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EX-32 - EXHIBIT 32 - Federal Home Loan Bank of Topekaex3311732.htm
EX-31.2 - EXHIBIT 31.2 - Federal Home Loan Bank of Topekaex33117312.htm
EX-31.1 - EXHIBIT 31.1 - Federal Home Loan Bank of Topekaex33117311.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
 
OR
 
¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
 
Commission File Number 000-52004
 
FEDERAL HOME LOAN BANK OF TOPEKA
(Exact name of registrant as specified in its charter)
 
Federally chartered corporation
 
48-0561319
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
One Security Benefit Pl. Suite 100
Topeka, KS
 
 
66606
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code: 785.233.0507

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x  Yes  ¨  No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨                            Accelerated filer ¨
Non-accelerated filer x (Do not check if a smaller reporting company)    Smaller reporting company ¨
Emerging growth company ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  ¨ Yes  x No
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
 
Shares outstanding as of
May 2, 2017
Class A Stock, par value $100 per share
2,229,770
Class B Stock, par value $100 per share
13,822,662




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


2


Important Notice about Information in this Quarterly Report

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

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

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

Special Cautionary Notice Regarding Forward-looking Statements

The information in this Form 10-Q contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include statements describing the objectives, projections, estimates or future predictions of the FHLBank’s operations. These statements may be identified by the use of forward-looking terminology such as “anticipates,” “believes,” “may,” “is likely,” “could,” “estimate,” “expect,” “will,” “intend,” “probable,” “project,” “should,” or their negatives or other variations of these terms. The FHLBank cautions that by their nature forward-looking statements involve risks or uncertainties and that actual results may differ materially from those expressed in any forward-looking statements as a result of such risks and uncertainties, including but not limited to:
Governmental actions, including legislative, regulatory, judicial or other developments that affect the FHLBank; its members, counterparties or investors; housing government-sponsored enterprises (GSE); or the FHLBank System in general;
Changes in the FHLBank’s capital structure;
Changes in economic and market conditions, including conditions in our district and the U.S. and global economy, as well as the mortgage, housing and capital markets;
Changes in demand for FHLBank products and services or consolidated obligations of the FHLBank System;
Effects of derivative accounting treatment and other accounting rule requirements, or changes in such requirements;
The effects of amortization/accretion;
Gains/losses on derivatives or on trading investments and the ability to enter into effective derivative instruments on acceptable terms;
Volatility of market prices, interest rates and indices and the timing and volume of market activity;
Membership changes, including changes resulting from member failures or mergers, changes due to member eligibility, or changes in the principal place of business of members;
Our ability to declare dividends or to pay dividends at rates consistent with past practices;
Soundness of other financial institutions, including FHLBank members, non-member borrowers, counterparties, and the other FHLBanks;
Changes in the value or liquidity of collateral underlying advances to FHLBank members or non-member borrowers or collateral pledged by reverse repurchase and derivative counterparties;
Competitive forces, including competition for loan demand, purchases of mortgage loans and access to funding;
The ability of the FHLBank to introduce new products and services to meet market demand and to manage successfully the risks associated with all products and services;
The ability of the FHLBank to keep pace with technological changes and the ability to develop and support technology and information systems, including the ability to securely access the internet and internet-based systems and services, sufficient to effectively manage the risks of the FHLBank’s business;
The ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the FHLBank has joint and several liability;
Changes in the U.S. government’s long-term debt rating and the long-term credit rating of the senior unsecured debt issues of the FHLBank System;
Changes in the fair value and economic value of, impairments of, and risks associated with, the FHLBank’s investments in mortgage loans and mortgage-backed securities (MBS) or other assets and related credit enhancement (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.


3


Readers of this report should not rely solely on the forward-looking statements and should consider all risks and uncertainties addressed throughout this report, as well as those discussed under Item 1A – Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2016, incorporated by reference herein.

All forward-looking statements contained in this Form 10-Q are expressly qualified in their entirety by reference to this cautionary notice. The reader should not place undue reliance on such forward-looking statements, since the statements speak only as of the date that they are made and the FHLBank has no obligation and does not undertake publicly to update, revise or correct any forward-looking statement for any reason to reflect events or circumstances after the date of this report.


PART I

Item 1: Financial Statements


4


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF CONDITION - Unaudited
 
 
(In thousands, except par value)
 
 
 
03/31/2017
12/31/2016
ASSETS
 
 
Cash and due from banks
$
108,492

$
207,254

Interest-bearing deposits
401,161

387,920

Securities purchased under agreements to resell (Note 10)
2,500,000

2,400,000

Federal funds sold
2,705,000

2,725,000

 
 
 
Investment securities:
 
 
Trading securities (Note 3)
2,702,316

2,502,788

Available-for-sale securities (Note 3)
1,124,924

1,091,721

Held-to-maturity securities1 (Note 3)
4,852,742

4,502,224

Total investment securities
8,679,982

8,096,733

 
 
 
Advances (Notes 4, 6)
25,822,945

23,985,835

 
 
 
Mortgage loans held for portfolio, net:
 
 
Mortgage loans held for portfolio (Notes 5, 6)
6,702,565

6,642,399

Less allowance for credit losses on mortgage loans (Note 6)
(1,617
)
(1,674
)
Mortgage loans held for portfolio, net
6,700,948

6,640,725

 
 
 
Overnight loans to other FHLBanks

600,000

Accrued interest receivable
72,569

68,400

Premises, software and equipment, net
21,139

16,205

Derivative assets, net (Notes 7, 10)
51,998

60,900

Other assets
26,897

27,777

 
 
 
TOTAL ASSETS
$
47,091,131

$
45,216,749

 
 
 
LIABILITIES
 
 
Deposits (Note 8)
$
579,805

$
598,931

 
 
 
Consolidated obligations, net:
 
 
Discount notes (Note 9)
22,505,730

21,775,341

Bonds (Note 9)
21,670,348

20,722,335

Total consolidated obligations, net
44,176,078

42,497,676

 
 
 
Mandatorily redeemable capital stock (Note 11)
2,264

2,670

Accrued interest payable
60,887

49,808

Affordable Housing Program payable
37,404

33,242

Derivative liabilities, net (Notes 7, 10)
2,665

7,171

Other liabilities
102,599

64,803

 
 
 
TOTAL LIABILITIES
44,961,702

43,254,301

 
 
 
Commitments and contingencies (Note 14)



1    Fair value: $4,844,888 and $4,487,252 as of March 31, 2017 and December 31, 2016, respectively.
The accompanying notes are an integral part of these financial statements.


5


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF CONDITION - Unaudited
 
 
(In thousands, except par value)
 
 
 
03/31/2017
12/31/2016
 
 
 
CAPITAL
 
 
Capital stock outstanding - putable:
 
 
Class A ($100 par value; 1,738 and 1,621 shares issued and outstanding) (Note 11)
$
173,756

$
162,143

Class B ($100 par value; 11,786 and 10,645 shares issued and outstanding) (Note 11)
1,178,589

1,064,532

Total capital stock
1,352,345

1,226,675

 
 
 
Retained earnings:
 
 
Unrestricted
632,842

611,226

Restricted
134,714

123,970

Total retained earnings
767,556

735,196

 
 
 
Accumulated other comprehensive income (loss) (Note 12)
9,528

577

 
 
 
TOTAL CAPITAL
2,129,429

1,962,448

 
 
 
TOTAL LIABILITIES AND CAPITAL
$
47,091,131

$
45,216,749



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


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF INCOME - Unaudited
 
 
(In thousands)
 
 
 
Three Months Ended
 
03/31/2017
03/31/2016
INTEREST INCOME:
 
 
Interest-bearing deposits
$
648

$
332

Securities purchased under agreements to resell
4,150

3,029

Federal funds sold
4,290

1,395

Trading securities
14,929

18,181

Available-for-sale securities
4,432

2,022

Held-to-maturity securities
14,852

11,532

Advances
72,887

53,199

Prepayment fees on terminated advances, net
870

489

Mortgage loans held for portfolio
52,578

52,301

Other
301

327

Total interest income
169,937

142,807

 
 
 
INTEREST EXPENSE:
 
 
Deposits
582

226

Consolidated obligations:
 
 
Discount notes
35,488

20,907

Bonds
67,103

56,729

Mandatorily redeemable capital stock (Note 11)
14

9

Other
78

66

Total interest expense
103,265

77,937

 
 
 
NET INTEREST INCOME
66,672

64,870

(Reversal) provision for credit losses on mortgage loans (Note 6)
(45
)
(257
)
NET INTEREST INCOME AFTER LOAN LOSS (REVERSAL) PROVISION
66,717

65,127

 
 
 
OTHER INCOME (LOSS):
 
 
Total other-than-temporary impairment losses on held-to-maturity securities
(4
)
(64
)
Net amount of impairment losses on held-to-maturity securities reclassified to/(from) accumulated other comprehensive income (loss)
(33
)
37

Net other-than-temporary impairment losses on held-to-maturity securities (Note 3)
(37
)
(27
)
Net gain (loss) on trading securities (Note 3)
4,687

49,204

Net gain (loss) on derivatives and hedging activities (Note 7)
603

(58,486
)
Standby bond purchase agreement commitment fees
1,160

1,380

Letters of credit fees
938

852

Other
534

561

Total other income (loss)
7,885

(6,516
)
 
 
 

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


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF INCOME - Unaudited
 
 
(In thousands)
 
 
 
Three Months Ended
 
03/31/2017
03/31/2016
OTHER EXPENSES:
 
 
Compensation and benefits
$
8,429

$
7,751

Other operating
3,730

3,341

Federal Housing Finance Agency
752

809

Office of Finance
778

712

Other
1,227

1,026

Total other expenses
14,916

13,639

 
 
 
INCOME BEFORE ASSESSMENTS
59,686

44,972

 
 
 
Affordable Housing Program
5,970

4,498

 
 
 
NET INCOME
$
53,716

$
40,474



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


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF COMPREHENSIVE INCOME - Unaudited
 
 
(In thousands)
 
 
Three Months Ended
 
03/31/2017
03/31/2016
Net income
$
53,716

$
40,474

 
 
 
Other comprehensive income (loss):
 
 
Net unrealized gain (loss) on available-for-sale securities:
 
 
Unrealized gain (loss)
8,485

4,742

Total net unrealized gain (loss) on available-for-sale securities
8,485

4,742

 
 
 
Net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities:
 
 
Non-credit portion
(4
)
(62
)
Reclassification of non-credit portion included in net income
37

25

Accretion of non-credit portion
376

550

Total net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities
409

513

 
 
 
Defined benefit pension plan:
 
 
Amortization of net loss
57

47

Total defined benefit pension plan
57

47

 
 
 
Total other comprehensive income (loss)
8,951

5,302

 
 
 
TOTAL COMPREHENSIVE INCOME
$
62,667

$
45,776

 


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


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

Comprehensive income
 
 
 
 
 
 
32,379

8,095

40,474

5,302

45,776

Proceeds from issuance of capital stock
11

1,074

3,940

394,047

3,951

395,121

 
 
 
 
395,121

Repurchase/redemption of capital stock
(1,158
)
(115,815
)
(7
)
(654
)
(1,165
)
(116,469
)
 
 
 
 
(116,469
)
Net reclassification of shares to mandatorily redeemable capital stock
(35
)
(3,509
)
(1,567
)
(156,725
)
(1,602
)
(160,234
)
 
 
 
 
(160,234
)
Net transfer of shares between Class A and Class B
1,480

148,046

(1,480
)
(148,046
)


 
 
 
 

Dividends on capital stock (Class A - 1.0%, Class B - 6.0%):
 
 
 
 
 
 
 
 
 
 
 
Cash payment
 
 
 
 
 
 
(73
)
 
(73
)
 
(73
)
Stock issued
 
 
191

19,081

191

19,081

(19,081
)
 
(19,081
)
 

Balance at March 31, 2016
2,095

$
209,479

11,370

$
1,136,967

13,465

$
1,346,446

$
573,391

$
99,711

$
673,102

$
(13,675
)
$
2,005,873

 
 
