

GSE MBS

5,902,762





5,902,762

Private label residential MBS

2,531

11,907

52,661

92,244

52

159,395

Total mortgage-backed securities

5,953,328

11,907

52,661

92,244

52

6,110,192

 
 
 
 
 
 
 
 
TOTAL INVESTMENTS
$
69,280

$
8,822,561

$
1,624,282

$
52,661

$
92,244

$
2,945,052

$
13,606,080

                   
1 
Investment amounts represent the carrying value and do not include related accrued interest receivable of $24.5 million at December 31, 2015.
2 
Amounts include unsecured credit exposure with overnight original maturities.
3 
Amounts represent collateralized overnight borrowings by counterparty rating.



63


Table 39
 
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 overnight original maturities.
3 
Amounts represent collateralized overnight borrowings by counterparty rating.

Securities Concentrations - We did not hold securities from any issuers, excluding securities issued or guaranteed by U.S. government agencies or GSEs, with aggregate book values greater than ten percent of our capital as of December 31, 2015.

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.


64


Table 40 presents a summary of the UPB of private-label MBS/ABS by interest rate type and by type of collateral (in thousands):

Table 40
 
12/31/2015
12/31/2014
 
Fixed
Rate1
Variable
Rate1
Total
Fixed
Rate1
Variable
Rate1
Total
Private-label residential MBS:
 

 

 

 

 

 

Prime
$
16,223

$
72,913

$
89,136

$
24,730

$
92,710

$
117,440

Alt-A
40,151

43,376

83,527

64,196

67,979

132,175

Total private-label residential MBS
56,374

116,289

172,663

88,926

160,689

249,615

Home equity loan ABS:
 

 

 

 

 

 

Subprime




2,707

2,707

TOTAL
$
56,374

$
116,289

$
172,663

$
88,926

$
163,396

$
252,322

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


65


Almost all of our private-label MBS 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 portfolio from OTTI. Table 41 presents statistical information for our private-label MBS by rating (dollar amounts in thousands):

Table 41
 
12/31/2015
Private-label residential MBS:
 
UPB by credit rating:
 
Double-A
$
2,538

Single-A
11,903

Triple-B
52,861

Double-B
38,856

Single-B
18,432

Triple-C
16,918

Double-C
10,855

Single-D
20,248

Unrated
52

TOTAL
$
172,663

 
 
Amortized cost
$
167,345

Gross unrealized losses
(8,854
)
Fair value
160,555

 
 
OTTI:
 
Credit-related OTTI charge taken year-to-date
$
826

Non-credit-related OTTI charge taken year-to-date
(545
)
TOTAL
$
281

 
 
Weighted average percentage of fair value to UPB
93.0
%
Original weighted average credit support1
4.9

Weighted average credit support1
11.5

Weighted average collateral delinquency2
10.2

                   
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 20 outstanding private-label MBS upon which we have recognized OTTI, there is no evidence of a likely credit loss in our other 84 private-label MBS; 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.

We also evaluate other non-mortgage related investment securities, primarily consisting of municipal bonds issued by housing finance authorities, for potential impairment, but this evaluation has not ever determined any non-MBS securities to be impaired.


66


In addition to evaluating all of our private-label MBS 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 stress case scenario is designed to provide an indication of the sensitivity of our private-label MBS to fluctuations in housing prices compared to 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 fluctuations 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 at December 31, 2015 would have been $0.3 million compared to $0.2 million recorded under the base case scenario.


Deposits: Total deposits increased 27.5 percent from December 31, 2014 to December 31, 2015, mostly due to an increase in overnight balances and demand deposits. Deposit programs are offered primarily to facilitate customer transactions with us. Deposit products offered primarily include demand and overnight deposits and short-term certificates of deposit. 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 five basis points on demand deposits and ten basis points 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 2016 if demand for loans at member institutions increases, if members continue to deleverage 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.
 
Table 42 presents the maturities for time deposits in denominations of $250,000 or more by remaining maturity (in thousands):
 
Table 42
 
 
Remaining Maturity
 
3 months or less
Over 3 months but within 6 months
Over 6 months but within 12 months
Total
December 31, 2015
$
18,400

$

$

$
18,400

 
 
 
 
 
December 31, 2014
$
29,400

$

$

$
29,400

 
Table 43 presents the average amount of and the annual rate paid on deposit types that exceed 10 percent of average deposits (dollar amounts in thousands). Deposit types are included only in the year(s) that the 10 percent threshold is met.

Table 43
 
 
2015
2014
2013
 
Amount
Rate
Amount
Rate
Amount
Rate
Overnight deposits
$
386,599

0.10
%
$
553,362

0.10
%
$
792,029

0.10
%
Demand deposits
246,354

0.05

248,423

0.05

219,505

0.05


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 7A – “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.


67


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 21.0 percent from December 31, 2014 to December 31, 2015 and the mix between discount notes and bonds changed over the period. Discount notes increased in both absolute balances and as a percentage of total consolidated obligations. Discount notes increased from 41.3 percent of total outstanding consolidated obligations as of December 31, 2014 to 52.3 percent as of December 31, 2015. Conversely, bonds decreased in absolute balances and as a percentage of total consolidated obligations outstanding. Bonds decreased from 58.7 percent of total outstanding consolidated obligations as of December 31, 2014 to 47.7 percent as of December 31, 2015. The increase in discount notes from December 31, 2014 to December 31, 2015 was primarily to fund the increase in short-term advances and our line of credit product (see this Item 7 - “Financial Condition – Advances”).

During 2015, especially in the second half of the year, consolidated obligation funding swapped or indexed to LIBOR became more expensive primarily due to the decline in the swap spreads caused by actions taken by foreign central banks to support their currencies and also due to heavy issuance of term corporate debt that is swapped to LIBOR. These conditions are expected to persist so we may intentionally choose to fund a larger portion of our balance sheet using discount notes during 2016, as long as the cost of funding with discount notes is below the cost of issuing swapped fixed rate bonds or variable rate bonds. For a discussion on yields and spreads, see Table 12 under this Item 7 - “Results of Operations.” We expect short-term interest rates to remain relatively low for the near term, and we anticipate being able to call some higher rate long-term debt in 2016. Refinancing debt usually increases costs in the month the calls are initiated due to the acceleration of unamortized concessions on the debt when it is called because we amortize concession costs to contractual maturity. However, this increase is offset by the lower rate on the newly issued debt and by funding benefits from timing differences between the date the debt is called and the forward settlement date of the replacement debt (conventionally not exceeding 30 days forward). For further discussion of how our portfolio of unswapped callable bonds impacted interest rate risk, see Item 7A – “Quantitative and Qualitative Disclosures About Market Risk.”

Several recent developments have the potential to impact the demand for FHLBank consolidated obligations in 2016 and perhaps beyond. For a discussion of the impact of these recent developments, U.S. government programs, governmental regulation of commercial banks, and the financial markets on the cost of FHLBank consolidated obligations, see “Financial Market Trends” under this Item 7.

While we had stable access to funding markets during 2015, 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, 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.


68


Borrowings with original maturities of one year or less are considered short-term. Table 44 summarizes short-term borrowings (dollar amounts in thousands):
 
Table 44
 
Consolidated Obligation Discount Notes
Consolidated Obligation Bonds With Original Maturities of One Year or Less
 
2015
2014
2013
2015
2014
2013
Outstanding at end of the period1
$
21,821,045

$
14,221,276

$
10,890,528

$
5,748,000

$
2,780,000

$
2,400,000

Weighted average rate at end of the period2
0.27
%
0.08
%
0.08
%
0.30
%
0.13
%
0.12
%
Daily average outstanding for the period1
$
20,069,457

$
12,157,140

$
10,752,950

$
4,137,392

$
2,721,260

$
1,513,699

Weighted average rate for the period2
0.10
%
0.07
%
0.08
%
0.18
%
0.12
%
0.14
%
Highest outstanding at any month-end1
$
22,134,395

$
16,471,814

$
12,434,484

$
6,623,000

$
2,960,000

$
2,400,000

                   
1 
Par Value
2 
Computed based on par value and coupon/interest rate
 
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 OIS 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 do not qualify for 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 and the uncertainty surrounding the cost associated 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). For additional information on how we use derivatives, see Item 1 – “Business – Use of Derivatives.”
 
The notional amount of total derivatives outstanding decreased by $1.8 billion from December 31, 2014 to December 31, 2015 primarily due to decreases in interest rate swaps hedging various structures of consolidated obligation bonds and interest rate caps hedging embedded caps in MBS, which were partially offset by the increase in interest rate swaps hedging consolidated obligation discount notes and interest rate swaps hedging fixed rate MBS. These changes correspond to the change in the mix of debt between bonds and discount notes, and composition changes in investments. For additional information regarding the types of derivative instruments and risks hedged, see Tables 61 and 62 under Item 7A – “Quantitative and Qualitative Disclosures About Market Risk.”

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

Capital stock increased 24.1 percent from December 31, 2014 to December 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. During 2014, the FHLBank reduced its activity-based stock purchase requirement for advances from 5.0 percent to 4.5 percent.


69


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, through a mandated change or through a reduction of advance balances, 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 FHLBank-established limits held by any individual member periodically throughout the year. In April 2014, we began the practice of repurchasing all outstanding excess Class A Common Stock, generally on a monthly basis. Our current practice of regular weekly exchanges of all excess Class B Common Stock over $50,000 per member for Class A Common Stock remains in effect.

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.

The increase in retained earnings from December 31, 2014 to December 31, 2015 is attributed to the net income for the year of $93.4 million, exceeding the $68.7 million payment of dividends in 2015. Dividends increased $22.5 million for the year ended December 31, 2014 to the year ended December 31, 2015 as a result of the changes to capital management policies enacted in 2014. The Board of Directors also believed that it was appropriate and prudent to continue to grow our retained earnings during periods when our earnings were strong, allowing us to pay an acceptable dividend on our members’ capital stock investments and also build retained earnings. Another factor is the JCE Agreement with the other FHLBanks effective February 28, 2011 that provides that, upon the satisfaction of the FHLBanks’ obligations to REFCORP effective June 30, 2011, each FHLBank, on a quarterly basis, allocates at least 20 percent of its net income to a separate RRE Account until the balance of that account equals at least one percent of that FHLBank’s average balance of outstanding consolidated obligations for the previous quarter. These restricted retained earnings are not available to pay dividends (see the discussion of our JCE Agreement and the amendment to our capital plan under Item 1 – “Business – Capital, Capital Rules and Dividends”).
 
Our capital stock is not publicly traded. Members may request to redeem any capital stock in excess of the minimum stock purchase requirements, but any repurchase of excess capital stock prior to the end of the redemption period is entirely at our discretion (see Item 1 – “Business – Capital, Capital Rules and Dividends”). All redemptions (at member request at the end of the redemption period) or repurchases (at our discretion, prior to the end of any applicable redemption period if made at a member’s request) are made at the par value of $100 per share. Stock redemption periods are six months for Class A Common Stock and five years for Class B Common Stock, although we can, at our discretion, repurchase amounts over a member’s minimum stock purchase requirements at any time prior to the end of the redemption periods as long as we will remain in compliance with our regulatory capital requirements after such repurchase. Ownership of our capital stock is concentrated within the financial services industry, and is stratified across various institutional entities as reflected in Table 45 as of December 31, 2015 and 2014 (dollar amounts in thousands):
 
Table 45
 
2015
2014
 
Count
Amount
Count
Amount
Commercial banks
636
$
638,336

659

$
487,866

Thrift institutions
31
337,899

32

296,582

Insurance companies
22
160,136

23

121,283

Credit unions
77
72,332

78

68,222

CDFIs
2
244

2

88

Total GAAP capital stock
768
1,208,947

794

974,041

Mandatorily redeemable capital stock
10
2,739

10

4,187

TOTAL REGULATORY CAPITAL STOCK
778
$
1,211,686

804

$
978,228



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Following are highlights from our capital plan:
Two classes of authorized stock - Class A Common Stock and Class B Common Stock;
Both classes have $100 par value and both are defined as common stock;
Class A Common Stock is required for membership. The membership or asset-based stock requirement is currently 0.1 percent of total assets at the end of the prior calendar year, with a minimum requirement of 10 shares ($1,000) and a cap of 5,000 shares ($500,000). The asset-based stock requirement is subject to change by our Board of Directors within ranges specified in the capital plan. The membership or asset-based stock requirement is initially calculated on the date of membership and then recalculated once a year, except in the case of mergers. Class A Common Stock, up to a member’s asset-based stock requirement, is used to satisfy a member’s activity-based stock requirement before any Class B Common Stock is purchased by the member;
To the extent a member’s asset-based requirement in Class A Common Stock is insufficient to support its calculated activity-based requirement, Class B Common Stock must be purchased in order to support a member’s activities with us. The activity-based requirements listed below are the current requirements, but are subject to change by our Board of Directors within ranges specified in the capital plan. The activity-based stock requirement is the sum of the stock requirements for each activity less the asset-based stock requirement in Class A Common Stock and is calculated whenever a member enters into a transaction as follows:
Advances - 4.5 percent of outstanding advances (range = 4.0 to 6.0 percent);
Letters of credit - 0.0 percent of outstanding letters of credit (range = 0.0 to 1.0 percent);
AMA - 0.0 percent of the principal amount of member’s mortgage loans (range = 0.0 to 6.0 percent), limited to a maximum of 1.5 percent of the member’s total assets at the end of the prior calendar year (range = 1.0 to 3.0 percent); and
Derivatives (interest rate swaps, caps, floors and equity options) - 0.0 percent of the total notional amount (range = 0.0 to 2.0 percent);
Excess stock is calculated daily. We may exchange excess Class B Common Stock for Class A Common Stock, but only if we remain in compliance with our regulatory capital requirements after the exchange;
A member may hold excess Class A or Class B Common Stock, subject to our rights to repurchase excess stock or to exchange excess Class B Common Stock for Class A Common Stock, or may ask to redeem all or part of its excess Class A or Class B Common Stock. A member may also ask to exchange all or part of its excess Class A or Class B Common Stock for Class B or Class A Common Stock, respectively, but all such exchanges are completed at our discretion;
As a member increases its activities with us above the amount of activity supported by its asset-based requirement, excess Class A Common Stock is first exchanged for Class B Common Stock to meet the activity requirement prior to the purchase of additional Class B Common Stock;
Under the plan, the Board of Directors establishes a dividend parity threshold that is a rate per annum expressed as a positive or negative spread relative to a published reference interest rate index (e.g., LIBOR, Federal funds, etc.) or an internally calculated reference interest rate based upon any of our assets or liabilities (average yield on advances, average cost of consolidated obligations, etc.);
Class A and Class B Common Stock share in dividends equally up to the dividend parity threshold, then the dividend rate for Class B Common Stock can exceed the rate for Class A Common Stock, but the Class A Common Stock dividend rate can never exceed the Class B Common Stock dividend rate;
Members were notified of the initial reference interest rate and spread that defined the dividend parity threshold prior to implementation of our capital plan and have been, and will continue to be, notified at least 90 days prior to any change thereof;
A member may submit a redemption request to us for any or all of its excess Class A and/or Class B Common Stock;
Within five business days of receipt of a redemption request for excess Class A Common Stock, we must notify the member if we decline to repurchase the excess Class A Common Stock, at which time the six-month waiting period will apply. Otherwise, we will repurchase any excess Class A Common Stock within five business days, though it is usually repurchased on the same date as the member’s redemption request;
Within five business days of receipt of a redemption request for excess Class B Common Stock, we must notify the member if we decline to repurchase the excess Class B Common Stock, at which time the five-year waiting period will apply. Otherwise, we will repurchase any excess Class B Common Stock within five business days, though it is usually repurchased on the same date as the member’s redemption request;
A member may cancel or revoke its written redemption request prior to the end of the redemption period (six months for Class A Common Stock and five years for Class B Common Stock) or its written notice of withdrawal from membership prior to the end of a six-month period starting on the date we received the member’s written notice of withdrawal from membership. Our capital plan provides that we will charge the member a cancellation fee in accordance with a schedule where the amount of the fee increases with the passage of time. There is no grace period after the submission of a redemption request during which the member may cancel its redemption request without being charged a cancellation fee; and
Each required share of Class A and Class B Common Stock is entitled to one vote up to the statutorily imposed voting caps.


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Required Class A Common Stock decreased from 17.6 percent of total required stock as of December 31, 2014 to 13.8 percent of total required stock as of December 31, 2015 (see Table 46) due to the increase in advances and the required activity-based capital stock as of December 31, 2015. Additionally, because of the change in the composition of our stock between the two classes, as well as the increase in the Class B dividend rate during the last half of 2014, the weighted average dividend rate increased to 5.26 percent for 2015 compared to 4.22 percent for 2014.

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 our 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 46 provides a summary of member capital requirements under our current capital plan as of December 31, 2015 and 2014 (in thousands):

Table 46
Requirement
12/31/2015
12/31/2014
Asset-based (Class A only)
$
154,290

$
154,304

Activity-based (additional Class B)1
960,538

723,450

Total Required Stock2
1,114,828

877,754

Excess Stock (Class A and B)
96,858

100,474

Total Stock2
$
1,211,686

$
978,228

 
 
 
Activity-based Requirements:
 

 

Advances3
$
1,052,889

$
813,778

AMA assets (mortgage loans)4
1,521

1,978

Total Activity-based Requirement
1,054,410

815,756

Asset-based Requirement (Class A Common Stock) not supporting member activity1
60,418

61,998

Total Required Stock2
$
1,114,828

$
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, which includes 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 13 of the Notes to Financial Statements under Item 8 for additional information and compliance as of December 31, 2015 and 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 (see the discussion of our JCE Agreement and the amendment to our capital plan under Item 1 – “Business – Capital, Capital Rules and Dividends”). The dividend payout ratio represents the percentage of net income paid out as dividends. The significant fluctuations in the dividend payout ratios for recent year-ends (see Table 8 under Item 6 – “Selected Financial Data”) are primarily attributable to the changes in net income due to the volatility of net gain (loss) on derivatives and hedging activities and net gain (loss) on trading securities (see this Item 7 – “Results of Operations” for additional discussion).


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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).

The current dividend parity threshold is equal to the average effective overnight Federal funds rate for a dividend period minus 100 basis points. 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 current level of the overnight Federal funds target rate, 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 47 presents the dividend rates per annum paid on capital stock under our capital plan for the periods indicated:

Table 47
Applicable Rate per Annum
12/31/2015
09/30/2015
06/30/2015
03/31/2015
Class A Common Stock
1.00
 %
1.00
 %
1.00
 %
1.00
 %
Class B Common Stock
6.00

6.00

6.00

6.00

Weighted Average1
5.31

5.29

5.22

5.19

Dividend Parity Threshold:
 
 
 
 
Average effective overnight Federal funds rate
0.16
 %
0.14
 %
0.13
 %
0.11
 %
Spread to index
(1.00
)
(1.00
)
(1.00
)
(1.00
)
TOTAL (floored at zero percent)
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.

Table 48 presents the dividend rates per annum paid on capital stock under our capital plan for the periods indicated:

Table 48
Applicable Rate per Annum
12/31/2014
09/30/2014
06/30/2014
03/31/2014
Class A Common Stock
1.00
 %
1.00
 %
1.00
 %
0.25
 %
Class B Common Stock
6.00

6.00

5.00

4.00

Weighted Average1
5.17

5.15

4.22

2.60

Dividend Parity Threshold:
 
 
 
 
Average effective overnight Federal funds rate
0.10
 %
0.09
 %
0.09
 %
0.07
 %
Spread to index
(1.00
)%
(1.00
)%
(1.00
)%
(1.00
)%
TOTAL (floored at zero percent)
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.


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We increased the dividend rate to 6.00 percent on Class B Common Stock in 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 dividend 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 2016, 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.

As of December 31, 2015, 65.6 percent of our capital was capital stock, and 34.4 percent was retained earnings and AOCI. As of December 31, 2014, 61.4 percent of our capital was capital stock, and 38.6 percent was retained earnings and AOCI. We were in compliance with our minimum regulatory capital requirements as of December 31, 2015 as mentioned previously. Additionally, within our RMP we have an internal minimum total capital-to-asset ratio requirement of 4.04 percent, which is in excess of the 4.00 percent regulatory requirement. All regulatory and internal capital ratios include mandatorily redeemable capital stock as capital, which we otherwise treat as a liability under GAAP. We expect to maintain a regulatory capital-to-asset percentage greater than the regulatory minimum of 4.0 percent and greater than our RMP minimum of 4.04 percent. However, our GAAP total capital percentage could drop below these levels because mandatorily redeemable capital stock is considered a liability under GAAP. See Table 8 under Item 6 – “Selected Financial Data” for reported percentages for total capital ratio and regulatory capital ratio.

Liquidity: We maintain high levels of liquidity to achieve our mission of serving as an economical funding source for our members and housing associates. As part of fulfilling our mission, we also maintain minimum liquidity requirements in accordance with certain Finance Agency regulations and guidelines and in accordance with policies established by management and the Board of Directors. Our business model enables us to manage the levels of our assets, liabilities, and capital in response to member credit demand, membership composition, and market conditions. As such, assets and liabilities utilized for liquidity purposes can vary significantly in the normal course of business due to the amount and timing of cash flows as a result of these factors.

Sources and Uses of Liquidity – 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.

During the year ended December 31, 2015, proceeds (net of premiums and discounts) from the issuance of bonds and discount notes were $14.1 billion and $309.0 billion, respectively, compared to $10.3 billion and $53.9 billion for the same period in 2014. The large increase between periods reflects the cumulative effect of using shorter term discount notes, primarily overnight discount notes, during 2015. We use short-term discount notes to fund short-term advances and our short-term liquidity portfolio. The increase in overnight discount note issuance correlated with the increased activity in our overnight investment in Federal funds sold and overnight investment in reverse repurchase agreements. We continued to issue shorter-term discount notes as well as swapped step-up, callable, and term fixed and floating rate consolidated obligation bonds to capture attractive funding, match repricing structures on advances and investments, and provide additional liquidity. Our other sources of liquidity include deposit inflows, repayments of advances and mortgage loans, maturing investments, interest income, Federal Funds purchased, and proceeds from reverse repurchase agreements or the sale of unencumbered assets.


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At December 31, 2015, our short-term liquidity portfolio, which consists of cash and investments with remaining maturities of one year or less and includes term and overnight Federal funds sold, certificates of deposit, commercial paper, and reverse repurchase agreements, increased $1.3 billion, from $6.1 billion as of December 31, 2014 to $7.4 billion as of December 31, 2015. The increase was due to balance sheet growth, which impacts required levels of liquidity. The composition of cash and short-term investments changed between periods due to greater ability to invest cash in reverse repurchase agreements as a result of participation in the Federal Reserve Bank of New York's overnight reverse repurchase agreement program beginning mid-2015. New counterparty relationships have also provided us with more options for utilizing reverse repurchase agreements for overnight investments during 2015. 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 GSE MBS 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 remained relatively flat at $1.3 billion in par value as of December 31, 2015 and 2014. We held GSE MBS with a par value of $962.2 million and $136.5 million as of December 31, 2015 and 2014, respectively. 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.

We manage our average capital ratio to remain above our minimum regulatory and RMP requirements so that we have the ability to issue additional consolidated obligations should the need arise. Excess capital capacity ensures we are able to meet the liquidity needs of our members and/or repurchase excess stock either upon the submission of a redemption request by a member or at our discretion for balance sheet or capital management purposes.

Uses of liquidity primarily include issuing advances, purchasing investments, and repaying called and maturing consolidated obligations for which we are the primary obligor. We also use liquidity to purchase mortgage loans, repay member deposits, pledge collateral to derivative counterparties, redeem or repurchase capital stock, and pay dividends to members.

During the year ended December 31, 2015, advance disbursements totaled $98.5 billion compared to $64.6 billion for the same period in 2014. During the year ended December 31, 2015, investment purchases (excluding overnight investments) totaled $5.3 billion compared to $1.1 billion for the same period in 2014. During the year ended December 31, 2015, payments on consolidated obligation bonds and discount notes were $14.5 billion and $301.4 billion, respectively, compared to $10.2 billion and $50.5 billion for the same period in 2014, which includes bonds that were called during the period. The large increase in payments on discount notes between periods primarily reflects the cumulative effect of using discount notes, including overnight discount notes, to fund the growth in short-term advances and our short-term liquidity portfolio.

Liquidity Requirements – We are subject to five metrics for measuring liquidity: statutory, operational, and contingency liquidity, and calendar day guidelines under different scenarios. Statutory liquidity requires us to have an amount equal to current deposits received from members invested in obligations of the United States, deposits in eligible banks or trust companies, and advances with a final maturity not exceeding five years. Operational liquidity requires that we maintain liquidity in an amount not less than 20 percent of the sum of our demand and overnight deposits and other overnight borrowings, plus 10 percent of the sum of our term deposits, consolidated obligations, and other borrowings that mature within one year. Contingency liquidity is an amount sufficient to meet our liquidity needs for five business days if we are unable to access the capital markets to issue consolidated obligations. Contingency plans are in place at the FHLBank and the Office of Finance that prioritize the allocation of liquidity resources in the event of financial market disruptions, as well as systemic Federal Reserve wire transfer system disruptions. Further, under the FHLBank Act, the Secretary of Treasury has the authority, at his discretion, to purchase consolidated obligations up to an aggregate amount of $4.0 billion. No borrowings under this authority have been outstanding since 1977. Our net liquidity in excess of contingency liquidity over a cumulative five-business-day period was $4.8 billion as of December 31, 2015.

In addition to the liquidity measures described above, we are required by the Finance Agency to meet two daily liquidity standards, each of which assumes that we are unable to access the market for consolidated obligations. The first standard requires us to maintain sufficient funds to meet our obligations for 15 days under a scenario in which it is assumed that members do not renew any maturing advances. The second standard requires us to maintain sufficient funds to meet our obligations for five days under a scenario in which it is assumed that members renew all maturing advances. We 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.


75


In order to ensure sufficient liquidity, 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 37 days as of December 31, 2015 from 45 days as of December 31, 2014. A portion of this decrease was a result of the transition to two-month discount notes instead of three-month discount notes. The use of shorter term discount notes correlates with the significant increase in our line of credit advance product, and was a strategic shift to reduce the amount and cost of liquidity. 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 was 4 days and 2 days as of December 31, 2015 and December 31, 2014, respectively, 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 33 days on December 31, 2015 as a result of our transition to using two-month discount notes instead of three-month discount notes. 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 increase our cost of funds and reduce our net interest income.

Off-Balance Sheet Arrangements: In the ordinary course of business, we engage in financial transactions that, in accordance with GAAP, are not recorded on the Statements of Condition or may be recorded on the Statements of Condition in amounts that are different from the full contract or notional amount of the transactions. See Note 17 of the Notes to Financial Statements under Item 8 – “Financial Statements and Supplementary Data” for more information on our off-balance sheet arrangements.

Contractual Obligations: Table 49 represents the payment due dates or expiration terms under the specified contractual obligation type, excluding derivatives, by period as of December 31, 2015 (in thousands). Consolidated obligations listed exclude discount notes, which have maturities of one year or less, and are based on contractual maturities. Actual distributions could be influenced by factors affecting potential early redemptions.
 
Table 49
Contractual Obligations
Total
Payments due by period
1 Year or Less
After 1 Through 3 Years
After 3 Through 5 Years
After 5 Years
Consolidated obligation bonds
$
19,823,795

$
9,276,390

$
4,078,055

$
1,831,850

$
4,637,500

Operating leases
347

78

162

107


Commitments to fund mortgage loans
66,045

66,045




Advance commitments
129,423

104,473

24,950



Expected future pension benefit payments
13,119

295

828

1,215

10,781

Mandatorily redeemable capital stock
2,739

2,541

2

196


TOTAL
$
20,035,468

$
9,449,822

$
4,103,997

$
1,833,368

$
4,648,281


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. Proper identification, assessment and management of risks, complemented by adequate internal controls, enable our stakeholders to have confidence in our ability to meet our housing finance mission, serve our stockholders, earn a profit, compete in the industry, and sustain and prosper over the long term. We maintain comprehensive risk management processes to facilitate, control and monitor risk taking. Periodic reviews by internal and external auditors, Finance Agency examiners and independent consultants subject our practices to additional scrutiny, further strengthening the process.


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We maintain an enterprise risk management (ERM) program in an effort to enable the identification of all inherent significant risks to the organization and institute the prompt and effective management of any major risk exposures. Under this program, we perform annual risk assessments designed to identify and evaluate all material risks that could adversely affect the achievement of our performance objectives and compliance requirements. ERM is a process, effected by our Board of Directors, management and other personnel, applied in strategy setting and across the FHLBank. It is designed to identify potential events that may affect us, manage risk within our Risk Appetite Statement and provide reasonable assurance regarding the achievement of objectives in the following categories: (1) Strategic - strategic initiatives and objectives that align with our mission, vision, and core values; (2) Operations - effective and efficient use of our resources to achieve basic business objectives, including performance and profitability goals and safeguarding of resources; (3) Reporting - reliability of reporting, including filings with the SEC, interim and condensed financial statements and selected financial data derived from such statements, such as earnings releases reported publicly and other FHLBank financial information posted on our website or provided to the Office of Finance in connection with the FHLBank System Combined Financial Reports; and (4) Compliance - complying with laws and regulations to which we are subject. 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.

Our Risk Philosophy Statement, approved by our Board of Directors, establishes the broad parameters we consider in executing our business strategy and represents a set of shared attitudes and beliefs that characterize how we consider risk in everything we do. Our Risk Appetite Statement, also approved by our Board of Directors, defines the level of risk exposure we are willing to accept or retain in pursuit of stakeholder value. While we consider our risk appetite first in evaluating strategic alternatives, defining and managing to a specific risk appetite does not ensure we will not incur greater than expected losses or that we won’t be faced with an unexpected, catastrophic loss. By defining and managing to a specific risk appetite, our Board of Directors and senior management strive to ensure that there is a common understanding of our desired risk profile, which enhances the ability of both to make improved strategic and tactical decisions. Our monthly Risk Dashboard provides a holistic view of our risk profile and the means for reporting our key risk metrics as defined within our Risk Appetite Metrics document, which is also approved by our Board of Directors. The Risk Dashboard is intended to demonstrate, at an entity level, whether our enterprise risks are well controlled and normal operations are expected with standard Board of Directors involvement (low residual risk environment).

As part of our ERM program, entity level risk assessment workshops are conducted with our management committees to identify and reach a general consensus on the primary risks that must be managed to help ensure achievement of our strategic objectives and allow for future success for the organization. By using this type of top-down assessment, we seek to: (1) gain an understanding of our current risk universe; (2) obtain management’s input on new and/or increasing areas of exposure; (3) determine the impact our primary risks might have on achieving our strategic business plan objectives; (4) discuss and validate our current risk management approach; (5) identify other risk management strategies that might be implemented to better ensure alignment with our desired residual risk profile; and (6) prioritize the allocation of resources to address those areas where current risk management strategies may be falling short relative to the overall level of perceived residual risk. These risk assessment workshops have resulted in the development of risk strategies and action plans in an effort to enhance the risk management practices throughout the FHLBank. The results of these activities are summarized in an annual risk assessment report, which is reviewed by the Strategic Risk Management Committee and approved by the Risk Oversight Committee of the Board of Directors.

Business units also play key roles in our risk management program. We utilize a customized business unit risk assessment approach in order to ensure that: (1) risk assessments are completed annually for all of our business units; (2) effective internal controls and strategies are in place for managing the identified risks within the key processes throughout the FHLBank; and (3) risk management or internal control weaknesses are properly identified with necessary corrective actions taken. As a result of our efforts, 20 business unit risk assessments were completed in 2015 addressing 125 key processes throughout the FHLBank. The number of business unit risk assessments and key processes will necessarily fluctuate over time as organizational changes occur, responsibilities shift and new products and services are developed. All risk assessments are reviewed by senior management and presented to the Risk Oversight Committee of the Board of Directors on a scheduled basis in order to keep our Board of Directors apprised of any weaknesses in the current risk management process of each business unit and the steps undertaken by management to address any identified weaknesses. The outcomes of these business unit risk assessments are linked to the entity level risk assessment workshop results to ensure consistency between the top down and bottom up approaches and to ensure that no risks are overlooked.


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Effective risk management programs include not only conformance to risk management best practices by management but also incorporate Board of Director oversight. As previously noted, our Board of Directors plays an active role in the ERM process by regularly reviewing risk management policies and approving aggregate levels of risk. Involvement by the Board of Directors in establishing risk tolerance levels, including oversight of the development and maintenance of programs to manage it, should be substantial and reflect a high level of director fiduciary responsibility and accountability. In addition to establishing the formal risk philosophy, Risk Appetite Statement, Risk Appetite Metrics and reviewing the annual and business unit risk assessment reports, our Board of Directors reviews both the RMP and Member Products Policy at least annually. Various management committees, including the Strategic Risk Management Committee, the Strategic Planning Group, the Market Risk Analysis Committee, the Credit Underwriting Committee, the Operations Risk Committee, the Disclosure Committee, the Technology Committee, and the Asset/Liability Committee oversee our risk management process. The following discussion highlights our different strategies to diversify and manage risk. See Item 7A – “Quantitative and Qualitative Disclosures About Market Risk” for a separate discussion of market risk.

Credit Risk Management: Credit risk is defined as the potential that a borrower or counterparty will fail to meet its financial obligations in accordance with agreed terms. 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.

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 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 PMI or 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.


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Table 50 presents the UPB and maximum coverage outstanding with the top five third-party primary mortgage insurers and all others for seriously delinquent loans as of December 31, 2015 (in thousands):

Table 50
Insurance Provider
Credit Rating1
Unpaid Principal Balance2
Maximum Coverage Outstanding3
Mortgage Guaranty Insurance Co.
Double-B
$
1,512

$
402

Genworth Mortgage Insurance Corp.
Double-B
1,286

390

Republic Mortgage Insurance Co.
No Rating
475

148

Radian Guaranty Inc.
Double-B
188

74

United Guaranty Residential Insurance Co.
Triple-B
171

57

All others4
 
9,799

71

TOTAL
 
$
13,431

$
1,142

                   
1 
Represents the lowest credit ratings of S&P, Moody’s or Fitch as of December 31, 2015.
2 
Represents the UPB of conventional loans 90 days or more delinquent or in the process of foreclosure. Assumes PMI in effect at time of origination. Insurance coverage may be discontinued once a certain LTV ratio is met.
3 
Represents the estimated contractual limit for reimbursement of principal losses (i.e., risk in force) assuming the PMI at origination is still in effect. The amount of expected claims under these insurance contracts is substantially less than the contractual limit for reimbursement.
4 
Includes the UPB of all remaining seriously delinquent loans as of December 31, 2015 regardless of whether or not there is third-party PMI.

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 Ginnie Mae 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 96 percent of our MBS/CMO portfolio is securitized by Fannie Mae or Freddie Mac. All of our private-label MBS have been downgraded below triple-A subsequent to purchase (see Table 41), but the downgraded securities have been and are currently paying according to contractual agreements with the exception of four securities that have experienced immaterial cash flow shortfalls. 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 (uncleared 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.

Uncleared Derivatives. We are subject to non-performance by the counterparties to our uncleared derivative transactions. We generally require collateral on uncleared 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 uncleared derivative transactions as of December 31, 2015.

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 December 31, 2015.


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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 8 of the Notes to Financial Statements under Item 8 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 are defaults, 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 51 and 52 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 or S&P) for derivative positions with counterparties to which we had credit exposure (in thousands):

Table 51
12/31/2015
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:
 
 
 
 
Uncleared derivatives:
 
 
 
 
Double-A
$
250,000

$
53

$

$
53

Single-A
1,832,154

26,512

22,004

4,508

Liability positions with credit exposure:
 
 
 
 
Uncleared derivatives1:
 
 
 
 
Single-A
2,803,762

(53,857
)
(58,156
)
4,299

Cleared derivatives2
5,977,132

(51,148
)
(93,808
)
42,660

TOTAL DERIVATIVE POSITIONS WITH CREDIT EXPOSURE
$
10,863,048

$
(78,440
)
$
(129,960
)
$
51,520

                   
1 
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.
2 
Represents derivative transactions cleared with Clearinghouses, which are not rated.


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Table 52
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:
 
 
 
 
Uncleared derivatives:
 
 
 
 
Single-A
$
3,949,300

$
36,459

$
29,417

$
7,042

Liability positions with credit exposure:
 
 
 
 
Uncleared derivatives1:
 
 
 
 
Single-A
2,245,492

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

Cleared derivatives2
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 
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.
2 
Represents derivative transactions cleared with Clearinghouses, which are not rated.

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.

Table 53 presents the total fair value of cross-border outstandings to countries in which we do business as of December 31, 2015 (dollar amounts in thousands). No individual country amounted to one percent or more of our total assets.

Table 53
 
Total1
 
Amount
Percent of
Total Assets
Federal funds sold2
$
1,260,000

2.8
%
 
 
 
Derivative assets:
 
 
Net exposure at fair value
(51,835
)
 
Cash collateral held
57,855

 
Net exposure after cash collateral
6,020


 
 
 
TOTAL
$
1,266,020

2.8
%
                   
1 
Represents 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 December 31, 2015 were $1.1 billion (Canada, Netherlands, and Germany).
2 
Consists solely of overnight Federal funds sold.


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Table 54 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 December 31, 2014 (dollar amounts in thousands):

Table 54
 
Canada
Other1
Total
 
Amount
Percent of Total Assets
Amount
Percent of Total Assets
Amount
Percent of Total Assets
Federal funds sold2
$
525,000

1.4
%
$
1,200,000

3.3
%
$
1,725,000

4.7
%
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
Net exposure at fair value
(18,571
)
 
(14,030
)
 
(32,601
)
 
Cash collateral held
20,762

 
17,738

 
38,500

 
Net exposure after cash collateral
2,191


3,708


5,899


 
 
 
 
 
 
 
TOTAL
$
527,191

1.4
%
$
1,203,708

3.3
%
$
1,730,899

4.7
%
__________
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 December 31, 2014 were $1.2 billion (Germany, Norway, Netherlands, and United Kingdom).
2 
Consists solely of overnight Federal funds sold.

Table 55 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 December 31, 2013 (dollar amounts in thousands):

Table 55
 
Finland
Other1
Total
 
Amount
Percent of Total Assets
Amount
Percent of Total Assets
Amount
Percent of Total Assets
Federal funds sold2
$
375,000

1.1
%
$
200,000

0.6
%
$
575,000

1.7
%
 
 
 
 
 
 
 
Trading securities3


150,005

0.4

150,005

0.4

 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
Net exposure at fair value

 
13,833

 
13,833

 
Cash collateral held

 
(9,668
)
 
(9,668
)
 
Net exposure after cash collateral


4,165


4,165


 
 
 
 
 
 
 
TOTAL
$
375,000

1.1
%
$
354,170

1.0
%
$
729,170

2.1
%
__________
1 
Represents other foreign countries where individual exposure is less than one percent of total assets. There were no cross-border outstandings to any individual country that totaled between 0.75 and 1.0 percent of our total assets as of December 31, 2013.
2 
Consists solely of overnight Federal funds sold.
3 
Consists of commercial paper and 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.


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Finance Agency regulations require us at all times to have at least an amount equal to our current deposits received from our members
invested in obligations of the United States, deposits in eligible banks or trust companies, or advances with maturities not exceeding five years. Table 56 summarizes our compliance with the Bank Act liquidity requirements as of December 31, 2015 and 2014 (in thousands):
 
Table 56
 
12/31/2015
12/31/2014
Liquid assets1
$
2,682,668

$
4,620,236

Total qualifying deposits
759,366

595,775

Excess liquid assets over requirement
$
1,923,302

$
4,024,461

                    
1 
Although we have other assets that qualify as eligible investments under the liquidity requirements, only Federal funds sold and deposits with the Federal Reserve are listed because these exceed the liquidity requirements without the consideration of any other eligible investments.

Finance Agency regulations and our RMP require us to maintain contingency liquidity, which is defined as eligible transactions that we may use to meet our liquidity needs for a minimum of five business days without access to the consolidated obligation debt markets. Eligible transactions for meeting the contingency liquidity requirement are defined below. Both the Finance Agency and our liquidity measures depend on certain assumptions which may or may not prove valid in the event of an actual market disruption. We believe that under normal operating conditions, routine member borrowing needs and consolidated obligation maturities could be met without access to the consolidated obligation debt markets for at least five business days; however, under extremely adverse market conditions, our ability to meet a significant increase in member advance demand could be impaired if we are denied access to the consolidated obligation debt markets. We complete our contingency liquidity calculation weekly, or more often if deemed necessary.

We are required to maintain daily contingency liquidity in an amount not less than:
20 percent of demand, overnight and certificates of deposit; plus
100 percent of Federal funds purchased that mature within one week; plus
100 percent of consolidated obligations and other borrowings that mature within one week (less consolidated obligations settling within one week); plus
100 percent of consolidated obligations expected to be called within one week; plus
100 percent of consolidated obligation amortization payments expected within one week.

For contingency liquidity purposes under our RMP, we are authorized to hold the following investments, with the limitation that a security pledged under a repurchase agreement cannot be used to satisfy liquidity requirements:
Marketable assets with a maturity of one year or less;
Self-liquidating assets with a maturity of seven days or less;
Assets that are generally accepted as collateral in the repurchase agreement market; and
Irrevocable lines of credit from financial institutions rated not lower than the second highest credit rating category by an NRSRO.


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Table 57 summarizes our compliance with the Finance Agency’s regulatory requirements and our RMP contingency liquidity requirements as of the most recently available weekly computation dated March 8, 2016 (in thousands):

Table 57
 
03/08/2016
Sources of Contingency Liquidity:
 
Marketable assets with a maturity of one year or less
$
2,808,033

Self-liquidating assets with a maturity of 7 days or less
2,192,857

Assets that are generally accepted as collateral in the repurchase agreement market
3,559,573

Irrevocable lines of credit

Total Sources
8,560,463

Uses of Contingency Liquidity:
 
20 percent of demand, overnight and certificates of deposit
137,890

100 percent of Federal funds purchased maturing within one week

100 percent of consolidated obligations and other borrowings maturing within one week
5,646,290

Less 100 percent of consolidated obligations settling within one week

100 percent of consolidated obligations expected to be called within one week
20,000

100 percent of consolidated obligations amortization within one week

Total Uses
5,804,180

EXCESS CONTINGENCY LIQUIDITY
$
2,756,283


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. The RMP provides that we shall maintain a daily operational liquidity level in an amount not less than:
20 percent of the sum of our balance of demand and overnight deposits and other overnight borrowings; plus
10 percent of the sum of our term deposits, consolidated obligations and other borrowings that mature within one year.

As set forth in our RMP, the following investments are eligible for compliance with operational liquidity requirements, with the limitation that a security pledged under a repurchase agreement cannot be used to satisfy liquidity requirements:
Overnight Federal funds sold and overnight deposits;
Overnight reverse repurchase agreements;
All securities classified as trading;
Cash and collected balances held at the Federal Reserve Banks, net of member pass-through deposit reserves; and
Securities that are generally accepted as collateral in the repurchase agreement market.

In 2015, we managed exposure to operational liquidity risk by maintaining appropriate daily liquidity levels above the thresholds established by our RMP. We were in compliance with the operational liquidity requirements of our RMP at all times during 2015.

Finance Agency guidelines and our RMP require us to maintain a minimum number of calendar days of positive cash balances without access to the capital markets for the issuance of consolidated obligations under two different scenarios as described below:
10 to 20 days (initial and current target set by Finance Agency at 15 days) of positive cash balances under the roll-off scenario. Under the roll-off scenario, we assume that maturing member advances are not renewed; and
Three to seven days (initial and current target set by Finance Agency at five days) of positive cash balances under the renew scenario. Under the renew scenario, we assume that all maturing advances are renewed.

We calculate our liquidity under these guidelines daily and are required to submit the calculations in a report to the Finance Agency each Wednesday. Under each of these scenarios, we are allowed to include U.S. Treasury and GSE securities classified as trading securities as available liquidity two days after the day of the report and consider Federal funds sold and money market assets classified as trading securities (commercial paper and certificates of deposit) as available liquidity on the day of the report. We were in compliance with these requirements at all times during 2015.

We generally maintained stable access to the capital markets throughout 2015. For additional discussion of the market for our consolidated obligations and the overall market affecting liquidity see “Financial Market Trends” under this Item 7.


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An entity’s liquidity position is vulnerable to any rating, event, performance or ratio trigger (collectively called triggers) that would lead to the termination of the entity’s credit availability or the acceleration of repayment of credit obligations owed by the entity. We have reviewed the appropriate documents concerning our vulnerability to transactions that contain triggers to gain an understanding of the manner in which risks can arise from such triggers. Triggers adverse to us currently exist in agreements for uncleared derivative transactions and SBPAs. Our staff monitors triggers in order to properly manage any type of potential risks from triggers.

With respect to advances, letters of credit, standby credit facility commitments, SBPAs and member derivatives, we are the beneficiary of certain triggers based on the member’s or housing associate’s financial performance (or the ratings of bonds underlying SBPAs) as defined in detail in our policies and/or the appropriate agreements. See Notes 1 and 7 in Item 8 – “Financial Statements and Supplementary Data – Notes to Financial Statements” for collateral requirements designed for our credit products.

Uncleared derivative transactions entered into with non-member counterparties, including interest rate swaps, swaptions, interest rate caps and interest rate floors, generally have two-way bilateral triggers based on our ratings or the counterparties’ ratings, as applicable to the situation (i.e., which party is at risk). These transactions also have two-way rating triggers that provide for early termination, at the option of us or the counterparty, if the other party’s rating falls to or below the rating trigger level. Early termination by a counterparty may result in losses to us. Our agreements with uncleared derivative counterparties incorporate termination triggers at ratings of BBB+ and Baa1 or lower. The triggers are incorporated in a master derivatives credit support annex or bilateral security agreement. Collateral-related triggers are designed to reduce the amount of unsecured credit risk exposure that we or the counterparty are willing to accept for a given rating level determined by the NRSROs. In certain cases, however, we have entered into bilateral security agreements with non-member counterparties with bilateral-collateral-exchange provisions that require all credit exposures be collateralized (i.e., $0 threshold, meaning all exposures are collateralized). The maximum threshold amount of unsecured credit risk exposure for each rating level for agreements with two-way bilateral triggers based on ratings is defined in Table 58:

Table 58
S&P or Fitch Ratings
Moody’s Ratings
Exposure Threshold
AAA
Aaa
$50 million
AA+, AA, AA-
Aa1, Aa2, Aa3
$15 million
A+, A
A1, A2
$3 million
A-
A3
$1 million
Below A-
Below A3
$0

If the FHLBank’s or an uncleared derivative counterparty’s exposure to the other ever exceeds the threshold based on the other’s NRSRO rating, a margin call is promptly issued requiring the party to collateralize the amount of credit risk exposure in excess of the exposure threshold. The collateral posted by our uncleared derivative counterparties as of December 31, 2015 and 2014 was in the form of cash. Recently issued rules will subject us to a mandatory two-way initial margin requirement and daily variation margin exchange between uncleared derivative counterparties. The rules specify the types of collateral that may be posted or collected as initial or variation margin and sets forth haircuts for certain collateral asset classes. Collateral must be posted to a third-party custodian and cannot be rehypothecated. Accordingly, when these requirements become effective beginning in 2017, we expect the cost of engaging in uncleared derivatives to increase. For additional information regarding recently adopted final rules relating to margin requirements for uncleared derivatives, see Item 1 – Business – Legislative and Regulatory Developments. For additional information regarding our credit exposure relating to derivative contracts, see Note 8 of the Notes to Financial Statements under Item 8 – “Financial Statements and Supplementary Data.”

The amount of collateral that we must post for uncleared derivative transactions is determined by the market value of the transactions and our credit rating. In August 2011, our rating was downgraded from AAA to AA+, and as a result we had to increase our collateral requirements. We had sufficient liquidity to satisfy this change and believe that our liquidity position is such that we could accommodate additional collateral requirements associated with potential further credit downgrades.

We have executed SBPAs with multiple state housing finance authorities. All of the SBPAs contain rating triggers beneficial to us providing that if the housing finance authority bonds covered by the SBPA are rated below investment grade (triple-B), we would not be obligated to purchase the bonds even though we were otherwise required to do so under the terms of the SBPA contract. In addition, some transactions also contain a provision that allows us to terminate our obligation to purchase these bonds under the SBPA upon 30 days prior written notice if the long-term rating on the underlying bonds were to be withdrawn, suspended or reduced below single-A. As of December 31, 2015 and 2014, we were a party to, or participated in, 29 and 27 SBPAs, respectively, in which our aggregate principal and interest commitments were $1.4 billion and $1.5 billion, respectively.


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Business Risk Management: Business risk is the risk of an adverse impact on our profitability resulting from external factors that may occur in both the short and long run. We manage business risk, in part, through a commitment to strategic planning and by having a strategic business plan in effect at all times that describes how the business activities will achieve our mission and also details the operating goals and strategic objectives for each major business activity. The Strategic Business Plan is intended to make transparent our strategic plans as well as the strategic planning process that helps formulate those plans. The Strategic Business Plan is augmented from time-to-time, at least annually, with appropriate research and analysis. The Strategic Business Plan provides a mechanism for the Board of Directors to fulfill its responsibility for establishing our long-term strategic direction. Directors’ knowledge of the external environment through their positions with member institutions in the financial services industry as well as a variety of other professions provides a strong experience base to complement the capabilities and competencies of management. Full development of the Strategic Business Plan, including tactical strategies and implementation, is delegated to management and facilitated by the Strategic Planning and Development department. We use planning scenarios to develop the Strategic Business Plan and we continue to refine and enhance the scenario planning process each year. We believe this process results in the development of robust and effective future scenarios, thereby enhancing the overall effectiveness of our strategic planning process and the development of risk strategies for each scenario. The Board of Directors plays a key role in the development of the Strategic Business Plan and regularly monitors progress in the achievement of business objectives. Two Board of Directors’ meetings are set aside each year for strategic planning purposes.

The Finance Agency published an amended stress test rule in the Federal Register on November 24, 2015 (effective January 1, 2016) to align with the Federal Reserve’s established schedules for Comprehensive Capital Analysis and Review (CCAR) institutions. The final rule amends the stress testing regulation as follows: (1) moves the start date of the stress test cycles from October 1 of a calendar year to January 1 of the following calendar year; (2) requires the Finance Agency to provide the scenarios no later than 30 days after the Federal Reserve Board publishes its scenarios (expanded from the current 15 days); (3) requires stress tests be completed based on December 31 data (rather than the current requirement of September 30 data); (4) reports on the stress tests will be due by August 31 of each year (as opposed to April 30); and (5) the FHLBanks will be required to publicly disclose a summary of the severely adverse scenario between November 15 and November 30 (as opposed to July 15-July 30). Our stress test results for the severely adverse scenario were posted to our public website as required under the Finance Agency rule on July 23, 2015.

To manage business concentration risk, earnings simulations are conducted annually with estimated base-, best- and worst-case assumptions. The worst-case scenario includes the effects on us if one or more of our larger members significantly reduces its advance levels or is no longer a member. The total advance growth and distribution for our top five borrowers is monitored on a monthly basis by the Asset/Liability Committee. See Table 25 under this Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Advances” for advance concentration to the top five borrowers.

Business risk also includes political, reputation, and regulatory risk. Congress occasionally considers legislation that could have an impact on the housing GSEs, including the FHLBanks. It is possible that Congress will introduce legislation that will impact relevant statutes. Legislation has the power to impact our cost of funds and our cost of doing business. It could also limit or expand existing authorities or change the competitive balance among the FHLBanks and other housing GSEs. Consequently, we seek to positively influence legislative outcomes; support, oppose, or comment upon regulatory proposals; and we continually educate all relevant stakeholders about our positive impact on the communities we serve. To manage these types of business risks, we maintain a Government Relations Officer position and work with lobbying firms in Washington, D.C. Additionally, we partner with our Washington, D.C.-based trade association, the Council of FHLBanks, to ensure that the FHLBank System's common legislative and regulatory interests are served. More specifically, we promote the enactment of laws and regulations that are beneficial to the FHLBanks, and we oppose detrimental laws and regulations. We also work to enhance awareness and understanding of the FHLBanks among Washington leaders, including members of Congress and their staff, Executive departments, regulators, trade associations, and the financial media. We annually prepare a detailed Congressional Outreach Plan in an effort to focus attention on our legislative and regulatory priorities.

Joint and Several Liability - Although we are primarily liable for our portion of consolidated obligations (i.e., those issued on our behalf), we are also jointly and severally liable with the other FHLBanks for the payment of principal and interest on consolidated obligations of all the FHLBanks. See Item 1 – “Business – Debt Financing – Consolidated Obligations” and Note 10 of the Notes to Financial Statements under Item 8 for additional information regarding the FHLBank’s joint and several liability.

Operations Risk Management: Operations risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, or systems, or from external events. This category of risk is inherent in our daily business activities and involves people, information technology (IT) systems, processes, and external events. A number of strategies are used to mitigate operations risk, including systems and procedures to monitor transactions and financial positions, segregation of duties, documentation of transactions, secondary reviews, comprehensive risk assessments conducted at the entity and business unit level, and periodic reviews by our Internal Audit department. The Operations Risk Committee serves as the primary venue for overseeing all of our operations risk management initiatives and activities.


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Human Error and Circumvention or Failure of Internal Controls and Procedures - Employees play a vital role in implementing our risk management practices and strategies. We look to recruit, develop, promote, and retain the best employees by offering a fair and competitive compensation package and by providing a comfortable, secure and professional work environment in a cost effective manner. To ensure our employees understand the importance of establishing and maintaining an effective internal control system, we maintain an Internal Control Policy which, in addition to defining internal control and describing the five interrelated components of the FHLBank’s internal control framework, outlines the objectives and principles for our internal controls, establishes and delineates business unit managers’ responsibilities for maintaining internal controls, and establishes the Internal Audit department as the business unit responsible for reviewing the adequacy of our internal controls. We have established and maintain an effective internal control system, guided by the Internal Control Policy, that addresses the efficiency and effectiveness of our activities, the safeguarding of our assets, and the reliability, completeness and timely reporting of financial and management information to the Board of Directors and outside parties, including the Office of Finance, the SEC and the Finance Agency. The annual business unit risk assessment program serves to reinforce our focus on maintaining strong internal controls by identifying significant inherent risks and the internal controls and strategies used to mitigate those risks to acceptable residual risk levels. The business unit risk assessment program provides management and the Board of Directors with a thorough understanding of our risk management and internal control structure.

Systems Malfunctions and Information Security Threats - We rely heavily on IT systems and other technology to conduct our business. To manage operations risk as it relates to IT systems, we devote significant management attention and resources to technology. Executive management reviews and approves all major projects to ensure alignment of IT resources with our strategic direction. Our Technology Committee assists executive management in overseeing the development and implementation of significant technology strategies. The Technology Committee is also charged with providing strategic oversight of all technology-related activities, monitoring the strategic alignment and synchronization of IT services with our Strategic Business Plan (as well as our immediate and long-term goals and objectives), reviewing the operational health of IT systems, and reviewing new and/or anticipated future projects related to our strategic initiatives. Protection of our information assets is also necessary to establish and maintain trust between us and our customers, maintain compliance with applicable laws and regulations, and protect our reputation. Consequently, we maintain an enterprise-wide information security program. The goal of our enterprise information security program is to maintain an information security framework such that: (1) information assets are protected from unauthorized access, modification, disclosure and destruction; (2) integrity and confidentiality of information is maintained; (3) information assets and information systems are available when needed; and (4) cyber security threats and/or other information security risks are identified, monitored, assessed, and appropriately managed or mitigated through the FHLBank's enterprise information security program.

Man-made or Natural Disasters - Business disruption and systems failure due to man-made or natural disasters are managed by having in place at all times a disaster recovery plan, the purpose of which is to provide contingency plans for situations where the operations cannot be carried out in their normal manner. We maintain contingency plans which deal with business interruptions lasting for a prolonged period of time. An off-site recovery operations center is also maintained which is an important component of our overall disaster recovery planning effort. The recovery center is maintained on a different power grid and is serviced by another telephone central office than our main headquarters. An on-site power generator supports the site in case of total power failure. The off-site recovery center is also used to store computer equipment, information, supplies, and other resources specifically acquired for business continuity purposes. Comprehensive testing is conducted utilizing the off-site recovery location at least once each year with additional limited tests conducted on a quarterly basis. The disaster recovery plans are reviewed and updated semi-annually with employee emergency contact information updated weekly through our human resource information system. We also have a reciprocal back-up agreement in place with FHLBank of Boston to provide short-term advances to our members on our behalf in the event that our facilities are inoperable. In the event that FHLBank of Boston’s facilities are inoperable, we have agreed to provide short-term liquidity advances to FHLBank of Boston’s members. We complete an annual test of this agreement with FHLBank of Boston to ensure the process and related systems are functioning properly. Since 1999, the FHLBank maintained a funds transfer contingency agreement with the FHLBank of Seattle, which authorized either FHLBank to process wire transfers for the other during a contingency situation. With the merger between the FHLBanks of Seattle and Des Moines effective May 31, 2015, FHLBank Topeka entered into a new wire services bilateral agreement with the FHLBank of Boston effective May 29, 2015. FHLBank Topeka’s Wire Services and Legal departments worked with the FHLBank of Boston to conduct testing of the newly activated Funds Transfer Contingency agreement (successfully completed on June 12, 2015) and also terminated the original agreement with the FHLBank of Seattle.


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Internal or External Fraud - Our Anti-Fraud Policy, which includes our Whistleblower Procedures, along with our Anti-Money Laundering Policy, forms the foundation of our Fraud Awareness Program. Our Fraud Awareness Program establishes our methodology and framework for preventing, detecting, deterring, reporting, remediating, and punishing suspicious activities, money laundering activities, fraud activities, dishonest activities, and violations of the Code of Ethics and other fraudulent activities that could create risks for us or undermine the public’s confidence in the integrity of our activities. Employees may submit good faith complaints or concerns regarding accounting or auditing matters, fraud concerns, potential wrongdoing or violations of applicable securities laws and regulations, or violations of the Commodity Exchange Act and relevant implementing regulations to management or our anonymous reporting service without fear of dismissal or retaliation of any kind. We are committed to achieving compliance with all applicable securities laws and regulations, the Commodity Exchange Act and relevant implementing regulations, accounting standards, accounting controls and audit practices. Decisions to prosecute or refer fraud investigation results to the appropriate law enforcement and/or regulatory agencies for independent investigation shall be made in conjunction with legal counsel and appropriate senior management, as will final decisions on disposition of the case.

Recently Issued Accounting Standards
See Note 2 of the Notes to Financial Statements under Item 8 – "Financial Statements and Supplementary Data" for a discussion of recently issued accounting standards.

Item 7A: Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk Management
We measure interest rate risk exposure by various methods, including the calculation of DOE and 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 theoretical 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. A positive DOE results when the duration of assets and designated derivatives is greater than the duration of liabilities and designated derivatives. A positive DOE generally indicates a degree of interest rate risk exposure in a rising interest rate environment. A negative DOE indicates a degree of interest rate risk exposure in a declining interest rate environment. Higher DOE numbers, whether positive or negative, indicate greater volatility of MVE in response to changing interest rates. That is, if we have a DOE of 3.0, a 100 basis point (one percent) increase in interest rates would cause our MVE to decline by approximately three percent whereas a 100 basis point decrease in interest rates would cause our MVE to increase by approximately three percent. It should be noted that a decline in MVE does not necessarily translate directly into a decline in near-term income, especially for entities that do not trade financial instruments. Changes in market value may indicate trends in income over longer periods, and knowing the sensitivity of our market value to changes in interest rates provides a measure of the interest rate risk we take.

Under the RMP approved by our Board of Directors, our DOE is generally limited to a range of ±5.0 assuming current interest rates. In addition, our DOE is generally limited to a range of ±7.0 assuming an instantaneous parallel increase or decrease in interest rates of 200 basis points. During periods of extremely low interest rates, such as the current interest rate environment, the Finance Agency requires that FHLBanks employ a constrained down shock analysis to limit the evolution of forward interest rates to positive non-zero values. Since our market risk model imposes a zero boundary on post-shock interest rates, no additional calculations are necessary in order to meet this Finance Agency requirement.

The DOE parameters established by our Board of Directors represent one way to establish general limits on the amount of interest rate risk that we find acceptable. If our DOE exceeds the policy limits established by the Board of Directors, we either: (1) take asset/liability actions to bring the DOE back within the ranges established in our RMP; or (2) review and discuss potential asset/liability management actions with the Board of Directors at the next regularly scheduled meeting that could bring the DOE back within the ranges established in the RMP and ascertain a course of action, which can include a determination that no asset/liability management actions are necessary. A determination that no asset/liability management actions are necessary can be made only if the Board of Directors agrees with management’s recommendations. All of our DOE measurements were inside Board of Director established policy limits (discussed in previous paragraph) and operating ranges (discussed in next paragraph) as of December 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.


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We typically maintain DOE within the above ranges through management of the durations of our assets, liabilities and derivatives. Significant resources in terms of staffing, software and equipment are continuously devoted to assuring that the level of interest rate risk existing in our balance sheet is properly measured and limited to prudent and reasonable levels. The DOE that management and the Board of Directors consider prudent and reasonable is somewhat lower than the RMP limits mentioned above and can change depending upon market conditions and other factors. As set forth in our Risk Appetite Metrics approved by the Board of Directors, we typically manage our DOE in the current base scenario to remain in the range of ±2.5 and in the ±200 basis point interest rate shock scenarios to remain in the range of ±4.0. When DOE exceeds either the limits established by the RMP or the more narrowly-defined ranges to which we manage DOE, corrective actions taken may include: (1) the purchase of interest rate caps, interest rate floors, swaptions or other derivatives; (2) the sale of assets; and/or (3) the addition to the balance sheet of assets or liabilities having characteristics that are such that they counterbalance the excessive duration observed. For example, if our DOE has become more positive than desired due to variable rate MBS that have reached interest rate cap limits, we may purchase interest rate caps that have the effect of removing those MBS cap limits. We would be short caps in the MBS investments and long caps in the offsetting derivative positions, thus reducing our DOE. Further, if an increase in our DOE were due to the extension of mortgage loans, MBS or new advances to members, the more appropriate action would be to add new long-term liabilities, whether callable or non-callable, to the balance sheet to offset the lengthening asset position.

Table 59 presents our DOE in the base and the up and down 200 basis point interest rate shock scenarios:

Table 59
Duration of Equity
Date
Up 200 Basis Points
Base
Down 200 Basis Points
12/31/2015
2.0
1.0
2.0
09/30/2015
1.9
1.2
0.9
06/30/2015
1.7
0.6
0.2
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

All DOE results continue to remain inside our operating range of ±2.5 in the base scenario and ±4.0 in the ±200 basis point interest rate shock scenarios. Our DOE as of December 31, 2015 increased in all interest rate shock scenarios from December 31, 2014. The primary factors contributing to these net changes in duration during the period were: (1) the increase in 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, including decreasing prepayment projections based on the increase in interest rates; 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 as conditions permitted and the significant issuance of discount notes funding the growth in short-term advances.

The increase in longer-term interest rates during 2015 is generally to lengthen the 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 this period, as discussed in Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – MPF Program,” the duration profile changed as expected since a general increase in long-term interest rates typically generates slower prepayments for both new production mortgage loans, as well as the outstanding fixed rate mortgage loan portfolio. Generally, higher interest rates indicate a relative decline in refinancing incentive for borrowers.


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The fixed rate mortgage loan portfolio increased in net outstanding balance, yet the portfolio actually decreased slightly as an overall percentage of total assets as the balance sheet expanded, decreasing from 16.9 percent of total assets as of December 31, 2014 to 14.4 percent as of December 31, 2015. Even with this weighting decrease, the mortgage loan portfolio remains a sizable portion of our balance sheet and changes occurring with this portfolio tend to be magnified in terms of DOE. Since the DOE calculation is a market value based measurement and as portfolio market values increase or decrease, they become larger or smaller contributors to the overall market value of total assets. For example, as the absolute unpaid balance of the mortgage loan portfolio increased during 2015 and became a smaller percentage of assets, the actual market value of the portfolio decreased in response to the increase in interest rates and became a smaller percentage of the overall market value of our assets. This decrease in market value is expected behavior since fixed rate portfolios exhibit price declines as interest rates increase and reflects the traditional inverse price to yield relationship. In addition, since the mortgage loan portfolio continues to comprise a significant percentage of overall assets, its behavior is quite visible in the duration risk profile and changes in this portfolio are typically magnified as interest rates 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, when our advance balances increase, as they did during 2015, our mortgage loan portfolio effectively decreases as a proportion of our total assets, assuming all other asset portfolios and interest rates remain constant. This relationship then causes the duration of the mortgage loan portfolio to have a somewhat smaller contribution impact to the overall DOE since DOE is a market value weighted measurement. With the absolute growth in the mortgage loan portfolio during the period, and with the associated long-term interest rate increase, the mortgage loan portfolio actually decreased slightly as a percentage of the market value of the net balance sheet, causing the DOE profile to have a partially muted impact from the mortgage loan duration profile.

Further, with the increase in rates decreasing projected prepayments and lengthening the overall duration profile for our mortgage loan portfolio, the absolute impact to our DOE was a net increase since the weighting and the absolute duration profile of the portfolio remains a sizable asset category as mentioned previously. With these balance sheet dynamics, we continue to actively manage and monitor the contributing factors of our market 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 mortgage loans were continually added to the mortgage loan portfolio to replace mortgage 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 established risk tolerances. To effectively manage these changes in the mortgage loan portfolio (including new production and prepaid loans) and related sensitivity to changes in market conditions, a continued calling and reissuance of unswapped callable consolidated obligation bonds with short lock-out periods (generally three months) favorably positioned us for potential declines in the interest rate environment. Generally, the call of higher rate callable bonds and reissuance of these bonds when interest rates are lower 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.

Even though long-term interest rates increased during the period, we continued to experience prepayments of the fixed rate mortgage loan portfolio. As interest rates fluctuated during the period, the short lock-out periods of the callable bonds plus some maturities of non-callable bonds provided the opportunity to refinance a measured amount of our liabilities throughout 2015. While the overall increase in long-term interest rates during 2015 typically causes the duration profile of the existing portfolio of unswapped callable bonds to lengthen, the portfolio actually shortened slightly as the option values trended more out-of-the-money based on a decline in implied volatility for this portfolio. With the decline in volatility the options became less valuable and generally lowered the convexity profile of the portfolio. In other words, the options were further out-of-the-money and less sensitive to interest rate changes and provided less liability duration overall leading to an overall increase, or more positive, net DOE. In addition, the portfolio became a smaller percentage of the balance sheet based on the increased issuance of discount notes in response to the growth in short-term advances and associated capital stock activity. This discount note increase naturally diluted the percentage of outstanding unswapped callable bonds and reduced the weighting of this portfolio as an overall percentage of liabilities. As discussed previously, a portfolio weighting change can alter the impact of a portfolio's overall contribution to net DOE and in this case, the unswapped callable bonds reduced weighting led to a smaller contribution to DOE generating a more asset sensitive DOE. Further, this liability behavior is a result of the inherent convexity (discussed below) profile of these portfolios and demonstrates the specific duration sensitivity to changes in interest rates in certain shock scenarios. Further discussion of the unswapped callable bond calls, maturities on non-callable bonds and reissuance of callable bonds in relation to the mortgage portfolios is discussed in Item 7 – "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Consolidated Obligations.” The combination of these factors contributed to the net DOE increase in all interest rate shock scenarios.


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In addition, we purchased $2.5 billion of GSE MBS/CMOs throughout the year as allowable according to Finance Agency regulations. The variable rate GSE MBS purchased were without embedded interest rate caps. As mentioned previously, the addition of mortgage securities, whether fixed or variable rate, typically lengthens the duration profile of the respective portfolios and generally lengthens our DOE. This lengthening was further impacted by the previous discussion regarding the fixed rate mortgage loan portfolio. The relationship of the variable rate GSE MBS/CMOs and the purchased interest rate cap portfolio provides a measured impact on the positively shocked duration results as well. We did not purchase additional interest rate caps during 2015.

We generally purchase interest rate caps to offset the impact of embedded caps in variable rate GSE MBS/CMOs 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 GSE variable rate CMOs with embedded caps. We periodically assess derivative strategies to ensure that overall balance sheet risk is appropriately hedged within our 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 interest rate caps, but also 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, including a convexity profile that continues to perform well within our expectations. Our purchases of interest rate caps tend to partially offset the negative convexity of our mortgage assets and the effects of any interest rate caps embedded in the adjustable rate MBS/CMOs.

Convexity is the measure of the exponential change in prices for a given change in interest rates; or more simply stated, it measures the rate of change in duration as interest rates change. When an instrument is negatively convex, price generally increases at a slower pace as interest rates decline. When an instrument’s convexity profile approaches zero, it simply demonstrates that the duration profile is flattening or that the duration is changing at an increasingly slower rate. When an instrument’s convexity profile moves further from zero, the duration profile is steepening and is changing in price at an increasingly faster rate. Duration is a measure of the relative risk of a financial instrument, and the more rapidly duration changes as interest rates change, the riskier the instrument. The variable rate MBS/CMOs have negative convexity as a result of the embedded caps and prepayment options. Additionally, all of our mortgage loans are fixed rate, so they have negative convexity as a result of the prepayment options. We seek to mitigate this negative convexity with purchased options that have positive convexity (interest rate caps) and callable liabilities that have negative convexity (unswapped callable bonds), which offset some or all of the negative convexity risk in our assets. With the changes in current capital market conditions, the extremely low level of interest rates and the general shape of the yield curve, all of which make it challenging to manage our market risk position, we continue to take measured asset/liability actions to stay within established policy limits.

With respect to the down instantaneous shock scenarios, the sensitivities of both the assets and liabilities are impacted to a large extent by the absolute level of rates and the zero boundary methodology as discussed previously. Since the term structure of interest rates is at or near historically low levels, an instantaneous parallel shock of down 100 basis points or 200 basis points will effectively produce a flattened term structure of interest rates near zero. This flattened term structure will produce slight, if any, variations in valuations, which generate near zero duration results since the duration measurement captures the sensitivity of valuations to changes in rates. These near zero duration results should be viewed in the context of the broader risk profile of the base and positive interest rate shock scenarios to establish a sufficient vantage point for helping discern the overall sensitivity of our balance sheet and of DOE. The net DOE increase in the down 200 basis point interest rate shock scenario during the period is generally a function of related factors noted previously, including the impact of the changing term structure of interest rates. As with all scenario changes that occurred during the period, the impact from various sensitivities was expected and discussed during our regular interest-rate risk profile review process.

As noted previously, if at any point a risk measurement nears or exceeds an operating range or policy limit established by the Board of Directors, certain actions may be implemented both by management and the Board of Directors. We typically manage a DOE measurement that exceeds the established limits with various asset/liability management actions. Whenever an established limit is exceeded the Board of Directors is advised by management and the issue is discussed at the next regularly scheduled Board of Directors’ meeting. If after discussion, the Board of Directors determines that asset/liability management action is required, the Board-approved approach is implemented by management to address the situation. Even though all of our DOE measurements are inside management’s operating range as of December 31, 2015, active monitoring of portfolio relationships and overall DOE dynamics continues as do evaluation processes for acceptable future asset/liability management actions.

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 0.5 month and -0.6 months for December 31, 2015 and 2014, respectively. Again, 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 the interest rate environment. 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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Matching the duration of assets with the duration of liabilities funding those assets is accomplished through the use of different debt maturities and embedded option characteristics, as well as the use of derivatives, primarily interest rate swaps, caps, floors and swaptions as discussed previously. Interest rate swaps increase the flexibility of our funding alternatives by providing desirable cash flows or characteristics that might not be as readily available or cost-effective if obtained in the standard GSE debt market. Finance Agency regulation prohibits the speculative use of derivatives, and we do not engage in derivatives trading for short-term profit. Because we do not engage in the speculative use of derivatives through trading or other activities, the primary risk posed by derivative transactions is credit risk in that a counterparty may fail to meet its contractual obligations on a transaction and thereby force us to replace the derivative at market price (see Item 7 – “Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management – Credit Risk Management” for additional information).

As discussed earlier, the funding of mortgage loans and prepayable assets with liabilities that have similar duration or average cash flow patterns over time is our primary strategy for and means of managing the interest rate risk for these assets. To achieve the desired liability durations, we issue debt across a broad spectrum of final maturities. Because the durations of mortgage loans and other prepayable assets change as interest rates change, callable consolidated obligation bonds with similar duration characteristics, on average, are frequently issued. The duration of callable bonds shortens when interest rates decrease and lengthens when interest rates increase, allowing the duration of the debt to better match the typical duration of mortgage loans and other prepayable assets as interest rates change. In addition to actively monitoring this relationship, the funding and hedging profile and process are continually measured and reevaluated. We may also use purchased interest rate caps, floors and swaptions to manage the duration of our assets and liabilities. For example, in order to manage our interest-rate risk in rising interest rate environments, we may purchase out-of-the-money interest rate caps to help manage the duration extension of mortgage assets, especially variable rate MBS/CMOs with periodic and lifetime embedded interest rate caps. We may also purchase receive-fixed or pay-fixed swaptions (options to enter into receive-fixed rate or pay-fixed rate interest rate swaps) to manage our overall DOE in falling or rising interest rate environments, respectively. During times of falling interest rates, when mortgage assets are prepaying quickly and shortening in duration, we may also synthetically convert fixed rate debt to variable rate using interest rate swaps in order to shorten the duration of our liabilities to more closely match the shortening duration of mortgage assets. As we need to lengthen the liability duration, we terminate selected interest rate swaps to effectively extend the duration of the previously swapped debt.

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 an 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 60 presents MVE as a percent of TRCS. As of December 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.


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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 and throughout most of 2015, 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 increase during the fourth quarter of 2014 was the result of members repaying advances late in the quarter and the associated decrease in required capital stock due to the decrease in advances. These events prompted the repurchase of excess capital stock and primarily generated the increase in MVE/TRCS ratios in all scenarios at December 31, 2014. 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.

Table 60
Market Value of Equity as a Percent of Total Regulatory Capital Stock
Date
Up 200 Basis Points
Base
Down 200 Basis Points
12/31/2015
168
171
177
09/30/2015
165
168
172
06/30/2015
168
169
174
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 61 and 62 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):


93


Table 61
12/31/2015
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 
$
3,099,956

$
(62,746
)
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

(634
)
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 
1,470,842

(57,377
)
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 
60,000

(94
)
Firm commitment to issue a fixed rate advance
Forward settling interest rate swap
Protect against fair value risk
Fair Value Hedge
129,423

(1,708
)
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 
1,254,820

(55,350
)
Fixed rate MBS trading investments
Pay fixed, receive variable interest rate swap
Convert the investment’s fixed rate to a variable rate index
Economic Hedge 
854,338

(21,731
)
Fixed rate MBS available-for-sale investments
Pay fixed, receive variable interest rate swap
Convert the investment’s fixed rate to a variable rate index
Fair Value Hedge
498,948

(4,259
)
Adjustable rate MBS with embedded caps
Interest rate cap
Offset the interest rate cap embedded in a variable rate investment
Economic Hedge 
2,922,800

5,789

Mortgage Loans Held for Portfolio
 
 
 
 
 
Fixed rate mortgage purchase commitments
Mortgage purchase commitment
Protect against fair value risk
Economic Hedge 
66,045

7

Consolidated Obligation Discount Notes
 
 
 
 
 
Fixed rate non-callable consolidated obligation discount notes with tenors of 6 to 12 months
Receive fixed, pay variable interest rate swap
Convert the discount note's fixed rate to a variable rate
Fair Value Hedge 
648,779

531

Fixed rate non-callable consolidated obligation discount notes with tenors of less than six months
Receive fixed, pay variable interest rate swap
Convert the discount note's fixed rate to a variable rate
Economic Hedge 
249,693

133

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 
2,659,820

49,959

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 
780,000

2,607

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
90,000

(1,402
)
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 
895,000

(1,404
)
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 
800,000

(701
)
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 
8,000


TOTAL
 
 
 
$
16,554,464

$
(148,380
)


94


Table 62
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
)

Item 8: Financial Statements and Supplementary Data
 
The following financial statements and accompanying notes, including the Report of Independent Registered Public Accounting Firm, are set forth on pages F-1 to F-69 of this Form 10‑K.
 

95


Audited Financial Statements
 
 
Description
Page Number
Management's Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP
Statements of Condition as of December 31, 2015 and 2014
Statements of Income for the Years Ended December 31, 2015, 2014 and 2013
Statements of Comprehensive Income for the Years Ended December 31, 2015, 2014 and 2013
Statements of Capital for the Years Ended December 31, 2015, 2014 and 2013
Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013
Notes to Financial Statements

Tables 63 and 64 present supplementary quarterly financial information (unaudited) for the years ended December 31, 2015 and 2014 (in thousands):
 
Table 63
 
2015
 
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
Interest income
$
127,425

$
119,202

$
110,229

$
108,574

Interest expense
63,229

57,482

53,079

51,960

Net interest income
64,196

61,720

57,150

56,614

(Reversal) provision for credit losses on mortgage loans
283

(398
)
(992
)
(802
)
Net interest income after mortgage loan loss provision
63,913

62,118

58,142

57,416

Other non-interest income (loss)
(27,080
)
(30,256
)
(13,537
)
(9,216
)
Other non-interest expense
13,862

15,187

15,093

13,620

Assessments
2,298

1,669

2,952

3,459

NET INCOME
$
20,673

$
15,006

$
26,560

$
31,121


Table 64
 
2014
 
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
Interest income
$
109,438

$
107,035

$
105,967

$
105,861

Interest expense
51,638

50,463

49,668

51,367

Net interest income
57,800

56,572

56,299

54,494

Provision (reversal) for credit losses on mortgage loans
117

82

(2,109
)
295

Net interest income after mortgage loan loss provision
57,683

56,490

58,408

54,199

Other non-interest income (loss)
(15,219
)
(10,805
)
(13,153
)
(16,673
)
Other non-interest expense
12,981

13,880

13,498

12,784

Assessments
2,950

3,181

3,177

2,475

NET INCOME
$
26,533

$
28,624

$
28,580

$
22,267


The significant fluctuations that have occurred in non-interest income (loss) are primarily the result of the recognition of net gains/losses on derivatives and hedging activities as well as the recording of fair value changes on our trading securities. See Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations” for additional information.


96


Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
There were no changes in or disagreements with our accountants on accounting and financial disclosure during the two most recent fiscal years.

Item 9A: 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 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, with the participation of the President and Chief Executive Officer (CEO), our principal executive officer, and Chief Financial Officer (CFO), our principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2015. Based upon that evaluation, the CEO and CFO have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2015.

Management’s Report on Internal Control Over Financial Reporting
Management’s Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm with respect to the FHLBank’s internal control over financial reporting are included under Item 8 – “Financial Statements and Supplementary Data.”
 
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 Rule 13a-15(f) under the Exchange Act) that occurred during the last fiscal quarter of the fiscal year for which this annual report on Form 10-K is filed that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B: Other Information
 
Director Resignation and Election.
On March 4, 2016, Thomas H. Olson, Jr., a member director representing the state of Colorado, advised FHLBank that he was resigning from the Board of Directors, effective on that same date. In connection with his resignation, Mr. Olson did not express any disagreement on any matter relating to FHLBank’s operations, policies or practices. The term of the member directorship previously held by Mr. Olson was set to expire on December 31, 2016.

On March 9, 2016, the Board of Directors elected Mr. Olson to the Board of Directors to fill the unexpired term of office of the vacant member directorship in the state of Nebraska. Mr. Olson’s term began immediately and will expire on December 31, 2018. As discussed further in Item 10, Mr. Olson will serve on the same committees and in the same capacity as he served as a member director representing the state of Colorado, which included the Audit and Housing & Governance committees. Mr. Olson will be compensated in accordance with FHLBank’s Board of Directors Compensation Policy, further described in Item 11.

The election of Mr. Olson took place in accordance with the rules governing the election of Federal Home Loan Bank directors specified in the Bank Act and the related regulations of the Finance Agency.

Amendments to Bylaws.
On March 9, 2016, the Board of Directors of the FHLBank approved and adopted certain amendments to its amended and restated bylaws (Bylaws), which became effective on that same date. The amendments are intended to comply with the Finance Agency’s final rule on Responsibilities of Boards of Directors, Corporate Practices and Corporate Governance Matters, published in the Federal Register on November 19, 2015 and effective December 21, 2015 (Corporate Governance Rule). Among other things, the Corporate Governance Rule requires each Federal Home Loan Bank to designate in its bylaws a body of law to follow for its corporate governance and indemnification practices and procedures.


97


Pursuant to FHLBank’s amendments to the Bylaws, FHLBank elected to follow the corporate governance and indemnification practices and procedures set forth in the Delaware General Corporation Law. Conforming adjustments to align the Bylaws with Delaware law were made to existing provisions contained in the Bylaws pertaining to the indemnification of directors and officers and director liability. Further, apart from matters pertaining to the Corporate Governance Rule, various ministerial, technical and conforming changes were made throughout the Bylaws.

The foregoing summary of the amendments to the Bylaws is qualified in its entirety by reference to the text of the amended and restated Bylaws, which is attached hereto as Exhibit 3.2, and a marked copy of the amended and restated Bylaws, reflecting the amendments, attached hereto as Exhibit 99.3.

Amendments to the Executive Incentive Compensation Plan.
Executive Incentive Compensation Plan: On December 18, 2015, the Board of Directors of the FHLBank, subject to the authority of the Director of the Finance Agency to prohibit compensation that is not reasonable and comparable to the compensation paid to executives in other similar businesses involving similar duties and responsibilities, adopted revisions to the FHLBank’s Executive Incentive Compensation Plan (EICP). The revisions did not become effective until the Finance Agency issued a notice of non-objection to the FHLBank, which occurred on March 4, 2016.

The EICP, which initially became effective on January 1, 2012, is a cash-based annual incentive plan with a long-term deferral component that establishes individual incentive compensation award opportunities related to achievement of performance objectives by the FHLBank and by eligible key employees (Participants) during Performance Periods. The EICP provides Participants the opportunity to earn incentive compensation awards based on the FHLBank’s achievement of certain financial goals established by the Board of Directors. All capitalized terms used in this disclosure pertaining to the amendments to the EICP that are not otherwise defined herein shall have the meaning attributed to such term in the EICP, which is attached hereto as Exhibit 10.6. For more information regarding the EICP, see “Item 11 - Executive Compensation.”

The amendments to the EICP primarily clarify the calculation of the Total Base Opportunity in Section 2.1.21 of the EICP and remove unnecessary language in Section 6.3(c), which is addressed elsewhere in the EICP and relates to the forfeiture of vested and unvested Cash Incentive or Deferred Incentive.

The foregoing summary of EICP and the amendments to the EICP are qualified in their entirety by reference to the text of the EICP, which is attached hereto as Exhibit 10.6.

2016 EICP Targets: In addition to the revisions to the EICP, on December 18, 2015, the Board of Directors adopted Performance Measures pursuant to the EICP for the 2016 Base Performance Period and the 2017-2019 Deferral Performance Period (the 2016 EICP Targets Document), subject to the authority of the Director of the Finance Agency to prohibit compensation that is not reasonable and comparable to the compensation paid to executives in other similar businesses involving similar duties and responsibilities. For more information regarding the Performance Measures, see “Item 11 - Executive Compensation.”