 
 
 
 
 
 
 
 
 
 
 
Capital Stock1
Retained Earnings
Accumulated
Total Capital
 
Other
 
Class A
Class B
Total
Comprehensive
 
Shares
Par Value
Shares
Par Value
Shares
Par Value
Unrestricted
Restricted
Total
Income (Loss)
Balance at December 31, 2016
1,621

$
162,143

10,645

$
1,064,532

12,266

$
1,226,675

$
611,226

$
123,970

$
735,196

$
577

$
1,962,448

Comprehensive income
 
 
 
 
 
 
42,972

10,744

53,716

8,951

62,667

Proceeds from issuance of capital stock

31

4,387

438,669

4,387

438,700

 
 
 
 
438,700

Repurchase/redemption of capital stock
(1,605
)
(160,498
)
(4
)
(429
)
(1,609
)
(160,927
)
 
 
 
 
(160,927
)
Net reclassification of shares to mandatorily redeemable capital stock
(4
)
(485
)
(1,729
)
(172,910
)
(1,733
)
(173,395
)
 
 
 
 
(173,395
)
Net transfer of shares between Class A and Class B
1,726

172,565

(1,726
)
(172,565
)


 
 
 
 

Dividends on capital stock (Class A - 1.0%, Class B - 6.5%):
 
 
 
 




 
 
 
 
 

Cash payment
 
 
 
 




(64
)
 
(64
)
 
(64
)
Stock issued
 
 
213

21,292

213

21,292

(21,292
)
 
(21,292
)
 

Balance at March 31, 2017
1,738
$
173,756

11,786
$
1,178,589

13,524
$
1,352,345

$
632,842

$
134,714

$
767,556

$
9,528

$
2,129,429

                   
1    Putable


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


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF CASH FLOWS - Unaudited
 
 
(In thousands)
 
 
 
Three Months Ended
 
03/31/2017
03/31/2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
Net income
$
53,716

$
40,474

Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:
 
 
Depreciation and amortization:
 
 
Premiums and discounts on consolidated obligations, net
(32
)
(1,000
)
Concessions on consolidated obligations
1,151

2,001

Premiums and discounts on investments, net
691

549

Premiums, discounts and commitment fees on advances, net
(1,543
)
(1,622
)
Premiums, discounts and deferred loan costs on mortgage loans, net
4,328

4,091

Fair value adjustments on hedged assets or liabilities
1,272

1,392

Premises, software and equipment
498

517

Other
57

47

(Reversal) provision for credit losses on mortgage loans
(45
)
(257
)
Non-cash interest on mandatorily redeemable capital stock
13

6

Net other-than-temporary impairment losses on held-to-maturity securities
37

27

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

(21
)
Other adjustments
12

(157
)
Net (gain) loss on trading securities
(4,687
)
(49,204
)
(Gain) loss due to change in net fair value adjustment on derivative and hedging activities
5,955

72,104

(Increase) decrease in accrued interest receivable
(4,138
)
7,640

Change in net accrued interest included in derivative assets
(6,460
)
(9,067
)
(Increase) decrease in other assets
(104
)
749

Increase (decrease) in accrued interest payable
11,090

10,843

Change in net accrued interest included in derivative liabilities
(504
)
(6,740
)
Increase (decrease) in Affordable Housing Program liability
4,162

1,526

Increase (decrease) in other liabilities
(5,602
)
(4,519
)
Total adjustments
6,151

28,905

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
59,867

69,379

 
 
 

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


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF CASH FLOWS - Unaudited
 
 
(In thousands)
 
 
 
Three Months Ended
 
03/31/2017
03/31/2016
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
Net (increase) decrease in interest-bearing deposits
$
4,423

$
(341,009
)
Net (increase) decrease in securities purchased under resale agreements
(100,000
)
1,185,000

Net (increase) decrease in Federal funds sold
20,000

(330,000
)
Net (increase) decrease in short-term trading securities
(200,000
)

Proceeds from maturities of and principal repayments on long-term trading securities
5,159

255,284

Purchases of long-term trading securities

(193,445
)
Proceeds from maturities of and principal repayments on long-term available-for-sale securities
1,241

447

Purchases of long-term available-for-sale securities
(30,408
)
(318,669
)
Proceeds from maturities of and principal repayments on long-term held-to-maturity securities
218,349

217,454

Purchases of long-term held-to-maturity securities
(524,988
)
(18,425
)
Principal collected on advances
116,198,905

33,241,537

Advances made
(118,053,563
)
(35,041,019
)
Principal collected on mortgage loans
226,724

200,093

Purchases of mortgage loans
(292,016
)
(222,757
)
Proceeds from sale of foreclosed assets
45

797

Principal collected on other loans made
619

578

Net (increase) decrease in loans to other FHLBanks
600,000


Proceeds from sale of premises, software and equipment
48

1

Purchases of premises, software and equipment
(5,012
)
(1,749
)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
(1,930,474
)
(1,365,882
)
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
Net increase (decrease) in deposits
(4,966
)
(46,151
)
Net proceeds from issuance of consolidated obligations:
 
 
Discount notes
229,023,531

140,349,601

Bonds
2,927,114

1,416,303

Payments for maturing and retired consolidated obligations:
 
 
Discount notes
(228,296,599
)
(137,005,650
)
Bonds
(1,973,230
)
(4,138,750
)
Proceeds from financing derivatives

9,517

Net interest payments received (paid) for financing derivatives
(7,900
)
(25,064
)
Proceeds from issuance of capital stock
438,700

395,121

Payments for repurchase/redemption of capital stock
(160,927
)
(116,469
)
Payments for repurchase of mandatorily redeemable capital stock
(173,814
)
(159,546
)
Cash dividends paid
(64
)
(73
)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
1,771,845

678,839

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(98,762
)
(617,664
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
207,254

682,670

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
108,492

$
65,006

 
 
 

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


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF CASH FLOWS - Unaudited
 
 
(In thousands)
 
 
 
Three Months Ended
 
03/31/2017
03/31/2016
Supplemental disclosures:
 
 
Interest paid
$
95,448

$
69,437

Affordable Housing Program payments
$
1,927

$
3,290

Net transfers of mortgage loans to other assets
$
337

$
223

Change in capital expenditures incurred but reserved for construction holdback
$
468

$


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



FEDERAL HOME LOAN BANK OF TOPEKA
Notes to Financial Statements - Unaudited
March 31, 2017


NOTE 1BASIS OF PRESENTATION

Basis of Presentation: The accompanying interim financial statements of the Federal Home Loan Bank of Topeka (FHLBank or FHLBank Topeka) are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instruction provided by Article 10, Rule 10-01 of Regulation S-X. The financial statements contain all adjustments which are, in the opinion of management, necessary for a fair statement of the FHLBank’s financial position, results of operations and cash flows for the interim periods presented. All such adjustments were of a normal recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year or any other interim period.

The FHLBank’s significant accounting policies and certain other disclosures are set forth in the notes to the audited financial statements for the year ended December 31, 2016. The interim financial statements presented herein should be read in conjunction with the FHLBank’s audited financial statements and notes thereto, which are included in the FHLBank’s annual report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 9, 2017 (annual report on Form 10-K). The notes to the interim financial statements highlight significant changes to the notes included in the annual report on Form 10-K.

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

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

The FHLBank utilizes two Derivative Clearing Organizations (Clearinghouses) for all cleared derivative transactions, LCH.Clearnet LLC and CME Clearing. Effective January 3, 2017, CME Clearing made certain amendments to its rulebook changing the legal characterization of variation margin payments to be daily settlement payments rather than collateral. Variation margin payments related to LCH.Clearnet LLC contracts continue to be characterized as cash collateral. At both Clearinghouses, initial margin is considered cash collateral.



14


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

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

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. In March 2017, FASB issued an amendment to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendment requires that the employer disaggregate the service cost component and the other components of net benefit cost and allow only the service cost component of net benefit cost to be eligible for capitalization. The amendment is intended to provide transparency, consistency, and usefulness to users of financial statements. The amendment will be effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, which is January 1, 2018 for the FHLBank, and early adoption is permitted. This guidance should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The adoption of this guidance is not expected to have a material effect on the FHLBank's financial condition, results of operations or cash flows.

Classification of Certain Cash Receipts and Cash Payments. In August 2016, FASB issued amendments to clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. This guidance is intended to reduce existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance is effective for the FHLBank for interim and annual periods beginning on January 1, 2018, and early adoption is permitted. This guidance should be applied using a retrospective transition method to each period presented. This guidance is not expected to have a material impact on the FHLBank's statement of cash flows.

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

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

The guidance is effective for the FHLBank for interim and annual periods beginning on January 1, 2020. Early application is permitted as of the interim and annual reporting periods beginning after December 15, 2018. The guidance should be applied using a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In addition, entities are required to use a prospective transition approach for debt securities for which an other-than-temporary impairment (OTTI) charge had been recognized before the effective date. The FHLBank is currently evaluating this guidance and has begun its implementation efforts by identifying key interpretive issues that will eventually determine the magnitude of the impact on the FHLBank's financial condition, results of operations and cash flows.


15


Contingent Put and Call Options in Debt Instruments. In March 2016, FASB issued amendments to resolve current diversity in practice by clarifying the steps required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. The amendments became effective for annual periods, and interim periods within those annual periods, beginning on January 1, 2017. The adoption of this guidance had no effect on the FHLBank's financial condition, results of operations or cash flows.

Leases. In February 2016, FASB issued amendments to lease accounting guidance. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases in the statement of financial condition, which effectively removes a source of off-balance sheet financing for operating leases. A distinction remains between finance leases and operating leases, but the assets and liabilities arising from operating leases are now also required to be recognized in the statement of financial condition. Lessor accounting is largely unchanged. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, which is January 1, 2019 for the FHLBank. The FHLBank has a limited number of lease agreements and is currently evaluating this guidance 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 has concluded that this guidance will impact disclosures related to the fair value of financial instruments. However, 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.

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, FASB voted to defer the effective date of the new standard by one year. In addition, in March 2016, FASB issued amendments to clarify the implementation guidance on principal versus agent considerations, in particular, relating to how an entity should determine whether the entity is a principal or an agent for each specified good or service promised to the customer and the nature of each specified good or service. The amendments do not change the core principle in the new revenue standard. The standard is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017, which is January 1, 2018 for the FHLBank. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the FHLBank does not expect the new guidance to have a material impact on its financial condition, results of operations or cash flows.



16


NOTE 3INVESTMENT SECURITIES

Trading Securities: Trading securities by major security type as of March 31, 2017 and December 31, 2016 are summarized in Table 3.1 (in thousands):

Table 3.1
 
Fair Value
 
03/31/2017
12/31/2016
Non-mortgage-backed securities:
 
 
Certificates of deposit
$
200,006

$

GSE obligations1
1,564,310

1,563,351

Non-mortgage-backed securities
1,764,316

1,563,351

Mortgage-backed securities:
 
 
U.S. obligation MBS2
665

690

GSE MBS3
937,335

938,747

Mortgage-backed securities
938,000

939,437

TOTAL
$
2,702,316

$
2,502,788

                   
1 
Represents debentures issued by other FHLBanks, Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), Federal Farm Credit Bank (Farm Credit) and Federal Agricultural Mortgage Corporation (Farmer Mac). GSE securities are not guaranteed by the U.S. government.
2 
Represents single-family MBS issued by Government National Mortgage Association (Ginnie Mae), which are guaranteed by the U.S. government.
3 
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.