The 2016 EICP Targets Document establishes three levels of participation by Participants based on the Participant’s position and responsibility as set forth in the 2016 EICP Targets Document. The Total Base Opportunity for the three levels of participation is as follows:

Table 65
Participant
Total Base Opportunity
Threshold
Target
Optimum
Level 1
 
 
 
CEO
40.0
%
80.0
%
120.0
%
Level 2
 
 
 
COO
35.0

70.0

105.0

Level 3
 
 
 
CRO
27.5

55.0

82.5

General Counsel
27.5

55.0

82.5

CFO
27.5

55.0

82.5



98


In the event the FHLBank’s performance during the Base Performance Period results in the achievement of a Total Base Opportunity that exceeds 100 percent of a Participant’s base salary at the start of the Base Performance Period, the 2016 EICP Targets Document provides that the Total Base Opportunity shall be capped at 100 percent of the Participant’s base salary.

The 2016 EICP Targets Document establishes separate metrics for the Base Performance Period Metrics and the Deferral Performance Period Metrics. The Base Performance Period Metrics are measured by the results achieved in attaining specified performance levels in the following six areas, which are weighted as follows for each of the Participants:

Table 66
Objective
CEO/COO/CFO
CRO
General Counsel
Adjusted Return Spread on Total Regulatory Capital
20
%
10
%
15
%
Net Income after Capital Charge
20

10

15

Retained Earnings
10

10

10

Core Mission Assets Ratio
10

10

10

Risk Management - Market, Credit and Liquidity Risks
20

30

25

Risk Management - Compliance, Business and Operations Risks
20

30

25

Total
100
%
100
%
100
%

The Deferral Performance Period is the three-year period over which the FHLBank’s performance is measured based on parameters set forth in the 2016 EICP Targets Document and during which a Deferred Incentive can be earned. The Deferred Incentive means 50 percent of the Total Base Opportunity, which shall be deferred for the Deferral Performance Period and is subject to adjustment based on the extent of achievement of the Performance Measures during the Deferral Performance Period. In order for Participants to be eligible to receive a Final Deferred Incentive Award for the 2017-2019 Deferral Performance Period, the FHLBank must have an MVE of not less than 100 percent of the FHLBank’s TRCS outstanding (as defined in the FHLBank’s RMP), as of the last day of the Deferral Performance Period. Upon determining the FHLBank has achieved this minimum requirement, the calculation of the Final Deferred Incentive Award amounts is measured by evaluating the following:

Table 67
 
Threshold
Target
Optimum
Total Return:
10/11 or 11/11 vs. FHLBanks
5/11 vs. FHLBanks
2/11 or 1/11 vs. FHLBanks
Deferred Incentive
$
$
$
Performance Measure Percentage
75
%
100
%
125
%
Weighting
0.50

0.50

0.50

Dollar Value (Deferred Incentive x Performance Measure Percentage x Weight)
$
$
$
 
 
 
 
MVE / Total Regulatory Capital (TRC):
10/11 or 11/11 vs. FHLBanks
5/11 vs. FHLBanks
2/11 or 1/11 vs. FHLBanks
Deferred Incentive
$
$
$
Performance Measure Percentage
75
%
100
%
125
%
Weighting
0.50

0.50

0.50

Dollar Value (Deferred Incentive x Performance Measure Percentage x Weight)
$
$
$
 
 
 
 
Final Deferred Incentive Award (Dollar Value for Total Return + Dollar Value for MVE/TRC)
$
$
$

Total awards payable under the EICP are not determinable at this time.

The foregoing summary of the 2016 EICP Targets document is qualified in its entirety by reference to the text of the 2016 EICP Targets Document, which is attached hereto as Exhibit 10.16.


99


Item 10: Directors, Executive Officers and Corporate Governance
 
Executive Officers
Table 68 sets forth certain information regarding each of our executive officers as of the date of this annual report on Form 10-K.
 
Table 68
Executive Officer
Age
Position Held
Andrew J. Jetter
60
President/Chief Executive Officer
David S. Fisher
59
SEVP/Chief Operating Officer
Mark E. Yardley
60
EVP/Chief Risk Officer
Sonia R. Betsworth
54
SVP/Chief Credit Officer
Denise L. Cauthon
52
SVP/Chief Accounting Officer
Patrick C. Doran
54
SVP/General Counsel/Chief Compliance Officer/Corporate Secretary
Joe B. Edwards
59
SVP/Chief Information Officer
Dan J. Hess
50
SVP/Chief Business Officer
Thomas E. Millburn
45
SVP/Chief Internal Audit Officer
William W. Osborn
50
SVP/Chief Financial Officer
Terence C. Wise
63
SVP/Director of Strategic Planning and Development

No executive officer has any family relationship with any other executive officer or director. All executive officers, other than the Chief Internal Audit Officer and Chief Risk Officer (CRO), may be removed from office or discharged by the Board of Directors or the President and CEO with or without cause. The Chief Internal Audit Officer may be removed from office, with or without cause, only with the approval of the Audit Committee. The CRO may be removed from office, with or without cause, only with the approval of the Risk Oversight Committee.
 
There are no arrangements or understandings between any executive officer and any other person pursuant to which the executive officer was or is to be selected as an officer of the FHLBank, including no employment agreement between any executive officer and the FHLBank.
 
Except as otherwise indicated below, each officer has been engaged in the principal occupation listed above for at least five years:
 
Andrew J. Jetter became President and CEO of the FHLBank in September 2002. He served as Executive Vice President and Chief Operating Officer from January 1998 to September 2002. Mr. Jetter joined the FHLBank in 1987 as an attorney and was promoted to General Counsel in 1989, Vice President in 1993, and Senior Vice President in 1996.
 
David S. Fisher became Senior Executive Vice President and Chief Operating Officer (COO) of the FHLBank in April 2008. He served as Executive Vice President and COO from January 2006 through March 2008.
 
Mark E. Yardley became Executive Vice President and CRO of the FHLBank in May 2010. Mr. Yardley previously served as Executive Vice President and CFO from February 2005 to May 2010, First Senior Vice President and CFO from December 1999 through February 2005 and as First Senior Vice President, Director of Finance, from January 1999 to December 1999. Mr. Yardley joined the FHLBank in 1984 as Director of Internal Audit and was promoted to Assistant Vice President in 1990 and Vice President in 1991.
 
Sonia R. Betsworth became Senior Vice President and Chief Credit Officer in March 2013. She served as Senior Vice President, Director of Credit from July 2009 to March 2013; Senior Vice President, Director of Member Products from April 2006 through June 2009; Director of Sales, Lending and Collateral from 2002 to April 2006; and Director of Credit and Collateral from 1999 to 2002. She joined the FHLBank in 1983. Ms. Betsworth was named Assistant Vice President in 1994 and Vice President in 1998.
 
Denise L. Cauthon became Senior Vice President and Chief Accounting Officer (CAO) in December 2010. Ms. Cauthon served as First Vice President and CAO from May to November 2010, First Vice President and Controller from March 2007 to April 2010, and Vice President and Controller from January 2005 to March 2007. Ms. Cauthon joined the FHLBank in 1989 as a staff internal auditor and was promoted to Assistant Liability Manager and then Financial Reporting Accountant in 1998. Ms. Cauthon was promoted to Financial Reporting and Operations Manager in 1999 and was named Assistant Vice President in 2000. She was promoted to Assistant Controller-Financial Reporting in 2002 and became Vice President in 2004.
 

100


Patrick C. Doran became Senior Vice President, General Counsel, Chief Compliance Officer and Corporate Secretary of the FHLBank in December 2015. He served as Senior Vice President, General Counsel and Corporate Secretary from May 2004 to December 2015.
 
Joe B. Edwards became Senior Vice President and Chief Information Officer (CIO) in July 2013. Prior to joining the FHLBank, Mr. Edwards was Senior Vice President and CIO at ACE Cash Express, Inc., a multi-unit retailer of financial services, where he was responsible for IT development, operations, business intelligence and call center operations from January 1998 through his retirement in December 2012.

Dan J. Hess became Senior Vice President and Chief Business Officer in March 2013. Mr. Hess previously served as Senior Vice President, Director of Member Products from July 2009 to March 2013; First Vice President, Director of Sales from April 2002 to May 2009; and Senior Vice President, Director of Sales from May 2009 to July 2009. Mr. Hess joined the FHLBank in 1995 as a Correspondent Banking Account Manager for Kansas. He was promoted to Lending Officer in 1997, to Assistant Vice President and Lending Manager in 1999, and to Vice President in 2000.

Thomas E. Millburn became Senior Vice President, Chief Internal Audit Officer in March 2011. Mr. Millburn previously served as Senior Vice President, Director of Internal Audit since December 2010. Mr. Millburn joined the FHLBank in 1994 as a staff internal auditor and was promoted to Assistant Vice President, Director of Internal Audit in 1999, Vice President in 2000 and then to First Vice President in March 2004.
 
William W. Osborn became Senior Vice President and CFO in June 2010. Mr. Osborn joined the FHLBank in May 2006 as Director of Product Profitability and Pricing. He was promoted to Director of Banking Strategies in January 2008, to First Vice President in April 2008 and to Senior Vice President in April 2009.

Terence C. Wise became Senior Vice President, Director of Strategic Planning and Development in March 2013. He served as First Vice President, Director of Strategic Planning and Development from October 2011 through February 2013. Prior to joining the FHLBank in July 2011 as Director of Strategic Planning and Development, Mr. Wise was Senior Vice President - Finance and Treasurer for Affirmative Insurance Holdings, a distributor and producer of non-standard personal automobile insurance policies and related products and services located in Burr Ridge, Illinois, from July 2008 to January 2011.
 
Directors
The Bank Act (as amended by the Recovery Act) and Finance Agency regulations mandate that our Board of Directors consist of 13 directors or such other number as may be provided by the Finance Agency, a majority of whom are to be member directors and at least two-fifths of whom are to be independent directors. Due to the interplay of the “method of equal proportions,” which the Finance Agency uses to allocate member directorships to each state in our four-state district, the requirement that at least two-fifths of the directorate must be comprised of independent directors and the requirement that the number of member directorships allocated to each of those four states must be at least equal to the number allocated to each state on December 31, 1960, the Finance Agency may be required from time to time to allocate additional member director seats. The most recent designation from the Finance Agency resulted in no change to the size of our board, which is to consist of 17 directors in 2016, 10 of whom are to be member directors and 7 of whom are independent directors. One member directorship in the state of Colorado is currently vacant. Under the Finance Agency regulations, new and re‑elected directors serve four-year terms, subject to adjustment by the Finance Agency to establish staggering of the board. Directors cannot be elected to serve more than three consecutive full terms. A director may be re‑elected to a directorship for a term that commences no earlier than two years after the expiration of the third full term. Each director must be: (1) a citizen of the United States; (2) either a resident in our district or serve as an officer or director of a member located in our district; and (3) elected by a vote of the members, in accordance with the Bank Act and Finance Agency regulations. Additionally, at least two of the independent directors must qualify as public interest directors. To qualify as a public interest director, an individual must have more than four years of experience in representing consumer or community interests in banking services, credit needs, housing, or consumer financial protections.


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Member directorships are designated to each of the four states in our district and each of our members is entitled to nominate and vote for candidates representing the state in which the member’s principal place of business is located. To qualify as a nominee for a member directorship, a nominee must be an officer or director of a member located in the state to which the director of the Finance Agency has allocated the directorship, and such member must meet all minimum capital requirements established by its appropriate Federal banking agency or appropriate state regulator. Member directors are nominated by members located in the state to which the member directorship is assigned, based on a determination by the nominating institution that the nominee possesses the applicable experience, qualifications, attributes and skills to qualify the nominee to serve as an FHLBank director, without any participation from our Board of Directors. Following the nomination process, a member is entitled to cast, for each applicable member directorship, one vote for each share of capital stock that the member is required to hold, subject to a statutory limitation. Under this limitation, the total number of votes that each member may cast is limited to the average number of shares of capital stock that were required to be held by all members in that state as of the record date for voting.
 
Each of our member directors meets the required qualifications and, as such, each is an officer or director of a member in the respective state from which they were nominated and elected.
 
Independent directors are elected by ballot from among those eligible persons nominated by the Board of Directors after consultation with the Affordable Housing Advisory Council and after the nominee has been submitted to the Finance Agency for review. In nominating independent directors, our Board of Directors may consider an individual’s current and prior experience on the Board of Directors, the qualifications of nominees, and the skills and experience most likely to add strength to the Board of Directors, among other skills, qualifications and attributes. Finance Agency regulations require us to encourage the consideration of diversity in nominating or soliciting nominees for positions on its Board of Directors. Our Board of Directors will consider diversity in nominating independent directors and in electing member directors when the Board of Directors is permitted to elect member directors in the event of a vacancy. If our Board of Directors nominates only one individual for each independent directorship, then each nominee must receive at least 20 percent of the number of votes eligible to be cast in the election to be elected. If our Board of Directors nominates more persons for the type of independent directorship to be filled than there are directorships of that type to be filled in the election, then the nominee receiving the highest number of votes will be elected. Each member voting in the independent director election is entitled to cast one vote for each share of capital stock that the member is required to hold, subject to the statutory limitation discussed above. Our Board of Directors has adopted procedures for the nomination and election of independent directors, consistent with the requirements of the Bank Act and Finance Agency regulations.
 
There are no arrangements or understandings between any director and any other person pursuant to which the director was or is to be selected as a director or nominee. No director has any family relationship with any other director or executive officer. No director or person nominated to become a director or executive officer of the FHLBank has been involved in any legal proceeding during the past ten years that would affect the integrity or ability of such director or nominee to serve in such capacity.

As of the date of this annual report on Form 10-K, we have 16 directors, 9 of whom are serving directorships as “member directors” (as such term is defined under the Bank Act) and seven of whom are serving directorships as “independent directors” (as such term is also defined under the Bank Act). We currently have one vacant directorship in the state of Colorado.

On November 3, 2015, we declared elected Holly Easterling as an independent director and Michael B. Jacobson as a member director from the state of Nebraska, as reported in our current report on Form 8-K filed with the SEC on November 3, 2015. Additionally, on September 21, 2015, FHLBank filed a Current Report on Form 8-K announcing that G. Bridger Cox, from the state of Oklahoma, and Bruce A. Schriefer, from the state of Kansas, were deemed elected as member directors of FHLBank’s Board of Directors. Each of the directors will serve four-year terms commencing as of January 1, 2016 and expiring on December 31, 2019.
 

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Table 69 sets forth certain information regarding each of our directors as of the date of this annual report on Form 10-K.
 
Table 69
Director
Age
Type of
Directorship
Director Since
Current Term
Expiration
Board Committee
Membership1
Milroy A. Alexander
66
Independent
January 2015
December 2016
(a), (b), (e)
Robert E. Caldwell, II
45
Independent
January 2004
December 2018
(b), (c) Vice Chair, (e) Chair, (f)
G. Bridger Cox
63
Member
January 2011
December 2019
(b), (c) Chair
Holly Easterling
52
Independent
January 2016
December 2019
(a), (f)
James R. Hamby
64
Member
January 2007
December 2017
(a), (c), (f) Chair
Andrew C. Hove, Jr.
81
Independent
April 2007
December 2017
(d), (e), (f)
Michael B. Jacobson
62
Member
January 2012
December 2019
(a), (f)
Jane C. Knight
72
Independent
January 2004
December 2018
(d), (e)
Richard S. Masinton
74
Independent
April 2007
December 2017
(b) Chair, (c), (d)
Neil F. M. McKay
75
Independent
April 2007
December 2016
(a), (f)
L. Kent Needham
62
Member
January 2013
December 2016
(d), (e)
Mark J. O’Connor
51
Member
May 2011
December 2017
(b), (d), (f)
Thomas H. Olson, Jr.2
50
Member
January 2013
December 2018
(a), (e)
Mark W. Schifferdecker
51
Member
January 2011
December 2018
(a) Chair, (b), (c), (d)
Bruce A. Schriefer
66
Member
January 2007
December 2019
(a), (b), (c), (d) Chair
Douglas E. Tippens
61
Member
January 2015
December 2018
(e), (f)
                   
1 
Board of Director committees are as follows: (a) Audit; (b) Compensation; (c) Executive; (d) Risk Oversight; (e) Housing and Governance; and (f) Operations.
2 
Subsequent to the date of this annual report on Form 10-K, Mr. Olson resigned as a member director representing the state of Colorado, effective March 4, 2016. On March 9, 2016, Mr. Olson was elected by the Board of Directors to fill the vacant member directorship in the state of Nebraska and will serve in that position until December 31, 2018. As a member director for the state of Nebraska, Mr. Olson will serve on the same committees and in the same capacity as he served as a member director representing the state of Colorado, which included the Audit and Housing & Governance committees.
 
The following describes the principal occupation, business experience, qualifications and skills, among other matters, of the 16 directors who currently serve on the Board of Directors. Except as otherwise indicated, each director has been engaged in the principal occupation described below for at least five years:
 
Milroy A. Alexander has been a housing, financial and business consultant since 2010, serving nonprofit housing organizations, local housing authorities and the City of Denver housing and neighborhood redevelopment department. He also served his second and third terms as a director of the Municipal Securities Rulemaking Board from October 2010 through September 2012 and May 2013 through September 2013. He is a trustee of Rose Community Foundation and board chair of the Lowry Redevelopment Authority. Mr. Alexander previously served as Executive Director and CEO of the Colorado Housing and Finance Authority in Denver, Colorado. The Board of Directors considered Mr. Alexander’s qualifications, skills and attributes, including his more than 20 years of service at a state housing finance agency, including nine years as Executive Director and CEO and 12 years as CFO, his certification as a CPA, his more than 10 years as an auditor with Touche Ross & Co., his past service on the audit committees of many organizations and his ability to provide the Board of Directors with racial diversity, when making his nomination.

Robert E. Caldwell, II is the Vice Chairman of our Board of Directors. Mr. Caldwell has been Director of Corporate Development for Nebco, Inc., a supplier of materials to the construction industry to construct buildings, streets and highways, since August 2014. Prior to his service at Nebco, Inc., Mr. Caldwell was the President and COO of WRK Real Estate, LLC, a real estate management and development company, since January 2014. Mr. Caldwell previously served as President and CEO of Hampton Enterprises, Inc., a commercial real estate development, general contracting, construction management and property management firm, from 2006 through 2013. Prior to 2006, he served as General Counsel for Linweld, Inc., a large independent manufacturer and distributor of industrial/medical gases and welding supplies. The Board of Directors considered Mr. Caldwell’s qualifications, skills and attributes, including his B.S. in business administration, his J.D. and MBA, his experience as General Counsel for Linweld, Inc., a subsidiary of a Japanese public company, his service as President and CEO of a commercial real estate and construction company, and his prior service as an FHLBank director, when making his nomination.


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G. Bridger Cox is the Chairman of our Board of Directors. Mr. Cox has been Chairman and President of Citizens Bank & Trust Company, Ardmore, Oklahoma, since 1996. Although the Board of Directors did not participate in Mr. Cox’s nomination since he is a member director, Mr. Cox is a graduate of the Stonier Graduate School of Banking at Rutgers University, possesses more than 30 years of banking management experience, has served on the board of directors of the Oklahoma Industrial Finance Authority and the Oklahoma Development Finance Authority, and has prior experience as an FHLBank director, that assists in his service as a director. Prior to his current term, Mr. Cox served as a member director of the FHLBank from January 1998 through December 2006.

Holly Easterling has served the Chickasaw Nation in various roles since 1997 and presently serves as Secretary of the Department of Treasury for the Chickasaw Nation since October 2012. From October 2010 to September 2012, she served as the Administrator of Planning and Organizational Development for the Chickasaw Nation. From August 2003 to October 2010, she served as an Elected Tribal Legislator for the Pontotoc District. Ms. Easterling serves as a trustee of the Chickasaw Foundation and is a past trustee of the Ada City Schools Foundation. The Board of Directors considered Ms. Easterling's qualifications, skills and attributes, including her role as Secretary for the Department of Treasury for the Chickasaw Nation, her experience as a CPA and at public accounting firms, her experience in and knowledge of auditing and accounting, financial management, organizational management, project development and risk management practices, and her ability to provide the Board of Directors with gender and racial diversity, when making her nomination.

James R. Hamby has been CEO of Vision Bank, Ada, Oklahoma, since 1990. Although the Board of Directors did not participate in Mr. Hamby’s nomination since he is a member director, Mr. Hamby possesses an MBA and is a graduate of the Graduate School of Banking at Southern Methodist University, has over 30 years of banking experience, including more than 20 years as CEO of a bank, significant experience in bank investments, bank accounting and all other aspects of banking, and prior experience as an FHLBank director, that assists in his service as a director. Prior to his current term, Mr. Hamby served as a member director of the FHLBank from January 1995 through December 2000.

Andrew C. Hove, Jr., now retired, previously served as Vice Chairman and Acting Chairman of the Federal Deposit Insurance Corporation from 1991 to 2001, and prior to that he served as the Chairman and CEO of Minden Exchange Bank and Trust, Minden, Nebraska. Mr. Hove currently serves on the boards of directors of NeighborWorks Lincoln, and Great Western Bank, Sioux Falls, South Dakota. Mr. Hove also previously served on the board of directors of Sovereign Bank, Wyomissing, Pennsylvania, a public company, until 2009. The Board of Directors considered Mr. Hove’s qualifications, skills and attributes, including his experience as Chairman and CEO of a community bank, his experience as Vice Chairman and Acting Chairman of the Federal Deposit Insurance Corporation, his activities and affiliation with NeighborWorks Lincoln, and his prior service as an FHLBank director, when making his nomination.

Michael B. Jacobson has been Chairman, President and CEO of NebraskaLand National Bank, North Platte, Nebraska, since 1998. Although the Board of Directors did not participate in Mr. Jacobson’s nomination since he is a member director, Mr. Jacobson possesses a B.S. in agricultural economics, is a graduate of the Colorado Graduate School of Banking and has over 35 years of banking experience, including more than 22 years as the CEO of a bank, that assists in his service as a director.

Jane C. Knight, now retired, served as Vice President of Site-based Strategies for Kansas Big Brothers Big Sisters from 2002 through 2005. Prior to that, she directed the Wichita office for Kansas Governor Bill Graves and was in charge of addressing constituent concerns, including housing issues. The Board of Directors considered Ms. Knight’s qualifications, skills and attributes, including her prior management skills, including her service as Director of the Kansas Governor’s regional office, her experience with housing issues through the Governor’s office and Habitat for Humanity, her experience with not-for-profit organizations, her ability to provide the Board of Directors with gender diversity, and her prior service as an FHLBank director, when making her nomination.

Richard S. Masinton, now retired, was Executive Vice President of Quinn Capital, LLC, a private equity company in Leawood, Kansas from January 2009 through 2014. Mr. Masinton previously served as Chief Financial Officer and Executive Vice President of Russell Stover Candies, a candy manufacturer, in Kansas City, Missouri, from 1996 until 2008. In January 2009, Mr. Masinton was elected to the board of directors of No More Homeless Pets Kansas City, an animal welfare charity. He also sits on the boards of directors of Eco-Choice Springwater, LLC and CRB Biosoft, LLC. Mr. Masinton previously retired from the boards of directors of OneNeck IT Services Corp in 2008 and Enterprise Financial Services Corporation, a publicly owned bank holding company, in 2007. He has also served on the board of advisors of the University of Kansas School of Business and on an advisory board at the University of Oklahoma School of Business. The Board of Directors considered Mr. Masinton’s qualifications, skills and attributes, including his Masters Degree in Accounting, Finance and Economics, his certification as a CPA, his experience on the board of a publicly owned bank holding company, including his seven years of experience as Chairman of the audit committee of such bank holding company, his 40 years of experience as a corporate executive, and his prior service as an FHLBank director, when making his nomination.


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Neil F. M. McKay was Chief Financial Officer and Treasurer of Capitol Federal Savings in Topeka, Kansas, from 1994 through March 2006. Mr. McKay, now retired, has held significant executive positions in various financial institutions including Heartland Federal Savings in Ponca City, Oklahoma, and First Nationwide Bank (now part of Citibank) in San Francisco, California. He was also a CPA in public practice for 12 years. The Board of Directors considered Mr. McKay’s qualifications, skills and attributes, including his certification as a CPA, his 12 years of service as an audit manager of large, publicly traded banks, his experience as Controller of a $30 billion publicly traded bank, his experience as CFO of an $8 billion publicly traded bank, and his prior service as an FHLBank director, when making his nomination.

L. Kent Needham has served as Chairman, President and CEO of The First Security Bank, Overbrook, Kansas, since 2007. Although the Board of Directors did not participate in Mr. Needham’s nomination since he is a member director, Mr. Needham possesses an MBA, is a graduate of the Colorado Graduate School of Banking, and has over 35 years of banking experience, including more than 20 years as CEO, that assists in his service as a director.

Mark J. O’Connor currently serves as a Senior Vice President of FirstBank Holding Company, Lakewood, Colorado, and has served as Vice President of FirstBank since 2002. Although the Board of Directors did not participate in Mr. O’Connor’s most recent nomination since he is a member director, Mr. O’Connor has more than 27 years of banking experience. He is a graduate of the Pacific Coast Banking School, currently serves as the Director of Investments and Chairs the ALCO Committee of a large bank holding company and has over 13 years of investment portfolio management experience. Mr. O’Connor serves on the Foundation Board of a local university and sits on its Investment Committee. He has experience on the board, including service as chairman, of a state housing finance authority, and his prior experience as an FHLBank director assists in his service as a director.

Thomas H. Olson, Jr. is currently Chairman of Points West Community Bank, Sidney, Nebraska, and has been CEO of Points West Community Bank, Julesburg, Colorado, since 1998. Mr. Olson is currently also the Chairman of Points West Community Bank, Julesburg, Colorado, a director and the Chairman of the Independent Bankers of Colorado, Chairman of First Nebraska Bancs, Inc., Chairman of Bank of Estes Park, Chairman of First National Financial, Chairman of Fullerton National Bank, Chairman of Woodstock Land and Cattle, and Director of Rush Creek Land and Livestock. The Board of Directors considered Mr. Olson’s qualifications, skills and attributes, including his B.S. in Finance and Accounting, that he is a graduate of the Colorado Graduate School of Banking, and his over 22 years of banking experience, including more than 17 years as CEO, when making his election.

Mark W. Schifferdecker has been President and CEO of The Girard National Bank, Girard, Kansas, since 2003. Although the Board of Directors did not participate in Mr. Schifferdecker’s nomination since he is a member director, Mr. Schifferdecker has experience as a CPA, possesses more than 10 years of experience as the CEO of a community bank, served more than 10 years as an auditor with KPMG, served six years on the board of directors of the Federal Reserve Bank of Kansas City, including two years as chairman of the Audit Committee, and served on the board of directors of Bankers’ Bank of Kansas, N.A., including one year as chairman, that assists in his service as a director.

Bruce A. Schriefer joined Bankers’ Bank of Kansas, Wichita, Kansas, in 1996 and served as President, CEO until his retirement in February 2015. He remains a director of Bankers' Bank of Kansas and is vice-chairman of its parent BBOK Bancshares, Inc. Although the Board of Directors did not participate in Mr. Schriefer’s nomination since he is a member director, Mr. Schriefer possesses more than 40 years of experience at various levels of commercial banking, experience as a former director of the Federal Reserve Bank of Kansas City, experience on the boards of directors of various national and state trade associations, experience as a member of the FDIC Advisory Committee on Community Banking, and prior experience as an FHLBank director, that assists in his service as a director.

Douglas E. Tippens has been President of BancFirst, Yukon, Oklahoma, since November 2015. Prior to that time, he served as President and CEO of Bank of Commerce, Yukon, Oklahoma, from 2006 to November 2015, and served on the board of directors of Bank of Commerce, Chelsea, Oklahoma, from 2013 to January 2016. Although the Board of Directors did not participate in Mr. Tippens’ nomination since he is a member director, Mr. Tippens possesses a B.S. in agriculture economics, an MBA, is a graduate of the Graduate School of Banking at the University of Wisconsin, has more than 35 years of banking experience, including nine years as president and CEO, and served on the board of directors of the Federal Reserve Bank of Kansas City, Oklahoma City Branch, that assists in his service as a director.


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Code of Ethics
We have adopted a Code of Ethics that applies to our directors, officers (including our principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions) and employees. Our Code of Ethics has been posted on our website at www.fhlbtopeka.com in the "Corporate Governance" page. We will also post on our website any amendments to, or waivers from, a provision of our Code of Ethics that applies to the principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions as required by applicable rules and regulations. The Code of Ethics is available, in print, free of charge, upon request. Written requests may be made to the General Counsel of the FHLBank at One Security Benefit Place, Suite 100, Topeka, Kansas, 66606.
 
Audit Committee Financial Expert
We have a separately-designated, standing audit committee, which consists of Mark W. Schifferdecker (chairman), Milroy A. Alexander, Holly Easterling, James R. Hamby, Michael B. Jacobson, Neil F.M. McKay, Thomas H. Olson, Jr. and Bruce A. Schriefer.
 
The Board of Directors has determined that each of Neil F.M. McKay and Mark W. Schifferdecker is an “audit committee financial expert” as that term is defined under SEC regulations. Mr. McKay and Mr. Schifferdecker are “independent” in accordance with the Nasdaq Independence Standards (defined under Item 13 below) for audit committee members, as those standards were applied by our Board of Directors.
 
The Compensation Committee Report is included following the Compensation Discussion and Analysis in Item 11 - “Executive Compensation.”

Item 11. Executive Compensation

Compensation Discussion and Analysis
Overview of Previous Year Performance and Compensation: Our overall executive compensation philosophy is to attract, retain, and motivate highly-qualified executive officers who will advance: (1) our business objectives to promote our long-term growth and profitability in accordance with achievement of our long-term strategic objectives; and (2) our mission of supporting our members’ interests.

We met or exceeded almost all of our short-term objectives in 2015, having not met the Retained Earnings goal, discussed below. We believe we otherwise continued our strong performance against our long-term objectives as well. These objectives were designed to drive our performance in key areas that align our incentive compensation with our members’ view of our performance and with our ongoing long-term financial stability.

The named executive officers in 2015 were comprised of the President and CEO, the Senior Executive Vice President and COO, the Executive Vice President and CRO, the Senior Vice President and General Counsel, and until July 14, 2015, the Senior Vice President and CAO, and effective as of and after July 14, 2015 due to a reorganization, the Senior Vice President and CFO (the Named Executive Officers). In determining the appropriate total compensation package for our Named Executive Officers, we considered the principal objectives of our compensation program as: (1) attracting and retaining highly-qualified and talented individuals; and (2) motivating these individuals to achieve short- and long-term FHLBank-wide performance goals through incentive compensation.

In 2015, we provided competitive compensation opportunities for our Named Executive Officers based on thoughtful adjustments to base salary and on incentive compensation achievable through our EICP. The EICP provides cash-based annual incentives and deferred incentive awards, which promote the achievement of short- and long-term objectives.

The achievement of both short- and long-term goals translated to incentive awards earned by our Named Executive Officers in recognition of their contribution to our overall success.

Framework for Compensation Decisions: The Compensation Committee of the Board of Directors (Compensation Committee) oversees the compensation of the Named Executive Officers. The Compensation Committee’s responsibilities in 2015 included:
Advising the Board of Directors on the establishment of appropriate compensation, incentive and benefits programs, including recommending performance goals for the EICP;
Approving the base salaries and salary adjustments of the COO, CRO, General Counsel, CFO and CAO, as recommended by the CEO; and
Recommending to the Board of Directors the base salary, including any salary adjustments, of the CEO.


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Elements of Executive Compensation in 2015: To implement our compensation objectives, the elements of our 2015 compensation program for the Named Executive Officers included: (1) annual base salary; (2) annual and deferred cash incentive award opportunities under our EICP; (3) retirement and other benefits; (4) limited perquisites; and (5) potential payments upon termination or change in control.

Use of Benchmarks - We believe a key to attracting and retaining highly-qualified executive officers is the identification of the appropriate peer groups within which we must compete for executive talent. We have historically recruited nationally, both within and outside of the FHLBank System, in our efforts to attract highly-qualified candidates for the Named Executive Officer positions. To ensure that we are offering and paying competitive compensation to retain our Named Executive Officers, the Board of Directors (and/or Compensation Committee) has periodically retained compensation consultants to assist with comparative analyses of the Named Executive Officers’ total compensation through a review of survey data reflecting potential comparator benchmarks for total compensation. Our Compensation Committee has used such survey data as guideposts in considering and determining competitive levels of base salary and total compensation for our Named Executive Officers among other factors as described above.

In 2015, the Compensation Committee considered the competitiveness of the total compensation paid to our Named Executive Officers by reviewing comparative survey data obtained from the compensation consultant, McLagan Partners, Inc. (McLagan). The Compensation Committee looked primarily to McLagan’s FHLBank Custom Compensation Survey and available pay data; and secondarily to a subset of McLagan’s proprietary survey database for financial services institutions. Based on advice of McLagan, the Compensation Committee selected a subset of survey data within McLagan’s proprietary survey database to reflect information about a more narrow survey group of comparator financial services institutions.

The decision to remain competitive primarily with the other FHLBanks and to also consider the broader labor market of a limited group of financial services institutions reflects our belief that the knowledge and skills necessary to effectively perform our Named Executive Officers’ duties may be developed as a result of experience not only at other FHLBanks, but also at a variety of other financial services institutions. We also recognize that Topeka’s geographic location may be a disadvantage in attracting executives, but generally is a positive factor in retaining executives.

Of the FHLBank-based survey data and the broader survey data utilized, the Compensation Committee considered the 25th percentile, 50th percentile (median) and 75th percentile compensation ranges for analyzing executive positions similar to those of our Named Executive Officers in considering the competitiveness of our total compensation for the Named Executive Officers. The Compensation Committee generally strives to establish annual base salary and incentive compensation opportunities for our Named Executive Officers in the median range of the survey data reviewed assuming target level performance would be achieved. The ultimate compensation determined appropriate in any given year, however, will depend on the scope of a Named Executive Officer’s responsibilities as compared to similar positions within our identified peer groups, the experience and performance of the individual Named Executive Officer, and our overall performance. Generally, the Compensation Committee and CEO operate to recommend below median pay for poor performance and above median pay for superior performance. While survey information is one factor in setting compensation for our Named Executive Officers, we believe that surveys should not override the need for independent decisions by the Compensation Committee that are consistent with our financial condition and future prospects.
 
Annual Base Salary - A significant element of each Named Executive Officer’s total compensation is annual base salary, which is designed to reward our Named Executive Officers for past performance and their commitment to future performance and to serve as the foundation for competitive total compensation. Adjustments to annual base salaries for the Named Executive Officers are considered annually and may be made in April following an analysis of our compensation practices and the FHLBank’s performance in the previous year, as well as projections for future years and other factors.

For 2015, the Compensation Committee again determined that appropriate annual base salaries for each Named Executive Officer should be competitive with the salaries of comparable executive positions within financial institutions that the Compensation Committee defined as our peers for purposes of providing guideposts for a competitive compensation analysis, as discussed in more detail below under “Use of Benchmarks.” Adjustments to annual base salaries of the Named Executive Officers for 2015 were based on: (1) each Named Executive Officer’s scope of responsibility and accountability; (2) analysis of our comparator peer groups (as described below); (3) performance of the FHLBank based on achievement levels of FHLBank-wide goals in the prior year; (4) the perceived performance of each Named Executive Officer, as a subjective matter; and (5) other factors such as experience, time in position, general economic conditions, and labor supply and demand conditions.


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A final factor that the Compensation Committee generally considers in determining base salary increases in its effort to retain our Named Executive Officers is the relative difference in compensation between the executive officers as well as the pay relationship between executive officers and other employees at the FHLBank. The Compensation Committee believes that internal pay equity provides an additional perspective to that of peer group survey compensation information. While comparisons to compensation levels of executive positions within our peer groups are the primary basis used to assess the overall competitiveness of our compensation program, we also believe that our executive compensation practices should be internally consistent and equitable.

The Compensation Committee also considered guidance and communications from its regulator, the Finance Agency, in determining total compensation for the Named Executive Officers as more specifically addressed below under “Finance Agency Oversight.”

In 2015, the Compensation Committee and the CEO determined that, with respect to competitive pay positioning for purposes of retaining our Named Executive Officers, it was appropriate to increase the base salaries of the Named Executive Officers to maintain competitive total compensation. Consideration was also given to each Named Executive Officer’s scope of responsibility, market comparators, individual and FHLBank performance, and other factors as described above. As a result of the Compensation Committee’s consideration of these factors, the Compensation Committee recommended and the Board approved an increase to our CEO’s base salary effective April 1, 2015 of four percent from his prior salary. The Compensation Committee also weighed these factors in determining to approve the CEO’s recommendation to increase the base salaries for the COO, CRO, General Counsel and CAO, and the CEO considered these factors when approving the base salary of the CFO. The base salaries of the COO, CRO, General Counsel, and CFO were increased by four percent while the base salary for the CAO was increased by two percent effective April 1, 2015. These increases were generally consistent with increases of approximately 3.5 percent received by most of our other employees’ base salaries for 2015. On July 14, 2015, the CFO was appointed as Principal Financial Officer, effective on that same date. As a result of the Compensation Committee’s consideration of the factors listed above, the Compensation Committee recommended and the Board approved an increase to our CFO’s base salary effective July 1, 2015 of eight percent from his prior salary. All recommended salary increases were subject to review by the Finance Agency, except for the CFO's annual increase in April, which was approved by the CEO.

Annual and Deferred Cash Incentive Awards - Effective January 1, 2012, we adopted the EICP as a cash-based annual incentive plan with a long-term deferral component that establishes individual incentive compensation award opportunities related to achievement of performance objectives during the performance periods. The EICP establishes two performance periods: (1) a Base Performance Period aligned with the calendar year; and (2) a Deferral Performance Period (or the long-term performance period), which is a three-year period commencing the calendar year following the Base Performance Period. Named Executive Officers may earn an annual cash incentive during a Base Performance Period and a deferred cash incentive during a Deferral Performance Period. For each Base Performance Period, the Board will establish a Total Base Opportunity for Named Executive Officers. The Total Base Opportunity is equal to a percentage of each Named Executive Officer’s annual base salary at the beginning of the Base Performance Period, and is composed of the cash incentive and the deferred incentive. The EICP effectively combines our previous Executive Short Term Incentive Plan (ESTIP) and Long Term Incentive Plan (LTIP).

We believe that well-designed incentive compensation plans provide important opportunities to motivate our Named Executive Officers to accomplish financial, risk, and operational goals that promote our mission. Thus, motivating our Named Executive Officers to accomplish business and financial short- and long-term goals that promote a high level of performance for our members is a key objective of our total compensation program. Consequently, our compensation and benefits programs are designed to motivate our Named Executive Officers to engage in the behaviors and performance necessary to deliver our desired results.

To effectively motivate the Named Executive Officers to accomplish both short- and long-term goals that promote our performance, we believe that incentive awards must represent pay at risk. In other words, the administration of our incentive compensation plans must be such that awards are distributed only in exchange for accomplishing pre-established, Board of Directors-approved goals, and are distributed only in accordance with such achievement. In 2015, we achieved this compensation objective through attainment of objectives under our EICP.

Beginning in the fourth quarter of 2014, goal metrics, metric performance ranges and metric weights for award opportunities under the 2015 EICP were developed. The proposed performance objectives reflected the drivers of our business and mission and were based upon the Compensation Committee’s and management’s discussions with respect to our primary mission and stockholder perceptions of success. The Compensation Committee and management appropriately aligned the performance objectives to the Strategic Business Plan. The Compensation Committee reviewed and analyzed the proposed performance objectives, as appropriate, for 2015 before submitting the objectives to the Board of Directors for approval in December 2014.


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For the Base Performance Period of January 1, 2015 to December 31, 2015, the Board of Directors approved a Total Base Opportunity equal to a percentage of each Named Executive Officer’s annual base salary at the beginning of the Base Performance Period. Certain Named Executive Officers have a greater and more direct impact than others on the success of the FHLBank; therefore, these differences are recognized by varying the Total Base Opportunity for each Named Executive Officer. The Total Base Opportunity is the amount that may be earned for achieving performance levels under established Performance Measures and is comprised of the Cash Incentive and the Deferred Incentive. In the event the FHLBank’s performance during the Base Performance Period results in the achievement of a Total Base Opportunity that exceeds 100 percent of a Participant’s base salary at the start of the Base Performance Period, the Target Document provides that the Total Base Opportunity shall be capped at 100 percent of the Participant’s base salary in accordance with regulatory restrictions. The Deferred Incentive is 50 percent of the Total Base Opportunity, which shall be deferred for the Deferred Performance Period, which is the three-year period from January 1, 2016 to December 31, 2018, over which the FHLBank’s performance is measured based on specific parameters. The Cash Incentive is the portion of the Total Base Opportunity that is not the Deferred Incentive and becomes payable after the end of the Base Performance Period upon achievement of established Performance Measures, subject to review by the Director of the Finance Agency.

Awards under the EICP may be granted for achievement of Performance Measures corresponding to achievement levels, from threshold, to target, to optimum performance for each goal metric. Threshold represents the minimum achievement level; target represents the expected achievement level; and optimum represents the achievement level that substantially exceeds the target level. Awards may be earned for performance attainment within these achievement levels as a percentage of base salary that corresponds to actual performance. For performance that falls between any two levels of achievement, linear interpolation is used to ensure that the award is consistent with the level of performance achieved. Named Executive Officers may earn annual awards expressed as a percent of their earned base salary. Table 70 presents the Total Base Opportunity for each Named Executive Officer for each achievement level for the Base Performance Period:

Table 70
Position
Total Base Opportunity
Threshold
Target
Optimum
CEO
40.0
%
80.0
%
120.0
%
COO
32.5

65.0

97.5

CRO, General Counsel, CFO and CAO1
25.0

50.0

75.0

                   
1 
FHLBank’s CAO served as its Principal Financial Officer until July 14, 2015.


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The Total Base Opportunity Goal Metrics for 2015 are described in Table 71:

Table 71
Total Base Opportunity Goal Metric
Definition
Adjusted Return Spread on Regulatory Total Capital1
The spread between (a) adjusted net income divided by daily average regulatory total capital and (b) the average daily overnight Federal funds effective rate (Fed Effective).
Net Income after Capital Charge
The dollar amount of adjusted net income as defined in the above metric which exceeds the cost of the required return on capital.
Retained Earnings
The dollar amount of GAAP retained earnings as of December 31, 2015.
Core Mission Assets Ratio
Core Mission Assets Ratio is defined as daily advances plus mortgage loans held for portfolio divided by daily consolidated obligations.
Risk Management - Market, Credit and Liquidity Risks
Management of FHLBank risks as determined by the weighted average rating by the Board of Directors in an annual evaluation of the Risk Appetite metrics in this area using a 1 (lowest) to 5 (highest) point scale. General risk categories are market, credit and liquidity risks.
Risk Management - Compliance, Business and Operations Risks
Management of FHLBank risks as determined by the weighted average rating by the Board of Directors in an annual evaluation of the Risk Appetite metrics in this area using a 1 (lowest) to 5 (highest) point scale. General risk categories are compliance, business and operations risks.
                   
1 
As part of evaluating our financial performance and measuring EICP performance, we begin with the components of “adjusted income” and “adjusted ROE,” non-GAAP financial measures defined in Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.” We adjust net income reported in accordance with GAAP for the impact of: (1) AHP assessments (equivalent to an effective minimum income tax rate of 10 percent); (2) fair value changes on derivatives and hedging activities (excludes net interest settlements related to derivatives not qualifying for hedge accounting); and (3) other items excluded because they are not considered a part of our routine operations or ongoing business model, such as prepayment fees, gain/loss on retirement of debt, gain/loss on mortgage loans held for sale and gain/loss on securities. For measuring our EICP performance, we further adjust for other items excluded because they are not considered a part of our routine operations or ongoing business model, such as interest expense on mandatorily redeemable capital stock, amortization of derivative option costs and amortization/accretion of premium/discount on unswapped MBS classified as trading. This resulting EICP adjusted income, also a non-GAAP financial measure of income, is used to compute an EICP adjusted ROE that is then compared to the average overnight Federal funds effective rate with the difference referred to as EICP adjusted ROE spread.

The profit-oriented objectives of “Adjusted Return Spread on Regulatory Total Capital” and “Net Income after Capital Charge” (non-GAAP financial measures) were based on the belief that profitability is critical to the long-term viability of the organization. The “Risk Management” objectives were included in recognition of the impact that the Named Executive Officers have on management of business, compliance, credit, liquidity, market and operations risks and an effort to reward positive risk management performance as determined by the Board of Directors. We divided the risk management objectives to provide balance and focus in the amount of risk exposure we are willing to accept/retain in pursuit of stakeholder value. The “Retained Earnings” objective reflects our desire to ensure we operate from a position of capital strength and take appropriate steps to protect our members from the potential impairment of the par value of our capital stock. Finally, the performance objective for “Core Mission Assets Ratio” establishes benchmark ratios for our advances and mortgage loans in order to focus on providing liquidity to our members.

Award levels were set at threshold, target and optimum percentages of annual base salary. Table 72 sets forth the specific annual goal performance ranges and the actual achievement levels for each of our Total Base Opportunity Goal Metrics in 2015:

Table 72
Total Base Opportunity Goal Metrics
Annual Performance Range
Actual Achievement
Threshold
Target
Optimum
Adjusted Return Spread on Regulatory Total Capital
4.72
%
5.85
%
6.42
%
6.00
%
Net Income after Capital Charge
$
71,477,000

$
91,477,000

$
101,477,000

$
102,506,132

Retained Earnings
$
655,263,000

$
681,920,000

$
702,007,000

$
651,781,483

Core Mission Assets Ratio
60.00
%
70.00
%
80.00
%
79.45
%
Risk Management - Market, Credit and Liquidity Risks (5.0 point scoring scale)
3.00

4.00

5.00

4.90

Risk Management - Compliance, Business and Operations Risks (5.0 point scoring scale)
3.00

4.00

5.00

4.01



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As reflected in Table 72, 2015 was a strong year regarding the achievement of our EICP base opportunity performance objectives. However, Retained Earnings goal achievement was below threshold because of fair value losses on trading securities and derivatives and hedging activities, which resulted in a net decrease of $23.9 million, partially offset by a $14.5 million increase in net interest income. The fair value fluctuations were largely due to a significant widening in mortgage rates relative to the interest rate swap curve in the latter half of 2015 that negatively impacted the values of both our economic interest rate swaps and the hedged fixed rate multi-family GSE MBS. As a result of the Retained Earnings goal achievement being below threshold, no payout was received relating to this goal.

Table 73 provides the metric weight for each Total Base Opportunity Goal Metric as a percent of the Total Base Opportunity for each Named Executive Officer in 2015.

Table 73
Performance Objective
Metric Weight
CEO/COO/CFO
CRO
General Counsel/CAO1
Adjusted Return Spread on Regulatory Total Capital
20
%
10
%
15
%
Net Income after Capital Charge
20

10

15

Retained Earnings
10

20

10

Core Mission Assets Ratio
10

10

10

Risk Management - Market, Credit and Liquidity Risks
20

25

25

Risk Management - Compliance, Business and Operations Risks
20

25

25

                   
1 
FHLBank’s CAO served as its Principal Financial Officer until July 14, 2015.

The final value of the Deferred Incentive portion of the Total Base Opportunity is measured by evaluating Performance Measures as presented in Table 74, which provides a template of how amounts will be calculated for the calendar year 2016 to calendar year 2018:

Table 74
 
Threshold
Target
Optimum
Total Return1:
10/11 or 11/11 vs. FHLBanks
5/11 vs. FHLBanks
2/11 or 1/11 vs. FHLBanks
Deferred Incentive
$
$
$
Performance Measure Percentage
75
%
100
%
125
%
Weighting
0.50

0.50

0.50

Dollar Value (Deferred Incentive x Performance Measure Percentage x Weight)
$
$
$
 
 
 
 
MVE / TRC2:
10/11 or 11/11 vs. FHLBanks
5/11 vs. FHLBanks
2/11 or 1/11 vs. FHLBanks
Deferred Incentive
$
$
$
Performance Measure Percentage
75
%
100
%
125
%
Weighting
0.50

0.50

0.50

Dollar Value (Deferred Incentive x Performance Measure Percentage x Weight)
$
$
$
 
 
 
 
Final Deferred Incentive Award (Dollar Value for Total Return + Dollar Value for MVE/TRC)
$
$
$
                   
1 
Total Return equals the Total Dividends, plus the Change in Retained Earnings, divided by the Average TRC over the three-year period. Total Dividends is defined as all dividends paid on all capital stock during the three-year period; Change in Retained Earnings is defined as the change in retained earnings from 12/31/2015 to 12/31/2018; and Average TRC is defined as the average daily ending balance of regulatory capital for dates starting with 01/01/2016 and ending 12/31/2018. TRC is defined as total capital stock plus retained earnings plus subordinated debt plus mandatorily redeemable capital stock. TRC will also include any additional capital from mergers that will be reported in the Finance Agency Call Report System (CRS) on the statements of condition. For performance comparison purposes, FHLBank Topeka will be ranked against the other FHLBanks, with the highest total return being the best performance, and ranking 1st out of the 11 FHLBanks.
2 
Using amounts reported on the Trendbook Analysis from the CRS, MVE/TRC is calculated by dividing base case MVE by TRC (as defined above) calculated at the end of the Deferral Performance Period. For performance comparison purposes, FHLBank Topeka will be ranked against the other FHLBanks, with the highest MVE/TRC being the best performance, and ranking 1st out of the 11 FHLBanks.


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For any Performance Period, an award will not be payable if we fail to achieve performance at or above the Performance Measure(s) set by the Compensation Committee. The Compensation Committee may, in its discretion, reduce or eliminate an award payable under the EICP under any of the following circumstances: (1) we receive a composite “4” or “5” rating in our Finance Agency examination in any single year in any single Base Performance Period or Deferral Performance Period; (2) the Board of Directors finds a serious, material safety-soundness problem or a serious, material risk management deficiency exists; (3) during the most recent Finance Agency examination, the Finance Agency identified an unsafe or unsound practice or condition that is material to the financial operation of the FHLBank within a Named Executive Officer’s area(s) of responsibility and such unsafe or unsound practice or condition is not subsequently resolved in favor of the FHLBank by the last day of the Base Performance Period or Deferral Performance Period; or (4) a given participant does not achieve satisfactory individual achievement levels (as determined in the sole discretion of the Compensation Committee) during the Deferral Performance Period. Additionally, Deferred Incentive awards shall be reduced by one-third for each year during the Deferral Performance Period in which we have negative net income, as defined and in accordance with GAAP. For Deferral Performance periods beginning 2015 and later in order for Participants to be eligible to receive a Final Deferred Incentive Award, the FHLBank must have an MVE of not less than 100 percent of FHLBank’s TRCS outstanding, as of the last day of the Deferral Performance Period.

Under the EICP Targets for the 2013-2015 Deferral Performance Period, the achievement of base award opportunities is measured over a three-year performance period. Table 75 presents the Base Award Opportunity Percentage, Base Award Weighted Average Achievement and Base Award Opportunity Percentage Achieved for each Named Executive Officer eligible to participate in the Deferral Performance Period under the EICP for January 1, 2013 - December 31, 2015:

Table 75
Named Executive Officer
Level
2013-2015
2013-2015
2013-2015
Base Award Opportunity Percentage
Base Award Weighted
Average Achievement
Base Award Opportunity
Percentage Achieved
Andrew J. Jetter, President & CEO
Level I
40.0
%
121.09
%
48.44
%
David S. Fisher, SEVP & COO
Level II
32.5

121.09

39.35

Mark E. Yardley, EVP & CRO
Level III
25.0

121.09

30.27

Patrick C. Doran, SVP & General Counsel
Level III
25.0

121.09

30.27

William W. Osborn, SVP & CFO
Level III
25.0

121.09

30.27

Denise L. Cauthon, SVP & CAO1
Level III
25.0

121.09

30.27

                   
1 
Ms. Cauthon served as FHLBank's Principal Financial Officer until July 14, 2015.

The weighted average achievement for the 2013-2015 performance goals was 121.09 percent. The metric weight for the 2013-2015 performance goals as a percent of the total EICP award opportunity for all Named Executive Officers and the 2013-2015 goal achievement percentage is included in Table 76:

Table 76
Objective
Metric Weight
2013-2015
Goal
Achievement Percentage
Total Return
37.5
%
125.00
%
Expense Growth
25.0

118.75

MVE/TRCS
37.5

118.75


A Named Executive Officer, in the discretion of the Compensation Committee, may be required to forfeit an award earned under the EICP if the Named Executive Officer is: (1) discharged from employment with the FHLBank for Good Cause as defined under the EICP; (2) engages in competition with the FHLBank or interferes with the business relationships of the FHLBank during his employment or following his termination; or (3) discloses confidential information of the FHLBank.


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Retirement and Other Benefits - We maintain a comprehensive retirement program for our eligible employees comprised of two qualified retirement plans: (1) the Pentegra Defined Benefit Plan for Financial Institutions, a tax‑qualified multiple-employer defined-benefit plan (DB Plan); and (2) the Pentegra Financial Institutions Thrift Plan, a defined contribution retirement savings plan qualified under the Internal Revenue Code (IRC) for employees of the FHLBank (DC Plan). In response to federal legislation, which imposed restrictions on the pension benefits payable to our executives, we subsequently established a third retirement plan, the Benefit Equalization Plan (BEP) in order to maintain the competitive level of our total compensation for executive officers, including the Named Executive Officers. Generally, the BEP is characterized as a non-qualified “excess benefit” plan, which restores those retirement benefits that exceed the IRC limits applicable to the qualified DB Plan and DC Plan. In this respect, the BEP is an extension of our retirement commitment to our Named Executive Officers and other eligible highly compensated employees that preserves and restores the full pension benefits that, due to IRC limitations, are not payable from the qualified pension plans.

DB Plan - Our DB Plan covers all full time employees of the FHLBank as of January 1, 2009 who have met the eligibility requirements of: (1) attainment of age 21; (2) completion of twelve months of employment; and (3) employed by the FHLBank as of December 31, 2008, including the Named Executive Officers. Employees are not fully vested until they have completed five years of employment. The regular form of retirement benefits provides a single life annuity; a lump-sum payment or other additional payment options are also available to a limited degree for those Named Executive Officers who were employed prior to the plan change in 2003. The benefits are not subject to offset for social security or any other retirement benefits received. In 2015, each of the Named Executive Officers participated in the DB Plan, which required no contribution from any Named Executive Officer.

The DB Plan provides a normal retirement benefit at or after age 65 where a Named Executive Officer has met the vesting requirement of completing five years of employment equal to 2.0 percent of his/her highest three-year average salary multiplied by his/her years of benefit service, up to 30 years. Three Named Executive Officer participants (Mr. Jetter, Mr. Yardley and Ms. Cauthon) are eligible to receive benefits in excess of 2.0 percent because of a plan change in 2003. The amount in excess of 2.0 percent is a calculated “frozen add-on” determined at the time of the plan change. The formula for this “frozen add-on” is the old benefit formula as of August 31, 2003 minus the new benefit formula as of September 1, 2003. Earnings are defined as base salary plus overtime and bonuses, subject to an annual IRC Section 401(a)(17) limit of $265,000 on earnings for 2015. Annual benefits provided under the DB Plan also are subject to IRC limits, which vary by age and benefit option selected. The annual IRC Section 415(b)(1)(A) benefit limit is $210,000 for 2015. Benefits are payable in the event of retirement, death, disability, or termination of employment if vested. Only the portion of the benefit accrued before September 1, 2003 is payable as a lump sum to employees who have attained age 50; otherwise, benefits are paid in installments.
 
Early retirement benefits are payable at a reduced rate. Upon termination of employment prior to age 65, Named Executive Officers meeting the 5-year vesting and age 45 early retirement eligibility criteria are entitled to an early retirement benefit. Each of the Named Executive Officers is eligible for early retirement. The early retirement benefit amount is calculated by taking the normal retirement benefit amount and reducing it by 3.0 percent times the difference between the age of the early retiree and age 65. If the Named Executive Officer was employed prior to September 1, 2003 and his/her age and benefit service added together totaled 70 (Rule of 70), the normal retirement benefit amount would be reduced by 1.5 percent for each year between the age of the early retiree and age 65 for the portion of the normal retirement benefit accrued prior to September 1, 2003.

The measurement date used to determine the current year’s benefit obligation was December 31, 2015. The present value of the accrued benefit of the DB Plan, calculated through September 1, 2003, was valued at 50 percent of benefit value using the 2000 RP Mortality table (generational table for annuities) and 50 percent of benefit value using the 2000 RP Mortality table (statistical mortality table for lump sums), discounted to the current age of each Named Executive Officer at 4.34 percent interest. The present value of benefits accrued after September 1, 2003 is multiplied by a present value factor which uses the 2000 RP Mortality table (generational table for annuities) discounted to the current age of each Named Executive Officer at 4.34 percent. As of December 31, 2015, the actuary’s calculations utilized: (1) the projected unit credit valuation method; (2) the 2014 RP white collar worker annuitant tables (with Scale MP-2015); (3) an average salary increase adjustment; and (4) a 4.00 percent discount rate as the primary assumptions attributable to valuation of benefits under the DB portion of the BEP (see "BEP" below).

DC Plan - The DC Plan is a tax-qualified, defined contribution pension plan. Substantially all officers and employees of the FHLBank are covered by the plan. The FHLBank contributes a matching amount equal to a percentage of voluntary employee contributions, subject to certain limitations (see "BEP" below).


113


All employees who have met the eligibility requirements can choose to participate in the DC Plan. We match employee contributions based on the length of service and the amount of an employee’s contribution. These employer contributions are immediately 100 percent vested. Matching ratios for all employees, including the Named Executive Officers, under the DC Plan are as follows:
 
 
Year 1
No match
Years 2 through 3
100 percent match up to 3 percent of employee’s eligible compensation
Years 4 through 5
150 percent match up to 3 percent of employee’s eligible compensation
After 5 years
200 percent match up to 3 percent of employee’s eligible compensation

BEP - The BEP is, in part, an unfunded, nonqualified deferred compensation plan (the Supplemental Thrift Plan). The Supplemental Thrift Plan allows the Named Executive Officers, who so choose, to receive a credit for elective contributions in excess of the maximum permitted by the IRC limitations in the FHLBank’s DC Plan in which they participate. If portions of the Named Executive Officer’s regular DC Plan account contributions are returned after the end of the preceding year because of IRC limitations, the Named Executive Officer is credited with make-up contributions under the Supplemental Thrift Plan equal to the Named Executive Officer’s returned portions.
 
The Supplemental Thrift Plan allows Named Executive Officers to receive a rate of return based on our return on equity calculated for EICP purposes for the previous year. For 2015, the rate of return earned on the Supplemental Thrift Plan was 6.61 percent, which was our return on equity calculated for EICP purposes for 2014.
 
Named Executive Officers are at all times 100 percent vested in their Supplemental Thrift Plan accounts. In the event of unforeseen emergencies, they may request withdrawals equal to the lesser of the amounts necessary to meet their financial hardships or the amount of their account balances. As of December 31, 2015, each of the Named Executive Officers would be entitled to receive his or her respective balance of compensation deferred through participation under the BEP within ninety days of any such Named Executive Officer’s termination of employment due to death, disability or retirement and upon a change in control as defined in the BEP and in accordance with IRC Section 409A and applicable regulations. For each Named Executive Officer, these amounts are listed in Table 83 under the column titled “Aggregate Balance at Last FYE.”

Other benefits - We are also committed to providing competitive benefits designed to promote health and welfare for all employees (including their families), including the Named Executive Officers. We offer all employees a variety of benefits including medical, dental, vision, prescription drug, life insurance, long-term disability, flexible spending accounts, employee assistance program and travel accident insurance. The Named Executive Officers participate in these benefit programs on the same basis as all other eligible employees.

Perquisites - The Board of Directors views limited perquisites afforded to the Named Executive Officers as an element of the total compensation program. Any perquisites provided, however, are not intended to materially add to any Named Executive Officer’s compensation package and, as such, are provided to them primarily as a convenience associated with their respective duties and responsibilities. Examples of perquisites that were provided to the Named Executive Officers in 2015 are the personal use of an FHLBank-owned automobile for the President and limited spousal travel for Named Executive Officers.

Categorical types of perquisites provided to the Named Executive Officers in 2015 are presented and detailed in the All Other Compensation Table (see Table 80 under this Item 11) and are more specifically described in the case that aggregate perquisites to any single Named Executive Officer exceeded $10,000.

Potential payments upon termination or change in control
Severance Benefits - We provide severance benefits to the Named Executive Officers pursuant to our Named Executive Officers Severance Policy. The policy’s primary objective is to provide a level of protection to officers from loss of income during a period of unemployment. These officers are eligible to receive severance pay under the policy if we terminate the officer’s employment with or without cause, subject to certain limitations. These limitations include: (1) the officer voluntarily terminates employment; or (2) the officer’s employment is terminated by us for misconduct.


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Provided the requirements of the policy are met and the Named Executive Officer provides us an enforceable release, Table 77 presents the term and amounts that would have been payable to the Named Executive Officer under the Named Executive Officers Severance Policy as of December 31, 2015, absent a qualifying event that would result in payments under the Change in Control Plan (see "Change in Control Plan" below).

Table 77
Officer
Months
Severance Amount1
COBRA2
Severance Total
Andrew J. Jetter
12
$
718,000

$
15,367

$
733,367

David S. Fisher
9
356,250

6,927

363,177

Mark E. Yardley
9
267,000

7,727

274,727

Patrick C. Doran
6
151,750

7,794

159,544

William W. Osborn
6
142,000

7,684

149,684

Denise L. Cauthon3
6
111,750

7,794

119,544

                   
1 
Severance Amount equals the number of months of base salary as described under the Severance Policy.
2 
COBRA equals the number of months of medical, dental and vision coverage cost as described under the Severance Policy.
3 
Ms. Cauthon served as FHLBank's Principal Financial Officer until July 14, 2015.

The amounts above do not include accrued incentive plan payments as presented in the Summary Compensation Table; the aggregate balance of the DC Plan as presented in the Nonqualified Deferred Compensation Table; or the present value of accumulated benefits of the BEP as presented in the Pension Benefits Table.

Change in Control Plan - The Change in Control Plan provides that, upon both a change in control and the termination of a participant that qualifies as a Change in Control Termination, a participant will be entitled to a cash lump sum payment. A Change in Control means the occurrence of any of the following events, provided it shall not include any reorganization that is mandated by any Federal statute, rule, regulations or directive: (1) the merger, reorganization, or consolidation of FHLBank Topeka with or into another FHLBank or other entity; (2) the sale or transfer of all or substantially all of the business or assets of FHLBank Topeka to another FHLBank or other entity; (3) the purchase by FHLBank Topeka or transfer to FHLBank Topeka of substantially all of the business or assets of another FHLBank; (4) a change in the composition of the Board of Directors, as a result of one or a series of related transactions, that causes the combined number of member directors from the states of Colorado, Kansas, Nebraska and Oklahoma to cease to constitute a majority of the directors of FHLBank Topeka; or (5) the liquidation or dissolution of FHLBank Topeka. We provide for payments under a Change in Control to: (1) promote key employee loyalty and to assure continued dedication to FHLBank Topeka, notwithstanding the possibility, threat or occurrence of a Change in Control; and (2) to reduce the personal uncertainties to key employees who are vital to FHLBank Topeka's future success associated with a pending or possible Change in Control, and to encourage those key employees' continued dedication to FHLBank Topeka.

A Participant will receive in a cash lump sum, an amount that, when combined with any amount payable under an FHLBank severance policy, equals a compensation multiplier times the sum of: (1) the Participant’s then annualized base salary; and (2) an amount equal to the target Total Base Opportunity as reflected in FHLBank’s EICP Targets document for the year in which the change in control occurs. Participants at Tier 1 are subject to a compensation multiplier of 2.99, participants at Tier 2 are subject to a compensation multiplier of 2.0, and participants at Tier 3 are subject to a compensation multiplier of 1.0. A Participant is also eligible to receive the continuation of certain group health care benefits for a period of years equal to his or her compensation multiplier. On June 19, 2015, FHLBank’s board approved the following Participants in the Change in Control Plan: Tier 1 - Andrew J. Jetter, President and CEO; Tier 2 - David S. Fisher, Senior Executive Vice President and COO, and Mark E. Yardley, Executive Vice President and CRO; and Tier 3 - Patrick C. Doran, Senior Vice President and General Counsel, and William W. Osborn, Senior Vice President and CFO.
 

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Table 78 represents the elements of potential payments upon a Change in Control and the total amount that would be payable to the Named Executive Officers as of December 31, 2015 subject to FHLBank’s Change in Control Plan, adopted on June 19, 2015 and non-objected to by the Finance Agency on July 15, 2015.

Table 78
Officer
Severance Amount1
Incentive2
COBRA3
Change in Control Total
Andrew J. Jetter
$
2,146,820

$
1,652,274

$
46,102

$
3,845,196

David S. Fisher
950,000

594,100

18,472

1,562,572

Mark E. Yardley
712,000

342,500

20,604

1,075,104

Patrick C. Doran
303,500

146,000

15,589

465,089

William W. Osborn
284,000

126,525

15,367

425,892

                   
1 
Compensation Multiplier times the annual base salary at year end as described under the Change in Control Policy.
2 
Compensation Multiplier times target Total Base Opportunity reflected in the 2015 EICP Targets as described in under the Change in Control Policy.
3 
COBRA equals the number of months of medical, dental and vision coverage cost as described under the Change in Control Policy.

The amounts above do not include accrued incentive plan payments as presented in the Summary Compensation Table; the aggregate balance of the DC Plan as presented in the Nonqualified Deferred Compensation Table; or the present value of accumulated benefits of the BEP as presented in the Pension Benefits Table.

Why We Choose to Pay These Elements: We believe the Compensation Committee’s analyses described above provided an appropriate process to determine 2015 compensation levels for each Named Executive Officer that reasonably positions us to competitively manage our operations for success and to accomplish our mission.

The mix of compensation elements that comprised the total compensation of our Named Executive Officers in 2015, particularly allowed us to provide total compensation that we believe appropriately balanced reasonable guaranteed pay through carefully considered base salary determinations with additional at-risk cash compensation opportunities for the Named Executive Officers. This means that while we strived to match an appropriate level of compensation comparable to that reflected by our perceived peer groups and internal pay analysis through annual base salary and retirement benefits components, we also strived to provide a component of compensation that is at-risk in both the shorter term and the longer term. These at-risk awards represent an opportunity to reward our Named Executive Officers based on the achievement of both our annual and long-term performance goals and the discretion vested in our Compensation Committee.

The Compensation Committee believes that the Supplemental Thrift Plan, as defined under “Deferred Compensation” in this Item 11, and the defined benefit portion of the BEP provide additional retirement benefits that are necessary for our total compensation package to remain competitive, particularly compared with competitors who may offer equity-based compensation.

Finance Agency Oversight: Section 1113 of the Recovery Act requires that the Director of the Finance Agency prevent an FHLBank from paying compensation to its executive officers that is not reasonable and comparable to that paid for employment in similar businesses involving similar duties and responsibilities. In 2009, the Finance Agency issued an advisory bulletin establishing certain principles for executive compensation at the FHLBanks and the Office of Finance that include: (1) such compensation must be reasonable and comparable to that offered to executives in similar positions at comparable financial institutions; (2) such compensation should be consistent with sound risk management and preservation of the par value of FHLBank capital stock; (3) a significant percentage of an executive’s incentive based compensation should be tied to longer-term performance and outcome-indicators and be deferred and made contingent upon performance over several years; and (4) the Board of Directors should promote accountability and transparency in the process of setting compensation. On January 28, 2014, the Finance Agency issued a final rule on executive compensation, which defines “reasonable” and “comparable” compensation and establishes the review and approval process for certain compensation payments and agreements.

The FHLBanks have been directed to provide all compensation actions affecting their Named Executive Officers to the Finance Agency for review.
 

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Compensation Committee Report: The Compensation Committee of our Board of Directors has reviewed and discussed the Compensation Discussion and Analysis with management. Based on its review and discussions with management, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in our annual report on Form 10-K.

The Compensation Committee
of the Board of Directors
Richard S. Masinton, Chair
Milroy A. Alexander
Robert E. Caldwell II
G. Bridger Cox
Mark J. O’Connor
Mark W. Schifferdecker
Bruce A. Schriefer



117


Table 79 presents the Summary Compensation Table for the Named Executive Officers.
 
Table 79
Name and Principal Position
Year
Salary
Non-Equity Incentive Plan Compensation1
Change in Pension Value and Nonqualified Deferred Compensation Earnings2
All Other Compensation3
Total
Andrew J. Jetter4
2015
$
711,187

$
684,512

$
185,015

$
61,085

$
1,641,799

President & CEO
2014
685,721

627,386

2,067,470

69,827

3,450,404

 
2013
665,750

586,898

17,716

77,840

1,348,204

David S. Fisher5
2015
470,500

375,849

146,824

47,082

1,040,255

SEVP & COO
2014
453,604

337,859

450,400

45,218

1,287,081

 
2013
440,186

307,849

17,838

44,485

810,358

Mark E. Yardley6
2015
352,625

212,734

44,175

34,131

643,665

EVP & CRO
2014
340,022

196,017

1,026,281

34,162

1,596,482

 
2013
330,165

210,840

10,337

33,254

584,596

Patrick C. Doran7
2015
300,625

185,585

63,565

25,867

575,642

SVP & General Counsel
2014
289,849

165,921

271,631

23,289

750,690

 
2013
280,021

142,437

1,230

23,105

446,793

William W. Osborn8
2015
271,012

155,082

54,241

9,263

489,598

SVP & CFO











Denise L. Cauthon9
2015
222,375

139,889

7,044

16,438

385,746

SVP & CAO
2014
217,459

124,607

467,138

18,520

827,724

 
2013
210,301

127,635

74

17,446

355,456

                   
1 
All compensation reported under “non-equity incentive plan compensation” represents performance awards earned pursuant to achievement of performance objectives under the FHLBank’s EICP (for 2013, 2014 and 2015), TLTIP (for the 2012-2014 performance period in 2014) and LTIP (for the 2011-2013 performance period in 2013).
2 
The change in pension value will fluctuate with changes in discount rates used to calculate the present value of accumulated benefits and can result in decreases. However per SEC rules, any net actuarial decreases in pension plan values have been excluded from this column. Nonqualified deferred compensation earnings includes above market earnings attributable to the BEP, which are calculated by multiplying the nonqualified deferred compensation balance as of January 1 of the applicable year by the average rate of return in excess of the long-term applicable Federal rate (120 percent compounded quarterly) published by the IRS.
3 
The 2015 components of All Other Compensation are provided in Table 80.
4 
Above market earnings attributable to the BEP for Mr. Jetter were $57,015, $31,470, and $17,716 for 2015, 2014, and 2013, respectively. The aggregate change in the value of Mr. Jetter’s accumulated benefit under the FHLBank’s DB Plan was $42,000, $503,000, and $(86,000) for 2015, 2014, and 2013, respectively. The aggregate change in the value of his accumulated benefit under the defined benefit portion of the FHLBank’s BEP was $86,000, $1,533,000, and $(427,000) for 2015, 2014, and 2013, respectively.
5 
Above market earnings attributable to the BEP for Mr. Fisher were $21,824, $11,400, and $5,838 for 2015, 2014, and 2013, respectively. The aggregate change in the value of Mr. Fisher’s accumulated benefit under the FHLBank’s DB Plan was $54,000, $179,000, and $12,000 for 2015, 2014, and 2013, respectively. The aggregate change in the value of his accumulated benefit under the defined benefit portion of the BEP was $71,000, $260,000, and $0 for 2015, 2014, and 2013, respectively.
6 
Above market earnings attributable to the BEP for Mr. Yardley were $30,175, $17,281, and $10,337 for 2015, 2014, and 2013, respectively. The aggregate change in the value of Mr. Yardley’s accumulated benefit under the FHLBank’s DB Plan was $30,000, $554,000, and $(95,000) for 2015, 2014, and 2013, respectively. The aggregate change in the value of his accumulated benefit under the defined benefit portion of the BEP was $(16,000), $455,000, and $(150,000) for 2015, 2014, and 2013, respectively.
7 
Above market earnings attributable to the BEP for Mr. Doran were $4,565, $2,631, and $1,230 for 2015, 2014, and 2013, respectively. The aggregate change in the value of Mr. Doran’s accumulated benefit under the FHLBank’s DB Plan was $34,000, $191,000, and $(14,000) for 2015, 2014, and 2013, respectively. The aggregate change in the value of his accumulated benefit under the defined benefit portion of the BEP was $25,000, $78,000, and $(17,000) in 2015, 2014, and 2013, respectively.
8 
Above market earnings attributable to the BEP for Mr. Osborn were $241 for 2015. The aggregate change in the value of Mr. Osborn's accumulated benefit under the FHLBank’s DB Plan was $26,000 for 2015. The aggregate change in the value of his accumulated benefit under the defined benefit portion of the BEP was $28,000 for 2015.
9 
Ms. Cauthon served as FHLBank's Principal Financial Officer until July 14, 2015. Above market earnings attributable to the BEP for Ms. Cauthon were $44, $138, and $74 for 2015, 2014, and 2013, respectively. The aggregate change in the value of Ms. Cauthon's accumulated benefit under the FHLBank’s DB Plan was $(5,000), $428,000, and $(111,000) for 2015, 2014, and 2013. The aggregate change in the value of her accumulated benefit under the defined benefit portion of the BEP was $12,000, $39,000, and $28,000 in 2015, 2014, and 2013.


118


Table 80 presents the components of “All Other Compensation” for 2015 as summarized in Table 79.
 
Table 80
 
 
 
 
 
 
 
 
 
Named Executive Officer
Perquisites and Personal Benefits1
Individual Disability Insurance
Life Insurance Premiums
Long Term Disability Premiums
FHLBank Contribution to DC Plan
FHLBank Contribution to Defined Contribution Portion of BEP
Other Miscellaneous
Total All Other Compensation
Andrew J. Jetter
$

$
6,733

$
1,568

$
923

$
15,900

$
35,764

$
197

$
61,085

David S. Fisher

6,456

986

923

14,860

23,660

197

47,082

Mark E. Yardley

3,946

705

923

15,900

12,460

197

34,131

Patrick C. Doran

1,420

598

923

15,900

6,829

197

25,867

William W. Osborn


532

850

7,685


196

9,263

Denise Cauthon2


445

712

7,755

7,264

262

16,438

                   
1 
Perquisites and personal benefits are only included if more than $10,000 in aggregate for an individual.
2 
Ms. Cauthon served as FHLBank's Principal Financial Officer until July 14, 2015.

Table 81 presents the Grants of Plan Based Awards Table for the Named Executive Officers.
 
Table 81
Name
Plan
Estimated Future Payouts Under Non‑Equity Incentive Plan Awards1
Threshold
Target
Optimum
Andrew J. Jetter
EICP-Cash Incentive
$
138,150

$
276,300

$
414,450

President & CEO
EICP-Deferred Incentive Opportunity2
138,150

276,300

414,450

David S. Fisher
EICP-Cash Incentive
74,263

148,525

222,788

SEVP & COO
EICP-Deferred Incentive Opportunity2
74,263

148,525

222,788

Mark E. Yardley
EICP-Cash Incentive
42,813

85,625

128,438

EVP & CRO
EICP-Deferred Incentive Opportunity2
42,813

85,625

128,438

Patrick C. Doran
EICP-Cash Incentive
36,500

73,000

109,500

SVP & General Counsel
EICP-Deferred Incentive Opportunity2
36,500

73,000

109,500

William W. Osborn
EICP-Cash Incentive
31,632

63,263

94,894

SVP & CFO
EICP-Deferred Incentive Opportunity2
31,632

63,263

94,894

Denise L. Cauthon3
EICP-Cash Incentive
27,375

54,750

82,125

SVP & CAO
EICP-Deferred Incentive Opportunity2
27,375

54,750

82,125

                   
1 
Amounts reflected for the EICP represent the applicable range of estimated future payouts and do not represent amounts actually earned or awarded for the fiscal year ended December 31, 2015. Award amounts are calculated using the base salaries in effect on January 1 at the beginning of the performance period. The EICP-Cash Incentive, if any, are earned and vested at year end. Awards, if any, under the EICP-Deferred Incentive Opportunity are payable in the year following the end of the three-year performance period. See discussion under Annual and Deferred Cash Incentive Awards under this Item 11 for a description of the terms of the EICP and future payouts.
2 
The final value of the EICP-Deferred Incentive Opportunity may be $0 if threshold metrics are not met, 75 percent of initial deferral at threshold, 100 percent at target and 125 percent at optimum.
3 
Ms. Cauthon served as FHLBank's Principal Financial Officer until July 14, 2015.




119


Pension Benefits: Table 82 presents the 2015 Pension Benefits Table for the Named Executive Officers.
 
Table 82
Name
Plan Name
Number of Years of Credited Services
Present Value Of Accumulated Benefit
Payments During Last Fiscal Year
Andrew J. Jetter
Pentegra Defined Benefit Plan for Financial Institutions
27.583
$
1,810,000

$

President & CEO
FHLBank Benefit Equalization Plan
27.583
5,378,000


David S. Fisher
Pentegra Defined Benefit Plan for Financial Institutions
8.917
534,000


SEVP & COO
FHLBank Benefit Equalization Plan
8.917
807,000


Mark E. Yardley
Pentegra Defined Benefit Plan for Financial Institutions
30.000
2,026,000


EVP & CRO
FHLBank Benefit Equalization Plan
30.000
1,657,000


Patrick C. Doran
Pentegra Defined Benefit Plan for Financial Institutions
10.667
520,000


SVP & General Counsel
FHLBank Benefit Equalization Plan
10.667
246,000


William W. Osborn
Pentegra Defined Benefit Plan for Financial Institutions
8.583
353,000


SVP & CFO
FHLBank Benefit Equalization Plan
8.583
97,000


Denise L. Cauthon1
Pentegra Defined Benefit Plan for Financial Institutions
25.333
1,206,000


SVP & CAO
FHLBank Benefit Equalization Plan
25.333
102,000


                   
1 
Ms. Cauthon served as FHLBank's Principal Financial Officer until July 14, 2015.

Deferred Compensation: Table 83 presents the 2015 Nonqualified Deferred Compensation Table for the Named Executive Officers. Our fiscal year (FY) is 2015, with a fiscal year end (FYE) of December 31, 2015.
 
Table 83
Name
Executive Contributions in Last FY1
Registrant Contributions in Last FY
Aggregate Earnings in Last FY
Aggregate Withdrawals / Distributions
Aggregate Balance at Last FYE2
Andrew J. Jetter
President & CEO
$
77,890

$
35,764

$
109,413

$

$
1,771,667

David S. Fisher
SEVP & COO
40,199

23,660

42,697


706,039

Mark E. Yardley
EVP & CRO
20,767

12,460

57,415


922,018

Patrick C. Doran
SVP & General Counsel
6,829

6,829

9,124


154,060

William W. Osborn
SVP & CFO


448


7,011

Denise L. Cauthon3
SVP & CAO
18,159

7,264

1,196


37,822

                   
1 
All amounts are also included in the salary column of Table 79.
2 
The total amount reported as preferential (above market) earnings in the aggregate balance at last FYE reported as compensation to each Named Executive Officer in the Executive Group in our Summary Compensation Tables for previous years (2006-2014) was $145,387 for Mr. Jetter, $33,063 for Mr. Fisher, $69,084 for Mr. Yardley, $8,157 for Mr. Doran, $0 for Mr. Osborn, and $212 for Ms. Cauthon. The amounts reported as preferential (above market) earnings for the current year are presented in Table 79.
3 
Ms. Cauthon served as FHLBank's Principal Financial Officer until July 14, 2015.


120


Director Compensation: Table 84 presents the Director Compensation Table for our 2015 Board of Directors.
 
Table 84
Name
Fees Earned or Paid in Cash
Milroy A. Alexander
$
80,000

Harley D. Bergmeyer
53,333

Robert E. Caldwell II
95,000

G. Bridger Cox
105,000

James R. Hamby
90,000

Thomas E. Henning
90,000

Andrew C. Hove, Jr.
80,000

Michael B. Jacobson
80,000

Jane C. Knight
80,000

Richard S. Masinton
90,000

Neil F. M. McKay
80,000

L. Kent Needham
80,000

Mark J. O’Connor
80,000

Thomas H. Olson Jr.
80,000

Mark W. Schifferdecker
90,000

Bruce A. Schriefer
80,000

Douglas E. Tippens
80,000


Director Fees - The Board of Directors establishes on an annual basis a Board of Directors Compensation Policy governing compensation for Board meeting attendance. Our 2015 Board of Directors Compensation Policy (2015 Policy) was adopted October 31, 2014 and became effective January 1, 2015. This policy was established in accordance with the Bank Act and Finance Agency regulations that were amended in 2008 to remove the statutory cap on director compensation. The applicable statutes and regulations allow each FHLBank to pay its directors reasonable compensation and expenses, subject to the authority of the Director of the Finance Agency to object to, and to prohibit prospectively, compensation and/or expenses that the Director of the Finance Agency determines are not reasonable. Our 2015 Policy provided that directors shall be paid a meeting fee for each day in attendance at a regular meeting of the Board of Directors up to a maximum annual compensation amount as set forth in the 2015 Policy.
 
In determining reasonable compensation for our directors, we participated in an FHLBank System review of director compensation, which included a study prepared by McLagan. FHLBank director compensation that was established by the Board under the 2015 Policy reflected this analysis. The 2015 Policy establishes annual compensation limits of $105,000 for the Chairman, $90,000 for the Vice-Chairman and Committee Chairs and $80,000 for all other directors. Additionally, an individual serving as a Vice Chair of the Board shall be entitled to an increase of $5,000 in his or her Maximum Annual Compensation in the event the individual serves as both Vice Chair of the Board and a Committee Chair.

The Board of Directors adopted a 2016 Board of Directors Compensation Policy (2016 Policy) governing compensation for board meeting attendance on September 25, 2015. The 2016 Policy is similar to the 2015 Policy, except that the 2016 Policy reflects increases in the established annual compensation limits to $125,000 for the Chairman, $105,000 for the Vice-Chairman and Committee Chairs and $95,000 for all other directors and in addition to the Maximum Annual Compensation reflected in the policy, a director may also realize the benefit of reasonable spousal or guest travel expenses that qualify as perquisites as set forth in the Directors and Executive Officers Travel Policy, for one meeting per calendar year, as designated by the Chair of the Board of Directors.

Director Expenses - Directors are also reimbursed for all necessary and reasonable travel, subsistence and other related expenses incurred in connection with the performance of their duties. For expense reimbursement purposes, directors’ official duties can include:
Meetings of the Board and Board Committees;
Meetings requested by the Finance Agency;
Meetings of FHLBank System committees;
FHLBank System director meetings;
Meetings of the Council of Federal Home Loan Banks and Council committees; and
Attendance at other events on behalf of the FHLBank.

121



Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

We are a cooperative. Our members or former members own all of our outstanding capital stock. A majority of our directors are elected from our membership. One of the voting rights of members is for the election of member and independent directors. Each member is eligible to vote for those open member director seats in the state in which its principal place of business is located and for all open independent director seats, which are elected by members of the entire FHLBank district. Membership is voluntary; however, members must give notice of their intent to withdraw from membership. A member that withdraws from membership may not be readmitted to membership for five years after the date upon which its required membership stock (Class A Common Stock) is redeemed by us.
 
Management cannot legally and, therefore, does not, own our capital stock. We do not offer any compensation plan to our employees under which equity securities of the FHLBank are authorized for issuance.
 