Net gains (losses) on trading securities during the three months ended March 31, 2017 and 2016 are shown in Table 3.2 (in thousands):

Table 3.2
 
Three Months Ended
 
03/31/2017
03/31/2016
Net gains (losses) on trading securities held as of March 31, 2017
$
4,687

$
53,955

Net gains (losses) on trading securities sold or matured prior to March 31, 2017

(4,751
)
NET GAIN (LOSS) ON TRADING SECURITIES
$
4,687

$
49,204


Available-for-sale Securities: Available-for-sale securities by major security type as of March 31, 2017 are summarized in Table 3.3 (in thousands):

Table 3.3
 
03/31/2017
 
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Mortgage-backed securities:
 
 
 
 
GSE MBS1
$
1,107,094

$
17,840

$
(10
)
$
1,124,924

TOTAL
$
1,107,094

$
17,840

$
(10
)
$
1,124,924

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


17


Available-for-sale securities by major security type as of December 31, 2016 are summarized in Table 3.4 (in thousands):

Table 3.4
 
12/31/2016
 
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Mortgage-backed securities:
 
 
 
 
GSE MBS1
$
1,082,376

$
9,396

$
(51
)
$
1,091,721

TOTAL
$
1,082,376

$
9,396

$
(51
)
$
1,091,721

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

Table 3.5 summarizes the available-for-sale securities with unrealized losses as of March 31, 2017 (in thousands). The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

Table 3.5
 
03/31/2017
 
Less Than 12 Months
12 Months or More
Total
 
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Mortgage-backed securities:
 
 
 
 
 
 
GSE MBS1
$
30,408

$
(10
)
$

$

$
30,408

$
(10
)
TOTAL TEMPORARILY IMPAIRED SECURITIES
$
30,408

$
(10
)
$

$

$
30,408

$
(10
)
                   
1 
Represents fixed rate multi-family MBS issued by Fannie Mae.

Table 3.6 summarizes the available-for-sale securities with unrealized losses as of December 31, 2016 (in thousands). The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

Table 3.6
 
12/31/2016
 
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
$

$

$
33,509

$
(51
)
$
33,509

$
(51
)
TOTAL TEMPORARILY IMPAIRED SECURITIES
$

$

$
33,509

$
(51
)
$
33,509

$
(51
)
                   
1 
Represents fixed rate multi-family MBS issued by Fannie Mae.

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


18


Held-to-maturity Securities: Held-to-maturity securities by major security type as of March 31, 2017 are summarized in Table 3.7 (in thousands):

Table 3.7
 
03/31/2017
 
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
$
95,580

$

$
95,580

$
62

$
(5,610
)
$
90,032

Non-mortgage-backed securities
95,580


95,580

62

(5,610
)
90,032

Mortgage-backed securities:
 
 
 
 
 
 
U.S. obligation MBS1
117,025


117,025

1

(209
)
116,817

GSE MBS2
4,542,231


4,542,231

13,909

(17,566
)
4,538,574

Private-label residential MBS
103,338

(5,432
)
97,906

4,952

(3,393
)
99,465

Mortgage-backed securities
4,762,594

(5,432
)
4,757,162

18,862

(21,168
)
4,754,856

TOTAL
$
4,858,174

$
(5,432
)
$
4,852,742

$
18,924

$
(26,778
)
$
4,844,888

                   
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.

Held-to-maturity securities by major security type as of December 31, 2016 are summarized in Table 3.8 (in thousands):

Table 3.8
 
12/31/2016
 
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
$
105,780

$

$
105,780

$
98

$
(5,707
)
$
100,171

Non-mortgage-backed securities
105,780


105,780

98

(5,707
)
100,171

Mortgage-backed securities:
 
 
 
 
 
 
U.S obligation MBS1
36,331


36,331


(201
)
36,130

GSE MBS2
4,250,547


4,250,547

12,044

(22,071
)
4,240,520

Private-label residential MBS
115,407

(5,841
)
109,566

4,869

(4,004
)
110,431

Mortgage-backed securities
4,402,285

(5,841
)
4,396,444

16,913

(26,276
)
4,387,081

TOTAL
$
4,508,065

$
(5,841
)
$
4,502,224

$
17,011

$
(31,983
)
$
4,487,252

                    
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.


19


Table 3.9 summarizes the held-to-maturity securities with unrealized losses as of March 31, 2017 (in thousands). The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

Table 3.9
 
03/31/2017
 
Less Than 12 Months
12 Months or More
Total
 
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses1
Non-mortgage-backed securities:
 
 
 
 
 
 
State or local housing agency obligations
$

$

$
24,390

$
(5,610
)
$
24,390

$
(5,610
)
Non-mortgage-backed securities


24,390

(5,610
)
24,390

(5,610
)
Mortgage-backed securities:
 
 
 
 
 
 
U.S. obligation MBS2
82,091

(125
)
34,600

(84
)
116,691

(209
)
GSE MBS3
503,701

(944
)
1,993,171

(16,622
)
2,496,872

(17,566
)
Private-label residential MBS
584

(1
)
79,149

(5,291
)
79,733

(5,292
)
Mortgage-backed securities
586,376

(1,070
)
2,106,920

(21,997
)
2,693,296

(23,067
)
TOTAL TEMPORARILY IMPAIRED SECURITIES
$
586,376

$
(1,070
)
$
2,131,310

$
(27,607
)
$
2,717,686

$
(28,677
)
                    
1 
Total unrealized losses in Table 3.9 will not agree to total gross unrecognized losses in Table 3.7. Total unrealized losses in Table 3.9 include non-credit-related OTTI recognized in accumulated other comprehensive income (AOCI) and gross unrecognized gains on previously other-than-temporarily impaired securities.
2 
Represents single-family MBS issued by Ginnie Mae, which are guaranteed by the U.S. government.
3 
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.

Table 3.10 summarizes the held-to-maturity securities with unrealized losses as of December 31, 2016 (in thousands). The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

Table 3.10
 
12/31/2016
 
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
$

$

$
34,348

$
(5,707
)
$
34,348

$
(5,707
)
Non-mortgage-backed securities


34,348

(5,707
)
34,348

(5,707
)
Mortgage-backed securities:
 
 
 
 
 
 
U.S obligation MBS2


35,998

(201
)
35,998

(201
)
GSE MBS3
1,097,379

(2,612
)
2,025,394

(19,459
)
3,122,773

(22,071
)
Private-label residential MBS
1,903

(3
)
85,984

(6,263
)
87,887

(6,266
)
Mortgage-backed securities
1,099,282

(2,615
)
2,147,376

(25,923
)
3,246,658

(28,538
)
TOTAL TEMPORARILY IMPAIRED SECURITIES
$
1,099,282

$
(2,615
)
$
2,181,724

$
(31,630
)
$
3,281,006

$
(34,245
)
                    
1 
Total unrealized losses in Table 3.10 will not agree to total gross unrecognized losses in Table 3.8. Total unrealized losses in Table 3.10 include non-credit-related OTTI recognized in 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.


20


The amortized cost, carrying value and fair values of held-to-maturity securities by contractual maturity as of March 31, 2017 and December 31, 2016 are shown in Table 3.11 (in thousands). Expected maturities of certain securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

Table 3.11
 
03/31/2017
12/31/2016
 
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
2,565

2,565

2,565

2,710

2,710

2,710

Due after five years through 10 years



10,055

10,055

10,048

Due after 10 years
93,015

93,015

87,467

93,015

93,015

87,413

Non-mortgage-backed securities
95,580

95,580

90,032

105,780

105,780

100,171

Mortgage-backed securities
4,762,594

4,757,162

4,754,856

4,402,285

4,396,444

4,387,081

TOTAL
$
4,858,174

$
4,852,742

$
4,844,888

$
4,508,065

$
4,502,224

$
4,487,252


Other-than-temporary Impairment: For the 19 outstanding private-label securities with OTTI during the lives of the securities, the FHLBank’s reported balances as of March 31, 2017 are presented in Table 3.12 (in thousands):

Table 3.12
 
03/31/2017
 
Unpaid
Principal
Balance
Amortized
Cost
Carrying
Value
Fair
Value
Private-label residential MBS:
 
 
 
 
Prime
$
9,551

$
8,531

$
7,911

$
8,878

Alt-A
25,815

23,006

18,194

22,026

TOTAL
$
35,366

$
31,537

$
26,105

$
30,904


Table 3.13 presents a roll-forward of OTTI activity for the three months ended March 31, 2017 and 2016 related to credit losses recognized in earnings (in thousands):

Table 3.13
 
Three Months Ended
 
03/31/2017
03/31/2016
Balance, beginning of period
$
7,502

$
7,785

Additional charge on securities for which OTTI was previously recognized1
37

27

Amortization of credit component of OTTI2
(69
)
(36
)
Balance, end of period
$
7,470

$
7,776

                    
1 
For the three months ended March 31, 2017 and 2016, securities previously impaired represent all securities that were impaired prior to January 1, 2017 and 2016, 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.


21


As of March 31, 2017, 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.


NOTE 4ADVANCES

General Terms: The FHLBank offers a wide range of fixed and variable rate advance products with different maturities, interest rates, payment characteristics and optionality. As of March 31, 2017 and December 31, 2016, the FHLBank had advances outstanding at interest rates ranging from 0.66 percent to 7.41 percent and 0.46 percent to 7.41 percent, respectively. Table 4.1 presents advances summarized by year of contractual maturity as of March 31, 2017 and December 31, 2016 (dollar amounts in thousands): 

Table 4.1
 
03/31/2017
12/31/2016
Year of Contractual Maturity
Amount
Weighted Average Interest Rate
Amount
Weighted Average Interest Rate
Due in one year or less
$
19,160,922

1.16
%
$
12,601,183

1.03
%
Due after one year through two years
1,886,504

1.78

2,019,260

1.96

Due after two years through three years
975,626

1.72

1,073,881

1.47

Due after three years through four years
1,047,470

2.08

781,339

1.96

Due after four years through five years
673,581

2.00

848,112

2.15

Thereafter
2,071,070

2.17

6,636,740

1.19

Total par value
25,815,173

1.37
%
23,960,515

1.24
%
Discounts
(12,435
)
 
(13,977
)
 
Hedging adjustments
20,207

 
39,297

 
TOTAL
$
25,822,945

 
$
23,985,835

 

The FHLBank’s advances outstanding include advances that contain call options that may be exercised with or without prepayment fees at the borrower’s discretion on specific dates (call dates) before the stated advance maturities (callable advances). In exchange for receiving the right to call the advance on a predetermined call schedule, the borrower may pay a higher fixed rate for the advance relative to an equivalent maturity, non-callable, fixed rate advance. The borrower normally exercises its call options on these advances when interest rates decline (fixed rate advances) or spreads change (adjustable rate advances). The FHLBank’s advances as of March 31, 2017 and December 31, 2016 include callable advances totaling $1,927,022,000 and $6,336,280,000, respectively. Of these callable advances, there were $1,880,337,000 and $6,260,837,000 of variable rate advances as of March 31, 2017 and December 31, 2016, respectively.

Convertible advances allow the FHLBank to convert an advance from one interest payment term structure to another. When issuing convertible advances, the FHLBank purchases put options from a member that allow the FHLBank to convert the fixed rate advance to a variable rate advance at the current market rate or another structure after an agreed-upon lockout period. A convertible advance carries a lower interest rate than a comparable-maturity fixed rate advance without the conversion feature. As of March 31, 2017 and December 31, 2016, the FHLBank had convertible advances outstanding totaling $1,027,342,000 and $1,147,392,000, respectively.


22


Table 4.2 presents advances summarized by contractual maturity or next call date (for callable advances) and by contractual maturity or next conversion date (for convertible advances) as of March 31, 2017 and December 31, 2016 (in thousands):

Table 4.2
 
Year of Contractual Maturity
or Next Call Date
Year of Contractual Maturity
or Next Conversion Date
Redemption Term
03/31/2017
12/31/2016
03/31/2017
12/31/2016
Due in one year or less
$
20,553,148

$
18,411,727

$
19,329,422

$
12,897,983

Due after one year through two years
1,532,082

1,752,403

1,809,504

1,800,460

Due after two years through three years
781,753

750,126

1,003,626

1,168,381

Due after three years through four years
960,052

666,059

1,136,120

808,139

Due after four years through five years
513,340

755,753

739,081

945,462

Thereafter
1,474,798

1,624,447

1,797,420

6,340,090

TOTAL PAR VALUE
$
25,815,173

$
23,960,515

$
25,815,173

$
23,960,515


Interest Rate Payment Terms:  Table 4.3 details additional interest rate payment terms for advances as of March 31, 2017 and December 31, 2016 (in thousands):

Table 4.3
 
03/31/2017
12/31/2016
Fixed rate:
 
 
Due in one year or less
$
8,496,631

$
2,400,382

Due after one year
5,273,824

5,589,805

Total fixed rate
13,770,455

7,990,187

Variable rate:
 

 

Due in one year or less
10,664,291

10,200,801

Due after one year
1,380,427

5,769,527

Total variable rate
12,044,718

15,970,328

TOTAL PAR VALUE
$
25,815,173

$
23,960,515


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


NOTE 5MORTGAGE LOANS

The MPF Program involves the FHLBank investing in mortgage loans, which have been funded by the FHLBank through or purchased from its participating members. These mortgage loans are government-insured or guaranteed loans (by the Federal Housing Administration (FHA), the Department of Veterans Affairs (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 participating financial institutions (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.


23


Mortgage Loans Held for Portfolio: Table 5.1 presents information as of March 31, 2017 and December 31, 2016 on mortgage loans held for portfolio (in thousands):

Table 5.1
 
03/31/2017
12/31/2016
Real estate:
 
 
Fixed rate, medium-term1, single-family mortgages
$
1,324,034

$
1,353,938

Fixed rate, long-term, single-family mortgages
5,273,241

5,182,103

Total unpaid principal balance
6,597,275

6,536,041

Premiums
103,638

103,665

Discounts
(2,871
)
(2,276
)
Deferred loan costs, net
363

387

Other deferred fees
(78
)
(85
)
Hedging adjustments
4,238

4,667

Total before Allowance for Credit Losses on Mortgage Loans
6,702,565

6,642,399

Allowance for Credit Losses on Mortgage Loans
(1,617
)
(1,674
)
MORTGAGE LOANS HELD FOR PORTFOLIO, NET
$
6,700,948

$
6,640,725

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

Table 5.2 presents information as of March 31, 2017 and December 31, 2016 on the outstanding unpaid principal balance (UPB) of mortgage loans held for portfolio (in thousands):

Table 5.2
 
03/31/2017
12/31/2016
Conventional loans
$
5,945,759

$
5,899,924

Government-guaranteed or insured loans
651,516

636,117

TOTAL UNPAID PRINCIPAL BALANCE
$
6,597,275

$
6,536,041


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


NOTE 6ALLOWANCE FOR CREDIT LOSSES

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


24


Roll-forward of Allowance for Credit Losses: Table 6.1 presents a roll-forward of the allowance for credit losses for the three months ended March 31, 2017 as well as the method used to evaluate impairment relating to all portfolio segments regardless of whether or not an estimated credit loss has been recorded as of March 31, 2017 (in thousands). The recorded investment in a financing receivable is the UPB, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or discounts, fair value hedging adjustments and direct write-downs. The recorded investment is not net of any valuation allowance.

Table 6.1
 
03/31/2017
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total
Allowance for credit losses:
 
 
 
 
 
Balance, beginning of three-month period
$
1,674

$

$

$

$
1,674

Net (charge-offs) recoveries
(12
)



(12
)
(Reversal) provision for credit losses
(45
)



(45
)
Balance, end of three-month period
$
1,617

$

$

$

$
1,617

 
 
 
 
 
 
Allowance for credit losses, end of period:
 

 

 

 

 

Individually evaluated for impairment
$

$

$

$

$

Collectively evaluated for impairment
1,617




1,617

 
 
 
 
 
 
Recorded investment, end of period:
 

 

 

 

 

Individually evaluated for impairment
$
11,883

$

$
25,848,675

$
16,763

$
25,877,321

Collectively evaluated for impairment
6,056,998

665,794



6,722,792

Total
$
6,068,881

$
665,794

$
25,848,675

$
16,763

$
32,600,113

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


25


Table 6.2 presents a roll-forward of the allowance for credit losses for the three months ended March 31, 2016 as well as the method used to evaluate impairment relating to all portfolio segments regardless of whether or not an estimated credit loss has been recorded as of March 31, 2016 (in thousands):

Table 6.2
 
03/31/2016
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total
Allowance for credit losses:
 
 
 
 
 
Balance, beginning of three-month period
$
1,972

$

$

$

$
1,972

Net (charge-offs) recoveries
(108
)



(108
)
(Reversal) provision for credit losses
(257
)



(257
)
Balance, end of three-month period
$
1,607

$

$

$

$
1,607

 
 
 
 
 
 
Allowance for credit losses, end of period:
 

 

 

 

 

Individually evaluated for impairment
$

$

$

$

$

Collectively evaluated for impairment
1,607




1,607

 
 
 
 
 
 
Recorded investment, end of period:
 

 

 

 



Individually evaluated for impairment
$
12,204

$

$
25,460,813

$
19,189

$
25,492,206

Collectively evaluated for impairment
5,786,733

643,747



6,430,480

Total
$
5,798,937

$
643,747

$
25,460,813

$
19,189

$
31,922,686

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

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


26


Table 6.3 summarizes the delinquency aging and key credit quality indicators for all of the FHLBank’s portfolio segments as of March 31, 2017 (dollar amounts in thousands):

Table 6.3
 
03/31/2017
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total
Recorded investment:
 
 
 
 
 
Past due 30-59 days delinquent
$
36,450

$
17,008

$

$

$
53,458

Past due 60-89 days delinquent
7,440

4,534



11,974

Past due 90 days or more delinquent
11,798

5,728



17,526

Total past due
55,688

27,270



82,958

Total current loans
6,013,193

638,524

25,848,675

16,763

32,517,155

Total recorded investment
$
6,068,881

$
665,794

$
25,848,675

$
16,763

$
32,600,113

 
 
 
 
 
 
Other delinquency statistics:
 

 

 

 

 

In process of foreclosure, included above2
$
4,189

$
1,676

$

$

$
5,865

Serious delinquency rate3
0.2
%
0.9
%
%
%
0.1
%
Past due 90 days or more and still accruing interest
$

$
5,728

$

$

$
5,728

Loans on non-accrual status4
$
15,323

$

$

$

$
15,323

                   
1 
The recorded investment for credit products includes only advances. The recorded investment for all other credit products is insignificant.
2 
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.
3 
Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total recorded investment for the portfolio class.
4 
Loans on non-accrual status include $1,299,000 of troubled debt restructurings. Troubled debt restructurings are restructurings in which the FHLBank, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.


27


Table 6.4 summarizes the key credit quality indicators for all of the FHLBank’s portfolio segments as of December 31, 2016 (dollar amounts in thousands):

Table 6.4
 
12/31/2016
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total
Recorded investment:
 
 
 
 
 
Past due 30-59 days delinquent
$
40,290

$
16,920

$

$

$
57,210

Past due 60-89 days delinquent
7,982

6,383



14,365

Past due 90 days or more delinquent
11,970

5,185



17,155

Total past due
60,242

28,488



88,730

Total current loans
5,962,533

622,856

24,009,010

17,385

30,611,784

Total recorded investment
$
6,022,775

$
651,344

$
24,009,010

$
17,385

$
30,700,514

 
 
 
 
 
 
Other delinquency statistics:
 

 

 

 

 

In process of foreclosure, included above2
$
4,408

$
1,748

$

$

$
6,156

Serious delinquency rate3
0.2
%
0.8
%
%
%
0.1
%
Past due 90 days or more and still accruing interest
$

$
5,185

$

$

$
5,185

Loans on non-accrual status4
$
15,002

$

$

$

$
15,002

                   
1 
The recorded investment for credit products includes only advances. The recorded investment for all other credit products is insignificant.
2 
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.
3 
Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total recorded investment for the portfolio class.
4 
Loans on non-accrual status include $1,327,000 of troubled debt restructurings. Troubled debt restructurings are restructurings in which the FHLBank, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.

Individually Evaluated Impaired Loans: Table 6.5 presents the recorded investment, UPB, and related allowance of impaired conventional mortgage loans individually assessed for impairment as of March 31, 2017 and December 31, 2016 (in thousands):

Table 6.5
 
03/31/2017
12/31/2016
 
Recorded Investment
Unpaid Principal Balance
Related Allowance
Recorded Investment
Unpaid Principal Balance
Related Allowance
With no related allowance
$
11,883

$
11,805

$

$
11,834

$
11,776

$

With an allowance






TOTAL
$
11,883

$
11,805

$

$
11,834

$
11,776

$



28


Table 6.6 presents the average recorded investment and related interest income recognized on these individually evaluated impaired loans during the three months ended March 31, 2017 and 2016 (in thousands):

Table 6.6
 
Three Months Ended
 
03/31/2017
03/31/2016
 
Average Recorded Investment
Interest Income Recognized
Average Recorded Investment
Interest Income Recognized
With no related allowance
$
11,652

$
74

$
11,322

$
82

With an allowance




TOTAL
$
11,652

$
74

$
11,322

$
82


The FHLBank had $2,544,000 and $2,608,000 classified as real estate owned (REO) recorded in other assets as of March 31, 2017 and December 31, 2016, respectively.


NOTE 7DERIVATIVES AND HEDGING ACTIVITIES

Table 7.1 presents outstanding notional amounts and fair values (excluding fair value adjustments related to variation margin on daily settled contracts) of the derivatives outstanding by type of derivative and by hedge designation as of March 31, 2017 and December 31, 2016 (in thousands). Total derivative assets and liabilities include the effect of netting adjustments, cash collateral, and variation margin for daily settled contracts.

Table 7.1
 
03/31/2017
12/31/2016
 
Notional
Amount
Derivative
Assets
Derivative
Liabilities
Notional
Amount
Derivative
Assets
Derivative
Liabilities
Derivatives designated as hedging instruments:
 

 

 

 

 

 

Interest rate swaps
$
7,726,660

$
75,578

$
47,825

$
7,896,110

$
70,683

$
65,471

Total derivatives designated as hedging relationships
7,726,660

75,578

47,825

7,896,110

70,683

65,471

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Interest rate swaps
2,087,163

1,462

33,103

2,022,630

649

40,824

Interest rate caps/floors
2,487,400

3,252


2,765,200

4,859


Mortgage delivery commitments
116,453

367

62

90,013

214

372

Total derivatives not designated as hedging instruments
4,691,016

5,081

33,165

4,877,843

5,722

41,196

TOTAL
$
12,417,676

80,659

80,990

$
12,773,953

76,405

106,667

Netting adjustments, cash collateral, and variation margin for daily settled contracts1
 
(28,661
)
(78,325
)
 
(15,505
)
(99,496
)
DERIVATIVE ASSETS AND LIABILITIES
 
$
51,998

$
2,665

 
$
60,900

$
7,171

                   
1 
Amounts represent the application of the netting requirements that allow the FHLBank to settle positive and negative positions as well as cash collateral, including initial or variation margin, and related accrued interest held or placed with the same clearing agent and/or derivative counterparty, and includes fair value adjustments on derivatives for which variation margin is characterized as a daily settled contract. Cash collateral posted was $84,732,000 and $105,481,000 as of March 31, 2017 and December 31, 2016, respectively. Cash collateral received was $24,776,000 and $21,490,000 as of March 31, 2017 and December 31, 2016, respectively. Variation margin for daily settled contracts was $(10,292,000) as of March 31, 2017.


29


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 three months ended March 31, 2017 and 2016, the FHLBank recorded net gain (loss) on derivatives and hedging activities as presented in Table 7.2 (in thousands):

Table 7.2
 
Three Months Ended
 
03/31/2017
03/31/2016
Derivatives designated as hedging instruments:
 
 
Interest rate swaps
$
(1,330
)
$
(2,490
)
Total net gain (loss) related to fair value hedge ineffectiveness
(1,330
)
(2,490
)
Derivatives not designated as hedging instruments:
 
 
Economic hedges:
 
 
Interest rate swaps
8,248

(43,208
)
Interest rate caps/floors
(1,608
)
(2,093
)
Net interest settlements
(5,183
)
(12,244
)
Mortgage delivery commitments
490

1,549

Total net gain (loss) related to derivatives not designated as hedging instruments
1,947

(55,996
)
Other1
(14
)

NET GAIN (LOSS) ON DERIVATIVES AND HEDGING ACTIVITIES
$
603

$
(58,486
)
                   
1 
Amount represents price alignment amount on derivatives for which variation margin is characterized as a daily settled contract.