Table 85 presents information on member institutions holding five percent or more of the total outstanding capital stock, which includes mandatorily redeemable capital stock, of the FHLBank as of March 8, 2016. Of these stockholders, no affiliated officer or director currently serves on our Board of Directors.
 
Table 85
Member Institutions Holding 5 Percent or More Capital Stock
Borrower Name
Address
City
State
Number of Shares
Percent of Total
Bank of Oklahoma, NA
PO Box 2300
Tulsa
OK
2,745,000

18.9
%
Capitol Federal Savings Bank
700 S Kansas Ave
Topeka
KS
2,058,750

14.2

MidFirst Bank
501 NW Grand Blvd
Oklahoma City
OK
1,864,800

12.9

TOTAL
 
 
 
6,668,550

46.0
%

Additionally, because of the fact that a majority of our Board of Directors is nominated and elected from our membership (“member directors”), these member directors are officers or directors of member institutions that own our capital stock. Table 86 presents total outstanding capital stock, which includes mandatorily redeemable capital stock, held as of March 8, 2016, for member institutions whose affiliated officers or directors served as our directors as of March 10, 2016:
 
Table 86
Total Capital Stock Outstanding to Member Institutions whose Officers or Directors Serve as a Director
Borrower Name
Address
City
State
Number of Shares
Percent of Total
Girard National Bank
100 E Forest
Girard
KS
20,718

0.1
%
Bank of the Prairie
18675 West 151st Street
Olathe
KS
8,543

0.1

NebraskaLand National Bank
121 N Dewey
North Platte
NE
7,813

0.1

FirstBank
10403 W Colfax Ave
Lakewood
CO
7,374

0.1

Points West Community Bank
809 Illinois Street
Sidney
NE
7,218

0.1

Points West Community Bank
100 E 3rd Street
Julesburg
CO
7,087

0.1

Vision Bank
1800 Arlington Street
Ada
OK
5,500


BancFirst
101 N. Broadway
Oklahoma City
OK
5,500


Fullerton National Bank
1400 S Dewey
Fullerton
NE
3,774


Citizens Bank & Trust Co.
1100 N Commerce
Ardmore
OK
2,475


Bankers’ Bank of Kansas, NA
555 N Woodlawn
Wichita
KS
1,793


First Security Bank
312 Maple Street
Overbrook
KS
1,357


Bank of Estes Park
Park Lane at MacGregor
Estes Park
CO
1,196


TOTAL
 
 
 
80,348

0.6
%


122


Item 13: Certain Relationships and Related Transactions, and Director Independence
 
Certain Relationships and Related Transactions
Since we are a cooperative, ownership of our capital stock is a prerequisite for our members to transact business with us. In recognition of this organizational structure, the SEC granted us an accommodation pursuant to a “no action letter,” dated May 23, 2006, which relieves us from the requirement to make disclosures under Item 404(a) of Regulation S-K for transactions with related persons, such as our members and directors, which occur in the ordinary course of business. Further, the Recovery Act codified this accommodation.
 
Members with beneficial ownership of more than five percent of our total outstanding capital stock and all of our directors are classified as related persons under SEC regulations. Transactions with members deemed related persons of the FHLBank occur in the ordinary course of our business since we conduct our advance and mortgage loan business almost exclusively with our members. Our member directors are officers or directors of members that own our capital stock and conduct business with us.
 
Information with respect to the directors who are officers or directors of our members is set forth under Item 10 ‑ “Directors and Executive Officers of the FHLBank and Corporate Governance ‑ Directors.” Additional information regarding members that are beneficial owners of more than five percent of our total outstanding capital stock is provided in Item 12 ‑ “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
 
See Item 11 - "Executive Compensation" for a discussion of the compensation of our Named Executive Officers and directors.
 
We have a written “Related Person Transactions Policy” (Policy) that provides for the review and approval or ratification by our Audit Committee of any transaction with a related person that is outside the ordinary course of business. Under the Policy, transactions with related persons that are in the ordinary course of business are deemed pre-approved.
 
A “Related Person” under the Policy is:
Any person who is, or at any time since the beginning of our last fiscal year was, a director or an executive officer of the FHLBank;
Any immediate family member of any of the foregoing persons and any person (other than a tenant or employee) sharing the household of such director or executive officer;
Any firm, corporation, or other entity in which any of the foregoing persons is an executive officer, a general partner or principal or in a similar position; or
Any member institution (or successor) of the FHLBank that is known to be the beneficial owner of more than five percent of our voting securities.
 
“Ordinary course of business” is defined in the Policy as activities conducted with members, including but not limited to providing our products and services to the extent such product and service transactions are conducted on terms no more favorable than the terms of comparable transactions with similarly situated members or housing associates, as applicable, or transactions between the FHLBank and a Related Person where the rates and charges involved in the transactions are subject to competitive bidding. Our products and services include: (1) credit products (i.e., line of credit, advances, forward settling advance commitments, letters of credit, standby credit facility and derivative transactions); (2) MPF Program mortgage loan products; (3) Housing and Community Development Program products; and (4) other services (i.e., deposit accounts, wire transfer services, safekeeping services, and unsecured credit transactions permissible under the RMP).
 
Transactions outside the ordinary course of business, with Related Persons that have a direct or indirect material interest, and exceed $120,000 are subject to Audit Committee review and approval under the Policy and include situations in which: (1) we obtain products or services from a Related Person of a nature, quantity or quality, or on terms that are not readily available from alternative sources; (2) we provide products or services to a Related Person on terms not comparable to those provided to unrelated parties; or (3) the rates or charges involved in the transactions are not subject to competitive bidding.

Director Independence
Board Operating Guidelines and Nasdaq Standards: The Board Operating Guidelines of the FHLBank (Guidelines), available at www.fhlbtopeka.com, require that the Board of Directors make an annual affirmative determination as to the independence of each director, as that term is defined by Rule 5605(a)(2) of the Nasdaq Marketplace Rules (the “Nasdaq Independence Standards”).
 
The Board of Directors has affirmatively determined that each one of its directors, both independent and member directors (each of whom is listed in Item 10 of this Form 10-K), is independent in accordance with the Nasdaq Independence Standards.
 

123


In order to assist the Board of Directors in making an affirmative determination of each director’s independence under the Nasdaq Independence Standards, the Board of Directors: (1) applied categorical standards for independence contained in the Guidelines and under the Nasdaq Independence Standards; (2) determined subjectively the independence of each director; and (3) considered the recommendation of the Audit Committee following its assessment of the independence of each director. The Board of Directors’ determination of independence under the Nasdaq Independence Standards rested upon a finding that each director has no relationship which, in the opinion of the Board of Directors, would interfere with that director’s exercise of independent judgment in carrying out the responsibilities of the director. Since under Finance Agency regulations, each independent director must be a bona fide resident of our district, and each member director must be an officer or director of one of our members, the Board of Directors included in its consideration whether any of these relationships would interfere with the exercise of independent judgment of a particular director.
 
Committee Independence
Audit Committee: In addition to the Nasdaq Independence Standards for committee members, our Audit Committee members are subject to the independence standards of the Finance Agency. Finance Agency regulations state that a director will be considered sufficiently independent to serve as an Audit Committee member if that director does not have a disqualifying relationship with the FHLBank or its management that would interfere with the exercise of that director’s independent judgment. Disqualifying relationships include but are not limited to:
Being employed by the FHLBank in the current year or any of the past five years;
Accepting compensation from the FHLBank other than compensation for service as a director;
Serving or having served in any of the past five years as a consultant, advisor, promoter, underwriter, or legal counsel of the FHLBank; or
Being an immediate family member of an individual who is, or has been in any of the past five years, employed by the FHLBank as an executive officer.
 
In addition to the independence standards for Audit Committee members required under the Finance Agency regulations, Section 10A(m) of the Exchange Act sets forth the independence requirements of directors serving on the Audit Committee of a listed company under the Exchange Act. Under Section 10A(m), in order to be considered independent, a member of the Audit Committee may not, other than in his or her capacity as a member of the Board of Directors or any other Board Committee: (1) accept any consulting, advisory, or other compensation from the FHLBank; or (2) be an affiliated person of the FHLBank.
 
All members of our Audit Committee were independent under the Finance Agency’s audit committee independence criteria and under the independence criteria of Section 10A(m) of the Exchange Act throughout the period covered by this annual report.
 
The Finance Agency’s criteria for audit committee independence are posted on the corporate governance page of our website at www.fhlbtopeka.com.

Item 14: Principal Accounting Fees and Services
 
Prior to approving PricewaterhouseCoopers LLP as our independent accountants for 2015, the Audit Committee considered whether PricewaterhouseCoopers LLP’s provision of services other than audit services is compatible with maintaining the accountants’ independence. The Audit Committee’s policy is to pre-approve all audit, audit-related, and permissible non-audit services provided by our independent accountants. The Audit Committee pre-approved all such services provided by the independent accountants during 2015 and 2014. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent accountants and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent accountants in accordance with its pre-approval and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.
 
Table 87 sets forth the aggregate fees we were billed for the years ended December 31, 2015 and 2014 by our external accounting firm, PricewaterhouseCoopers LLP (in thousands):
 
Table 87
 
2015
2014
Audit fees
$
727

$
662

Audit-related fees
99

51

Tax fees


All other fees
20


TOTAL
$
846

$
713



124


Audit fees during the years ended December 31, 2015 and 2014 were for professional services rendered for the audits of our annual financial statements and review of financial statements included in our annual reports on Form 10-K and quarterly reports on Form 10‑Q.
 
Audit-related fees during the years ended December 31, 2015 and 2014 were for discussions regarding miscellaneous accounting-related matters.

We are assessed our proportionate share of the costs of operating the Office of Finance, which includes the expenses associated with the annual audits of the combined financial statements of the 11 FHLBanks. The audit fees for the combined financial statements are billed directly by PricewaterhouseCoopers LLP to the Office of Finance and we are assessed our proportionate share of these expenses. In 2015 and 2014, we were assessed $30,000 and $25,000, respectively, for the costs associated with PricewaterhouseCoopers LLP’s audits of the combined financial statements for those years. These assessments are not included in the table above.

We are exempt from all federal, state and local taxation, with the exception of real property tax. Therefore, no tax consultation fees were paid during the years ended December 31, 2015 and 2014.

All other fees during the year ended December 31, 2015 were for consulting fees related to a private health care exchange feasibility study on behalf of all FHLBanks.


PART IV
 
Item 15: Exhibits, Financial Statement Schedules
 
a)
The financial statements included as part of this Form 10-K are identified in the index to Audited Financial Statements appearing in Item 8 of this Form 10-K and which index is incorporated in this Item 15 by reference.
b)
Exhibits.
 
We have incorporated by reference certain exhibits as specified below pursuant to Rule 12b-32 under the Exchange Act.
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
Federal Home Loan Bank of Topeka Amended and Restated Bylaws.
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.
10.1*
Exhibit 10.3 to the Current Report on Form 8-K, filed December 23, 2014, Federal Home Loan Bank of Topeka Benefit Equalization Plan, is incorporated herein by reference as Exhibit 10.1.
10.2
Exhibit 10.4 to the Form 10 Registration Statement, Federal Home Loan Bank of Topeka Office Complex Lease Agreement, is incorporated herein by reference as Exhibit 10.2.
10.2.1
Exhibit 10.4.1 to the Form 10 Registration Statement, Federal Home Loan Bank of Topeka Office Complex Lease Amendment, is incorporated herein by reference as Exhibit 10.2.1.
10.2.2
Exhibit 10.4.2 to the Form 10 Registration Statement, Federal Home Loan Bank of Topeka Office Second Complex Lease Amendment, is incorporated herein by reference as Exhibit 10.2.2.
10.2.3
Exhibit 10.2.3 to the 2013 Annual Report on Form 10-K, filed March 14, 2014, Federal Home Loan Bank of Topeka Office Third Complex Lease Amendment, is incorporated herein by reference as Exhibit 10.2.3
10.3
Exhibit 10.6 to the 2009 Annual Report on Form 10-K, filed March 25, 2010, Federal Home Loan Bank of Topeka Form of Advance, Pledge and Security Agreement (Specific Pledge), is incorporated herein by reference as Exhibit 10.4.
10.4
Exhibit 10.5 to the 2012 Annual Report on Form 10-K, filed March 15, 2013, Federal Home Loan Bank of Topeka Form of Advance, Pledge and Security Agreement (Blanket Pledge), is incorporated herein by reference as Exhibit 10.5.
10.5
Exhibit 10.6 to the 2013 Annual Report on Form 10-K, filed March 14, 2014, Federal Home Loan Bank of Topeka Form of Confirmation of Advance, is incorporated herein by reference as Exhibit 10.6.
10.6*
Federal Home Loan Bank of Topeka Executive Incentive Compensation Plan.
10.7*
Exhibit 10.1 to the Current Report on Form 8-K, filed March 2, 2016, Federal Home Loan Bank of Topeka 2012 Executive Incentive Compensation Plan Targets, is incorporated herein by reference as Exhibit 10.9.

125


10.8*
Exhibit 10.2 to the Current Report on Form 8-K, filed March 2, 2016, Federal Home Loan Bank of Topeka 2013 Executive Incentive Compensation Plan Targets, is incorporated herein by reference as Exhibit 10.10.
10.9*
Exhibit 10.1 to the Current Report on Form 8-K, filed January 21, 2016, Federal Home Loan Bank of Topeka 2014 Executive Incentive Compensation Plan Targets, is incorporated herein by reference as Exhibit 10.11.
10.10*
Exhibit 10.2 to the Current Report on Form 8-K, filed January 21, 2016, Federal Home Loan Bank of Topeka 2015 Executive Incentive Compensation Plan Targets, is incorporated herein by reference as Exhibit 10.12.
10.11*
Exhibit 10.3 to the Current Report on Form 8-K, filed December 21, 2011, Federal Home Loan Bank of Topeka “Transitional” Long-Term Incentive Plan, is incorporated herein by reference as Exhibit 10.13.
10.12*
Exhibit 10.1 to the Current Report on Form 8-K, filed July 20, 2015, Federal Home Loan Bank of Topeka, Change in Control Plan, is incorporated herein by reference as Exhibit 10.14.
10.13*
Exhibit 10.2 to the Current Report on Form 8-K, filed July 20, 2015, Federal Home Loan Bank of Topeka, NEO Severance Policy, is incorporated herein by reference as Exhibit 10.14.
10.14*
Exhibit 10.1 to the Current Report on Form 8-K, filed November 6, 2014 Federal Home Loan Bank of Topeka 2015 Board of Directors Compensation Policy, is incorporated herein by reference as Exhibit 10.15.
10.15*
Exhibit 10.1 to the Current Report on Form 8-K, filed November 3, 2015 Federal Home Loan Bank of Topeka 2016 Board of Directors Compensation Policy, is incorporated herein by reference as Exhibit 10.16.
10.16*
Federal Home Loan Bank of Topeka 2016 Executive Incentive Compensation Plan Targets
12.1
Federal Home Loan Bank of Topeka Statements of Computation of Ratios.
14.1
Federal Home Loan Bank of Topeka Code of Ethics.
24.1
Power of Attorney.
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 Financial 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 Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1
Federal Home Loan Bank of Topeka Audit Committee Charter.
99.2
Federal Home Loan Bank of Topeka Audit Committee Report.
99.3
Federal Home Loan Bank Amended and Restated Bylaws marked copy with amendments.
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
                    
* 
Represents a management contract or a compensatory plan or arrangement.
** 
The financial information contained in these XBRL documents is unaudited.

126



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
 
 
 
 
March 10, 2016
By: /s/ Andrew J. Jetter
Date
Andrew J. Jetter
 
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the dates indicated.
Signature
Title
Date
 
 
 
/s/Andrew J. Jetter
President and Chief Executive Officer
March 10, 2016
Andrew J. Jetter
(principal executive officer)
 
 
 
 
/s/William W. Osborn
Senior Vice President and Chief Financial Officer
March 10, 2016
William W. Osborn
(principal financial officer)
 
 
 
 
/s/Denise L. Cauthon
Senior Vice President and Chief Accounting Officer
March 10, 2016
Denise L. Cauthon
(principal accounting officer)
 
 
 
 
/s/G. Bridger Cox1
Chairman of the Board of Directors
March 10, 2016
G. Bridger Cox
 
 
 
 
 
/s/Robert E. Caldwell, II1
Vice Chairman of the Board of Directors
March 10, 2016
Robert E. Caldwell, II
 
 
 
 
 
/s/Milroy A. Alexander1
Director
March 10, 2016
Milroy A. Alexander
 
 
 
 
 
/s/Holly Easterling1
Director
March 10, 2016
Holly Easterling
 
 
 
 
 
/s/James R. Hamby1
Director
March 10, 2016
James R. Hamby 
 
 
 
 
 
/s/Andrew C. Hove, Jr.1
Director
March 10, 2016
Andrew C. Hove, Jr.
 
 
 
 
 
/s/Michael B. Jacobson1
Director
March 10, 2016
Michael B. Jacobson
 
 
 
 
 
/s/Jane C. Knight1
Director
March 10, 2016
Jane C. Knight
 
 
 
 
 
/s/Richard S. Masinton1
Director
March 10, 2016
Richard S. Masinton
 
 
 
 
 
/s/Neil F. M. McKay1
Director
March 10, 2016
Neil F. M. McKay
 
 

127


 
 
 
/s/L. Kent Needham1
Director
March 10, 2016
L. Kent Needham
 
 
 
 
 
/s/Mark J. O’Connor1
Director
March 10, 2016
Mark J. O’Connor
 
 
 
 
 
 
Director
March 10, 2016
Thomas H. Olson, Jr.
 
 
 
 
 
/s/Mark W. Schifferdecker1
Director
March 10, 2016
Mark W. Schifferdecker
 
 
 
 
 
/s/Bruce A. Schriefer1
Director
March 10, 2016
Bruce A. Schriefer
 
 
 
 
 
/s/Douglas E. Tippens1
Director
March 10, 2016
Douglas E. Tippens
 
 
1 
Pursuant to Power of Attorney

128


Management’s Report on Internal Control over Financial Reporting

 
Management of the Federal Home Loan Bank of Topeka (FHLBank) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. The FHLBank’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the FHLBank’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the FHLBank are being made only in accordance with authorizations of the FHLBank’s management and board of directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the FHLBank’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Management of the FHLBank assessed the effectiveness of the FHLBank’s internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based on this evaluation under the COSO framework, management has concluded that the FHLBank’s internal control over financial reporting was effective as of December 31, 2015.
 
The effectiveness of the FHLBank’s internal control over financial reporting as of December 31, 2015 has been audited by PricewaterhouseCoopers LLP, the FHLBank’s independent registered public accounting firm, as stated in their accompanying report.
 
/s/Andrew J. Jetter
Andrew J. Jetter
President and Chief Executive Officer
 
/s/William W. Osborn
William W. Osborn
Senior Vice President and Chief Financial Officer



F-1


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of the
Federal Home Loan Bank of Topeka:

In our opinion, the accompanying statements of condition and the related statements of income, comprehensive income, capital, and cash flows present fairly, in all material respects, the financial position of the Federal Home Loan Bank of Topeka (the "FHLBank") at December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the FHLBank maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The FHLBank's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the FHLBank's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/PricewaterhouseCoopers LLP

Kansas City, Missouri
March 10, 2016





F-2


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF CONDITION
 
 
(In thousands, except par value)
 
 
 
12/31/2015
12/31/2014
ASSETS
 
 
Cash and due from banks (Note 3)
$
682,670

$
2,545,311

Interest-bearing deposits
100,594

1,163

Securities purchased under agreements to resell (Note 12)
3,945,000

1,225,000

Federal funds sold
2,000,000

2,075,000

 
 
 
Investment securities:
 
 
Trading securities (Note 4)
2,294,606

1,462,049

Available-for-sale securities1 (Note 4)
495,063


Held-to-maturity securities2 (Note 4)
4,770,817

4,857,187

Total investment securities
7,560,486

6,319,236

 
 
 
Advances (Notes 5, 7, 18)
23,580,371

18,302,950

 
 
 
Mortgage loans held for portfolio, net:
 
 
Mortgage loans held for portfolio (Notes 6, 7, 18)
6,392,680

6,234,722

Less allowance for credit losses on mortgage loans (Note 7)
(1,972
)
(4,550
)
Mortgage loans held for portfolio, net
6,390,708

6,230,172

 
 
 
Accrued interest receivable
79,233

70,923

Premises, software and equipment, net
8,306

10,439

Derivative assets, net (Notes 8, 12)
51,591

32,983

Other assets (Note 17)
36,695

40,800

 
 
 
TOTAL ASSETS
$
44,435,654

$
36,853,977

 
 
 
LIABILITIES
 
 
Deposits (Notes 9, 18)
$
759,366

$
595,775

 
 
 
Consolidated obligations, net:
 
 
Discount notes (Notes 10, 17)
21,813,746

14,219,612

Bonds (Notes 10, 17)
19,875,255

20,221,002

Total consolidated obligations, net
41,689,001

34,440,614

 
 
 
Mandatorily redeemable capital stock (Note 13)
2,739

4,187

Accrued interest payable
52,281

58,243

Affordable Housing Program payable (Note 11)
28,011

30,863

Derivative liabilities, net (Notes 8, 12)
31,492

35,292

Other liabilities (Notes 15, 17)
31,012

103,736

 
 
 
TOTAL LIABILITIES
42,593,902

35,268,710

 
 
 
Commitments and contingencies (Note 17)


 
 
 

1    Amortized cost: $503,640 and $0 as of December 31, 2015 and December 31, 2014, respectively.
2    Fair value:$4,765,095 and $4,869,042 as of December 31, 2015 and December 31, 2014, respectively.
The accompanying notes are an integral part of these financial statements.
F-3


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF CONDITION
 
 
(In thousands, except par value)
 
 
 
12/31/2015
12/31/2014
CAPITAL
 
 
Capital stock outstanding - putable:
 
 
Class A ($100 par value; 1,797 and 2,083 shares issued and outstanding) (Notes 13, 18)
$
179,683

$
208,273

Class B ($100 par value; 10,293 and 7,657 shares issued and outstanding) (Notes 13, 18)
1,029,264

765,768

Total capital stock
1,208,947

974,041

 
 
 
Retained earnings:
 
 
Unrestricted
560,166

554,189

Restricted (Note 13)
91,616

72,944

Total retained earnings
651,782

627,133

 
 
 
Accumulated other comprehensive income (loss) (Note 14)
(18,977
)
(15,907
)
 
 
 
TOTAL CAPITAL
1,841,752

1,585,267

 
 
 
TOTAL LIABILITIES AND CAPITAL
$
44,435,654

$
36,853,977



The accompanying notes are an integral part of these financial statements.
F-4


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
 
STATEMENTS OF INCOME
 
 
 
(In thousands)
 
 
 
 
Year Ended December 31,
 
2015
2014
2013
INTEREST INCOME:
 
 
 
Interest-bearing deposits
$
241

$
169

$
311

Securities purchased under agreements to resell
4,371

575

1,027

Federal funds sold
2,131

1,368

1,346

Trading securities (Note 4)
66,017

50,271

56,895

Available-for-sale securities (Note 4)
956



Held-to-maturity securities (Note 4)
39,862

46,109

57,748

Advances (Note 5)
143,279

121,597

124,332

Prepayment fees on terminated advances (Note 5)
2,410

2,151

4,109

Mortgage loans held for portfolio (Note 6)
204,778

204,547

195,644

Other
1,385

1,514

1,653

Total interest income
465,430

428,301

443,065

 
 
 
 
INTEREST EXPENSE:
 
 
 
Deposits (Note 9)
590

770

983

Consolidated obligations:
 
 
 
Discount notes (Note 10)
21,585

9,242

8,884

Bonds (Note 10)
203,283

192,910

215,239

Mandatorily redeemable capital stock (Note 13)
39

40

25

Other
253

174

161

Total interest expense
225,750

203,136

225,292

 
 
 
 
NET INTEREST INCOME
239,680

225,165

217,773

(Reversal) provision for credit losses on mortgage loans (Note 7)
(1,909
)
(1,615
)
1,926

NET INTEREST INCOME AFTER LOAN LOSS (REVERSAL) PROVISION
241,589

226,780

215,847

 
 
 
 
OTHER INCOME (LOSS):
 
 
 
Total other-than-temporary impairment losses on held-to-maturity securities (Note 4)
(281
)
(4
)
(27
)
Net amount of impairment losses on held-to-maturity securities reclassified to/(from) accumulated other comprehensive income (loss)
(545
)
(516
)
(503
)
Net other-than-temporary impairment losses on held-to-maturity securities (Note 4)
(826
)
(520
)
(530
)
Net gain (loss) on trading securities (Note 4)
(47,991
)
(28,699
)
(50,985
)
Net gain (loss) on sale of held-to-maturity securities (Note 4)
390



Net gain (loss) on derivatives and hedging activities (Note 8)
(42,843
)
(38,230
)
10,107

Standby bond purchase agreement commitment fees
5,654

6,278

5,343

Letters of credit fees
3,233

3,069

3,044

Other
2,294

2,252

2,203

Total other income (loss)
(80,089
)
(55,850
)
(30,818
)
 
 
 
 

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


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
 
STATEMENTS OF INCOME
 
 
 
(In thousands)
 
 
 
 
Year Ended December 31,
 
2015
2014
2013
OTHER EXPENSES:
 
 
 
Compensation and benefits (Note 15)
$
33,175

$
30,282

$
29,541

Other operating (Note 17)
15,275

13,670

13,636

Federal Housing Finance Agency
2,410

2,468

2,426

Office of Finance
2,672

2,249

2,454

Other
4,230

4,474

4,705

Total other expenses
57,762

53,143

52,762

 
 
 
 
INCOME BEFORE ASSESSMENTS
103,738

117,787

132,267

 
 
 
 
Affordable Housing Program (Note 11)
10,378

11,783

13,229

 
 
 
 
NET INCOME
$
93,360

$
106,004

$
119,038



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


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
 
STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
(In thousands)
 
 
Year Ended December 31,
 
2015
2014
2013
Net income
$
93,360

$
106,004

$
119,038

 
 
 
 
Other comprehensive income:
 
 
 
Net unrealized gain (loss) on available-for-sale securities:
 
 
 
Unrealized gain (loss)
(8,577
)


Total net unrealized gains/losses on available-for-sale securities
(8,577
)


 
 
 
 
Net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities:
 
 
 
Non-credit portion
(206
)
(4
)
(19
)
Reclassification of non-credit portion included in net income
751

520

522

Accretion of non-credit portion
3,012

3,713

4,340

Non-credit portion included in basis of securities sold
267



Total net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities
3,824

4,229

4,843

 
 
 
 
Defined benefit pension plan:
 
 
 
Net gain (loss)
1,268

(1,923
)
1,667

Amortization of net loss
415

148

386

Total defined benefit pension plan
1,683

(1,775
)
2,053

 
 
 
 
Total other comprehensive income
(3,070
)
2,454

6,896

 
 
 
 
TOTAL COMPREHENSIVE INCOME
$
90,290

$
108,458

$
125,934

 


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


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
 
 
 
 
 
STATEMENTS OF CAPITAL
 
 
 
 
 
 
 
(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, 2012
4,053

$
405,304

8,592

$
859,152

12,645

$
1,264,456

$
453,346

$
27,936

$
481,282

$
(25,257
)
$
1,720,481

Proceeds from issuance of capital stock
15

1,451

5,023

502,299

5,038

503,750

 
 
 
 
503,750

Repurchase/redemption of capital stock
(1,711
)
(171,051
)
(208
)
(20,762
)
(1,919
)
(191,813
)
 
 
 
 
(191,813
)
Comprehensive income
 
 
 
 
 
 
95,231

23,807

119,038

6,896

125,934

Net reclassification of shares to mandatorily redeemable capital stock
(807
)
(80,680
)
(2,762
)
(276,161
)
(3,569
)
(356,841
)
 
 
 
 
(356,841
)
Net transfer of shares between Class A and Class B
2,750

275,039

(2,750
)
(275,039
)


 
 
 
 

Dividends on capital stock (Class A - 0.3%, Class B - 3.6%):
 
 
 
 
 
 
 
 
 
 
 
Cash payment
 
 
 
 
 
 
(291
)
 
(291
)
 
(291
)
Stock issued
 
 
327

32,697

327

32,697

(32,697
)
 
(32,697
)
 

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
14

1,439

7,805

780,551

7,819

781,990

 
 
 
 
781,990

Repurchase/redemption of capital stock
(6,987
)
(698,795
)
(135
)
(13,459
)
(7,122
)
(712,254
)
 
 
 
 
(712,254
)
Comprehensive income
 
 
 
 
 
 
84,803

21,201

106,004

2,454

108,458

Net reclassification of shares to mandatorily redeemable capital stock
(297
)
(29,728
)
(3,641
)
(364,120
)
(3,938
)
(393,848
)
 
 
 
 
(393,848
)
Net transfer of shares between Class A and Class B
5,053

505,294

(5,053
)
(505,294
)


 
 
 
 

Dividends on capital stock (Class A - 0.7%, Class B - 5.3%):
 
 
 
 
 
 
 
 
 
 
 
Cash payment
 
 
 
 
 
 
(299
)
 
(299
)
 
(299
)
Stock issued
 
 
459

45,904

459

45,904

(45,904
)
 
(45,904
)
 

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
19

1,857

12,237

1,223,719

12,256

1,225,576

 
 
 
 
1,225,576

Repurchase/redemption of capital stock
(4,613
)
(461,319
)
(115
)
(11,574
)
(4,728
)
(472,893
)
 
 
 
 
(472,893
)
Comprehensive income
 
 
 
 




74,688

18,672

93,360

(3,070
)
90,290

Net reclassification of shares to mandatorily redeemable capital stock
(220
)
(21,952
)
(5,642
)
(564,240
)
(5,862
)
(586,192
)
 
 
 
 
(586,192
)
Net transfer of shares between Class A and Class B
4,528

452,824

(4,528
)
(452,824
)


 
 
 
 

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




 
 
 
 
 

Cash payment
 
 
 
 




(296
)
 
(296
)
 
(296
)
Stock issued
 
 
684

68,415

684

68,415

(68,415
)
 
(68,415
)
 

Balance at December 31, 2015
1,797
$
179,683

10,293
$
1,029,264

12,090
$
1,208,947

$
560,166

$
91,616

$
651,782

$
(18,977
)
$
1,841,752

                   
1    Putable


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


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
 
STATEMENTS OF CASH FLOWS
 
 
 
(In thousands)
 
 
 
 
Year Ended December 31,
 
2015
2014
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
93,360

$
106,004

$
119,038

Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization:
 
 
 
Premiums and discounts on consolidated obligations, net
(13,982
)
(16,681
)
(30,258
)
Concessions on consolidated obligations
6,277

5,336

5,913

Premiums and discounts on investments, net
704

(1
)
(1,563
)
Premiums, discounts and commitment fees on advances, net
(9,880
)
(13,252
)
(15,129
)
Premiums, discounts and deferred loan costs on mortgage loans, net
19,237

15,129

20,119

Fair value adjustments on hedged assets or liabilities
10,300

13,256

14,862

Premises, software and equipment
2,193

1,908

1,943

Other
415

148

386

(Reversal) provision for credit losses on mortgage loans
(1,909
)
(1,615
)
1,926

Non-cash interest on mandatorily redeemable capital stock
34

38

23

Net realized (gain) loss on sale of held-to-maturity securities
(390
)


Net other-than-temporary impairment losses on held-to-maturity securities
826

520

530

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

(17
)
Other adjustments
(143
)
(70
)
160

Net (gain) loss on trading securities
47,991

28,699

50,985

(Gain) loss due to change in net fair value adjustment on derivative and hedging activities
54,710

55,779

676

(Increase) decrease in accrued interest receivable
(8,344
)
1,664

4,948

Change in net accrued interest included in derivative assets
10,982

3,993

4,030

(Increase) decrease in other assets
1,048

1,989

1,516

Increase (decrease) in accrued interest payable
(5,962
)
(4,204
)
(19,354
)
Change in net accrued interest included in derivative liabilities
(4,306
)
(3,170
)
3,881

Increase (decrease) in Affordable Housing Program liability
(2,852
)
(4,401
)
4,066

Increase (decrease) in other liabilities
426

(862
)
5

Total adjustments
107,358

84,209

49,648

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
200,718

190,213

168,686

 
 
 
 

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


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
 
STATEMENTS OF CASH FLOWS
 
 
 
(In thousands)
 
 
 
 
Year Ended December 31,
 
2015
2014
2013
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Net (increase) decrease in interest-bearing deposits
$
(80,744
)
$
35,581

$
91,882

Net (increase) decrease in securities purchased under resale agreements
(2,720,000
)
(1,225,000
)
1,999,288

Net (increase) decrease in Federal funds sold
75,000

(1,500,000
)
275,000

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

124,964

Proceeds from maturities of and principal repayments on long-term trading securities
321,621

954,029

384,447

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

(500,278
)
Proceeds from maturities of and principal repayments on long-term available-for-sale securities
162



Purchases of long-term available-for-sale securities
(505,049
)


Proceeds from sale of held-to-maturity securities
4,106



Proceeds from maturities of and principal repayments on long-term held-to-maturity securities
1,234,879

983,421

1,481,409

Purchases of long-term held-to-maturity securities
(1,222,058
)
(340,977
)
(1,739,417
)
Principal collected on advances
93,175,453

63,677,664

69,055,650

Advances made
(98,504,544
)
(64,624,457
)
(70,118,546
)
Principal collected on mortgage loans
1,004,008

774,013

1,210,217

Purchases of mortgage loans
(1,187,231
)
(1,070,975
)
(1,252,622
)
Proceeds from sale of foreclosed assets
5,577

4,791

5,072

Principal collected on other loans made
2,232

2,113

1,975

Proceeds from sale of premises, software and equipment

2

48

Purchases of premises, software and equipment
(1,058
)
(1,209
)
(4,246
)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
(9,599,815
)
(2,071,004
)
1,014,843

 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase (decrease) in deposits
156,178

(364,366
)
(219,403
)
Net proceeds from issuance of consolidated obligations:
 
 
 
Discount notes
309,022,332

53,852,808

83,223,175

Bonds
14,135,837

10,282,272

8,490,711

Payments for maturing and retired consolidated obligations:
 
 
 
Discount notes
(301,432,848
)
(50,524,180
)
(81,002,894
)
Bonds
(14,467,800
)
(10,154,700
)
(10,229,500
)
Proceeds from financing derivatives
14,119


170

Net interest payments received (paid) for financing derivatives
(56,075
)
(54,646
)
(55,726
)
Proceeds from issuance of capital stock
1,225,576

781,990

503,750

Payments for repurchase/redemption of capital stock
(472,893
)
(712,254
)
(191,813
)
Payments for repurchase of mandatorily redeemable capital stock
(587,674
)
(394,463
)
(357,765
)
Cash dividends paid
(296
)
(299
)
(291
)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
7,536,456

2,712,162

160,414

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(1,862,641
)
831,371

1,343,943

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

1,713,940

369,997

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
682,670

$
2,545,311

$
1,713,940

 
 
 
 
Supplemental disclosures:
 
 
 
Interest paid
$
223,684

$
206,876

$
238,078

 
 
 
 

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


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
 
STATEMENTS OF CASH FLOWS
 
 
 
(In thousands)
 
 
 
 
Year Ended December 31,
 
2015
2014
2013
Affordable Housing Program payments
$
13,413

$
16,429

$
10,245

 
 
 
 
Net transfers of mortgage loans to real estate owned
$
4,267

$
4,391

$
5,438


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



FEDERAL HOME LOAN BANK OF TOPEKA
Notes to Financial Statements
For the years ended December 31, 2015, 2014 and 2013

BACKGROUND INFORMATION

The Federal Home Loan Bank of Topeka (FHLBank or FHLBank Topeka), a federally chartered corporation, is one of 11 district Federal Home Loan Banks (FHLBanks). The FHLBanks are government-sponsored enterprises (GSE) that serve the public by enhancing the availability of credit for residential mortgages and targeted community development and provide a readily available, competitively-priced source of funds to their members. The FHLBank is a cooperative whose member institutions own substantially all of the outstanding capital stock of the FHLBank and generally receive dividends on their stock investments. Regulated financial depositories and insurance companies engaged in residential housing finance whose principal place of business is located in Colorado, Kansas, Nebraska or Oklahoma are eligible to apply for membership. Additionally, qualified community development financial institutions are eligible for membership. State and local housing authorities that meet certain statutory requirements may become housing associates of the FHLBank and also be eligible to borrow from the FHLBank. While eligible to borrow, housing associates are not members of the FHLBank and therefore are not permitted or required to hold capital stock.

All members are required to purchase stock in the FHLBank located in their district in accordance with the capital plan of that particular FHLBank. Under FHLBank Topeka’s capital plan, members must own capital stock in the FHLBank based on the amount of their total assets. Each member is also required to purchase activity-based capital stock as it engages in certain business activities with the FHLBank, including advances. Former members that still have outstanding business transactions with the FHLBank are also required to maintain their investments in FHLBank capital stock until the transactions mature or are paid off. As a result of these requirements, the FHLBank conducts business with members in the ordinary course of its business. For financial reporting purposes, the FHLBank defines related parties as those members: (1) with investments in excess of 10 percent of the FHLBank’s total regulatory capital stock outstanding, which includes mandatorily redeemable capital stock; or (2) with an officer or director serving on the FHLBank’s board of directors. See Note 18 for more information on related party transactions.

The FHLBanks are supervised and regulated by the Federal Housing Finance Agency (Finance Agency), an independent agency in the executive branch of the U.S. government. The Finance Agency’s stated 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. Each FHLBank is operated as a separate entity and has its own management, employees and board of directors. The FHLBanks do not have any special purpose entities or any other type of off-balance sheet conduits.

The FHLBanks have established a joint office called the Office of Finance to facilitate the issuance and servicing of the debt instruments of the FHLBanks, known as consolidated obligation bonds and consolidated obligation discount notes (collectively referred to as consolidated obligations) and to prepare the combined quarterly and annual financial reports of the FHLBanks. As provided by the Federal Home Loan Bank Act of 1932, as amended (Bank Act), and applicable regulations, consolidated obligations are backed only by the financial resources of the FHLBanks. Consolidated obligations are the primary source of funds for the FHLBanks in addition to deposits, other borrowings and capital stock issued to members. The FHLBank primarily uses these funds to provide advances to members and to acquire mortgage loans from members through the Mortgage Partnership Finance® (MPF®) Program. "Mortgage Partnership Finance," "MPF," and "MPF Xtra" are registered trademarks of the FHLBank of Chicago. In addition, the FHLBank also offers correspondent services such as wire transfer, security safekeeping and settlement services.


NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).

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


F-12


Fair Values: The fair value amounts, recorded on the Statements of Condition and presented in the note disclosures for the periods presented, 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 these financial instruments, there are inherent limitations in any valuation technique. Therefore, these fair values may not be indicative of the amounts that would have been realized in market transactions at the reporting dates. See Note 16 for more information.

Cash Flows: For purposes of the Statements of Cash Flows, the FHLBank considers cash on hand and non-interest-bearing deposits in banks as cash and cash equivalents.

Financial Instruments Meeting Netting Requirements: The FHLBank presents certain financial instruments, including derivatives, repurchase agreements and securities purchased under agreements to resell, on a net basis when it has a legal right of offset and all other requirements for netting are met (collectively referred to as the netting requirements). For these financial instruments, the FHLBank has elected to offset its asset and liability positions, as well as cash collateral received or pledged, when it has met the netting requirements. The net exposure for these financial instruments can change on a daily basis; therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested and the time when this collateral is received or pledged. Likewise, there may be a delay for excess collateral to be returned. See Note 12 for additional information regarding these financial instruments.

For derivative instruments that meet the netting requirements, any excess cash collateral received or pledged is recognized as a derivative liability or derivative asset. See Note 8 for additional information regarding these agreements.

Interest-bearing Deposits, Securities Purchased Under Agreements to Resell and Federal Funds Sold: These investments provide short-term liquidity and are carried at cost. The FHLBank treats securities purchased under agreements to resell as short-term collateralized loans, which are classified as assets on the Statements of Condition. Securities purchased under agreements to resell are held in safekeeping in the FHLBank’s name by third-party custodians approved by the FHLBank. If the fair value of the underlying securities decreases below the fair value required as collateral, the counterparty has the option to: (1) place an equivalent amount of additional securities in safekeeping in the FHLBank’s name; or (2) remit an equivalent amount of cash; otherwise, the dollar value of the resale agreement will be decreased accordingly. Federal funds sold consist of short-term unsecured loans generally transacted with counterparties that are considered by the FHLBank to be of investment quality.

Investment Securities: The FHLBank classifies investments as trading, available-for-sale and held-to-maturity at the date of acquisition. Purchases and sales of securities are recorded on a trade date basis.

Trading: Securities classified as trading are either held for liquidity purposes, swapped and classified as trading to provide a fair value offset to the gains (losses) on the interest rate swaps tied to the securities, or acquired as asset/liability management tools and carried at fair value. The FHLBank records changes in the fair value of these securities through other income (loss) as net gains (losses) on trading securities. Finance Agency regulation and the FHLBank’s Risk Management Policy (RMP) prohibit trading in or the speculative use of these instruments and limits credit risk arising from these instruments. While the FHLBank classifies certain securities as trading for financial reporting purposes, it does not actively trade any of these securities with the intent of realizing gains and holds these investments indefinitely as management periodically evaluates its asset/liability and liquidity needs. Short-term money market investments with maturities of three months or less are acquired and classified as trading securities primarily for liquidity purposes. These short-term money market investments are periodically sold to meet the FHLBank’s cash flow needs.

Available-for-Sale: Securities that are not classified as trading or held-to-maturity are classified as available-for-sale and are carried at fair value. The change in fair value of available-for-sale securities is recorded in other comprehensive income (loss) (OCI) as net unrealized gains (losses) on available-for-sale securities. For available-for-sale securities that have been hedged and the hedge relationships qualify as benchmark fair value hedges, the FHLBank records the portion of the change in value related to the risk being hedged in non-interest income as net gains (losses) on derivatives and hedging activities together with the related change in the fair value of the derivative, and records the remainder of the change in the fair value of the investment in OCI as net unrealized gains (losses) on available-for-sale securities.