The FHLBank carries derivative instruments at fair value on its Statements of Condition. Any change in the fair value of derivatives designated under a fair value hedging relationship is recorded each period in current period earnings. Fair value hedge accounting allows for the offsetting fair value of the hedged risk in the hedged item to also be recorded in current period earnings. For the three months ended March 31, 2017 and 2016, the FHLBank recorded net gain (loss) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the FHLBank’s net interest income as presented in Table 7.3 (in thousands):

Table 7.3
 
Three Months Ended
 
03/31/2017
03/31/2016
 
Gain (Loss) on Derivatives
Gain (Loss) on Hedged Items
Net Fair Value Hedge Ineffectiveness
Effect of Derivatives on Net Interest Income1
Gain (Loss) on Derivatives
Gain (Loss) on Hedged Items
Net Fair Value Hedge Ineffectiveness
Effect of Derivatives on Net Interest Income1
Advances
$
18,116

$
(18,228
)
$
(112
)
$
(16,491
)
$
(55,659
)
$
55,225

$
(434
)
$
(25,434
)
Investments
3,266

(3,813
)
(547
)
(2,715
)
(22,815
)
21,462

(1,353
)
(2,337
)
Consolidated obligation bonds
(4,220
)
3,585

(635
)
5,519

6,737

(7,153
)
(416
)
11,547

Consolidated obligation discount notes
16

(52
)
(36
)
(15
)
84

(371
)
(287
)
(60
)
TOTAL
$
17,178

$
(18,508
)
$
(1,330
)
$
(13,702
)
$
(71,653
)
$
69,163

$
(2,490
)
$
(16,284
)
                   
1 
The differentials between accruals of interest receivables and payables on derivatives designated as fair value hedges as well as the amortization/accretion of hedging activities are recognized as adjustments to the interest income or expense of the designated underlying hedged item.

Based on credit analyses and collateral requirements, FHLBank management does not anticipate any credit losses on its derivative agreements. The maximum credit risk applicable to a single counterparty was $22,816,000 and $21,112,000 as of March 31, 2017 and December 31, 2016, respectively. The counterparty was the same for both periods.


30


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 a Nationally Recognized Statistical Rating Organization (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 March 31, 2017 and December 31, 2016 was $899,000 and $4,779,000, respectively, for which the FHLBank has posted no collateral. If the FHLBank’s credit rating had been lowered one level (e.g., from double-A to single-A), the FHLBank would not have been required to deliver additional collateral to its uncleared derivative counterparties as of March 31, 2017 and December 31, 2016, respectively.

The FHLBank utilizes two Clearinghouses for all cleared derivative transactions, LCH.Clearnet LLC and CME Clearing. Effective January 3, 2017, CME Clearing made certain amendments to its rulebook changing the legal characterization of variation margin payments to represent daily settlement payments rather than collateral. Variation margin related to LCH.Clearnet LLC contracts continues to be characterized as cash collateral. At both Clearinghouses, initial margin is considered cash collateral. For cleared derivatives, the Clearinghouse determines initial margin requirements and generally, credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including but not limited to credit rating downgrades. The FHLBank was not required to post additional initial margin by its clearing agents as of March 31, 2017 and December 31, 2016.

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


NOTE 8DEPOSITS

The FHLBank offers demand, overnight and short-term deposit programs to its members and to other qualifying non-members. Table 8.1 details the types of deposits held by the FHLBank as of March 31, 2017 and December 31, 2016 (in thousands):

Table 8.1
 
03/31/2017
12/31/2016
Interest-bearing:
 
 
Demand
$
231,071

$
269,341

Overnight
307,100

278,200

Total interest-bearing
538,171

547,541

Non-interest-bearing:
 
 
Demand
41,634

51,390

Total non-interest-bearing
41,634

51,390

TOTAL DEPOSITS
$
579,805

$
598,931




31


NOTE 9 – CONSOLIDATED OBLIGATIONS

Consolidated Obligation Bonds: Table 9.1 presents the FHLBank’s participation in consolidated obligation bonds outstanding as of March 31, 2017 and December 31, 2016 (dollar amounts in thousands):

Table 9.1
 
03/31/2017
12/31/2016
Year of Contractual Maturity
Amount
Weighted
Average
Interest
Rate
Amount
Weighted
Average
Interest
Rate
Due in one year or less
$
11,375,135

1.02
%
$
11,001,615

0.92
%
Due after one year through two years
2,871,690

1.40

2,460,440

1.46

Due after two years through three years
1,092,300

1.54

1,190,750

1.51

Due after three years through four years
1,086,050

1.55

739,600

1.56

Due after four years through five years
979,600

1.68

1,215,600

1.60

Thereafter
4,246,400

2.44

4,088,400

2.39

Total par value
21,651,175

1.43
%
20,696,405

1.37
%
Premiums
23,862

 
26,812

 
Discounts
(2,293
)
 
(2,342
)
 
Concession fees
(9,712
)
 
(9,441
)
 
Hedging adjustments
7,316

 
10,901

 
TOTAL
$
21,670,348

 
$
20,722,335

 

The FHLBank’s participation in consolidated obligation bonds outstanding as of March 31, 2017 and December 31, 2016 includes callable bonds totaling $6,522,000,000 and $6,097,000,000, respectively. The FHLBank uses the unswapped callable bonds for financing its callable fixed rate advances (Note 4), MBS (Note 3) and mortgage loans (Note 5). Contemporaneous with a portion of its fixed rate callable bond issuances, the FHLBank also enters into interest rate swap agreements (in which the FHLBank generally pays a variable rate and receives a fixed rate) with call features that mirror the options in the callable bonds (a sold callable swap). The combined sold callable swap and callable debt transaction allows the FHLBank to obtain attractively priced variable rate financing. Table 9.2 summarizes the FHLBank’s participation in consolidated obligation bonds outstanding by year of maturity, or by the next call date for callable bonds as of March 31, 2017 and December 31, 2016 (in thousands):

Table 9.2
Year of Maturity or Next Call Date
03/31/2017
12/31/2016
Due in one year or less
$
17,430,135

$
16,581,615

Due after one year through two years
2,516,690

2,275,440

Due after two years through three years
626,300

694,750

Due after three years through four years
366,050

389,600

Due after four years through five years
219,600

190,600

Thereafter
492,400

564,400

TOTAL PAR VALUE
$
21,651,175

$
20,696,405



32


Table 9.3 summarizes interest rate payment terms for consolidated obligation bonds as of March 31, 2017 and December 31, 2016 (in thousands):

Table 9.3
 
03/31/2017
12/31/2016
Simple variable rate
$
10,287,000

$
9,537,000

Fixed rate
10,224,175

10,164,405

Fixed to variable rate
610,000

545,000

Step
490,000

420,000

Range
40,000

30,000

TOTAL PAR VALUE
$
21,651,175

$
20,696,405


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

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

Table 9.4
 
Book Value
Par Value
Weighted
Average
Interest
Rate1
March 31, 2017
$
22,505,730

$
22,522,432

0.66
%
 
 
 
 
December 31, 2016
$
21,775,341

$
21,784,924

0.47
%
                   
1 
Represents yield to maturity excluding concession fees.


NOTE 10ASSETS AND LIABILITIES SUBJECT TO OFFSETTING

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


33


Tables 10.1 and 10.2 present the fair value of financial assets, including the related collateral received from or pledged to clearing agents or counterparties and variation margin for daily settled contracts, based on the terms of the FHLBank’s master netting arrangements or similar agreements as of March 31, 2017 and December 31, 2016 (in thousands):

Table 10.1
03/31/2017
Description
Gross Amounts
of Recognized
Assets
Gross Amounts
Offset
in the
Statement of
Condition1
Net Amounts
of Assets
Presented
in the
Statement of
Condition
Gross Amounts
Not Offset
in the
Statement of
Condition2
Net
Amount
Derivative assets:
 
 
 
 
 
Uncleared derivatives
$
53,590

$
(44,574
)
$
9,016

$
(367
)
$
8,649

Cleared derivatives3
27,069

15,913

42,982


42,982

Total derivative assets
80,659

(28,661
)
51,998

(367
)
51,631

Securities purchased under agreements to resell
2,500,000


2,500,000

(2,500,000
)

TOTAL
$
2,580,659

$
(28,661
)
$
2,551,998

$
(2,500,367
)
$
51,631

                   
1 
Represents netting adjustments, cash collateral, and variation margin for daily settled contracts.
2 
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).
3 
Variation margin for daily settled contracts of $(10,292,000) is included with gross amounts offset in the Statement of Condition.

Table 10.2
12/31/2016
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
$
51,765

$
(39,540
)
$
12,225

$
(214
)
$
12,011

Cleared derivatives
24,640

24,035

48,675


48,675

Total derivative assets
76,405

(15,505
)
60,900

(214
)
60,686

Securities purchased under agreements to resell
2,400,000


2,400,000

(2,400,000
)

TOTAL
$
2,476,405

$
(15,505
)
$
2,460,900

$
(2,400,214
)
$
60,686

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


34


Tables 10.3 and 10.4 present the fair value of financial liabilities, including the related collateral received from or pledged to counterparties and variation margin for daily settled contracts, based on the terms of the FHLBank’s master netting arrangements or similar agreements as of March 31, 2017 and December 31, 2016 (in thousands):

Table 10.3
03/31/2017
Description
Gross Amounts
of Recognized
Liabilities
Gross Amounts
Offset
in the
Statement of
Condition1
Net Amounts
of Liabilities
Presented
in the
Statement of
Condition
Gross Amounts
Not Offset
in the
Statement of
Condition2
Net
Amount
Derivative liabilities:
 
 
 
 
 
Uncleared derivatives
$
56,020

$
(53,735
)
$
2,285

$
(62
)
$
2,223

Cleared derivatives
24,970

(24,590
)
380


380

Total derivative liabilities
80,990

(78,325
)
2,665

(62
)
2,603

TOTAL
$
80,990

$
(78,325
)
$
2,665

$
(62
)
$
2,603

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

Table 10.4
12/31/2016
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
$
72,039

$
(64,868
)
$
7,171

$
(372
)
$
6,799

Cleared derivatives
34,628

(34,628
)



Total derivative liabilities
106,667

(99,496
)
7,171

(372
)
6,799

TOTAL
$
106,667

$
(99,496
)
$
7,171

$
(372
)
$
6,799

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



35


NOTE 11CAPITAL

Capital Requirements: The FHLBank is subject to three capital requirements under the provisions of the Gramm-Leach-Bliley Act (GLB Act) and the Federal Housing Finance Agency's (Finance Agency) 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 11.1 illustrates that the FHLBank was in compliance with its regulatory capital requirements as of March 31, 2017 and December 31, 2016 (dollar amounts in thousands):

Table 11.1
 
03/31/2017
12/31/2016
 
Required
Actual
Required
Actual
Regulatory capital requirements:
 
 
 
 
Risk-based capital
$
336,896

$
1,946,691

$
333,044

$
1,800,372

Total regulatory capital-to-asset ratio
4.0
%
4.5
%
4.0
%
4.3
%
Total regulatory capital
$
1,883,645

$
2,122,165

$
1,808,670

$
1,964,541

Leverage capital ratio
5.0
%
6.6
%
5.0
%
6.3
%
Leverage capital
$
2,354,557

$
3,095,510

$
2,260,837

$
2,864,727


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

Table 11.2 presents a roll-forward of mandatorily redeemable capital stock for the three months ended March 31, 2017 and 2016 (in thousands):

Table 11.2
 
Three Months Ended
 
03/31/2017
03/31/2016
Balance, beginning of period
$
2,670

$
2,739

Capital stock subject to mandatory redemption reclassified from equity during the period
173,395

160,234

Redemption or repurchase of mandatorily redeemable capital stock during the period
(173,814
)
(159,546
)
Stock dividend classified as mandatorily redeemable capital stock during the period
13

6

Balance, end of period
$
2,264

$
3,433



36


Table 11.3 shows the amount of mandatorily redeemable capital stock by contractual year of redemption as of March 31, 2017 and December 31, 2016 (in thousands). The year of redemption in Table 11.3 is the end of the redemption period in accordance with the FHLBank’s capital plan. The FHLBank is not required to redeem or repurchase membership stock until six months (for Class A Common Stock) or five years (for Class B Common Stock) after the FHLBank receives notice for withdrawal. Additionally, the FHLBank is not required to redeem or repurchase activity-based stock until any activity-based stock becomes excess stock as a result of an activity no longer remaining outstanding. However, the FHLBank intends to repurchase the excess activity-based stock of non-members to the extent that it can do so and still meet its regulatory capital requirements.

Table 11.3
Contractual Year of Repurchase
03/31/2017
12/31/2016
Year 1
$
1

$
192

Year 2
1

1

Year 3


Year 4


Year 5
543

641

Past contractual redemption date due to remaining activity1
1,719

1,836

TOTAL
$
2,264

$
2,670

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

Excess Capital Stock: Excess capital stock is defined as the amount of stock held by a member (or former member) in excess of that institution’s minimum stock purchase requirement. Finance Agency rules limit the ability of the FHLBank to create excess member stock under certain circumstances. For example, the FHLBank may not pay dividends in the form of capital stock or issue new excess stock to members if the FHLBank’s excess stock exceeds one percent of its total assets or if the issuance of excess stock would cause the FHLBank’s excess stock to exceed one percent of its total assets. As of March 31, 2017, 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 2016, the FHLBank has been classified as adequately capitalized.



37



NOTE 12ACCUMULATED OTHER COMPREHENSIVE INCOME

Table 12.1 summarizes the changes in AOCI for the three months ended March 31, 2017 and 2016 (in thousands):

Table 12.1
 
Net Unrealized Gain (Loss) on Available-for-Sale Securities (Note 3)
Net Non-credit Portion of OTTI Losses on Held-to-maturity Securities (Note 3)
Defined Benefit Pension Plan
Total AOCI
Balance at December 31, 2015
$
(8,577
)
$
(7,950
)
$
(2,450
)
$
(18,977
)
Other comprehensive income (loss) before reclassification:
 
 
 
 
Unrealized gain (loss)
4,742

 
 
4,742

Non-credit OTTI losses
 
(62
)
 
(62
)
Accretion of non-credit loss
 
550

 
550

Reclassifications from other comprehensive income (loss) to net income:
 
 
 
 
Non-credit OTTI to credit OTTI1
 
25

 
25

Amortization of net loss - defined benefit pension plan2
 
 
47

47

Net current period other comprehensive income (loss)
4,742

513

47

5,302

Balance at March 31, 2016
$
(3,835
)
$
(7,437
)
$
(2,403
)
$
(13,675
)
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$
9,345

$
(5,841
)
$
(2,927
)
$
577

Other comprehensive income (loss) before reclassification:
 
 
 
 
Unrealized gain (loss)
8,485

 
 
8,485

Non-credit OTTI losses
 
(4
)
 
(4
)
Accretion of non-credit loss
 
376

 
376

Reclassifications from other comprehensive income (loss) to net income:
 
 
 
 
Non-credit OTTI to credit OTTI1
 
37

 
37

Amortization of net loss - defined benefit pension plan2
 
 
57

57

Net current period other comprehensive income (loss)
8,485

409

57

8,951

Balance at March 31, 2017
$
17,830

$
(5,432
)
$
(2,870
)
$
9,528

                   
1 
Recorded in “Net other-than-temporary impairment losses on held-to-maturity securities” on the Statements of Income. Amount represents a debit (decrease to other income (loss)).
2 
Recorded in “Compensation and benefits” on the Statements of Income. Amount represents a debit (increase to other expenses).


NOTE 13FAIR VALUES

The fair value amounts recorded on the Statements of Condition and presented in the note disclosures have been determined by the FHLBank using available market and other pertinent information and reflect the FHLBank’s best judgment of appropriate valuation methods. Although the FHLBank uses its best judgment in estimating the fair value of its financial instruments, there are inherent limitations in any valuation technique. Therefore, the fair values may not be indicative of the amounts that would have been realized in market transactions as of March 31, 2017 and December 31, 2016.


38


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, 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.

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

The FHLBank reviews its fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. There were no reclassifications of assets or liabilities recorded at fair value on a recurring basis during the three months ended March 31, 2017 and 2016.


39


The carrying value and fair value of the FHLBank’s financial assets and liabilities as of March 31, 2017 and December 31, 2016 are summarized in Tables 13.1 and 13.2 (in thousands). These values do not represent an estimate of the overall market value of the FHLBank as a going concern, which would take into account future business opportunities and the net profitability of assets and liabilities.

Table 13.1
 
03/31/2017
 
Carrying
Value
Total
Fair
Value
Level 1
Level 2
Level 3
Netting
Adjustment
and Cash
Collateral1
Assets:
 
 
 
 
 
 
Cash and due from banks
$
108,492

$
108,492

$
108,492

$

$

$

Interest-bearing deposits
401,161

401,161


401,161



Securities purchased under agreements to resell
2,500,000

2,500,000


2,500,000



Federal funds sold
2,705,000

2,705,000


2,705,000



Trading securities
2,702,316

2,702,316


2,702,316



Available-for-sale securities
1,124,924

1,124,924


1,124,924



Held-to-maturity securities
4,852,742

4,844,888


4,655,391

189,497


Advances
25,822,945

25,866,229


25,866,229



Mortgage loans held for portfolio, net of allowance
6,700,948

6,815,907


6,814,144

1,763


Accrued interest receivable
72,569

72,569


72,569



Derivative assets
51,998

51,998


80,659


(28,661
)
Liabilities:
 
 
 
 
 
 
Deposits
579,805

579,805


579,805



Consolidated obligation discount notes
22,505,730

22,504,048


22,504,048



Consolidated obligation bonds
21,670,348

21,547,096


21,547,096



Mandatorily redeemable capital stock
2,264

2,264

2,264




Accrued interest payable
60,887

60,887


60,887



Derivative liabilities
2,665

2,665


80,990


(78,325
)
Other Asset (Liability):
 
 
 
 
 
 
Standby letters of credit
(1,061
)
(1,061
)

(1,061
)


Standby bond purchase agreements
(32
)
5,037


5,037



Advance commitments

(5,690
)

(5,690
)


                   
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, related accrued interest held or placed with the same clearing agent or derivative counterparty, and variation margin for daily settled contracts. Variation margin for daily settled contracts of $(10,292,000) is included with derivative assets.


40


Table 13.2
 
12/31/2016
 
Carrying
Value
Total
Fair
Value
Level 1
Level 2
Level 3
Netting
Adjustment
and Cash
Collateral1
Assets:
 
 
 
 
 
 
Cash and due from banks
$
207,254

$
207,254

$
207,254

$

$

$

Interest-bearing deposits
387,920

387,920


387,920



Securities purchased under agreements to resell
2,400,000

2,400,000


2,400,000



Federal funds sold
2,725,000

2,725,000


2,725,000



Trading securities
2,502,788

2,502,788


2,502,788



Available-for-sale securities
1,091,721

1,091,721


1,091,721



Held-to-maturity securities
4,502,224

4,487,252


4,276,650

210,602


Advances
23,985,835

24,016,686


24,016,686



Mortgage loans held for portfolio, net of allowance
6,640,725

6,754,046


6,752,849

1,197


Overnight loans to other FHLBanks
600,000

600,000


600,000



Accrued interest receivable
68,400

68,400


68,400



Derivative assets
60,900

60,900


76,405


(15,505
)
Liabilities:
 


 
 
 
 
Deposits
598,931

598,931


598,931



Consolidated obligation discount notes
21,775,341

21,774,950


21,774,950



Consolidated obligation bonds
20,722,335

20,568,653


20,568,653



Mandatorily redeemable capital stock
2,670

2,670

2,670




Accrued interest payable
49,808

49,808


49,808



Derivative liabilities
7,171

7,171


106,667


(99,496
)
Other Asset (Liability):
 
 
 
 
 
 
Standby letters of credit
(1,151
)
(1,151
)

(1,151
)


Standby bond purchase agreements
6

6,016


6,016



Advance commitments

(6,241
)

(6,241
)


                   
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.
 
Fair Value Measurements: Tables 13.3 and 13.4 present, for each hierarchy level, the FHLBank’s assets and liabilities that are measured at fair value on a recurring or nonrecurring basis on the Statements of Condition as of or for the periods ended March 31, 2017 and December 31, 2016 (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 recorded investment. REO is measured at fair value when the asset’s fair value less costs to sell is lower than its carrying amount.


41


Table 13.3
 
03/31/2017
 
Total
Level 1
Level 2
Level 3
Netting
Adjustment
and Cash
Collateral1
Recurring fair value measurements - Assets:
 
 
 
 
 
Trading securities:
 
 
 
 
 
Certificates of deposit
$
200,006

$

$
200,006

$

$

GSE obligations2
$
1,564,310

$

$
1,564,310

$

$

U.S. obligation MBS3
665


665



GSE MBS4
937,335


937,335



Total trading securities
2,702,316


2,702,316



Available-for-sale securities:
 
 
 
 
 
GSE MBS5
1,124,924


1,124,924



Total available-for-sale securities
1,124,924


1,124,924



Derivative assets:
 
 
 
 
 
Interest-rate related
51,631


80,292


(28,661
)
Mortgage delivery commitments
367


367



Total derivative assets
51,998


80,659


(28,661
)
TOTAL RECURRING FAIR VALUE MEASUREMENTS - ASSETS
$
3,879,238

$

$
3,907,899

$

$
(28,661
)
 
 
 
 
 
 
Recurring fair value measurements - Liabilities:
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
Interest-rate related
$
2,603

$

$
80,928

$

$
(78,325
)
Mortgage delivery commitments
62


62



Total derivative liabilities
2,665


80,990


(78,325
)
TOTAL RECURRING FAIR VALUE MEASUREMENTS - LIABILITIES
$
2,665

$

$
80,990

$

$
(78,325
)
 
 
 
 
 
 
Nonrecurring fair value measurements - Assets6:
 
 
 
 
 
Held-to-maturity securities:
 
 
 
 
 
Private-label residential MBS
$
631

$

$

$
631

$

Impaired mortgage loans
1,769



1,769


Real estate owned
471



471


TOTAL NONRECURRING FAIR VALUE MEASUREMENTS - ASSETS
$
2,871

$

$

$
2,871

$

                   
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, related accrued interest held or placed with the same clearing agent or derivative counterparty, and variation margin for daily settled contracts.
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 
Represents single-family MBS issued by Ginnie Mae, which are guaranteed by the U.S. government.
4 
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.
5 
Represents multi-family MBS issued by Fannie Mae.
6 
Includes assets adjusted to fair value during the three months ended March 31, 2017 and still outstanding as of March 31, 2017.