Held-to-Maturity: Securities that the FHLBank has both the ability and intent to hold to maturity are classified as held-to-maturity and are carried at cost, adjusted for periodic principal repayments, amortization of premiums, accretion of discounts and other-than-temporary impairment (OTTI) recognized in net income and OCI.


F-13


The FHLBank may change its intent to hold to maturity a held-to-maturity investment without changing its intent to hold to maturity other held-to-maturity investments for the following circumstances: (1) evidence of a significant deterioration in the issuer’s creditworthiness; (2) a change in statutory or regulatory requirements significantly modifying either what constitutes a permissible investment or the maximum level of investments in certain kinds of investments, thereby causing the FHLBank to dispose of a held-to-maturity investment; (3) a significant increase by a regulator in the FHLBank’s capital requirements that causes the FHLBank to downsize by selling held-to-maturity investments; or (4) a significant increase in the risk weights of debt securities used for regulatory risk-based capital purposes. The FHLBank considers the following situations maturities for purposes of assessing ability and intent to hold to maturity: (1) the sale of the security is near enough to maturity (or call date if exercise of the call is probable) that interest rate risk is substantially eliminated as a pricing factor and the changes in market interest rates would not have a significant effect on the security’s fair value; or (2) the sale of a security occurs after the FHLBank has already collected a substantial portion (at least 85 percent) of the principal outstanding at acquisition either due to prepayments on the debt security or to scheduled payments on a debt security payable in equal installments (both principal and interest) over its term.

Premiums and Discounts: The FHLBank computes the amortization of purchased premiums and accretion of purchased discounts on mortgage-backed securities (MBS) using the level-yield method over the estimated cash flows of the securities. This method requires a retrospective adjustment of the effective yield each time the FHLBank receives a principal repayment or changes the estimated remaining cash flows as if the actual principal repayments and new estimated cash flows had been known since the original acquisition dates of the securities. The FHLBank uses nationally recognized, market-based third-party prepayment models to estimate future cash flows. The FHLBank computes the amortization of premiums and accretion of discounts on other investments using the level-yield method to the contractual maturities of the securities.

Gains and Losses on Sales: Gains and losses on the sales of investment securities are computed using the specific identification method and are included in other income (loss).

Investment Securities - Other-than-temporary Impairment: The FHLBank evaluates its individual available-for-sale and held-to-maturity investment securities in an unrealized loss position for OTTI at least quarterly, or more frequently if events or changes in circumstances indicate that these investments may be other-than-temporarily impaired. An investment is considered impaired when its fair value is less than its amortized cost basis. The FHLBank considers an OTTI to have occurred under any of the following circumstances:
The FHLBank has the intent to sell the impaired debt security;
The FHLBank believes, based on available evidence, it is more likely than not that it will be required to sell the debt security before the recovery of its amortized cost basis; or
The FHLBank does not expect to recover the entire amortized cost basis of the impaired debt security.

Recognition of OTTI: If either of the first two conditions above is met, the FHLBank recognizes an OTTI charge in earnings equal to the entire difference between the security’s amortized cost basis and its fair value as of the Statement of Condition date. For securities in an unrealized loss position that meet neither of the first two conditions, the entire loss position, or total OTTI, is evaluated to determine the extent and amount of credit loss.

To determine whether a credit loss exists, the FHLBank performs an analysis, which includes a cash flow analysis for private-label MBS, to determine if it will recover the entire amortized cost basis of each of these securities. The present value of the cash flows expected to be collected is compared to the amortized cost basis of the security to determine if a credit loss exists. If there is a credit loss, the carrying value of the security is adjusted to its fair value. However, rather than recognizing the entire difference between the amortized cost basis and the fair value in earnings, only the amount of the impairment representing the credit loss (i.e., the credit component) is recognized in earnings, while the amount related to all other factors (i.e., the non-credit component) is recognized in OCI. The credit loss on a debt security is limited to the amount of that security’s unrealized losses.

The total OTTI is presented in the Statements of Income with an offset for the amount of the non-credit portion of OTTI that is recognized in OCI. The remaining amount in the Statements of Income represents the credit loss for the period.

Accounting for OTTI Recognized in OCI: For subsequent accounting of other-than-temporarily impaired securities, the FHLBank records an additional OTTI if the present value of cash flows expected to be collected is less than the amortized cost basis. The total amount of this additional OTTI is determined as the difference between its carrying amount prior to the determination of this additional OTTI and its fair value. Additional credit losses related to previously other-than-temporarily impaired securities are reclassified out of OCI into the Statements of Income, but only to the extent of a security’s unrealized losses (i.e., difference between the security’s amortized cost and its fair value). The OTTI recognized in OCI is accreted to the carrying value of each held-to-maturity security on a prospective basis, based on the amount and timing of future estimated cash flows (with no effect on earnings unless the security is subsequently sold or there are additional decreases in cash flows expected to be collected).


F-14


Interest Income Recognition: The FHLBank recognizes subsequent interest income in accordance with the method described in accounting guidance for beneficial interests in securitized financial assets. As of the impairment measurement date, a new accretable yield is calculated for the impaired investment security. This adjusted yield is used to calculate the amount to be recognized into income over the remaining life of the security so as to match the amount and timing of future cash flows expected to be collected. Subsequent changes in estimated cash flows change the accretable yield on a prospective basis. The estimated cash flows and accretable yield are re-evaluated on a quarterly basis.

Advances: The FHLBank presents advances (secured loans to members, former members or housing associates) net of unearned commitment fees, premiums, discounts and fair value basis adjustments. The FHLBank amortizes the premiums and accretes the discounts on advances to interest income using the level-yield method. The FHLBank records interest on advances to interest income as earned.

Advance Modifications: In cases in which the FHLBank funds a new advance concurrently with or within a short period of time before or after the prepayment of an existing advance, the FHLBank evaluates whether the new advance meets the accounting criteria to qualify as a modification of an existing advance or whether it constitutes a new advance. The FHLBank compares the present value of cash flows on the new advance to the present value of cash flows remaining on the existing advance. If there is at least a 10 percent difference in the cash flows or if the FHLBank concludes the differences between the advances are more than minor based on qualitative factors, the advance is accounted for as a new advance. In all other instances, the new advance is accounted for as a modification.

Prepayment Fees: The FHLBank charges prepayment fees to its borrowers when certain advances are repaid before their original maturities. The FHLBank records prepayment fees net of hedging fair value basis adjustments included in the carrying value of the advance, as “Prepayment fees on terminated advances” in the interest income section of its Statements of Income.

If a new advance does not qualify as a modification of an existing advance, it is treated as an advance termination and any prepayment fee, net of hedging adjustments, is recorded to “Prepayment fees on terminated advances” in the interest income section of the Statements of Income.

If the new advance qualifies as a modification, the net prepayment fee received on the prepaid advance is deferred as a discount and included in the basis of the modified advance. The basis adjustment is amortized over the life of the modified advance to advance interest income. If the modified advance is hedged, the fair value gain or loss on the advance and the prepayment fee are included in the carrying amount of the modified advance, and any prior gains or losses and prepayment fees are amortized to interest income over the life of the modified advance using the level-yield method. Modified hedged advances are marked to benchmark fair value after the modification, and subsequent fair value changes are recorded in “Net gain (loss) on derivatives and hedging activities” in other income (loss).

Mortgage Loans Held for Portfolio: The FHLBank carries mortgage loans classified as held for investment at their principal amount outstanding, net of unamortized premiums, unaccreted discounts, deferred loan fees associated with table funded loans, hedging adjustments, unrealized gains and losses from mortgage purchase commitments, charge-offs, and other fees. The FHLBank has the intent and ability to hold these mortgage loans to maturity.

Premiums and Discounts: The FHLBank defers and amortizes/accretes mortgage loan origination fees (agent fees) and premiums and discounts paid to and received from participating financial institutions (PFI) as interest income using the level-yield method over the contractual lives of the loans. This method uses the cash flows required by the loan contracts, as adjusted for actual prepayments, to apply the interest method. The contractual method does not utilize estimates of future prepayments of principal.

Credit Enhancement Fees: The credit enhancement (CE) obligation is an obligation on the part of the PFI that ensures the retention of credit risk on loans it originates on behalf of or sells to the FHLBank. The amount of the CE obligation is determined at the time of purchase so that any losses in excess of the CE obligation for each pool of mortgage loans purchased approximate those experienced by an investor in a double-A rated MBS. As a part of our methodology to determine the amount of credit enhancement necessary, we analyze the risk characteristics of each mortgage loan using a model licensed from a Nationally Recognized Statistical Rating Organization (NRSRO). We use the model to evaluate loan data provided by the PFI as well as other relevant information.

The FHLBank pays the PFI a CE fee for managing this portion of the credit risk in the pool of loans. CE fees are paid monthly based on the remaining unpaid principal balance (UPB) of the loans in a master commitment. The required CE obligation amount may vary depending on the various product alternatives selected by the PFI. CE fees are recorded as an offset to mortgage loan interest income. To the extent the FHLBank experiences a loss in a master commitment, the FHLBank may be able to recapture future performance-based CE fees paid to the PFIs to offset these losses.


F-15


Other Fees: The FHLBank may receive other non-origination fees, such as delivery commitment extension fees and pair-off fees as part of the mark-to-market on derivatives to which they related or as part of the loan basis, as applicable. Delivery commitment extension fees are received when a PFI requires an extension of the delivery commitment period beyond the original stated expiration. These fees compensate the FHLBank for lost interest as a result of late funding and represent the member purchasing a derivative from the FHLBank. Pair-off fees are received from the PFI when the amount funded is more than or less than a specific percentage range of the delivery commitment amount. These fees compensate the FHLBank for hedge costs associated with the under-delivery or over-delivery. To the extent that pair off fees relate to under-deliveries of loans, they are included in the mark-to-market of the related delivery commitment derivative. If they relate to over-deliveries, they represent purchase price adjustments to the related loans acquired and are recorded as a part of the carrying value of the loan.

Allowance for Credit Losses: An allowance for credit losses is a valuation allowance separately established for each identified portfolio segment, if necessary, to provide for probable losses inherent in the FHLBank’s portfolios as of the Statement of Condition date. To the extent necessary, an allowance for credit losses for off-balance sheet credit exposures is recorded as a liability. See Note 7 for details on each allowance methodology.

Portfolio Segments: A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology for determining its allowance for credit losses. The FHLBank has developed and documented a systematic methodology for determining an allowance for credit losses, where applicable, for: (1) credit products (advances, letters of credit and other extensions of credit to members); (2) government-guaranteed or insured mortgage loans held for portfolio; (3) conventional mortgage loans held for portfolio; (4) the direct financing lease receivable; (5) term Federal funds sold; and (6) term securities purchased under agreements to resell.

Classes of Finance Receivables: Classes of finance receivables generally are a disaggregation of a portfolio segment to the extent that it is needed to understand the exposure to credit risk arising from these financing receivables. The FHLBank has determined that no further disaggregation of portfolio segments identified previously is needed as the credit risk arising from these financing receivables is assessed and measured at the portfolio segment level.

Non-accrual Loans: The FHLBank places a conventional mortgage loan on non-accrual status if it is determined that either: (1) the collection of interest or principal is doubtful; or (2) interest or principal is past due for 90 days or more, except when the loan is well-secured (e.g., through credit enhancements) and in the process of collection. The FHLBank does not place government-guaranteed or insured mortgage loans on non-accrual status due to 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. For those mortgage loans placed on non-accrual status, accrued but uncollected interest is reversed against interest income. The FHLBank records cash payments received on non-accrual loans first as interest income and then as a reduction of principal as specified in the contractual agreement, unless the collection of the remaining principal amount due is considered doubtful. If the collection of the remaining principal amount due is considered doubtful then cash payments received would be applied first solely to principal until the remaining principal amount due is expected to be collected and then as a recovery of any charge-off, if applicable, followed by recording interest income. A loan on non-accrual status may be restored to accrual status when: (1) none of its contractual principal and interest is due and unpaid, and the FHLBank expects repayment of the remaining contractual principal and interest; or (2) it otherwise becomes well secured and in the process of collection.

Troubled Debt Restructuring: The FHLBank considers a troubled debt restructuring to have occurred when a concession is granted to a borrower for economic or legal reasons related to the borrower’s financial difficulties and that concession would not have been considered otherwise. Loans that are discharged in Chapter 7 bankruptcy and have not been reaffirmed by the borrowers are also considered to be troubled debt restructurings, except in certain cases where supplemental mortgage insurance policies are held or where all contractual amounts due are still expected to be collected as a result of certain credit enhancements or government guarantees.

Impairment Methodology: A loan is considered impaired when, based on current information and events, it is probable that the FHLBank will be unable to collect all amounts due according to the contractual terms of the loan agreement.

Loans that are on non-accrual status and that are considered collateral-dependent are measured for impairment based on the fair value of the underlying property less estimated selling costs. Loans are considered collateral-dependent if repayment is expected to be provided solely by the sale of the underlying property; that is, there is no other available and reliable source of repayment. Collateral-dependent loans are impaired if the fair value of the underlying collateral is insufficient to recover the recorded investment on the loan. Interest income on impaired loans is recognized in the same manner as non-accrual loans.


F-16


Charge-off Policy: A charge-off is recorded if it is estimated that the recorded investment in a loan will not be recovered. The FHLBank evaluates whether to record a charge-off on a conventional mortgage loan upon the occurrence of a confirming event. Confirming events include, but are not limited to, the occurrence of foreclosure or notification of a claim against any of the credit enhancements. The FHLBank charges off the portion of outstanding conventional mortgage loan balances in excess of fair value of the underlying property, less cost to sell, for loans that are 180 days or more delinquent and certain loans that the borrower has filed for bankruptcy.

Real Estate Owned: Real estate owned (REO) includes assets that have been received in satisfaction of debt through foreclosures. REO is recorded at the lower of cost or fair value less estimated selling costs. The FHLBank recognizes a charge-off to the allowance for credit losses if the fair value of the REO less estimated selling costs is less than the recorded investment in the loan at the date of transfer from loans to REO. Any subsequent gains, losses and carrying costs are included in other expense in the Statements of Income. REO is recorded in other assets on the Statements of Condition.

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

Derivative Designations: Each derivative is designated as one of the following:
a qualifying fair value hedge of the change in fair value of: (1) a recognized asset or liability; or (2) an unrecognized firm commitment;
a qualifying cash flow hedge of: (1) a forecasted transaction; or (2) the variability of cash flows that are to be received or paid in connection with a recognized asset or liability;
a non-qualifying hedge of an asset or liability (an economic hedge) for asset/liability management purposes; or
a non-qualifying hedge of another derivative (an intermediary hedge) that is offered as a product to members.

Accounting for Qualifying Hedges: If hedging relationships meet certain criteria, including, but not limited to, formal documentation of the hedging relationship and an expectation to be highly effective, they qualify for hedge accounting and the offsetting changes in fair value of the hedged items attributable to the hedged risk may be recorded in earnings (fair value hedges) or OCI (cash flow hedges). Two approaches to hedge accounting include:
Long haul hedge accounting - The application of long haul hedge accounting generally requires the FHLBank to formally assess (both at the hedge's inception and at least quarterly) whether the derivatives that are used in hedging transactions have been effective in offsetting changes in the fair value or cash flows of hedged items attributable to the hedged risk or forecasted transactions and whether those derivatives may be expected to remain effective in future periods.
Shortcut hedge accounting - Transactions that meet more stringent criteria qualify for the shortcut method of hedge accounting in which an assumption can be made that the change in fair value of a hedged item, due to changes in the benchmark rate, exactly offsets the change in fair value of the related derivative. Under the shortcut method, the entire change in fair value of the interest rate swap is considered to be effective at achieving offsetting changes in fair values or cash flows of the hedged asset or liability. The FHLBank discontinued using shortcut hedge accounting for all derivative transactions entered into on or after July 1, 2008.

Derivatives are typically executed at the same time as the hedged item, and the FHLBank designates the hedged item in a qualifying hedge relationship at the trade date. In many hedging relationships, the FHLBank may designate the hedging relationship upon its commitment to disburse an advance or trade a consolidated obligation in which settlement occurs within the shortest period of time possible for the type of instrument based on market settlement conventions. The FHLBank defines market settlement conventions for advances to be five business days or less and for consolidated obligations to be thirty calendar days or less, using a next business day convention. The FHLBank then records the changes in fair value of the derivative and the hedged item beginning on the trade date.
 
Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (including changes that reflect losses or gains on firm commitments), are recorded in current period earnings. Changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge, to the extent that the hedge is effective, are recorded in accumulated OCI (AOCI), a component of capital, until earnings are affected by the variability of the cash flows of the hedged transaction (i.e., until the recognition of interest on a variable rate asset or liability is recorded in earnings). For both fair value and cash flow hedges, any hedge ineffectiveness (which represents the amount by which the change in the fair value of the derivative differs from the change in fair value of the hedged item attributable to the hedged risk or the variability in the cash flows of the forecasted transaction) is recorded in current period earnings.


F-17


Accounting for Non-Qualifying Hedges: An economic hedge is defined as a derivative hedging specific or non-specific underlying assets, liabilities or firm commitments that does not qualify for hedge accounting but is an acceptable hedging strategy under the FHLBank’s RMP. These economic hedging strategies also comply with Finance Agency regulatory requirements prohibiting speculative derivative transactions. An economic hedge by definition introduces the potential for earnings variability caused by changes in fair value on the derivatives that are recorded in the FHLBank’s income but not offset by corresponding changes in the fair value of the economically hedged assets, liabilities or firm commitments being recorded simultaneously in income. As a result, the FHLBank recognizes only the net interest and the change in fair value of these derivatives in other income (loss) as “Net gain (loss) on derivatives and hedging activities” with no offsetting fair value adjustments for the assets, liabilities or firm commitments.

The derivatives used in intermediary activities do not qualify for hedge accounting treatment and are separately marked-to-market through earnings. The net result of the accounting for these derivatives does not significantly affect the operating results of the FHLBank. These amounts are recorded in other income (loss) as “Net gains (losses) on derivatives and hedging activities.”

Accrued Interest Receivables and Payables: The differentials between accruals of interest receivables and payables on derivatives designated as fair value or cash flow hedges are recognized as adjustments to the interest income or expense of the designated underlying investment securities, advances, consolidated obligations or other financial instruments, thereby affecting the reported amount of net interest income on the Statements of Income. Changes in the fair value of an economic or intermediary hedge are recorded in current period earnings. The differentials between accruals of interest receivables and payables on intermediated derivatives for members and other economic hedges are recognized as other income (loss). Therefore, both the net interest on the stand-alone derivatives and the fair value changes are recorded in other income (loss) as “Net gain (loss) on derivatives and hedging activities.”

Discontinuance of Hedge Accounting: The FHLBank discontinues hedge accounting prospectively when: (1) it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item attributable to the hedged risk (including hedged items such as firm commitments or forecasted transactions); (2) the derivative and/or the hedged item expires or is sold, terminated or exercised; (3) it is no longer probable that the forecasted transaction will occur in the originally expected period; (4) a hedged firm commitment no longer meets the definition of a firm commitment; or (5) management determines that designating the derivative as a hedging instrument is no longer appropriate.

When hedge accounting is discontinued because the FHLBank determines that the derivative no longer qualifies as an effective fair value hedge of an existing hedged item, the FHLBank continues to carry the derivative on its Statements of Condition at fair value, ceases to adjust the hedged asset or liability for changes in fair value, and begins amortizing the cumulative basis adjustment on the hedged item into earnings over the remaining life of the hedged item using the level-yield method. When hedge accounting is discontinued because the FHLBank determines that the derivative no longer qualifies as an effective cash flow hedge of an existing hedged item, the FHLBank continues to carry the derivative on its Statements of Condition at fair value and amortizes the cumulative OCI adjustment to earnings when earnings are affected by the original forecasted transaction. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the FHLBank carries the derivative at fair value on its Statements of Condition, recognizing changes in the fair value of the derivative in current-period earnings. When the FHLBank discontinues hedge accounting because it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses in AOCI will be recognized immediately in earnings. When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the FHLBank continues to carry the derivative on its Statements of Condition at fair value, removing any asset or liability that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings.

Embedded Derivatives: The FHLBanks may issue debt, make advances, or purchase financial instruments in which a derivative instrument is embedded. Upon execution of these transactions, the FHLBank assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the advance, debt or purchased financial instrument (the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When the FHLBank determines that: (1) the embedded derivative has economic characteristics that are not clearly and closely related to the economic characteristics of the host contract; and (2) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as a stand-alone derivative instrument pursuant to an economic hedge. However, if the entire contract (the host contract and the embedded derivative) is to be measured at fair value, with changes in fair value reported in current period earnings (such as an investment security classified as trading), or if the FHLBank cannot reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract, the entire contract is carried on the Statements of Condition at fair value and no portion of the contract is designated as a hedging instrument.


F-18


Premises, Software and Equipment: The FHLBank records premises, software, and equipment at cost less accumulated depreciation and amortization. Depreciation is computed on the straight-line method over the estimated useful lives of the assets ranging from 3 to 20 years. Leasehold improvements are amortized on the straight-line basis over the shorter of the estimated useful life of the improvement or the remaining term of the lease. Improvements and major renewals are capitalized, and ordinary maintenance and repairs are expensed as incurred. As of December 31, 2015 and 2014, the accumulated depreciation and amortization related to premises, software and equipment was $29,155,000 and $27,471,000, respectively. Depreciation and amortization expense was $2,193,000, $1,908,000 and $1,943,000 for the years ended December 31, 2015, 2014, and 2013, respectively. Gains and losses on disposals are included in other income (loss).
 
The cost of purchased software and certain costs incurred in developing computer software for internal use is capitalized and amortized over future periods. Amortization is computed on the straight-line method over five years for purchased and developed software. As of December 31, 2015 and 2014, the FHLBank had $1,701,000 and $2,515,000, respectively, in unamortized computer software costs included in premises, software and equipment on its Statements of Condition. Amortization of computer software costs charged to expense was $1,064,000, $709,000 and $651,000 for the years ended December 31, 2015, 2014, and 2013, respectively.

Consolidated Obligations: Consolidated obligations are recorded at amortized cost.

Discounts and Premiums:  Consolidated obligation discounts are accreted and premiums are amortized to interest expense using a level-yield methodology over the contractual maturities of the corresponding debt.

Concessions: Amounts paid to dealers in connection with sales of consolidated obligations are deferred and amortized using the level-yield method over the contractual terms of the consolidated obligations. Concession amounts are prorated to the FHLBank by the Office of Finance based on the percentage of each consolidated obligation issued by the Office of Finance on behalf of the FHLBank. Unamortized concessions are included in “Other assets” and the amortization of those concessions is included in consolidated obligation interest expense.

Mandatorily Redeemable Capital Stock: The FHLBank reclassifies all stock subject to redemption from capital to liability once a member submits a written redemption request, gives notice of intent to withdraw from membership, or attains non-member status by merger or acquisition, charter termination or involuntary termination from membership, since the member shares will then meet the definition of a mandatorily redeemable financial instrument. There is no distinction as to treatment for reclassification from capital to liability between in-district redemption requests and those redemption requests triggered by out-of-district acquisitions. The FHLBank does not take into consideration its members’ right to cancel a redemption request in determining when shares of capital stock should be classified as a liability because the cancellation would be subject to a substantial cancellation fee. Member and non-member shares meeting the definition of mandatorily redeemable capital stock are reclassified to a liability at fair value, which has been determined to be par value ($100) plus any estimated accrued but unpaid dividends. The FHLBank’s dividends are declared and paid at each quarter-end; therefore, the fair value reclassified equals par value. Dividends declared on member shares for the time after classification as a liability are accrued at the expected dividend rate and reflected as interest expense in the Statements of Income. The repurchase of these mandatorily redeemable financial instruments by the FHLBank are reflected as financing cash outflows in the Statements of Cash Flows once settled.

If a member submits a written request to cancel a previously submitted written redemption request, the capital stock covered by the written cancellation request is reclassified from a liability to capital at fair value. After the reclassification, dividends on the capital stock are no longer classified as interest expense.

Restricted Retained Earnings: The FHLBank allocates 20 percent of its quarterly net income to a separate restricted retained earnings (RRE) account until the account balance equals at least 1 percent of its average balance of outstanding consolidated obligations for the previous quarter. These restricted retained earnings are not available to pay dividends and are presented separately on the Statements of Condition.

Finance Agency Expenses: A portion of the Finance Agency’s expenses and working capital fund are allocated among the FHLBanks based on the pro rata share of the annual assessments based on the ratio between each FHLBank’s minimum required regulatory capital and the aggregate minimum required regulatory capital of every FHLBank.

Office of Finance Expenses: Each FHLBank’s proportionate share of Office of Finance operating and capital expenditures is calculated using a formula that is based upon the following components: (1) two-thirds based upon each FHLBank’s share of total consolidated obligations outstanding; and (2) one-third based upon an equal pro rata allocation.


F-19


Assessments:
Affordable Housing Program (AHP): The FHLBank is required to establish, fund and administer an AHP. The AHP funds provide subsidies to members to assist in the purchase, construction or rehabilitation of housing for very low-, low- and moderate-income households. The required annual AHP funding is charged to earnings, and an offsetting liability is established.


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

Leases. In February 2016, Financial Accounting Standards Board (FASB) issued amendments to lease accounting guidance. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases in the statement of financial condition, which effectively removes a source of off-balance sheet financing for operating leases. A distinction remains between finance leases and operating leases, but the assets and liabilities arising from operating leases are now also required to be recognized in the statement of financial condition. Lessor accounting is largely unchanged. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, which is January 1, 2019 for the FHLBank. The FHLBank is currently evaluating these amendments to determine the impact, if any, on the FHLBank's financial condition, results of operations, or cash flows.

Recognition and Measurement of Financial Assets and Financial Liabilities. In January 2016, FASB issued amendments to improve the recognition, measurement, presentation, and disclosure of financial instruments through changes to existing GAAP. The provisions impacting the FHLBank include the elimination of the requirement to disclose the method and significant assumptions used to estimate the fair value of financial instruments carried at amortized cost, the requirement to use the notion of exit price when measuring the fair value of financial instruments for disclosure purposes, and the separate presentation of financial assets and financial liabilities by measurement category and form of asset (i.e., securities or loans and receivables) on the statement of financial condition or in the notes to financial statements. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, which is January 1, 2018 for the FHLBank. The FHLBank is currently evaluating these amendments to determine the impact, if any, on the FHLBank's financial condition, results of operations, or cash flows.

Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. In April 2015, 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. 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 adoption of this guidance did not have a material impact 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 did not have a material impact on the FHLBank's financial condition, results of operations, or cash flows.

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


F-20


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

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

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

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


NOTE 3 - CASH AND DUE FROM BANKS

Balances represent non-interest bearing deposits in banks.

Pass-through Deposit Reserves: The FHLBank acts as a pass-through correspondent for members required to deposit reserves with the Federal Reserve Banks (FRB). The amount shown as cash and due from banks includes $2,322,000 and $2,231,000 of reserve deposits with the FRB as of December 31, 2015 and 2014, respectively.



F-21


NOTE 4INVESTMENT SECURITIES

Trading Securities: Trading securities by major security type as of December 31, 2015 and 2014 are summarized in Table 4.1 (in thousands):

Table 4.1
 
Fair Value
 
12/31/2015
12/31/2014
Non-mortgage-backed securities:
 
 
U.S. Treasury obligations
$

$
25,016

GSE obligations1
1,338,639

1,299,979

Non-mortgage-backed securities
1,338,639

1,324,995

Mortgage-backed securities:
 
 
U.S. obligation MBS2
801

963

GSE MBS3
955,166

136,091

Mortgage-backed securities
955,967

137,054

TOTAL
$
2,294,606

$
1,462,049

                   
1 
Represents debentures issued by other FHLBanks, Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), Federal Farm Credit Bank (Farm Credit) and Federal Agricultural Mortgage Corporation (Farmer Mac). GSE securities are not guaranteed by the U.S. government.
2 
Represents single-family MBS issued by Government National Mortgage Association (Ginnie Mae), which are guaranteed by the U.S. government.
3 
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.

Net gains (losses) on trading securities during the years ended December 31, 2015, 2014, and 2013 are shown in Table 4.2 (in thousands):

Table 4.2
 
2015
2014
2013
Net gains (losses) on trading securities held as of December 31, 2015
$
(47,950
)
$
(28,069
)
$
(45,956
)
Net gains (losses) on trading securities sold or matured prior to December 31, 2015
(41
)
(630
)
(5,029
)
NET GAIN (LOSS) ON TRADING SECURITIES
$
(47,991
)
$
(28,699
)
$
(50,985
)

Available-for-sale Securities: Available-for-sale securities by major security type as of December 31, 2015 are summarized in Table 4.3 (in thousands). No available-for-sale securities were held as of December 31, 2014.

Table 4.3
 
12/31/2015
 
Amortized
Cost
OTTI
Recognized
in OCI
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Mortgage-backed securities:
 
 
 
 
 
GSE MBS1
$
503,640

$

$

$
8,577

$
495,063

TOTAL
$
503,640

$

$

$
8,577

$
495,063

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


F-22


Table 4.4 summarizes the available-for-sale securities with unrealized losses as of December 31, 2015 (in thousands). The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

Table 4.4
 
12/31/2015
 
Less Than 12 Months
12 Months or More
Total
 
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Mortgage-backed securities:
 
 
 
 
 
 
GSE MBS1
$
495,063

$
8,577

$

$

$
495,063

$
8,577

TOTAL TEMPORARILY IMPAIRED SECURITIES
$
495,063

$
8,577

$

$

$
495,063

$
8,577

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

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

Held-to-maturity Securities: Held-to-maturity securities by major security type as of December 31, 2015 are summarized in Table 4.5 (in thousands):

Table 4.5
 
12/31/2015
 
Amortized
Cost
OTTI
Recognized
in OCI
Carrying Value
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Non-mortgage-backed securities:
 
 
 
 
 
 
State or local housing agency obligations
$
111,655

$

$
111,655

$
138

$
5,164

$
106,629

Non-mortgage-backed securities
111,655


111,655

138

5,164

106,629

Mortgage-backed securities:
 
 
 
 
 
 
U.S. obligation MBS1
47,234


47,234

66

23

47,277

GSE MBS2
4,452,533


4,452,533

19,740

21,639

4,450,634

Private-label residential MBS
167,345

7,950

159,395

6,665

5,505

160,555

Mortgage-backed securities
4,667,112

7,950

4,659,162

26,471

27,167

4,658,466

TOTAL
$
4,778,767

$
7,950

$
4,770,817

$
26,609

$
32,331

$
4,765,095

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


F-23


Held-to-maturity securities by major security type as of December 31, 2014 are summarized in Table 4.6 (in thousands):

Table 4.6
 
12/31/2014
 
Amortized
Cost
OTTI
Recognized
in OCI
Carrying Value
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Non-mortgage-backed securities:
 
 
 
 
 
 
State or local housing agency obligations
$
126,105

$

$
126,105

$
148

$
6,083

$
120,170

Non-mortgage-backed securities
126,105


126,105

148

6,083

120,170

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


57,562

175


57,737

GSE MBS2
4,441,487


4,441,487

27,486

13,628

4,455,345

Private-label residential MBS
242,970

11,711

231,259

9,195

6,960

233,494

Home equity loan ABS
837

63

774

1,522


2,296

Mortgage-backed securities
4,742,856

11,774

4,731,082

38,378

20,588

4,748,872

TOTAL
$
4,868,961

$
11,774

$
4,857,187

$
38,526

$
26,671

$
4,869,042

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

Table 4.7 summarizes the held-to-maturity securities with unrealized losses as of December 31, 2015 (in thousands). The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

Table 4.7
 
12/31/2015
 
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
$

$

$
37,211

$
5,164

$
37,211

$
5,164

Non-mortgage-backed securities


37,211

5,164

37,211

5,164

Mortgage-backed securities:
 
 
 
 
 
 
U.S. obligation residential2
19,189

23



19,189

23

GSE MBS3
1,697,226

7,806

1,012,199

13,833

2,709,425

21,639

Private-label residential MBS
5,215

28

110,744

8,826

115,959

8,854

Mortgage-backed securities
1,721,630

7,857

1,122,943

22,659

2,844,573

30,516

TOTAL TEMPORARILY IMPAIRED SECURITIES
$
1,721,630

$
7,857

$
1,160,154

$
27,823

$
2,881,784

$
35,680

                    
1 
Total unrealized losses in Table 4.7 will not agree to total gross unrecognized losses in Table 4.5. Total unrealized losses in Table 4.7 include non-credit-related OTTI recognized in AOCI and gross unrecognized gains on previously other-than-temporarily impaired securities.
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.


F-24


Table 4.8 summarizes the held-to-maturity securities with unrealized losses as of December 31, 2014 (in thousands). The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

Table 4.8
 
12/31/2014
 
Less Than 12 Months
12 Months or More
Total
 
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses1
Non-mortgage-backed securities:
 
 
 
 
 
 
State or local housing agency obligations
$

$

$
38,067

$
6,083

$
38,067

$
6,083

Non-mortgage-backed securities


38,067

6,083

38,067

6,083

Mortgage-backed securities:
 
 
 
 
 
 
GSE MBS2
232,884

112

1,038,522

13,516

1,271,406

13,628

Private-label residential MBS
23,060

137

137,306

11,187

160,366

11,324

Mortgage-backed securities
255,944

249

1,175,828

24,703

1,431,772

24,952

TOTAL TEMPORARILY IMPAIRED SECURITIES
$
255,944

$
249

$
1,213,895

$
30,786

$
1,469,839

$
31,035

                    
1 
Total unrealized losses in Table 4.8 will not agree to total gross unrecognized losses in Table 4.6. Total unrealized losses in Table 4.8 include non-credit-related OTTI recognized in AOCI and gross unrecognized gains on previously other-than-temporarily impaired securities.
2 
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.

The amortized cost, carrying value and fair values of held-to-maturity securities by contractual maturity as of December 31, 2015 and 2014 are shown in Table 4.9 (in thousands). Expected maturities of certain securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

Table 4.9
 
12/31/2015
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
3,260

3,260

3,260




Due after five years through 10 years
12,375

12,375

12,356

17,920

17,920

17,779

Due after 10 years
96,020

96,020

91,013

108,185

108,185

102,391

Non-mortgage-backed securities
111,655

111,655

106,629

126,105

126,105

120,170

Mortgage-backed securities
4,667,112

4,659,162

4,658,466

4,742,856

4,731,082

4,748,872

TOTAL
$
4,778,767

$
4,770,817

$
4,765,095

$
4,868,961

$
4,857,187

$
4,869,042



F-25


Table 4.10 details interest rate payment terms for the amortized cost of held-to-maturity securities as of December 31, 2015 and 2014 (in thousands):

Table 4.10
 
12/31/2015
12/31/2014
Non-mortgage-backed securities:
 
 
Fixed rate
$

$
9,335

Variable rate
111,655

116,770

Non-mortgage-backed securities
111,655

126,105

Mortgage-backed securities:
 
 
Fixed rate
324,177

423,356

Variable rate
4,342,935

4,319,500

Mortgage-backed securities
4,667,112

4,742,856

TOTAL
$
4,778,767

$
4,868,961


Net gains (losses) were realized on the sale of long-term held-to-maturity securities during the year ended December 31, 2015 and are included in other income (loss). All securities sold had paid down below 15 percent of the principal outstanding at acquisition. Table 4.11 presents details of the sales (in thousands):

Table 4.11
 
12/31/2015
Proceeds from sale of held-to-maturity securities
$
4,106

Carrying value of held-to-maturity securities sold
(3,716
)
NET REALIZED GAINS (LOSSES)
$
390


Other-than-temporary Impairment: For those securities for which an OTTI was determined to have occurred during the year ended December 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 4.12 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/asset-backed securities (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 an NRSRO upon issuance of the MBS/ABS.

Table 4.12
Year of Securitization
Significant Inputs
Current
Credit
Enhancements
Prepayment
Rates
Default
Rates
Loss
Severities
Private-label residential MBS:
 
 
 
 
Prime
13.5
%
7.7
%
34.5
%
7.0
%
Alt-A
13.6

13.8

37.3

4.3

Total private-label residential MBS
13.6
%
12.5
%
36.7
%
4.8
%
 
 
 
 
 
Home equity loan ABS:
 
 
 
 
Subprime
2.1
%
5.3
%
82.4
%
5.1
%


F-26


For the 20 outstanding private-label securities with OTTI during the lives of the securities, the FHLBank’s reported balances as of December 31, 2015 are presented in Table 4.13 (in thousands):

Table 4.13
 
12/31/2015
 
Unpaid
Principal
Balance
Amortized
Cost
Carrying
Value
Fair
Value
Private-label residential MBS:
 
 
 
 
Prime
$
12,754

$
11,858

$
11,064

$
11,781

Alt-A
38,999

34,718

27,562

32,981

TOTAL
$
51,753

$
46,576

$
38,626

$
44,762


Table 4.14 presents a roll-forward of OTTI activity for the years ended December 31, 2015, 2014, and 2013 related to credit losses recognized in earnings (in thousands):

Table 4.14
 
2015
2014
2013
Balance, beginning of period
$
9,406

$
9,917

$
11,291

Additional charge on securities for which OTTI was not previously recognized
1



Additional charge on securities for which OTTI was previously recognized1
825

520

530

Realized principal losses on securities matured or sold during the period
(1,684
)


Amortization of credit component of OTTI2
(763
)
(1,031
)
(1,904
)
Balance, end of period
$
7,785

$
9,406

$
9,917

                    
1 
For the years ended December 31, 2015, 2014 and 2013, securities previously impaired represent all securities that were impaired prior to January 1, 2015, 2014 and 2013, 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 December 31, 2015, the fair value of a portion of the FHLBank's available-for-sale and held-to-maturity MBS were below the amortized cost of the securities due to interest rate volatility and/or illiquidity. However, the decline in fair value of these securities is considered temporary as the FHLBank expects to recover the entire amortized cost basis on the remaining securities in unrecognized loss positions and neither intends to sell these securities nor is it more likely than not that the FHLBank will be required to sell these securities before its anticipated recovery of the remaining amortized cost basis. For state and local housing agency obligations, the FHLBank determined that all of the gross unrealized losses on these bonds were temporary because the strength of the underlying collateral and credit enhancements was sufficient to protect the FHLBank from losses based on current expectations.



F-27


NOTE 5ADVANCES

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 December 31, 2015 and 2014, the FHLBank had advances outstanding at interest rates ranging from 0.22 percent to 7.41 percent and 0.11 percent to 8.01 percent, respectively. Table 5.1 presents advances summarized by year of contractual maturity as of December 31, 2015 and 2014 (dollars in thousands): 

Table 5.1
 
12/31/2015
12/31/2014
Year of Contractual Maturity
Amount
Weighted Average Interest Rate
Amount
Weighted Average Interest Rate
Due in one year or less
$
11,230,853

0.65
%
$
6,996,975

0.59
%
Due after one year through two years
2,465,866

2.49

1,513,363

2.14

Due after two years through three years
1,816,690

2.02

2,345,877

2.58

Due after three years through four years
970,726

1.43

1,501,614

2.16

Due after four years through five years
803,465

1.84

843,465

1.48

Thereafter
6,186,074

1.17

4,939,587

1.21

Total par value
23,473,674

1.16
%
18,140,881

1.32
%
Discounts
(17,866
)
 
(24,043
)
 
Hedging adjustments
124,563

 
186,112

 
TOTAL
$
23,580,371

 
$
18,302,950

 

The FHLBank’s advances outstanding include advances that contain call options that may be exercised with or without prepayment fees at the borrower’s discretion on specific dates (call dates) before the stated advance maturities (callable advances). In exchange for receiving the right to call the advance on a predetermined call schedule, the borrower may pay a higher fixed rate for the advance relative to an equivalent maturity, non-callable, fixed rate advance. The borrower normally exercises its call options on these advances when interest rates decline (fixed rate advances) or spreads change (adjustable rate advances). The FHLBank’s advances as of December 31, 2015 and 2014 include callable advances totaling $6,326,747,000 and $4,825,254,000, respectively. Of these callable advances, there were $6,213,293,000 and $4,697,045,000 of variable rate advances as of December 31, 2015 and 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 December 31, 2015 and 2014, the FHLBank had convertible advances outstanding totaling $1,472,842,000 and $1,586,242,000, respectively.


F-28


Table 5.2 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 December 31, 2015 and 2014 (in thousands):

Table 5.2
 
Year of Contractual Maturity
or Next Call Date
Year of Contractual Maturity
or Next Conversion Date
Redemption Term
12/31/2015
12/31/2014
12/31/2015
12/31/2014
Due in one year or less
$
16,894,032

$
11,526,757

$
12,454,894

$
8,411,617

Due after one year through two years
2,037,166

1,288,157

1,573,624

1,396,863

Due after two years through three years
1,464,854

1,898,273

1,577,890

1,415,935

Due after three years through four years
630,463

1,136,649

1,033,226

1,232,414

Due after four years through five years
622,489

587,884

830,265

905,965

Thereafter
1,824,670

1,703,161

6,003,775

4,778,087

TOTAL PAR VALUE
$
23,473,674

$
18,140,881

$
23,473,674

$
18,140,881


Interest Rate Payment Terms:  Table 5.3 details additional interest rate payment terms for advances as of December 31, 2015 and 2014 (in thousands):

Table 5.3
 
12/31/2015
12/31/2014
Fixed rate:
 
 
Due in one year or less
$
2,012,929

$
1,379,428

Due after one year
6,612,853

6,594,886

Total fixed rate
8,625,782

7,974,314

Variable rate:
 

 

Due in one year or less
9,217,924

5,617,547

Due after one year
5,629,968

4,549,020

Total variable rate
14,847,892

10,166,567

TOTAL PAR VALUE
$
23,473,674

$
18,140,881



Credit Risk Exposure and Security Terms: The FHLBank’s potential credit risk from advances is concentrated in commercial banks, thrifts and insurance companies. As of December 31, 2015 and 2014, the FHLBank had outstanding advances of $11,054,000,000 and $7,414,900,000, respectively, to three members that individually held 10 percent or more of the FHLBank’s advances, which represents 47.1 percent and 40.9 percent, respectively, of total outstanding advances. The members were the same each year.