42


Table 13.4
 
12/31/2016
 
Total
Level 1
Level 2
Level 3
Netting
Adjustment
and Cash
Collateral1
Recurring fair value measurements - Assets:
 
 
 
 
 
Trading securities:
 
 
 
 
 
GSE obligations2
$
1,563,351

$

$
1,563,351

$

$

U.S. obligation MBS3
690


690



GSE MBS4
938,747


938,747



Total trading securities
2,502,788


2,502,788



Available-for-sale securities:
 
 
 
 
 
GSE MBS5
1,091,721


1,091,721



Total available-for-sale securities
1,091,721


1,091,721



Derivative assets:
 
 
 
 
 
Interest-rate related
60,686


76,191


(15,505
)
Mortgage delivery commitments
214


214



Total derivative assets
60,900


76,405


(15,505
)
TOTAL RECURRING FAIR VALUE MEASUREMENTS - ASSETS
$
3,655,409

$

$
3,670,914

$

$
(15,505
)
 
 
 
 
 
 
Recurring fair value measurements - Liabilities:
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
Interest-rate related
$
6,799

$

$
106,295

$

$
(99,496
)
Mortgage delivery commitments
372


372



Total derivative liabilities
7,171


106,667


(99,496
)
TOTAL RECURRING FAIR VALUE MEASUREMENTS - LIABILITIES
$
7,171

$

$
106,667

$

$
(99,496
)
 
 
 
 
 
 
Nonrecurring fair value measurements - Assets6:
 
 
 
 
 
Held-to-maturity securities:
 
 
 
 
 
Private-label residential MBS
$
4,781

$

$

$
4,781

$

Impaired mortgage loans
1,205





$
1,205



Real estate owned
1,086



1,086


TOTAL NONRECURRING FAIR VALUE MEASUREMENTS - ASSETS
$
7,072

$

$

$
7,072

$

                   
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 
Represents single-family MBS issued by Ginnie Mae, which are guaranteed by the U.S. government.
4 
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.
5 
Represents multi-family MBS issued by Fannie Mae.
6 
Includes assets adjusted to fair value during the year ended December 31, 2016 and still outstanding as of December 31, 2016.



43


NOTE 14COMMITMENTS AND CONTINGENCIES

Joint and Several Liability: As provided by the Federal Home Loan Bank Act of 1932, as amended (Bank Act) or Finance Agency regulation, 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 $915,106,348,000 and $946,829,735,000 as of March 31, 2017 and December 31, 2016, respectively.

Off-balance Sheet Commitments: As of March 31, 2017 and December 31, 2016, off-balance sheet commitments are presented in Table 14.1 (in thousands):

Table 14.1
 
03/31/2017
12/31/2016
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
$
3,208,195

$
15,656

$
3,223,851

$
2,995,497

$
12,823

$
3,008,320

Advance commitments outstanding
80,475

15,000

95,475

37,950

45,025

82,975

Commitments for standby bond purchases
413,922

780,074

1,193,996

210,349

1,002,669

1,213,018

Commitments to fund or purchase mortgage loans
116,453


116,453

90,013


90,013

Commitments to issue consolidated bonds, at par
72,500


72,500

45,000


45,000


Commitments to Extend Credit: Standby letters of credit are executed for members for a fee. A standby letter of credit is a short-term financing arrangement between the FHLBank and its member or non-member housing associate. If the FHLBank is required to make payment for a beneficiary’s draw, these amounts are converted into a collateralized advance to the member. As of March 31, 2017, outstanding standby letters of credit had terms to maturity upon issuance of the currently outstanding standby letters of credit of 4 days to 10 years with a final expiration in 2020. As of December 31, 2016, outstanding standby letters of credit had terms to maturity upon issuance of the currently outstanding standby letters of credit of 7 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 $1,061,000 and $1,151,000 as of March 31, 2017 and December 31, 2016, respectively. Standby letters of credit are fully collateralized with assets allowed by the FHLBank’s Member Products Policy (MPP). Advance commitments legally bind and unconditionally obligate the FHLBank for additional advances up to 24 months in the future. Based upon management’s credit analysis of members and collateral requirements under the MPP, the FHLBank does not expect to incur any credit losses on the outstanding letters of credit or advance commitments.

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 2020, though some are renewable at the option of the FHLBank. As of March 31, 2017 and December 31, 2016, the total commitments for bond purchases were with two in-district and one out-of-district state housing authorities. The FHLBank was not required to purchase any bonds under any agreements during the three months ended March 31, 2017 and 2016.

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 $305,000 and $(158,000) as of March 31, 2017 and December 31, 2016, 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.



44


NOTE 15TRANSACTIONS WITH STOCKHOLDERS

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

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

Activity with Members that Exceed a 10 Percent Ownership in FHLBank Capital Stock: Tables 15.1 and 15.2 present information as of March 31, 2017 and December 31, 2016 on members that owned more than 10 percent of outstanding FHLBank regulatory capital stock in 2017 or 2016 (dollar amounts in thousands). None of the officers or directors of these members currently serve on the FHLBank’s board of directors.

Table 15.1
03/31/2017
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

0.3
%
$
257,369

21.8
%
$
257,869

19.0
%
Bank of Oklahoma, NA
OK
500

0.3

246,694

20.9

247,194

18.2

TOTAL
 
$
1,000

0.6
%
$
504,063

42.7
%
$
505,063

37.2
%

Table 15.2
12/31/2016
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
%
$
219,755

20.6
%
$
220,255

17.9
%
MidFirst Bank
OK
500

0.3

197,669

18.6

198,169

16.1

TOTAL
 
$
1,000

0.6
%
$
417,424

39.2
%
$
418,424

34.0
%

Advance and deposit balances with members that owned more than 10 percent of outstanding FHLBank regulatory capital stock as of March 31, 2017 and December 31, 2016 are summarized in Table 15.3 (dollar amounts in thousands).

Table 15.3
 
03/31/2017
12/31/2016
03/31/2017
12/31/2016
Member Name
Outstanding Advances
Percent of Total
Outstanding Advances
Percent of Total
Outstanding Deposits
Percent of Total
Outstanding Deposits
Percent of Total
MidFirst Bank
$
5,600,000

21.7
%
$
4,340,000

18.1
%
$
245

%
$
424

0.1
%
Bank of Oklahoma, NA
5,200,000

20.1

4,800,000

20.0

8,816

1.5

54,145

9.1

TOTAL
$
10,800,000

41.8
%
$
9,140,000

38.1
%
$
9,061

1.5
%
$
54,569

9.2
%

MidFirst Bank and Bank of Oklahoma, NA did not sell any mortgage loans into the MPF Program during the three months ended March 31, 2017 and 2016.


45


Transactions with FHLBank Directors’ Financial Institutions: Table 15.4 presents information as of March 31, 2017 and December 31, 2016 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 15.4
 
03/31/2017
12/31/2016
 
Outstanding Amount
Percent of Total
Outstanding Amount
Percent of Total
Advances
$
152,607

0.6
%
$
172,793

0.7
%
 
 
 
 
 
Deposits
$
12,542

2.2
%
$
12,329

2.1
%
 
 
 
 
 
Class A Common Stock
$
4,251

2.4
%
$
3,782

2.3
%
Class B Common Stock
4,744

0.4

5,585

0.5

TOTAL CAPITAL STOCK
$
8,995

0.7
%
$
9,367

0.8
%

Table 15.5 presents mortgage loans acquired during the three months ended March 31, 2017 and 2016 for members that had an officer or director serving on the FHLBank’s board of directors in 2017 or 2016 (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.

Table 15.5
 
Three Months Ended
 
03/31/2017
03/31/2016
 
Amount
Percent of Total
Amount
Percent of Total
Mortgage loans acquired
$
28,866

10.0
%
$
12,101

5.5
%


46


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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to assist the reader in understanding our business and assessing our operations both historically and prospectively. This discussion should be read in conjunction with our interim financial statements and related notes presented under Part I Item 1 of this quarterly report on Form 10-Q and the annual report on Form 10-K for the year ended December 31, 2016, which includes audited financial statements and related notes for the year ended December 31, 2016. Our MD&A includes the following sections:
Executive Level Overview – a general description of our business and financial highlights;
Financial Market Trends – a discussion of current trends in the financial markets and overall economic environment, including the related impact on our operations;
Critical Accounting Policies and Estimates – a discussion of accounting policies that require critical estimates and assumptions;
Results of Operations – an analysis of our operating results, including disclosures about the sustainability of our earnings;
Financial Condition – an analysis of our financial position;
Liquidity and Capital Resources – an analysis of our cash flows and capital position;
Risk Management – a discussion of our risk management strategies;
Impact of Recently Issued Accounting Standards; and
Legislative and Regulatory Developments.

Executive Level Overview
We are a regional wholesale bank that makes advances (loans) to, purchases mortgage loans 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.

Our primary funding source is consolidated obligations issued through the FHLBanks’ Office of Finance 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. 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 subject to a per member cap of $500 thousand. 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, standby letters of credit, and Acquired Member Assets (AMA), at levels determined by management with the Board of Director’s approval and within the ranges stipulated in the Capital Stock Plan. Currently, our capital increases when members are required to purchase additional capital stock in the form of Class B Common Stock to support an increase in 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, as the mortgage loans are supported by the retained earnings of the FHLBank (former members previously required to purchase AMA activity-based stock are subject to the prior requirement as long as there are UPBs 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.

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


47


Table 1
 
03/31/2017
12/31/2016
09/30/2016
06/30/2016
03/31/2016
Statement of Condition (as of period end):
 
 
 
 
 
Total assets
$
47,091,131

$
45,216,749

$
46,846,615

$
46,491,136

$
45,204,431

Investments1
14,286,143

13,609,653

13,392,337

13,444,589

13,134,315

Advances
25,822,945

23,985,835

26,723,461

26,182,562

25,435,390

Mortgage loans, net2
6,700,948

6,640,725

6,554,516

6,472,599

6,409,954

Total liabilities
44,961,702

43,254,301

44,788,060

44,474,365

43,198,558

Deposits
579,805

598,931

682,059

661,355

726,016

Consolidated obligation bonds, net3
21,670,348

20,722,335

18,383,598

16,753,990

17,150,133

Consolidated obligation discount notes, net3
22,505,730

21,775,341

25,518,065

26,887,678

25,159,376

Total consolidated obligations, net3
44,176,078

42,497,676

43,901,663

43,641,668

42,309,509

Mandatorily redeemable capital stock
2,264

2,670

3,025

4,356

3,433

Total capital
2,129,429

1,962,448

2,058,555

2,016,771

2,005,873

Capital stock
1,352,345

1,226,675

1,351,874

1,347,280

1,346,446

Total retained earnings
767,556

735,196

713,229

685,029

673,102

AOCI
9,528

577

(6,548
)
(15,538
)
(13,675
)
Statement of Income (for the quarterly period ended):
 
 
 
 
 
Net interest income
66,672

64,992

63,140

64,182

64,870

(Reversal) provision for credit losses on mortgage loans
(45
)
31

329

(212
)
(257
)
Other income (loss)
7,885

(2,135
)
8,708

(13,887
)
(6,516
)
Other expenses
14,916

16,853

17,935

15,279

13,639

Income before assessments
59,686

45,973

53,584

35,228

44,972

Affordable Housing Program (AHP) assessments
5,970

4,599

5,361

3,526

4,498

Net income
53,716

41,374

48,223

31,702

40,474

Selected Financial Ratios and Other Financial Data (for the quarterly period ended):
 
 
 
 
 
Dividends paid in cash4
64

73

73

72

73

Dividends paid in stock4
21,292

19,334

19,950

19,703

19,081

Weighted average dividend rate5
5.73
%
5.28
%
5.28
%
5.30
%
5.32
%
Dividend payout ratio6
39.76
%
46.91
%
41.52
%
62.38
%
47.32
%
Return on average equity
9.58
%
7.50
%
8.69
%
5.82
%
7.78
%
Return on average assets
0.43
%
0.34
%
0.39
%
0.26
%
0.34
%
Average equity to average assets
4.49
%
4.55
%
4.46
%
4.49
%
4.40
%
Net interest margin7
0.54
%
0.54
%
0.51
%
0.53
%
0.55
%
Total capital ratio8
4.52
%
4.34
%
4.39
%
4.34
%
4.44
%
Regulatory capital ratio9
4.51
%
4.34
%
4.41
%
4.38
%
4.48
%
Ratio of earnings to fixed charges10
1.58

1.56

1.65

1.44

1.58

                   
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 $1,617,000, $1,674,000, $1,660,000, $1,298,000 and $1,607,000 as of March 31, 2017, December 31, 2016, September 30, 2016, June 30, 2016 and March 31, 2016, respectively.
3 
Consolidated obligations are bonds and discount notes that we are primarily liable to repay. See Note 14 to the financial statements for a description of the total consolidated obligations of all FHLBanks for which we are jointly and severally liable.
4 
Dividends reclassified as interest expense on mandatorily redeemable capital stock and not included as dividends recorded in accordance with GAAP were $14,000, $16,000, $22,000, $32,000 and $9,000 for the quarters ended March 31, 2017, December 31, 2016, September 30, 2016, June 30, 2016 and March 31, 2016, 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 period as a percentage of net income for the period presented, although the Finance Agency regulation requires dividends be paid out of known income prior to declaration date.
7 
Net interest income as a percentage of average earning assets.
8 
GAAP capital stock, which excludes mandatorily redeemable capital stock, plus retained earnings and AOCI as a percentage of total assets.
9 
Regulatory capital (i.e., permanent capital and Class A Common Stock) as a percentage of total assets.
10 
Total earnings divided by fixed charges (interest expense including amortization/accretion of premiums, discounts and capitalized expenses related to indebtedness).