See Note 7 for information related to the FHLBank’s credit risk on advances and allowance for credit losses.

See Note 18 for detailed information on transactions with related parties.

See Note 16 for information about the fair value of advances.


NOTE 6MORTGAGE 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 loans (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)) and conventional residential loans credit-enhanced by PFIs. Depending upon a member’s product selection, the servicing rights can be retained or sold by the participating member. The FHLBank does not buy or own any mortgage servicing rights.


F-29


Mortgage Loans Held for Portfolio: Table 6.1 presents information as of December 31, 2015 and 2014 on mortgage loans held for portfolio (in thousands):

Table 6.1
 
12/31/2015
12/31/2014
Real estate:
 
 
Fixed rate, medium-term1, single-family mortgages
$
1,456,406

$
1,531,229

Fixed rate, long-term, single-family mortgages
4,830,091

4,596,914

Total unpaid principal balance
6,286,497

6,128,143

Premiums
100,502

100,353

Discounts
(2,440
)
(3,008
)
Deferred loan costs, net
596

830

Other deferred fees
(118
)
(168
)
Hedging adjustments
7,643

8,572

Total before Allowance for Credit Losses on Mortgage Loans
6,392,680

6,234,722

Allowance for Credit Losses on Mortgage Loans
(1,972
)
(4,550
)
MORTGAGE LOANS HELD FOR PORTFOLIO, NET
$
6,390,708

$
6,230,172

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

Table 6.2 presents information as of December 31, 2015 and 2014 on the outstanding UPB of mortgage loans held for portfolio (in thousands):

Table 6.2
 
12/31/2015
12/31/2014
Conventional loans
$
5,663,709

$
5,497,001

Government-guaranteed or insured loans
622,788

631,142

TOTAL UNPAID PRINCIPAL BALANCE
$
6,286,497

$
6,128,143


See Note 7 for information related to the FHLBank’s credit risk on mortgage loans and allowance for credit losses.

See Note 18 for detailed information on transactions with related parties.

See Note 16 for information about the fair value of mortgage loans held for portfolio.


NOTE 7ALLOWANCE 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.


F-30


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 Bank Act, which requires the FHLBank to obtain sufficient collateral to fully secure credit products. The estimated value of the collateral required to secure each member’s credit products is calculated by applying collateral discounts, or haircuts, to the market value or UPB of the collateral, as applicable. The FHLBank accepts certain investment securities, residential mortgage loans, deposits, and other real estate related assets as collateral. In addition, community financial institutions are eligible to utilize expanded statutory collateral provisions for small business loans, agriculture loans and community development loans. The FHLBank’s capital stock owned by borrowing members is held by the FHLBank as further collateral security for all indebtedness of the member to the FHLBank. Collateral arrangements may vary depending upon member credit quality, financial condition and performance; borrowing capacity; and overall credit exposure to the member. The FHLBank can also require additional or substitute collateral to protect its security interest. FHLBank management believes that these policies are effectively applied to manage the FHLBank’s credit risk from credit products.

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 December 31, 2015 and 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 December 31, 2015 and 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 December 31, 2015 and 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 17.

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

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


F-31



The FHLBank’s management of credit risk in the MPF Program involves several layers of loss protection that are defined in agreements among the FHLBank and its PFIs. The availability of loss protection may differ slightly among MPF products. The FHLBank’s loss protection consists of the following loss layers, in order of priority:
Homeowner Equity.
Primary Mortgage Insurance (PMI). PMI is on all loans with homeowner equity of less than 20 percent of the original purchase price or appraised value.
First Loss Account (FLA). The FLA functions as a tracking mechanism for determining the FHLBank’s potential loss exposure under each master commitment prior to the PFI’s CE obligation. If the FHLBank experiences losses in a master commitment, these losses will either be: (1) recovered through the withholding of future performance-based CE fees from the PFI; or (2) absorbed by the FHLBank. As of December 31, 2015 and 2014, the FHLBank’s exposure under the FLA was $39,094,000 and $34,635,000, respectively.
CE Obligation. PFIs have a CE obligation to absorb losses in excess of the FLA in order to limit the FHLBank’s loss exposure to that of an investor in an MBS that is rated the equivalent of double-A by an NRSRO. PFIs must either fully collateralize their CE obligation with assets considered acceptable by the FHLBank’s Member Products Policy (MPP) or purchase supplemental mortgage insurance (SMI) from mortgage insurers. Any incurred losses that would be absorbed by the CE obligation are not reserved as part of the FHLBank’s allowance for loan losses. As of December 31, 2015 and 2014, CE obligations available to cover losses in excess of the FLA were $462,915,000 and $413,279,000, respectively.

The FHLBank pays the participating member a fee, a portion of which may be based on the credit performance of the mortgage loans, in exchange for absorbing the CE obligation loss layer up to an agreed-upon amount. For some products, losses incurred under the FLA may be recovered by withholding future performance-based CE fees otherwise paid to our PFIs. The FHLBank records CE fees paid to the participating members as a reduction to mortgage interest income. Table 7.1 presents net CE fees paid to participating members for the years ended December 31, 2015, 2014, and 2013 (in thousands):

Table 7.1

2015
2014
2013
CE fees paid to PFIs
$
5,251

$
5,010

$
4,861

Performance-based CE fees recovered from PFIs
(128
)
(123
)
(157
)
NET CE FEES PAID
$
5,123

$
4,887

$
4,704


Mortgage Loans Evaluated at the Individual Master Commitment Level: The credit risk analysis of all conventional loans is performed at the individual master commitment level to properly determine the credit enhancements available to recover losses on mortgage loans under each individual master commitment.

Collectively Evaluated Mortgage Loans: The credit risk analysis of conventional loans evaluated collectively for impairment considers loan pool specific attribute data, including historical delinquency migration, 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.


F-32


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

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

Roll-forward of Allowance for Credit Losses: Table 7.2 presents a roll-forward of the allowance for credit losses for the year ended December 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 December 31, 2015 (in thousands):

Table 7.2
 
12/31/2015
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total
Allowance for credit losses:
 
 
 
 
 
Balance, beginning of period
$
4,550

$

$

$

$
4,550

Net charge-offs
(669
)



(669
)
(Reversal) provision for credit losses
(1,909
)



(1,909
)
Balance, end of period
$
1,972

$

$

$

$
1,972

 
 
 
 
 
 
Allowance for credit losses, end of period:
 

 

 

 

 

Individually evaluated for impairment
$

$

$

$

$

Collectively evaluated for impairment
1,972




1,972

 
 
 
 
 
 
Recorded investment2, end of period:
 

 

 

 

 

Individually evaluated for impairment
$
11,456

$

$
23,603,691

$
19,771

$
23,634,918

Collectively evaluated for impairment
5,773,396

639,084



6,412,480

Total
$
5,784,852

$
639,084

$
23,603,691

$
19,771

$
30,047,398

                   
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.



F-33


Table 7.3 presents a roll-forward of the allowance for credit losses for the year ended December 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 December 31, 2014 (in thousands):

Table 7.3
 
12/31/2014
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total
Allowance for credit losses:
 
 
 
 
 
Balance, beginning of period
$
6,748

$

$

$

$
6,748

Net charge-offs
(583
)



(583
)
(Reversal) provision for credit losses
(1,615
)



(1,615
)
Balance, end of period
$
4,550

$

$

$

$
4,550

 
 
 
 
 
 
Allowance for credit losses, end of period:
 

 

 

 

 

Individually evaluated for impairment
$

$

$

$

$

Collectively evaluated for impairment
4,550




4,550

 
 
 
 
 
 
Recorded investment2, end of period:
 

 

 

 



Individually evaluated for impairment
$

$

$
18,323,374

$
21,415

$
18,344,789

Collectively evaluated for impairment
5,617,281

648,492



6,265,773

Total
$
5,617,281

$
648,492

$
18,323,374

$
21,415

$
24,610,562

                   
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.


F-34


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

Table 7.4
 
12/31/2015
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total
Recorded investment2:
 
 
 
 
 
Past due 30-59 days delinquent
$
39,016

$
19,426

$

$

$
58,442

Past due 60-89 days delinquent
7,093

4,696



11,789

Past due 90 days or more delinquent
12,475

8,021



20,496

Total past due
58,584

32,143



90,727

Total current loans
5,726,268

606,941

23,603,691

19,771

29,956,671

Total recorded investment
$
5,784,852

$
639,084

$
23,603,691

$
19,771

$
30,047,398

 
 
 
 
 
 
Other delinquency statistics:
 

 

 

 

 

In process of foreclosure, included above3
$
3,661

$
2,947

$

$

$
6,608

Serious delinquency rate4
0.2
%
1.3
%
%
%
0.1
%
Past due 90 days or more and still accruing interest
$

$
8,021

$

$

$
8,021

Loans on non-accrual status5
$
15,976

$

$

$

$
15,976

                   
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 $1,320,000 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.


F-35


Table 7.5 summarizes the key credit quality indicators for the FHLBank’s mortgage loans as of December 31, 2014 (dollar amounts in thousands):

Table 7.5
 
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 7.6 presents the recorded investment, UPB, and related allowance of impaired conventional mortgage loans individually assessed for impairment as of December 31, 2015 (in thousands):

Table 7.6
 
12/31/2015
 
Recorded Investment
Unpaid Principal Balance
Related Allowance
With no related allowance
$
11,456

$
11,417

$

With an allowance



TOTAL
$
11,456

$
11,417

$



F-36


Table 7.7 presents the average recorded investment and related interest income recognized on these individually evaluated impaired loans during the year ended December 31, 2015 (in thousands):

Table 7.7
 
2015
 
Average Recorded Investment
Interest Income Recognized
With no related allowance
$
13,399

$
356

With an allowance
91


TOTAL
$
13,490

$
356


The FHLBank had $3,922,000 and $4,628,000 classified as REO recorded in other assets as of December 31, 2015 and 2014, respectively.


NOTE 8DERIVATIVES AND HEDGING ACTIVITIES

Nature of Business Activity: The FHLBank is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and its interest-bearing liabilities that finance these assets. The goal of the FHLBank’s interest-rate risk management strategy is not to eliminate interest rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, the FHLBank has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes it is willing to accept. In addition, the FHLBank monitors the risk to its interest income, net interest margin and average maturity of interest-earning assets and interest-bearing liabilities.

Consistent with Finance Agency regulation, the FHLBank enters into derivatives only to: (1) reduce the interest rate risk exposures inherent in otherwise unhedged assets and funding positions; (2) achieve risk management objectives; and (3) act as an intermediary between its members and counterparties. Finance Agency regulation and the FHLBank’s RMP prohibit trading in or the speculative use of these derivative instruments and limit credit risk arising from these instruments. The use of derivatives is an integral part of the FHLBank’s financial management strategy.

The FHLBank uses derivatives to:
Reduce funding costs by combining an interest rate swap with a consolidated obligation because the cost of a combined funding structure can be lower than the cost of a comparable consolidated obligation;
Reduce the interest rate sensitivity and repricing gaps of assets and liabilities;
Preserve a favorable interest rate spread between the yield of an asset (e.g., an advance) and the cost of the related liability (e.g., the consolidated obligation used to fund the advance). Without the use of derivatives, this interest rate spread could be reduced or eliminated when a change in the interest rate on the advance does not match a change in the interest rate on the consolidated obligation;
Mitigate the adverse earnings effects of the shortening or extension of certain assets (e.g., advances or mortgage assets) and liabilities;
Manage embedded options in assets and liabilities; and
Manage its overall asset/liability portfolio.

Application of Derivatives: Derivative financial instruments may be used by the FHLBank as follows:
As a fair value or cash flow hedge of an associated financial instrument, a firm commitment or an anticipated transaction;
As an economic hedge to manage certain defined risks in its statement of condition. These hedges are primarily used to manage mismatches between the coupon features of its assets and liabilities. For example, the FHLBank may use derivatives in its overall interest rate risk management activities to manage the interest rate sensitivity of consolidated obligations to approximate more closely the interest rate sensitivity of its assets (both advances and investments) and to manage the interest rate sensitivity of advances or investments to approximate more closely the interest rate sensitivity of its liabilities; and
As an intermediary hedge to meet the asset/liability management needs of its members. The FHLBank acts as an intermediary by entering into derivatives with its members and offsetting derivatives with other counterparties. This intermediation grants smaller members indirect access to the derivatives market. The derivatives used in intermediary activities do not receive hedge accounting treatment and are separately marked-to-market through earnings. The net result of the accounting for these derivatives does not significantly affect the operating results of the FHLBank.


F-37


Derivative financial instruments are used by the FHLBank when they are considered to be the most cost-effective alternative to achieve the FHLBank’s financial and risk management objectives. The FHLBank reevaluates its hedging strategies from time to time and may change the hedging techniques it uses or adopt new strategies.

The FHLBank transacts most of its derivatives with large banks and major broker/dealers. Some of these banks and broker/dealers or their affiliates buy, sell and distribute consolidated obligations. Over-the-counter derivative transactions may be either executed through a bilateral agreement with a counterparty (uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent) with a Derivative Clearing Organization (cleared derivatives).

Once a derivative transaction has been accepted for clearing by a Derivative Clearing Organization (Clearinghouse), the derivative transaction is novated and the executing counterparty is replaced with the Clearinghouse. The FHLBank is not a derivatives dealer and thus, does not trade derivatives for short-term profit.

Types of Derivatives: The FHLBank commonly enters into interest rate swaps (including callable and putable swaps), swaptions, and interest rate cap and floor agreements (collectively, derivatives) to reduce funding costs and to manage its exposure to interest rate risks inherent in the normal course of business. These instruments are recorded at fair value and reported in derivative assets or derivative liabilities on the Statements of Condition. Premiums paid at acquisition are accounted for as the basis of the derivative at inception of the hedge.

Interest Rate Swaps - An interest rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be paid and the manner in which the cash flows will be calculated. One of the simplest forms of an interest rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional principal amount at a predetermined fixed rate for a given period of time. In return for this promise, this party receives cash flows equivalent to the interest on the same notional principal amount at a variable interest rate index for the same period of time. The variable interest rate received or paid by the FHLBank in most derivative transactions is the London Interbank Offered Rate (LIBOR).

Swaptions - A swaption is an option that gives the buyer the right to enter into a specified interest rate swap at a certain time in the future. When used as a hedge, a swaption can protect the FHLBank against future interest rate changes. The FHLBank may enter into both payer swaptions and receiver swaptions to decrease its interest rate risk exposure related to the prepayment of certain assets. A payer swaption is the option to make fixed interest payments at a later date and a receiver swaption is the option to receive fixed interest payments at a later date.

Interest Rate Caps and Floors - In an interest rate cap agreement, a cash flow is generated if the price or interest rate of an underlying variable rises above a certain threshold (or cap) price or interest rate. In an interest rate floor agreement, a cash flow is generated if the price or interest rate of an underlying variable falls below a certain threshold (or floor) price or interest rate. Caps and floors are designed as protection against the interest rate on a variable rate asset or liability rising or falling below a certain level. The FHLBank purchases interest rate caps and floors to hedge option risk on variable rate MBS held in the FHLBank’s trading and held-to-maturity portfolios and to hedge embedded caps or floors in the FHLBank’s advances.

Types of Hedged Items: At the inception of every hedge transaction, the FHLBank documents all hedging relationships between derivatives designated as hedging instruments and the hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing effectiveness. This process includes linking all derivatives that are designated as fair value or cash flow hedges to: (1) assets and/or liabilities on the Statements of Condition; (2) firm commitments; or (3) forecasted transactions. The FHLBank formally assesses (both at the hedge’s inception and at least quarterly on an ongoing basis) whether the derivatives that are used have been effective in offsetting changes in the fair value or the cash flows of hedged items attributable to the hedged risk and whether those derivatives may be expected to remain effective in future periods. The FHLBank typically uses regression analyses or similar statistical analyses to assess the effectiveness of its hedging relationships.

Investments - The FHLBank invests in U.S. Treasury securities, U.S. Agency securities, GSE securities, MBS and state or local housing finance agency securities. The interest rate and prepayment risk associated with these investment securities is managed through a combination of debt issuance and derivatives. The FHLBank may manage the prepayment and interest-rate risks by funding investment securities with consolidated obligations that have call features or by economically hedging the prepayment risk with caps or floors, callable swaps or swaptions. The FHLBank may manage against prepayment and duration risks by funding investment securities with consolidated obligations that have call features. The FHLBank may also manage the risk arising from changing market prices and volatility of investment securities by entering into derivatives (economic hedges) that offset the changes in fair value or cash flows of the securities. The FHLBank’s derivatives associated with trading and held-to-maturity securities are designated as economic hedges, and the FHLBank's derivatives associated with available-for-sale securities are designated and qualify as fair value hedges.


F-38


Interest rate caps and floors, swaptions and callable swaps may also be used to hedge prepayment and option risk on the MBS held in the FHLBank’s trading, available-for-sale and held-to-maturity portfolios. Many of these derivatives are purchased interest rate caps that hedge interest rate caps embedded in the FHLBank’s trading and held-to-maturity variable rate Agency MBS. Although these derivatives are valid economic hedges against the prepayment and option risk of the portfolio of MBS, they are not specifically linked to individual investment securities and, therefore, do not receive either fair value or cash flow hedge accounting. The derivatives are marked-to-market through earnings.

Advances - With the issuance of a convertible advance, the FHLBank purchases from the member an option that enables the FHLBank to convert an advance from fixed rate to variable rate if interest rates increase. Once the FHLBank exercises its option to convert an advance to an at-the-market variable rate, the member then owns the option to terminate the converted advance without fee or penalty on the conversion date and each interest rate reset date thereafter. The FHLBank hedges a convertible advance by entering into a cancelable derivative with a non-member counterparty where the FHLBank pays a fixed rate and receives a variable rate. The derivative counterparty may cancel the derivative on a put date. This type of hedge is designated as a fair value hedge. The counterparty’s decision to cancel the derivative would normally occur in a rising rate environment. If the option is in-the-money, the derivative is cancelled by the derivative counterparty at par (i.e., without any premium or other payment to the FHLBank). When the derivative is cancelled, the FHLBank exercises its option to convert the advance to a variable rate. If a convertible advance is not prepaid by the member upon conversion to an at-the-market variable rate advance (i.e., callable variable rate advance), any hedge-related unamortized basis adjustment is amortized as a yield adjustment.

When fixed rate advances are issued to one or more borrowers, the FHLBank can either fund the advances with fixed rate consolidated obligations with the same tenor or simultaneously enter into a matching derivative in which the clearing agent or derivative counterparty receives fixed cash flows from the FHLBank designed to mirror in timing and amount the cash inflows the FHLBank receives on the advance. These transactions are designated as fair value hedges. In this type of transaction, the FHLBank typically receives from the clearing agent or derivative counterparty a variable cash flow that closely matches the interest payments on short-term discount notes or swapped consolidated obligation bonds.

The repricing characteristics and optionality embedded in certain financial instruments held by the FHLBank can create interest rate risk. For example, when a member prepays an advance, the FHLBank could suffer lower future income if the principal portion of the prepaid advance were invested in lower-yielding assets that continue to be funded by higher-cost debt. To protect against this risk, the FHLBank generally charges a prepayment fee on an advance that makes it financially indifferent to a member’s decision to prepay the advance. When the FHLBank offers advances (other than short-term advances) that a member may prepay without a prepayment fee, it usually finances these advances with callable debt or otherwise hedges the option being sold to the member.

Mortgage Loans - The FHLBank invests in fixed rate mortgage loans through the MPF Program. The prepayment options embedded in these mortgage loans can result in extensions or contractions in the expected lives of these investments, depending on changes in estimated future cash flows, which usually occur as a result of interest rate changes. The FHLBank may manage the interest rate and prepayment risk associated with mortgages through a combination of debt issuance and derivatives. The FHLBank issues both callable and non-callable debt to achieve cash flow patterns and liability durations similar to those expected on the mortgage loans. The FHLBank may use derivatives in conjunction with debt issuance to better match the expected prepayment characteristics of its mortgage loan portfolio.

Interest rate caps and floors, swaptions and callable swaps may also be used to hedge prepayment risk on the mortgage loans. Although these derivatives are valid economic hedges against the prepayment risk of the portfolio of mortgage loans, they are not specifically linked to individual loans and, therefore, do not receive either fair value or cash flow hedge accounting. The derivatives are marked-to-market through earnings.

Consolidated Obligations - While consolidated obligations are the joint and several obligations of the FHLBanks, each FHLBank enters into derivatives to hedge the interest rate risk associated with its specific debt issuances. The FHLBank manages the risk arising from changing market prices and volatility of a consolidated obligation by matching the cash inflow on the derivative with the cash outflow on the consolidated obligation.


F-39


For instance, in a typical transaction involving more than one FHLBank, fixed rate consolidated obligation bonds are issued for one or more FHLBanks, including FHLBank Topeka. In connection with its share of the bond issuance, FHLBank Topeka simultaneously enters into a matching derivative in which the clearing agent or derivative counterparty pays fixed cash flows to FHLBank Topeka designed to mirror in timing and amount the cash outflows FHLBank Topeka pays on the consolidated obligation. In this type of transaction, FHLBank Topeka typically pays the clearing agent or derivative counterparty a variable cash flow that closely matches the interest payments it receives on short-term or variable rate advances (typically one- or three-month LIBOR). These transactions are designated as fair value hedges. Note, though, that most of the FHLBank’s swapped consolidated obligation bonds are fixed rate, callable bonds where the FHLBank is the sole issuer of the particular debt issue. The swap transaction with a counterparty for debt upon which the FHLBank is the sole issuer follows the same process reflected above (simultaneous, matching terms, etc.).

This strategy of issuing bonds while simultaneously entering into derivatives enables the FHLBank to offer a wider range of attractively priced advances to its members and may allow the FHLBank to reduce its funding costs. The continued attractiveness of this debt depends on yield relationships between the bond and derivative markets. If conditions in these markets change, the FHLBank may alter the types or terms of the bonds that it issues. By acting in both the capital and derivatives markets, the FHLBank can raise funds at lower costs than through the issuance of simple fixed or variable rate consolidated obligations in the capital markets alone.

Firm Commitments - Commitments that obligate the FHLBank to purchase closed fixed rate mortgage loans from its members are considered derivatives. Accordingly, each mortgage purchase commitment is recorded as a derivative asset or derivative liability at fair value, with changes in fair value recognized in current period earnings. When a mortgage purchase commitment derivative settles, the current market value of the commitment is included with the basis of the mortgage loan and amortized accordingly.

The FHLBank may also hedge a firm commitment for a forward starting advance or consolidated obligation bond through the use of an interest rate swap. In this case, the swap functions as the hedging instrument for both the hedging relationship involving the firm commitment and the subsequent hedging relationship involving the advance or bond. The basis movement associated with the firm commitment is recorded as a basis adjustment of the advance or bond at the time the commitment is terminated and the advance or bond is issued. The basis adjustment is then amortized into interest income or expense over the life of the advance or bond. In addition, if a hedged firm commitment no longer qualifies as a fair value hedge, the hedge would be terminated and net gains and losses would be recognized in current period earnings. There were no gains or losses recognized due to disqualification of firm commitment hedges during the years ended December 31, 2015, 2014, and 2013.

Anticipated Debt Issuance - The FHLBank enters into interest rate swaps for the anticipated issuance of fixed rate consolidated obligation bonds to hedge the variability in forecasted interest payments associated with fixed rate debt that has not yet been issued. The interest rate swap is terminated upon issuance of the fixed rate bond, with the realized gain or loss on the interest rate swap recorded in OCI. Realized gains and losses reported in AOCI are recognized as earnings in the periods in which earnings are affected by the cash flows of the fixed rate bonds.

Financial Statement Impact and Additional Financial Information: The notional amount in derivative contracts serves as a factor in determining periodic interest payments or cash flows received and paid. However, the notional amount of derivatives reflects the FHLBank’s involvement in the various classes of financial instruments and represents neither the actual amounts exchanged nor the overall exposure of the FHLBank to credit and market risk; the overall risk is much smaller. The risks of derivatives can be measured meaningfully on a portfolio basis that takes into account the clearing agents, counterparties, the types of derivatives, the items being hedged and any offsets between the derivatives and the items being hedged.

The FHLBank considers accrued interest receivables and payables and the legal right to offset derivative assets and liabilities by clearing agent or derivative counterparty. Consequently, derivative assets and liabilities reported on the Statements of Condition generally include the net cash collateral, including initial or variation margin, and accrued interest received or pledged by clearing agents and/or derivative counterparties. Therefore, an individual derivative may be in an asset position (clearing agent or derivative counterparty would owe the FHLBank the current fair value, which includes net accrued interest receivable or payable on the derivative, if the derivative was settled as of the Statement of Condition date) but when the derivative fair value and cash collateral fair value (includes accrued interest on the collateral) are netted by clearing agent by Clearinghouse, or by derivative counterparty, the derivative may be recorded on the Statements of Condition as a derivative liability. Conversely, a derivative may be in a liability position (FHLBank would owe the clearing agent or derivative counterparty the fair value if settled as of the Statement of Condition date) but may be recorded on the Statements of Condition as a derivative asset after netting.


F-40


Table 8.1 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 December 31, 2015 and 2014 (in thousands):

Table 8.1
 
12/31/2015
12/31/2014
 
Notional
Amount
Derivative
Assets
Derivative
Liabilities
Notional
Amount
Derivative
Assets
Derivative
Liabilities
Derivatives designated as hedging instruments:
 

 

 

 

 

 

Interest rate swaps
$
10,338,768

$
59,828

$
136,261

$
11,605,502

$
89,100

$
198,181

Interest rate caps/floors
60,000


94

187,000


956

Total derivatives designated as hedging relationships
10,398,768

59,828

136,355

11,792,502

89,100

199,137

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Interest rate swaps
3,158,851

589

78,238

2,416,820

1,402

83,507

Interest rate caps/floors
2,930,800

5,798

9

4,090,800

9,984

36

Mortgage delivery commitments
66,045

71

64

53,004

146

8

Total derivatives not designated as hedging instruments
6,155,696

6,458

78,311

6,560,624

11,532

83,551

TOTAL
$
16,554,464

66,286

214,666

$
18,353,126

100,632

282,688

Netting adjustments and cash collateral1
 
(14,695
)
(183,174
)
 
(67,649
)
(247,396
)
DERIVATIVE ASSETS AND LIABILITIES
 
$
51,591

$
31,492

 
$
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 $190,483,000 and $209,164,000 as of December 31, 2015 and 2014, respectively. Cash collateral received was $22,004,000 and $29,417,000 as of December 31, 2015 and 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.

For the years ended December 31, 2015, 2014, and 2013, the FHLBank recorded net gain (loss) on derivatives and hedging activities as presented in Table 8.2 (in thousands):

Table 8.2
 
2015
2014
2013
Derivatives designated as hedging instruments:
 
 
 
Interest rate swaps
$
(2,878
)
$
(2,437
)
$
(2,334
)
Total net gain (loss) related to fair value hedge ineffectiveness
(2,878
)
(2,437
)
(2,334
)
Derivatives not designated as hedging instruments:
 
 
 
Economic hedges:
 
 
 
Interest rate swaps
10,797

31,910

43,347

Interest rate caps/floors
(4,159
)
(32,767
)
11,682

Net interest settlements
(47,670
)
(39,208
)
(38,519
)
Mortgage delivery commitments
1,067

4,272

(4,052
)
Intermediary transactions:
 
 
 
Interest rate swaps


(17
)
Total net gain (loss) related to derivatives not designated as hedging instruments
(39,965
)
(35,793
)
12,441

NET GAIN (LOSS) ON DERIVATIVES AND HEDGING ACTIVITIES
$
(42,843
)
$
(38,230
)
$
10,107



F-41


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 years ended December 31, 2015, 2014, and 2013, 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 8.3 (in thousands):

Table 8.3
 
2015
 
Gain (Loss) on Derivatives
Gain (Loss) on Hedged Items
Net Fair Value Hedge Ineffectiveness
Effect of Derivatives on Net Interest Income1
Advances
$
47,544

$
(48,323
)
$
(779
)
$
(125,346
)
Investments
1,750

(1,114
)
636

(1,657
)
Consolidated obligation bonds
(2,829
)
(212
)
(3,041
)
69,213

Consolidated obligation discount notes
(100
)
406

306

215

TOTAL
$
46,365

$
(49,243
)
$
(2,878
)
$
(57,575
)
 
 
 
2014
 
Gain (Loss) on Derivatives
Gain (Loss) on Hedged Items
Net Fair Value Hedge Ineffectiveness
Effect of Derivatives on Net Interest Income1
Advances
$
64,026

$
(63,486
)
$
540

$
(142,622
)
Consolidated obligation bonds
47,322

(50,299
)
(2,977
)
90,076

TOTAL
$
111,348

$
(113,785
)
$
(2,437
)
$
(52,546
)
 
 
 
 
 
 
2013
 
Gain (Loss) on Derivatives
Gain (Loss) on Hedged Items
Net Fair Value Hedge Ineffectiveness
Effect of Derivatives on Net Interest Income1
Advances
$
186,662

$
(183,314
)
$
3,348

$
(158,751
)
Consolidated obligation bonds
(158,941
)
153,259

(5,682
)
101,717

TOTAL
$
27,721

$
(30,055
)
$
(2,334
)
$
(57,034
)
                   
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.

Managing Credit Risk on Derivatives: The FHLBank is subject to credit risk due to the risk of nonperformance by counterparties to its derivative transactions and manages credit risk through credit analyses, collateral requirements and adherence to the requirements set forth in its RMP, U.S. Commodity Futures Trading Commission regulations and Finance Agency regulations. For uncleared derivatives, the degree of credit risk depends on the extent to which master netting arrangements are included in these contracts to mitigate the risk. The FHLBank requires collateral agreements with collateral delivery thresholds on all uncleared derivatives. Additionally, collateral related to derivatives with member institutions includes collateral assigned to the FHLBank, as evidenced by a written security agreement and held by the member institution for the benefit of the FHLBank.

For cleared derivatives, the Clearinghouse is the FHLBank’s counterparty. The Clearinghouse notifies the clearing agent of the required initial and variation margin, and the clearing agent in turn notifies the FHLBank. The requirement that the FHLBank posts initial and variation margin through the clearing agent, to the Clearinghouse, exposes the FHLBank to institutional credit risk if 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 for changes in the value of cleared derivatives is posted daily through a clearing agent.


F-42


The FHLBank has analyzed the enforceability of offsetting rights incorporated in its cleared derivative transactions and determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable law upon an event of default including a bankruptcy, insolvency or similar proceeding involving the Clearinghouse or the FHLBank’s clearing agent, or both. Based on this analysis, the FHLBank presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular Clearinghouse.

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 $24,670,000 and $31,332,000 as of December 31, 2015 and 2014, respectively. The counterparty was the same each period.

Certain of the FHLBank’s uncleared 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 uncleared derivative instruments in net liability positions. The aggregate fair value of all uncleared 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 December 31, 2015 and 2014 was $36,302,000 and $50,791,000, respectively, for which the FHLBank has posted collateral with a fair value of $6,622,000 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 $17,500,000 and $21,700,000 of collateral to its uncleared derivative counterparties as of December 31, 2015 and 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 December 31, 2015 and 2014.

The FHLBank’s net exposure on derivative agreements is presented in Note 12.


NOTE 9DEPOSITS

The FHLBank offers demand, overnight and short-term deposit programs to its members and to other qualifying non-members. Table 9.1 details the types of deposits held by the FHLBank as of December 31, 2015 and 2014 (in thousands):

Table 9.1
 
12/31/2015
12/31/2014
Interest-bearing:
 
 
Demand
$
235,547

$
188,886

Overnight
462,500

331,300

Term
18,400

29,400

Total interest-bearing
716,447

549,586

Non-interest-bearing:
 
 
Demand
42,919

46,189

Total non-interest-bearing
42,919

46,189

TOTAL DEPOSITS
$
759,366

$
595,775


Deposits classified as demand and overnight pay interest based on a daily interest rate. Term deposits pay interest based on a fixed rate determined at the issuance of the deposit. The weighted-average interest rate paid on interest-bearing deposits was 0.09 percent for each of the years ended December 31, 2015, 2014, and 2013.

The aggregate amount of term deposits with a denomination of $250,000 or more was $18,400,000 and $29,400,000 as of December 31, 2015 and 2014, respectively.



F-43


NOTE 10 – CONSOLIDATED OBLIGATIONS

Consolidated obligations consist of consolidated bonds and discount notes and, as provided by the Bank Act or Finance Agency regulation, are backed only by the financial resources of the FHLBanks. The FHLBanks jointly issue consolidated obligations with the Office of Finance acting as their agent. The Office of Finance tracks the amounts of debt issued on behalf of each FHLBank. In addition, the FHLBank records as a liability its specific portion of consolidated obligations for which it is the primary obligor. The FHLBank utilizes a debt issuance process to provide a scheduled monthly issuance of global bullet consolidated obligation bonds. As part of this process, management from each of the FHLBanks determine and communicate a firm commitment to the Office of Finance for an amount of scheduled global debt to be issued on its behalf. If the FHLBanks’ commitments do not meet the minimum debt issue size, the proceeds are allocated to all FHLBanks based on the larger of the FHLBank’s commitment or allocated proceeds based on the individual FHLBank’s regulatory capital to total system regulatory capital. If the FHLBanks’ commitments exceed the minimum debt issue size, the proceeds are allocated based on relative regulatory capital of the FHLBanks with the allocation limited to the lesser of the allocation amount or actual commitment amount.

The Finance Agency and the U.S. Secretary of the Treasury oversee the issuance of FHLBank debt through the Office of Finance. The FHLBanks can, however, pass on any scheduled calendar slot and not issue any global bullet consolidated obligation bonds upon agreement of 8 of the 11 FHLBanks. Consolidated obligation bonds are issued primarily to raise intermediate- and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits as to maturities. Consolidated obligation discount notes, which are issued to raise short-term funds, are generally issued at less than their face amounts and redeemed at par when they mature.

Although the FHLBank is primarily liable for its portion of consolidated obligations, the FHLBank is also jointly and severally liable with the other 10 FHLBanks for the payment of principal and interest on all consolidated obligations of each of the FHLBanks. The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations for which the FHLBank is not the primary obligor. Although it has never occurred, to the extent that an FHLBank would be required to make a payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank would be entitled to reimbursement from the non-complying FHLBank. However, if the Finance Agency determines that the non-complying FHLBank is unable to satisfy its obligations, then the Finance Agency may allocate the non-complying FHLBank’s outstanding consolidated obligation debt 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 the Finance Agency may determine to ensure that the FHLBanks operate in a safe and sound manner.

The par value of outstanding consolidated obligations of all FHLBanks, including outstanding consolidated obligations issued on behalf of the FHLBank, was approximately $905,201,752,000 and $847,174,797,000 as of December 31, 2015 and 2014, respectively. See Note 19 for FHLBank obligations acquired by FHLBank Topeka as investments. Finance Agency regulations require that each FHLBank maintain unpledged qualifying assets equal to its participation in the total consolidated obligations outstanding. Qualifying assets are defined as cash; secured advances; obligations of or fully guaranteed by the United States; obligations, participations or other instruments of or issued by Fannie Mae or Ginnie Mae; mortgages, obligations or other securities, which are or have ever been sold by Freddie Mac under the Bank Act; and such securities as fiduciary and trust funds may invest in under the laws of the state in which the FHLBank is located.


F-44


Consolidated Obligation Bonds: Table 10.1 presents the FHLBank’s participation in consolidated obligation bonds outstanding as of December 31, 2015 and 2014 (dollar amounts in thousands):

Table 10.1
 
12/31/2015
12/31/2014
Year of Contractual Maturity
Amount
Weighted
Average
Interest
Rate
Amount
Weighted
Average
Interest
Rate
Due in one year or less
$
9,276,390

0.58
%
$
6,165,800

0.42
%
Due after one year through two years
2,317,615

1.71

3,167,750

1.08

Due after two years through three years
1,760,440

1.71

1,861,935

2.15

Due after three years through four years
823,250

1.72

1,578,940

1.74

Due after four years through five years
1,008,600

1.59

1,678,250

1.54

Thereafter
4,637,500

2.60

5,706,650

2.45

Total par value
19,823,795

1.39
%
20,159,325

1.45
%
Premiums
19,895

 
30,739

 
Discounts
(3,483
)
 
(3,889
)
 
Hedging adjustments
35,048

 
34,827

 
TOTAL
$
19,875,255

 
$
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 December 31, 2015 and 2014 includes callable bonds totaling $6,758,500,000 and $9,726,000,000, respectively. The FHLBank uses the unswapped callable bonds for financing its callable fixed rate advances (Note 5), MBS (Note 4) and mortgage loans (Note 6). 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 10.2 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 December 31, 2015 and 2014 (in thousands):

Table 10.2
Year of Maturity or Next Call Date
12/31/2015
12/31/2014
Due in one year or less
$
15,594,890

$
15,271,800

Due after one year through two years
2,364,615

2,887,750

Due after two years through three years
990,440

1,040,935

Due after three years through four years
215,250

448,940

Due after four years through five years
138,600

155,250

Thereafter
520,000

354,650

TOTAL PAR VALUE
$
19,823,795

$
20,159,325



F-45


In addition to having fixed rate or simple variable rate coupon payment terms, consolidated obligation bonds may also have the following broad terms, regarding either the principal repayment or coupon payment:
Optional principal redemption bonds (callable bonds) that may be redeemed in whole or in part at the discretion of the FHLBank on predetermined call dates in accordance with terms of bond offerings;
Range bonds that have coupons at fixed or variable rates and pay the fixed or variable rate as long as the index rate is within the established range, but generally pay zero percent or a minimal interest rate if the specified index rate is outside the established range;
Conversion bonds that have coupons that convert from fixed to variable, or variable to fixed, or from one index to another, on predetermined dates according to the terms of the bond offerings; and
Step bonds that have coupons at fixed or variable rates for specified intervals over the lives of the bonds. At the end of each specified interval, the coupon rate or variable rate spread increases (decreases) or steps up (steps down). These bond issues generally contain call provisions enabling the bonds to be called at the FHLBank’s discretion on the step dates.

Table 10.3 summarizes interest rate payment terms for consolidated obligation bonds as of December 31, 2015 and 2014 (in thousands):

Table 10.3
 
12/31/2015
12/31/2014
Fixed rate
$
12,068,795

$
11,847,325

Simple variable rate
6,400,000

5,185,000

Step up/step down
895,000

2,830,000

Fixed to variable rate
370,000

150,000

Range
90,000

122,000

Variable to fixed rate

25,000

TOTAL PAR VALUE
$
19,823,795

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

Table 10.4
 
Book Value
Par Value
Weighted
Average
Interest
Rate1
December 31, 2015
$
21,813,746

$
21,821,045

0.27
%
 
 
 
 
December 31, 2014
$
14,219,612

$
14,221,276

0.08
%
                   
1 
Represents yield to maturity excluding concession fees.

Concessions on Consolidated Obligations: Unamortized concessions were $9,521,000 and $10,764,000 as of December 31, 2015 and 2014, respectively, and are included in other assets. Amortization of concessions is included in consolidated obligation interest expense. Amortization of concessions on bonds totaled $4,690,000, $4,504,000 and $5,519,000 in 2015, 2014, and 2013, respectively. Concessions on discount notes totaled $1,587,000, $832,000 and $394,000 in 2015, 2014, and 2013, respectively.

Information about the fair value of the consolidated obligations is included in Note 16.



F-46


NOTE 11AFFORDABLE HOUSING PROGRAM

The Bank Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, requires each FHLBank to establish an AHP. As a part of its AHP, the FHLBank provides subsidies in the form of direct grants or below-market interest rate advances to members that use the funds to assist in the purchase, construction or rehabilitation of housing for very low-, low- and moderate-income households. By regulation, to fund the AHP, the FHLBanks as a group must annually set aside the greater of $100,000,000 or 10 percent of the current year’s net earnings. For purposes of the AHP calculation, the term “net earnings” is defined as income before interest expense related to mandatorily redeemable capital stock and the assessment for AHP. The FHLBank accrues this expense monthly based on its net earnings.

The amount set aside for AHP is charged to expense and recognized as a liability. As subsidies are provided through the disbursement of grants or issuance of subsidized advances, the AHP liability is reduced accordingly. If the FHLBank’s net earnings before AHP would ever be zero or less, the amount of AHP liability would generally be equal to zero. However, if the result of the aggregate 10 percent calculation described above is less than the $100,000,000 minimum for the FHLBanks as a group, then the Bank Act requires the shortfall to be allocated among the FHLBanks based on the ratio of each FHLBank’s income for the previous year. If an FHLBank determines that its required AHP contributions are exacerbating any financial instability of that FHLBank, it may apply to the Finance Agency for a temporary suspension of its AHP contributions. The FHLBank has never applied to the Finance Agency for a temporary suspension of its AHP contributions.

Table 11.1 details the change in the AHP liability for the years ended December 31, 2015, 2014, and 2013 (in thousands):

Table 11.1
 
2015
2014
2013
Appropriated and reserved AHP funds as of the beginning of the period
$
30,863

$
35,264

$
31,198

AHP set aside based on current year income
10,378

11,783

13,229

Direct grants disbursed
(13,413
)
(16,429
)
(10,245
)
Recaptured funds1
183

245

1,082

Appropriated and reserved AHP funds as of the end of the period
$
28,011

$
30,863

$
35,264

                   
1 
Recaptured funds are direct grants returned to the FHLBank in those instances where the commitments associated with the approved use of funds are not met and repayment to the FHLBank is required by regulation. Recaptured funds are returned as a result of: (1) AHP-assisted homeowner’s transfer or sale of property within the five-year retention period that the assisted homeowner is required to occupy the property; (2) homeowner’s failure to acquire sufficient loan funding (funds previously approved and disbursed cannot be used); (3) over-subsidized projects; or (4) previously disbursed but unused grants.

As of December 31, 2015, the FHLBank’s AHP accrual on its Statements of Condition consisted of $10,802,000 for the 2016 AHP (uncommitted, including amounts recaptured and reallocated from prior years) and $17,209,000 for prior years’ AHP (committed but undisbursed).


NOTE 12ASSETS 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.


F-47


Tables 12.1 and 12.2 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 December 31, 2015 and 2014 (in thousands):

Table 12.1
12/31/2015
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:
 
 
 
 
 
Uncleared derivatives
$
62,102

$
(53,171
)
$
8,931

$
(71
)
$
8,860

Cleared derivatives
4,184

38,476

42,660


42,660

Total derivative assets
66,286

(14,695
)
51,591

(71
)
51,520

Securities purchased under agreements to resell
3,945,000


3,945,000

(3,945,000
)

TOTAL
$
4,011,286

$
(14,695
)
$
3,996,591

$
(3,945,071
)
$
51,520

                   
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 12.2
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:
 
 
 
 
 
Uncleared 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).


F-48


Tables 12.3 and 12.4 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 December 31, 2015 and 2014 (in thousands):

Table 12.3
12/31/2015
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:
 
 
 
 
 
Uncleared derivatives
$
159,334

$
(127,842
)
$
31,492

$
(73
)
$
31,419

Cleared derivatives
55,332

(55,332
)



Total derivative liabilities
214,666

(183,174
)
31,492

(73
)
31,419

TOTAL
$
214,666

$
(183,174
)
$
31,492

$
(73
)
$
31,419

                   
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 12.4
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:
 
 
 
 
 
Uncleared 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).



F-49


NOTE 13CAPITAL

Capital Requirements: 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 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 13.1 illustrates that the FHLBank was in compliance with its regulatory capital requirements as of December 31, 2015 and 2014 (dollar amounts in thousands):

Table 13.1
 
12/31/2015
12/31/2014
 
Required
Actual
Required
Actual
Regulatory capital requirements:
 
 
 
 
Risk-based capital
$
331,821

$
1,681,247

$
334,484

$
1,392,962

Total regulatory capital-to-asset ratio
4.0
%
4.2
%
4.0
%
4.4
%
Total regulatory capital
$
1,777,426

$
1,863,468

$
1,474,159

$
1,605,361

Leverage capital ratio
5.0
%
6.1
%
5.0
%
6.2
%
Leverage capital
$
2,221,783

$
2,704,091

$
1,842,699

$
2,301,842


Capital Stock: The FHLBank offers two classes of stock, Class A Common Stock and Class B Common Stock. Each member is required to hold capital stock to become and remain a member of the FHLBank (Asset-based Stock Purchase Requirement; Class A Common Stock) and enter into specified activities with the FHLBank including, but not limited to, access to the FHLBank’s credit products and selling Acquired Member Assets (AMA) to the FHLBank (Activity-based Stock Purchase Requirement; Class A Common Stock to the extent of a member’s Asset-based Stock Purchase Requirement, then Class B Common Stock for the remainder). The amount of Class A Common Stock a member must acquire and maintain is the Asset-based Stock Purchase Requirement, which is currently equal to 0.1 percent of a member’s total assets as of December 31 of the preceding calendar year, with a minimum requirement of $1,000, and a maximum requirement of $500,000. The amount of Class B Common Stock a member must acquire and maintain is the Activity-based Stock Purchase Requirement, which is currently equal to 4.5 percent of the principal amount of advances outstanding to the member less the member’s Asset-based Stock Purchase Requirement. There are currently no Activity-based Stock Purchase Requirements for AMA, letters of credit or derivatives.

The percentages listed above are subject to change by the FHLBank within ranges established in its capital plan. Changes to the percentages outside of the capital plan percentages require the FHLBank to request Finance Agency approval of an amended capital plan. See Note 18 for detailed information on transactions with related parties.


F-50


Any member may make a written request not in connection with a notice of withdrawal or attaining non-member status for the redemption of a part of its Class A Common Stock or all or part of its Class B Common Stock (i.e., excess stock redemption request). Within five business days of receipt of a member’s written redemption request, the FHLBank may notify the member that it declines to repurchase the excess stock before the end of that five business day period, at which time the applicable redemption period shall commence. Otherwise, the FHLBank will repurchase any excess stock within the five business day period. The redemption periods are six months for Class A Common Stock and five years for Class B Common Stock. Subject to certain limitations, the FHLBank may choose to repurchase a member’s excess stock on or before the end of the applicable redemption period.

The GLB Act made membership voluntary for all members. Finance Agency regulations provide members that withdraw from membership may not be readmitted to membership, or acquire any capital stock of any FHLBank, for a period of five years from the date on which the institution's membership terminated and it divested all of its shares of FHLBank stock.

Stock Dividends: The FHLBank’s board of directors may declare and pay non-cumulative dividends, expressed as a percentage rate per annum based upon the par value of capital stock on shares of Class A Common Stock outstanding and on shares of Class B Common Stock outstanding, out of previously unrestricted retained earnings and current earnings in either cash or Class B Common Stock. There is no dividend preference between Class A Common Stockholders and Class B Common Stockholders up to the Dividend Parity Threshold (DPT). Dividend rates in excess of the DPT may be paid on Class A Common Stock or Class B Common Stock at the discretion of the board of directors, provided, however, that the dividend rate paid per annum on the Class B Common Stock equals or exceeds the dividend rate per annum paid on the Class A Common Stock for any dividend period. The DPT can be changed at any time by the board of directors but will only be effective for dividends paid at least 90 days after the date members are notified by the FHLBank. The DPT effective for dividends paid during 2015, 2014, and 2013 was equal to the average overnight Federal funds effective rate minus 100 basis points. This DPT will continue to be effective until such time as it may be changed by the FHLBank’s board of directors. When the overnight Federal funds effective rate is below 1.00 percent, the DPT is zero percent for that dividend period (DPT is floored at zero).

The board of directors cannot declare a dividend if: (1) the FHLBank’s capital position is below its minimum regulatory capital requirements; (2) the FHLBank’s capital position will be below its minimum regulatory capital requirements after paying the dividend; (3) the principal or interest due on any consolidated obligation of the FHLBank has not been paid in full; (4) the FHLBank fails to provide the Finance Agency the quarterly certification prior to declaring or paying dividends for a quarter; or (5) the FHLBank fails to provide notification upon its inability to provide such certification or upon a projection that it will fail to comply with statutory or regulatory liquidity requirements or will be unable to timely and fully meet all of its current obligations.

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 13.2 provides the related dollar amounts for activities recorded in “Mandatorily redeemable capital stock” during the years ended December 31, 2015, 2014, and 2013 (in thousands):

Table 13.2
 
2015
2014
2013
Balance, beginning of period
$
4,187

$
4,764

$
5,665

Capital stock subject to mandatory redemption reclassified from equity during the period
586,192

393,848

356,841

Redemption or repurchase of mandatorily redeemable capital stock during the period
(587,674
)
(394,463
)
(357,765
)
Stock dividend classified as mandatorily redeemable capital stock during the period
34

38

23

Balance, end of period
$
2,739

$
4,187

$
4,764



F-51


Table 13.3 shows the amount of mandatorily redeemable capital stock by contractual year of redemption as of December 31, 2015 and 2014 (in thousands). The year of redemption in Table 13.3 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 13.3
Contractual Year of Repurchase
12/31/2015
12/31/2014
Year 1
$
407

$
53

Year 2
1


Year 3
1

1

Year 4

2

Year 5
196


Past contractual redemption date due to remaining activity1
2,134

4,131

TOTAL
$
2,739

$
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.

A member may cancel or revoke its written redemption request prior to the end of the redemption period (six months for Class A Common Stock and five years for Class B Common Stock) or its written notice of withdrawal from membership prior to the end of a six-month period starting on the date the FHLBank received the member’s written notice of withdrawal from membership. At the end of the six-month period, the member’s membership is terminated and the Class A Common Stock held to meet its Asset-based Stock Purchase Requirement will be redeemed by the FHLBank, as long as the FHLBank will continue to meet its regulatory capital requirements and as long as the Class A Common Stock is not needed to meet the former member’s Activity-based Stock Purchase Requirements. The FHLBank’s capital plan provides that the FHLBank will charge the member a cancellation fee in accordance with a schedule where the amount of the fee increases with the passage of time, the fee being 1.0 percent for any Class A Common Stock cancellation and starting at 1.0 percent in year one for Class B Common Stock and increasing by 1.0 percent each year to a maximum of 5.0 percent for cancellations in the fifth year for Class B Common Stock.

The Finance Agency issued a regulatory interpretation confirming that the mandatorily redeemable capital stock accounting treatment for certain shares of FHLBank capital stock does not affect the definition of regulatory capital for purposes of determining the FHLBank’s compliance with its regulatory capital requirements, calculating its mortgage securities investment authority (various percentages of total FHLBank capital depending on the date acquired), calculating its unsecured credit exposure to other GSEs (100 percent of total FHLBank capital) or calculating its unsecured credit limits to other counterparties (various percentages of total FHLBank capital depending on the rating of the counterparty).

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 December 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 for the fourth quarter of 2015, the FHLBank has been classified as adequately capitalized.



F-52


NOTE 14ACCUMULATED OTHER COMPREHENSIVE INCOME

Table 14.1 summarizes the changes in AOCI for the years ended December 31, 2015, 2014, and 2013 (in thousands):

Table 14.1
 
Net Unrealized Gain (Loss) on Available-for-Sale Securities (Note 4)
Net Non-credit Portion of OTTI Losses on
Held-to-maturity Securities (Note 4)
Defined Benefit Pension Plan (Note 15)
Total AOCI
Balance at December 31, 2012
$

$
(20,846
)
$
(4,411
)
$
(25,257
)
Other comprehensive income (loss) before reclassification:
 
 
 
 
Non-credit OTTI losses
 
(19
)
 
(19
)
Accretion of non-credit loss
 
4,340

 
4,340

Net gain (loss) - defined benefit pension plan
 
 
1,667

1,667

Reclassifications from other comprehensive income (loss) to net income:
 
 
 
 
Non-credit OTTI to credit OTTI1
 
522

 
522

Amortization of net loss - defined benefit pension plan2
 
 
386

386

Net current period other comprehensive income (loss)

4,843

2,053

6,896

Balance at December 31, 2013

(16,003
)
(2,358
)
(18,361
)
Other comprehensive income (loss) before reclassification:
 
 
 
 
Non-credit OTTI losses
 
(4
)
 
(4
)
Accretion of non-credit loss
 
3,713

 
3,713

Net gain (loss) - defined benefit pension plan
 
 
(1,923
)
(1,923
)
Reclassifications from other comprehensive income (loss) to net income:
 
 
 
 
Non-credit OTTI to credit OTTI1
 
520

 
520

Amortization of net loss - defined benefit pension plan2
 
 
148

148

Net current period other comprehensive income (loss)

4,229

(1,775
)
2,454

Balance at December 31, 2014

(11,774
)
(4,133
)
(15,907
)
Other comprehensive income (loss) before reclassification:
 
 
 
 
Unrealized gain (loss)
(8,577
)
 
 
(8,577
)
Non-credit OTTI losses
 
(206
)
 
(206
)
Accretion of non-credit loss
 
3,012

 
3,012

Non-credit loss included in basis of securities sold
 
267

 
267

Net gain (loss) - defined benefit pension plan
 
 
1,268

1,268

Reclassifications from other comprehensive income (loss) to net income:
 
 
 
 
Non-credit OTTI to credit OTTI1
 
751

 
751

Amortization of net loss - defined benefit pension plan2
 
 
415

415

Net current period other comprehensive income (loss)
(8,577
)
3,824

1,683

(3,070
)
Balance at December 31, 2015
$
(8,577
)
$
(7,950
)
$
(2,450
)
$
(18,977
)
                   
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).


F-53



NOTE 15 - PENSION AND POSTRETIREMENT BENEFIT PLANS

Qualified Defined Benefit Multiemployer Plan: The FHLBank participates in the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra Defined Benefit Plan), a tax-qualified defined benefit pension plan. The Pentegra Defined Benefit Plan is treated as a multiemployer plan for accounting purposes but operates as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. As a result, certain multiemployer plan disclosures are not applicable to the Pentegra Defined Benefit Plan. Under the Pentegra Defined Benefit Plan, contributions made by a participating employer may be used to provide benefits to employees of other participating employers because assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer. Also, in the event a participating employer is unable to meet its contribution requirements, the required contributions for the other participating employers could increase proportionately.

The Pentegra Defined Benefit Plan covers substantially all officers and employees of the FHLBank who began employment prior to January 1, 2009.

The Pentegra Defined Benefit Plan operates on a fiscal year from July 1 through June 30 and files one Form 5500 on behalf of all employers who participate in the plan. The Employer Identification Number is 13-5645888 and the three-digit plan number is 333. There are no collective bargaining agreements in place at the FHLBank.

The Pentegra Defined Benefit Plan’s annual valuation process includes calculating the plan’s funded status and separately calculating the funded status of each participating employer. The funded status is defined as the market value of assets divided by the funding target (100 percent of the present value of all benefit liabilities accrued at that date). As permitted by ERISA, the Pentegra Defined Benefit Plan accepts contributions for the prior plan year up to eight and a half months after the asset valuation date. As a result, the market value of assets at the valuation date (July 1) will increase by any subsequent contributions designated for the immediately preceding plan year ended June 30.

The most recent Form 5500 available for the Pentegra Defined Benefit Plan is for the year ended June 30, 2014. For the Pentegra Defined Benefit Plan years ended June 30, 2014 and 2013, the FHLBank’s contributions did not represent more than five percent of the total contributions to the Pentegra Defined Benefit Plan. The pension provisions under Moving Ahead for Progress in the 21st Century (MAP-21), enacted July 6, 2012, changed the discount rate to be used in the valuation of future benefits. The increased rates will decrease the valuation as well as the minimum required contributions. By maintaining a level of funding comparative to prior periods (contributing more than the minimum required contribution), the FHLBank is effectively increasing its funded status in the short-term. Table 15.1 presents the net pension cost and funded status of the FHLBank relating to the Pentegra Defined Benefit Plan (dollar amounts in thousands):

Table 15.1
 
2015
2014
2013
Net pension cost charged to compensation and benefits expense
$
2,004

$
1,604

$
2,510

Pentegra Defined Benefit Plan funded status as of July 11
106.9
%
111.4
%
101.3
%
FHLBank's funded status as of July 1
108.1
%
117.1
%
105.6
%
                   
1 
The funded status as of July 1, 2015 is preliminary and may increase because the plan’s participants were permitted to make contributions for the plan year ended June 30, 2015 through March 15, 2016. Contributions made on or before March 15, 2016, and designated for the plan year ended June 30, 2015, will be included in the final valuation as of July 1, 2015. The final funded status as of July 1, 2015 will not be available until the Form 5500 for the plan year July 1, 2015 through June 30, 2016 is filed (this Form 5500 is due to be filed no later than April 2017). The funded status as of July 1, 2014 is preliminary and may increase because the plan’s participants were permitted to make contributions for the plan year ended June 30, 2014 through March 15, 2015. Contributions made on or before March 15, 2015, and designated for the plan year ended June 30, 2014, will be included in the final valuation as of July 1, 2014. The final funded status as of July 1, 2014 will not be available until the Form 5500 for the plan year July 1, 2014 through June 30, 2015 is filed (this Form 5500 is due to be filed no later than April 2016).

Qualified Defined Contribution Plans: The FHLBank also participates in the Pentegra Defined Contribution Plan for Financial Institutions, a tax-qualified, defined contribution pension plan. Substantially all officers and employees of the FHLBank are covered by the plan. The FHLBank contributes a matching amount equal to a percentage of voluntary employee contributions, subject to certain limitations. The FHLBank’s contributions of $1,129,000, $1,046,000 and $962,000 to the Pentegra Defined Contribution Plan in 2015, 2014, and 2013, respectively, were charged to compensation and benefits expense.


F-54


Nonqualified Supplemental Retirement Plan: The FHLBank maintains a benefit equalization plan (BEP) covering certain senior officers. This non-qualified plan contains provisions for a deferred compensation component and a defined benefit pension component. The BEP is, in substance, an unfunded supplemental retirement plan. The cost of the defined benefit pension component of the BEP charged to compensation and benefits expense was $1,452,000, $1,081,000 and $1,295,000 in 2015, 2014, and 2013, respectively. Compensation and benefits expense and other interest expense include deferred compensation and accrued earnings under the BEP of $555,000, $432,000 and $427,000 in 2015, 2014, and 2013, respectively.

As indicated, the BEP is a supplemental retirement plan for covered retirees. There are no funded plan assets that have been designated to provide for the deferred compensation component or defined benefit pension component of the BEP. The obligations and funding status of the defined benefit portion of the FHLBank’s BEP as of December 31, 2015 and 2014 are presented in Table 15.2 (in thousands):

Table 15.2
 
2015
2014
Change in benefit obligation:
 
 
Projected benefit obligation at beginning of year
$
13,560

$
10,925

Service cost
523

408

Interest cost
510

509

Benefits paid
(206
)
(205
)
Net (gain) loss
(1,268
)
1,923

Projected benefit obligation at end of year
13,119

13,560

Change in plan assets:
 
 
Fair value of plan assets at beginning of year


Employer contributions
206

205

Benefits paid
(206
)
(205
)
Fair value of plan assets at end of year


FUNDED STATUS
$
13,119

$
13,560


Table 15.3 presents the components of the net periodic pension cost for the defined benefit portion of the FHLBank’s BEP for the years ended December 31, 2015, 2014, and 2013 (in thousands):

Table 15.3
 
2015
2014
2013
Service cost
$
523

$
408

$
469

Interest cost
510

509

437

Amortization of net loss
415

148

386

NET PERIODIC POSTRETIREMENT BENEFIT COST
$
1,448

$
1,065

$
1,292


The estimated actuarial (gain) loss that will be amortized from AOCI into net periodic benefits costs over the next fiscal year is $190,000.

The measurement date used to determine the current year’s benefit obligation was December 31, 2015.


F-55


Table 15.4 presents the key assumptions and other information for the actuarial calculations for the defined benefit portion of the FHLBank’s BEP for the years ended December 31, 2015, 2014, and 2013 (dollar amounts in thousands):

Table 15.4
 
2015
2014
2013
Discount rate - benefit obligation
4.00
%
3.75
%
4.75
%
Discount rate - net periodic benefit cost
3.75
%
4.75
%
3.75
%
Salary increases
4.83
%
5.03
%
5.03
%
Amortization period (years)
7

8

8

Accumulated benefit obligation
$
11,070

$
11,196

$
9,220


The FHLBank estimates that its required contributions to the defined benefit portion of the FHLBank’s BEP for the year ended December 31, 2016 will be $295,000.

The FHLBank’s estimated future benefit payments are presented in Table 15.5 (in thousands):

Table 15.5
Year ending December 31,
Estimated Benefit Payments
2016
$
295

2017
366

2018
462

2019
548

2020
667

2021 through 2025
4,697



NOTE 16FAIR 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 December 31, 2015 and 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, available-for-sale 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.


F-56


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 years ended December 31, 2015 and 2014.


F-57


The carrying value and fair value of the FHLBank’s financial assets and liabilities as of December 31, 2015 and 2014 are summarized in Tables 16.1 and 16.2 (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 16.1
 
12/31/2015
 
Carrying
Value
Total
Fair
Value
Level 1
Level 2
Level 3
Netting
Adjustment
and Cash
Collateral
Assets:
 
 
 
 
 
 
Cash and due from banks
$
682,670

$
682,670

$
682,670

$

$

$

Interest-bearing deposits
100,594

100,594


100,594



Securities purchased under agreements to resell
3,945,000

3,945,000


3,945,000



Federal funds sold
2,000,000

2,000,000


2,000,000



Trading securities
2,294,606

2,294,606


2,294,606



Available-for-sale securities
495,063

495,063


495,063



Held-to-maturity securities
4,770,817

4,765,095


4,497,911

267,184


Advances
23,580,371

23,609,868


23,609,868



Mortgage loans held for portfolio, net of allowance
6,390,708

6,571,563


6,569,749

1,814


Accrued interest receivable
79,233

79,233


79,233



Derivative assets
51,591

51,591


66,286


(14,695
)
Liabilities:
 
 
 
 
 
 
Deposits
759,366

759,366


759,366



Consolidated obligation discount notes
21,813,746

21,813,507


21,813,507



Consolidated obligation bonds
19,875,255

19,851,097


19,851,097



Mandatorily redeemable capital stock
2,739

2,739

2,739




Accrued interest payable
52,281

52,281


52,281



Derivative liabilities
31,492

31,492


214,666


(183,174
)
Other Asset (Liability):
 
 
 
 
 
 
Standby letters of credit
(1,078
)
(1,078
)

(1,078
)


Standby bond purchase agreements
98

6,995


6,995



Advance commitments

(3,737
)

(3,737
)




F-58


Table 16.2
 
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 Methodologies and Techniques and Significant Inputs:

Cash and Due From Banks: The fair values approximate the carrying values.

Interest-bearing Deposits: The balance is comprised of interest-bearing deposits in banks. Based on the nature of the accounts, the carrying value approximates the fair value.

Securities Purchased Under Agreements to Resell: The fair values are determined by calculating the present value of the future cash flows. The discount rates used in the calculations are rates for securities with similar terms. For overnight borrowings, the carrying value approximates fair value.

Federal Funds Sold: The carrying value of overnight Federal funds approximates fair value, and term Federal funds are valued using projected future cash flows discounted at the current replacement rate.

Investment Securities - non-MBS: The fair values of short-term non-MBS investments are determined using an income approach based on representative publicly available curves based on the short-term non-MBS investment type.


F-59


For non-MBS long-term (as determined by original issuance date) securities, the FHLBank obtains prices from up to four designated third-party pricing vendors when available. The pricing vendors use various proprietary models to price investments. The inputs to those models are derived from various sources including, but not limited to: benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers and other market‑related data. Each pricing vendor has an established challenge process in place for all valuations, which facilitates resolution of potentially erroneous prices identified by the FHLBank. The use of multiple pricing vendors provides the FHLBank with additional data points regarding levels of inputs and final prices that are used to validate final pricing of investment securities. The utilization of the average of available vendor prices within a cluster tolerance and the evaluation of reasonableness of outlier prices described below does not discard available information.

Annually, the FHLBank conducts reviews of the four pricing vendors to confirm and further augment its understanding of the vendors’ pricing processes, methodologies and control procedures. The FHLBank’s review process includes obtaining available vendors’ independent auditors’ reports regarding the internal controls over their valuation process, although the availability of pertinent reports varies by vendor.

The FHLBank utilizes a valuation technique for estimating the fair values of non-MBS long-term securities as follows:
The FHLBank’s valuation technique first requires the establishment of a median price for each security. If four prices are received, the average of the middle two prices is used; if three prices are received, the middle price is used; if two prices are received, the average of the two prices is used; and if one price is received, it is used subject to validation.
All prices that are within a specified tolerance threshold of the median price are included in the cluster of prices that are averaged to compute a default price.
Prices that are outside the threshold (outliers) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, and/or non‑binding dealer estimates) to determine if an outlier is a better estimate of fair value.
If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price rather than the default price.
If, on the other hand, the analysis confirms that an outlier (or outliers) is (are) in fact not representative of fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of the security.
If all prices received for a security are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.

As of December 31, 2015, four prices were received for substantially all of the FHLBank’s non-MBS long-term holdings with most vendor prices falling within the tolerances so the final prices for those securities were computed by averaging the prices received. Based on the FHLBank’s reviews of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or, in those instances in which there were outliers, the FHLBank’s additional analyses), the FHLBank has concluded that its final prices result in reasonable estimates of fair value and that the fair value measurements are classified appropriately in the fair value hierarchy. Based on the significant lack of market activity for state or local housing agency obligations, the fair value measurements for those securities were classified as Level 3 within the fair value hierarchy as of December 31, 2015 and 2014.

Investment Securities - MBS/ABS: For MBS/ABS securities, the FHLBank obtains prices from up to four designated third-party pricing vendors when available. These pricing vendors use various proprietary models to price investments. The inputs to those models are derived from various sources including, but not limited to: benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers and other market-related data (certain inputs are actively quoted and can be validated to external sources). Since many MBS/ABS are not traded on a daily basis, the pricing vendors use available information as applicable such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual securities. Each pricing vendor has an established challenge process in place for all valuations, which facilitates resolution of potentially erroneous prices identified by the FHLBank. The use of multiple pricing vendors provides the FHLBank with additional data points regarding levels of inputs and final prices that are used to validate final pricing of investment securities. The utilization of the average of available vendor prices within a cluster tolerance and the evaluation of reasonableness of outlier prices does not discard available information.

Similar to the description above for non-MBS long-term securities, the FHLBank has conducted reviews of the four pricing vendors and has established a price for each MBS/ABS using a formula that was based upon the number of prices received, subject to review of outliers. As an additional step, the FHLBank reviewed the final fair value estimates of its private-label MBS/ABS holdings for reasonableness using an implied yield test. The FHLBank calculated an implied yield for each of its private-label MBS/ABS using the estimated fair value derived from the process described above and the security’s projected cash flows from the FHLBank’s OTTI process and compared such yield to the yield for comparable securities according to dealers and other third-party sources to the extent comparable yield data was available. This analysis did not indicate that any adjustments to the fair value estimates were necessary.


F-60


As of December 31, 2015, four vendor prices were received for substantially all of the FHLBank’s MBS/ABS holdings with most vendor prices falling within the tolerances so the final prices for those securities were computed by averaging the prices received. Based on the FHLBank’s reviews of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or, in those instances in which there were outliers or significant yield variances, the FHLBank’s additional analyses), the FHLBank has concluded that its final prices result in reasonable estimates of fair value and that the fair value measurements are classified appropriately in the fair value hierarchy. Based on the significant lack of market activity for private-label MBS/ABS, the fair value measurements for those securities were classified as Level 3 within the fair value hierarchy as of December 31, 2015 and 2014.

Advances: The fair values of advances are determined by calculating the present values of the expected future cash flows from the advances, excluding the amount of accrued interest receivable. The discount rates used in these calculations are equivalent to the replacement advance rates for advances with similar terms.

The inputs used to determine the fair values of advances are as follows:
Consolidated Obligation (CO) curve and LIBOR curve. The Office of Finance constructs an internal curve, referred to as the CO curve, using the U.S. Treasury curve as a base curve that is then adjusted by adding indicative spreads obtained from market observable sources. These market indications are generally derived from pricing indications from dealers, historical pricing relationships, recent GSE trades and secondary market activity. The CO curve is used for fixed rate callable and non-callable advances. The LIBOR curve is used for variable rate advances and certain fixed rate advances with other optionality.
Volatility assumption. To estimate the fair values of advances with optionality, the FHLBank uses market-based expectations of future interest rate volatility implied from current market prices for similar options.
Spread adjustment. Represents an adjustment to the CO curve or LIBOR curve.

In accordance with Finance Agency regulations, an advance with a maturity or repricing period greater than six months requires a prepayment fee sufficient to make the FHLBank financially indifferent to the borrower’s decision to prepay the advance. Therefore, the fair value of an advance does not assume prepayment risk. The FHLBank did not adjust the fair value measurement for creditworthiness primarily because advances were fully collateralized.

Mortgage Loans Held for Portfolio: The fair values of mortgage loans are determined based on quoted market prices of similar mortgage loans. These prices, however, can change rapidly based upon market conditions and are highly dependent upon the underlying prepayment assumptions.

Accrued Interest Receivable and Payable: The fair values approximate the carrying values.

Derivative Assets/Liabilities: The FHLBank bases the fair values of derivatives on instruments with similar terms or market prices, when available. However, active markets do not exist for many of the FHLBank’s derivatives. Consequently, fair values for these instruments are generally estimated using standard valuation techniques such as discounted cash flow analysis and comparisons to similar instruments. The FHLBank is subject to credit risk due to the risk of nonperformance by counterparties to its derivative transactions. For uncleared derivatives, the degree of credit risk depends on the extent to which master netting arrangements are included in these contracts to mitigate the risk. In addition, the FHLBank requires collateral agreements with collateral delivery thresholds on the majority of its uncleared derivatives. 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 through a clearing agent for changes in the value of cleared derivatives. The FHLBank has evaluated the potential for the fair value of the instruments to be impacted by counterparty credit risk and its own credit risk and has determined that no adjustments were significant or necessary to the overall fair value measurements of derivatives.

The fair values of the FHLBank’s derivative assets and liabilities include accrued interest receivable/payable and cash collateral, including initial and variation margin, remitted to/received from counterparties. The estimated fair values of the accrued interest receivable/payable and cash collateral approximate their carrying values due to their short-term nature. Derivatives are presented on a net basis by clearing agent by Clearinghouse or by counterparty when it has met the netting requirements. If these netted amounts are positive, they are classified as an asset and, if negative, a liability.


F-61


The discounted cash flow model uses market-observable inputs. Inputs by class of derivative are as follows:
Interest-rate related:
Discount rate assumption - Overnight-index Swap curve;
Forward interest rate assumption for rate resets - LIBOR swap curve;
Volatility assumptions - market-based expectations of future interest rate volatility implied from current market prices for similar options; and
Prepayment assumptions.
Mortgage delivery commitments:
To be announced (TBA) price - market-based prices of TBAs by coupon class and expected term until settlement.

Deposits: The fair values of deposits are determined by calculating the present values of the expected future cash flows from the deposits. The calculated present values are reduced by the accrued interest payable. The discount rates used in these calculations are the cost of deposits with similar terms.
 
Consolidated Obligations: The fair values for consolidated obligation bonds and discount notes are determined by using standard valuation techniques and inputs based on the cost of raising comparable term debt.

The inputs used to determine the fair values of consolidated obligations are as follows:
CO curve and LIBOR curve. Fixed rate consolidated obligations that do not contain options are discounted using a replacement rate based on the CO curve. Variable rate consolidated obligations that do not contain options are discounted using LIBOR. Consolidated obligations that contain optionality are discounted using LIBOR.
Volatility assumption. To estimate the fair values of consolidated obligations with optionality, the FHLBank uses market-based expectations of future interest rate volatility implied from current market prices for similar options.

Mandatorily Redeemable Capital Stock: The fair value of capital stock subject to mandatory redemption is generally at par value. Fair value also includes estimated dividends earned at the time of reclassification from equity to liabilities, until such amount is paid, and any subsequently declared stock dividend. The FHLBank’s dividends are declared and paid at each quarter end; therefore, fair value equaled par value as of the end of the periods presented. Stock can only be acquired by members at par value and redeemed or repurchased at par value. Stock is not traded and no market mechanism exists for the exchange of stock outside the cooperative structure.

Standby Letters of Credit: The fair values of standby letters of credit are based on the present value of fees currently charged for similar agreements. The value of these guarantees is recognized and recorded in other liabilities.

Standby Bond Purchase Agreements: The fair values of the standby bond purchase agreements are estimated using the present value of the future fees on existing agreements with fees determined using rates currently charged for similar agreements.

Advance Commitments: The fair values of advance commitments are based on the present value of fees currently charged for similar agreements, taking into account the remaining terms of the agreement and the difference between current levels of interest rates and the committed rates.

Fair Value Measurements: Tables 16.3 and 16.4 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 or for the period ended December 31, 2015 and 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 during a period 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 7. REO is measured at fair value when the asset’s fair value less costs to sell is lower than its carrying amount.


F-62


Table 16.3
 
12/31/2015
 
Total
Level 1
Level 2
Level 3
Netting
Adjustment
and Cash
Collateral1
Recurring fair value measurements - Assets:
 
 
 
 
 
Trading securities:
 
 
 
 
 
GSE obligations2, 3
$
1,338,639

$

$
1,338,639

$

$

U.S. obligation MBS4
801


801



GSE MBS5
955,166


955,166



Total trading securities
2,294,606


2,294,606



Available-for-sale securities:
 
 
 
 
 
GSE MBS6
495,063


495,063



Total available-for-sale securities
495,063


495,063



Derivative assets:
 
 
 
 
 
Interest-rate related
51,520


66,215


(14,695
)
Mortgage delivery commitments
71


71



Total derivative assets
51,591


66,286


(14,695
)
TOTAL RECURRING FAIR VALUE MEASUREMENTS - ASSETS
$
2,841,260

$

$
2,855,955

$

$
(14,695
)
 
 
 
 
 
 
Recurring fair value measurements - Liabilities:
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
Interest-rate related
$
31,428

$

$
214,602

$

$
(183,174
)
Mortgage delivery commitments
64


64



Total derivative liabilities
31,492


214,666


(183,174
)
TOTAL RECURRING FAIR VALUE MEASUREMENTS - LIABILITIES
$
31,492

$

$
214,666

$

$
(183,174
)
 
 
 
 
 
 
Nonrecurring fair value measurements - Assets7:
 
 
 
 
 
Held-to-maturity securities:
 
 
 
 
 
Private-label residential MBS
$
6,151

$

$

$
6,151

$

Impaired mortgage loans
1,823



1,823


Real estate owned
2,168



2,168


TOTAL NONRECURRING FAIR VALUE MEASUREMENTS - ASSETS
$
10,142

$

$

$
10,142

$

                   
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, Farm Credit and Farmer Mac. GSE securities are not guaranteed by the U.S. government.
3 
See Note 19 for transactions with other FHLBanks.
4 
Represents single-family MBS issued by Ginnie Mae, which are guaranteed by the U.S. government.
5 
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.
6 
Represents multi-family MBS issued by Fannie Mae.
7 
Includes assets adjusted to fair value during the year ended December 31, 2015 and still outstanding as of December 31, 2015.


F-63


Table 16.4
 
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, 3
1,299,979


1,299,979



U.S. obligation MBS4
963


963



GSE MBS5
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 securities6:
 
 
 
 
 
Private-label residential MBS
$
134

$

$

$
134

$

Real estate owned7
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.
3 
See Note 19 for transactions with other FHLBanks.
4 
Represents single-family MBS issued by Ginnie Mae, which are guaranteed by the U.S. government.
5 
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.
6 
Excludes impaired securities with carrying values less than their fair values at date of impairment.
7 
Includes REO written down to fair value during the quarter ended December 31, 2014 and still outstanding as of December 31, 2014.



F-64


NOTE 17COMMITMENTS AND CONTINGENCIES

Joint and Several Liability: As provided by the Bank Act or Finance Agency regulation and as described in Note 10, 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 $863,556,912,000 and $812,794,196,000 as of December 31, 2015 and 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 December 31, 2015, FHLBank Topeka has concluded that a loss accrual is not necessary at this time.

Off-balance Sheet Commitments: As of December 31, 2015 and 2014, off-balance sheet commitments are presented in Table 17.1 (in thousands):

Table 17.1
 
12/31/2015
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
$
2,795,968

$
16,598

$
2,812,566

$
2,544,683

$
9,880

$
2,554,563

Advance commitments outstanding
104,473

24,950

129,423


32,796

32,796

Commitments for standby bond purchases
314,742

1,108,133

1,422,875

759,725

785,250

1,544,975

Commitments to fund or purchase mortgage loans
66,045


66,045

53,004


53,004

Commitments to issue consolidated bonds, at par
55,000


55,000

50,000


50,000

Commitments to issue consolidated discount notes, at par
1,154,355


1,154,355





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 December 31, 2015, outstanding standby letters of credit had original terms of 6 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 $1,078,000 and $926,000 as of December 31, 2015 and 2014, respectively. Standby letters of credit are fully collateralized with assets allowed by the FHLBank’s 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.


F-65


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 December 31, 2015 and 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 years ended December 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 $7,000 and $138,000 as of December 31, 2015 and 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.

Lease Commitments: Net rental costs under operating leases of approximately $73,000, $115,000 and $118,000 in 2015, 2014, and 2013, respectively, for premises and equipment have been charged to other operating expenses. Total future minimum net rentals, which extend no later than 2020, are $347,000.

Safekeeping Custodial Arrangements: The FHLBank acts as a securities safekeeping custodian on behalf of participating members. Actual securities are held by a third-party custodian acting as agent for the FHLBank. As of December 31, 2015, the total original par value of customer securities held by the FHLBank under this arrangement was $42,166,054,000.

Other commitments and contingencies are discussed in Notes 1, 5, 6, 7, 8, 10, 11, 13 and 15.


NOTE 18TRANSACTIONS 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.

As provided by statute, the FHLBank’s members have the right to vote on the election of directors. In accordance with the Bank Act and Finance Agency regulations, members elect all of the FHLBank’s board of directors. Under the statute and regulations, each member directorship is designated to one of the four states in the FHLBank’s district, and a member is entitled to vote only for candidates for the state in which the member’s principal place of business is located. Each independent director is elected by the members at large from among individuals nominated by the FHLBank’s board of directors. A member is entitled to cast, for each applicable directorship, one vote for each share of capital stock that the member is required to hold as of the record date for voting, subject to a statutory limitation. Under this limitation, the total number of votes that a member may cast is limited to the average number of shares of the FHLBank’s capital stock that were required to be held by all members in that state as of the record date for voting. Non-member stockholders are not entitled to cast votes for the election of directors. As of December 31, 2015 and 2014, no member owned more than 10 percent of the voting interests of the FHLBank due to the statutory limitation on members’ voting rights as discussed above.

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.


F-66


Activity with Members that Exceed a 10 Percent Ownership in FHLBank Capital Stock: Tables 18.1 and 18.2 present information as of December 31, 2015 and 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 18.1
12/31/2015
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
$
500

0.3
%
$
218,915

21.3
%
$
219,415

18.1
%
MidFirst Bank
OK
500

0.3

172,718

16.8

173,218

14.3

TOTAL
 
$
1,000

0.6
%
$
391,633

38.1
%
$
392,633

32.4
%

Table 18.2
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
%

Advance and deposit balances with members that owned more than 10 percent of outstanding FHLBank regulatory capital stock as of December 31, 2015 and 2014 are summarized in Table 18.3 (dollar amounts in thousands). Information is only listed for the period in which the member owned more than 10 percent of outstanding FHLBank regulatory stock.

Table 18.3
 
12/31/2015
12/31/2014
12/31/2015
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
$
4,800,000

20.4
%
$
2,103,400

11.6
%
$
21,492

2.8
%
$
2,534

0.4
%
MidFirst Bank
3,779,000

16.1

2,736,500

15.1

541

0.1

567

0.1

Capitol Federal Savings Bank




2,575,000

14.2





1,737

0.3

TOTAL
$
8,579,000

36.5
%
$
7,414,900

40.9
%
$
22,033

2.9
%
$
4,838

0.8
%

Bank of Oklahoma, NA and MidFirst Bank did not sell any mortgage loans into the MPF Program during the years ended December 31, 2015 and 2014. Additionally, Capitol Federal Savings Bank did not sell any mortgage loans into the MPF Program during the year ended December 31, 2014.


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Transactions with FHLBank Directors’ Financial Institutions: Table 18.4 presents information as of December 31, 2015 and 2014 for members that had an officer or director serving on the FHLBank’s board of directors (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 18.4
 
12/31/2015
12/31/2014
 
Outstanding Amount
Percent of Total
Outstanding Amount
Percent of Total
Advances
$
150,566

0.6
%
$
219,239

1.2
%
 
 
 
 
 
Deposits
$
7,895

1.0
%
$
8,524

1.4
%
 
 
 
 
 
Class A Common Stock
$
4,023

2.2
%
$
4,175

2.0
%
Class B Common Stock
4,725

0.5

7,419

1.0

TOTAL CAPITAL STOCK
$
8,748

0.7
%
$
11,594

1.2
%

Table 18.5 presents mortgage loans acquired during the years ended December 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 18.5
 
2015
2014
 
Amount
Percent of Total
Amount
Percent of Total
Mortgage loans acquired
$
115,182

9.9
%
$
90,894

8.7
%

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 7 for additional information on the direct financing lease.



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NOTE 19TRANSACTIONS WITH OTHER FHLBANKS

FHLBank Topeka had the following business transactions with other FHLBanks during the years ended December 31, 2015, 2014, and 2013 as presented in Table 19.1 (in thousands). All transactions occurred at market prices.

Table 19.1
Business Activity
2015
2014
2013
Average overnight interbank loan balances to other FHLBanks1
$
2,252

$
907

$
1,847

Average overnight interbank loan balances from other FHLBanks1
5,992

3,014

13,671

Average deposit balances with FHLBank of Chicago for interbank transactions2
1,208

698

2,115

Transaction charges paid to FHLBank of Chicago for transaction service fees3
3,477

3,259

3,126

Par amount of purchases of consolidated obligations issued on behalf of other FHLBanks4


150,500

_________
1 
Occasionally, the FHLBank loans (or borrows) short-term funds to (from) other FHLBanks. Interest income on loans to other FHLBanks is included in Other Interest Income and interest expense on borrowings from other FHLBanks is included in Other Interest Expense on the Statements of Income.
2 
Balances are interest bearing and are classified on the Statements of Condition as interest-bearing deposits.
3 
Fees are calculated monthly based on outstanding loans at the per annum rate in effect at origination.
4 
Purchases of consolidated obligations issued on behalf of one FHLBank and purchased by the FHLBank occur at market prices with third parties and are accounted for in the same manner as similarly classified investments. Outstanding fair value balances totaling $224,754,000 and $229,177,000 as of December 31, 2015 and 2014, respectively, are included in the non-MBS GSE obligations totals presented in Note 4. Interest income earned on these securities totaled $9,011,000, $9,019,000, and $7,151,000 for the years ended December 31, 2015, 2014, and 2013, respectively.


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