48


Net income increased $13.2 million, or 32.7 percent, to $53.7 million for the three months ended March 31, 2017 compared to $40.5 million for the same period in the prior year. The increase in net income was largely a result of fair value fluctuations on derivatives and hedging activities and trading securities compared to the prior year period, combined with an increase in net interest income of $1.8 million, or 2.8 percent. The increase in net interest income when compared to the same period in 2016 was due primarily to the maturing and callable debt replaced mid-2016 at a lower cost, and the general increase in market interest rates on interest-earning assets. Detailed discussion relating to the fluctuations in net interest income can be found under this Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.”

Total assets increased $1.9 billion, or 4.1 percent, from December 31, 2016 to March 31, 2017. This increase was due to a $1.8 billion, or 7.7 percent, increase in advances, mostly in our short-term fixed-rate advances. The growth in advances since 2014 has been largely attributed to the increase in dividend rates on our Class B Common Stock (from 5.0 percent to 6.0 percent in 2014, and from 6.0 percent to 6.5 percent in 2017), which effectively reduces the cost of our advances to our members and increases our members' ability to profitably deploy the funding. Changes in interest rates could reduce the benefit of the dividend as it relates to advances to our members, which could cause a significant decline in advances.

Total liabilities increased $1.7 billion, or 3.9 percent, from December 31, 2016 to March 31, 2017. This increase was due to a $0.7 billion increase in consolidated obligation discount notes and a $1.0 billion increase in consolidated obligation bonds. Our funding mix generally is driven by asset composition, but we may also shift our debt composition as a result of market conditions that impact the cost of consolidated obligations swapped or indexed to LIBOR. For additional information, see Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition.”

Return on average equity (ROE) was 9.58 percent and 7.78 percent for the three months ended March 31, 2017 and 2016, respectively. Despite the increase in average capital caused by the increase in advances, the increase in net income resulted in an increase in ROE for the quarter ended March 31, 2017 compared to the prior year period.

Dividends paid to members totaled $21.4 million for the three months ended March 31, 2017 compared to $19.2 million for the same period in the prior year. While the dividend rate for Class A Common Stock remained at 1.00 percent, we increased the dividend rate for Class B Common Stock to 6.5 percent during the first quarter of 2017. Differences in the weighted average dividend rates between the last five quarters are due to the difference in the mix of outstanding Class A Common Stock and Class B Common Stock between those periods. Other factors impacting the outstanding stock class mix and, therefore, the average dividend rates include weekly exchanges of excess Class B Common Stock to Class A Common Stock and periodic repurchases of excess Class A Common Stock (see “Liquidity and Capital Resources - Capital under this Item 2). 

Finance Agency guidance requires that our strategic business plan describes how our business activities will achieve our mission consistent with the Finance Agency’s core mission asset guidance. We intend to manage our balance sheet with an emphasis towards maintaining a core mission assets ratio above 70 percent during 2017. Our ratio of average advances and average mortgage loans to average consolidated obligations based on par balances (core mission assets ratio) was 77 percent for the first quarter of 2017. However, because this ratio is dependent on several variables such as member demand for our advance and mortgage loan products, it is possible that we will be unable to maintain the core mission assets ratio at this level indefinitely.


49


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

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

Table 2
 
03/31/2017
03/31/2016
 
 
 
Market Instrument
Three-month
Three-month
03/31/2017
12/31/2016
03/31/2016
Average
Average
Ending Rate
Ending Rate
Ending Rate
Overnight Federal funds effective/target rate1
0.70
%
0.37
%
0.50 to 1.00%
0.50 to 0.75%
0.25 to 0.50%
Federal Open Market Committee (FOMC) target rate for overnight Federal funds1
0.50 to 1.00

0.25 to 0.50

0.50 to 1.00
0.50 to 0.75
0.25 to 0.50
3-month U.S. Treasury bill1
0.59

0.28

0.75
0.50
0.17
3-month LIBOR1
1.07

0.62

1.15
1.00
0.63
2-year U.S. Treasury note1
1.24

0.83

1.26
1.20
0.74
5-year U.S. Treasury note1
1.94

1.37

1.94
1.94
1.24
10-year U.S. Treasury note1
2.44

1.91

2.41
2.45
1.80
30-year residential mortgage note rate2
4.35

3.94

4.34
4.39
3.94
                   
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.

During the first quarter of 2017, the cost of FHLBank consolidated obligations as measured by the spread to comparative U.S. Treasury rates remained relatively stable; however, funding spreads began to deteriorate as the market began to price in the expectation of an increase in the target rate for overnight Federal funds. The FOMC confirmed market expectations by raising the target rate for overnight Federal funds in March 2017 for the second time in three months, amid positive economic indicators. Market participants are assigning a high probability of additional increases in 2017. The FOMC is currently 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, but the FOMC has indicated that it intends to phase out reinvestments after it begins increasing the target range for the Federal funds rate, depending on economic conditions and outlook. The rates on U.S. Treasuries, GSE debt, and GSE MBS are likely to increase once the Federal Reserve is no longer reinvesting those principal payments. We issue debt at a spread above U.S. Treasury securities; as a result, 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 2 – “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. Recent regulatory changes to money market funds has intensified demand for our debt. Several market events continue to have the potential to impact the demand for our consolidated obligations including geopolitical events and/or disruptions; potential policy changes under the incoming administration and a pending Congressional budget agreement; potential regulatory changes in liquidity requirements; changes in interest rates and the shape of the yield curve as the FOMC contemplates additional increases in short-term interest rates; and a decline in dealer demand due to regulatory changes related to capital.

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.


50


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

The accounting policies that management believes are the most critical to an understanding of our financial results and condition and require complex management judgment are described under Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our annual report on Form 10-K, incorporated by reference herein. There were no material changes to our critical accounting policies and estimates during the quarter ended March 31, 2017.

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

Table 3
 
Increase (Decrease) in Earnings Components
 
Three Months Ended
 
03/31/2017 vs. 03/31/2016
 
Dollar Change
Percentage Change
Total interest income
$
27,130

19.0
 %
Total interest expense
25,328

32.5

Net interest income
1,802

2.8

(Reversal) provision for credit losses on mortgage loans
212

82.5

Net interest income after mortgage loan loss provision
1,590

2.4

Net gain (loss) on trading securities
(44,517
)
(90.5
)
Net gain (loss) on derivatives and hedging activities
59,089

101.0

Other non-interest income
(171
)
(6.2
)
Total other income (loss)
14,401

221.0

Operating expenses
1,067

9.6

Other non-interest expenses
210

8.2

Total other expenses
1,277

9.4

AHP assessments
1,472

32.7

NET INCOME
$
13,242

32.7
 %

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

Table 4
 
Three Months Ended
 
03/31/2017
03/31/2016
 
Interest Income
Percent of Total
Interest Income
Percent of Total
Investments1
$
43,301

25.5
%
$
36,491

25.6
%
Advances
73,757

43.4

53,688

37.6

Mortgage loans held for portfolio
52,578

30.9

52,301

36.6

Other
301

0.2

327

0.2

TOTAL INTEREST INCOME
$
169,937

100.0
%
$
142,807

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.


51


Net income for the three months ended March 31, 2017 was $53.7 million compared to $40.5 million for the three months ended March 31, 2016. The $13.2 million, or 32.7 percent, increase was due to net positive fair value fluctuations on derivatives and hedging activities and trading securities as a result of changes in interest rates, mortgage-related spreads and swap spreads. Net interest income increased $1.8 million for the three months ended March 31, 2017 due primarily to the maturing and callable debt replaced mid-2016 at a lower cost, and the general increase in market interest rates on interest-earning assets.

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 $1.8 million increase in net interest income for the three months ended March 31, 2017 compared to March 31, 2016 was due primarily to the maturing and callable debt replaced in 2016 at a lower cost and growth in the average balance of interest-earning assets, along with increases in average yields on advances and short-term investments (see Table 5). Net interest spread and net interest margin both decreased slightly in the first quarter of 2017 due to a 17 basis point increase in the average rate on borrowings between periods which was partially offset by the 15 basis point increase in the average yield on interest-earning assets between periods, all of which are discussed in greater detail below.

The average yield on investments, which consist of interest-bearing deposits, Federal funds sold, securities purchased under agreement to resell (reverse repurchase agreements), and investment securities, increased six basis points, from 1.22 percent for the quarter ended March 31, 2016 to 1.28 percent for the quarter ended March 31, 2017, as a result of compositional changes in the portfolio combined with increasing yields on most individual portfolios. The average yield on long-term investments decreased seven basis points due to maturities of fixed rate securities that were replaced with floating rate securities at lower rates. The average yield on short-term investments increased 27 basis points and the average balance of the portfolio increased $0.7 billion, largely as a result of attractive yields and spreads on reverse repurchase agreements and Federal funds sold.

The average yield on advances increased 26 basis points, from 0.74 percent for the three months ended March 31, 2016 to 1.00 percent for the three months ended March 31, 2017. The increase in the average yield on advances was due to the increase in short-term interest rates in conjunction with FOMC policy changes.

The average yield on mortgage loans decreased nine basis points, from 3.29 percent for the three months ended March 31, 2016 to 3.20 percent for the three months ended March 31, 2017. The decrease is a result of continued downward repricing of the portfolio as prepayments of higher-coupon loans have remained steady, along with the related premium acceleration (yields on mortgage loans decline as premiums are amortized; amortization accelerates as prepayments increase), combined with purchases of mortgage loans at lower average rates. Mortgage rates increased at the end of 2016 and are expected to increase slightly in 2017, and as a result premium amortization is likely to remain near or slightly lower than current levels, as prepayments tend to slow during periods of relatively stable or rising rates.

The average cost of consolidated obligation bonds increased 5 basis points to 1.27 percent for the three months ended March 31, 2017 compared to 1.22 percent for the three months ended March 31, 2016, and the average cost of discount notes increased 22 basis points over the same period, from 0.33 percent for the three months ended March 31, 2016 to 0.55 percent for the three months ended March 31, 2017 as a result of the increase in short-term interest rates between periods. During 2016, we were able to replace some maturing consolidated obligation bonds and called unswapped consolidated obligation bonds at a lower cost, which partially offset some of the increase in the average total cost. During the last half of 2016, the spread to LIBOR improved so we increased our allocation of floating rate consolidated obligation bonds and decreased our allocation of discount notes in an effort to reduce our LIBOR basis risk. The average balance of bonds increased by $2.7 billion, or 14.4 percent, and the average balance of discount notes increased by $0.3 billion, or 1.2 percent. For further discussion of how we use bonds and discount notes, see Item 2 – “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 7 and 8 under this Item 2), which does not reflect the full economic impact of the swaps on yields, especially for trading investments that are swapped to a variable rate.


52


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

Table 5
 
Three Months Ended
 
03/31/2017
03/31/2016
 
Average
Balance
Interest
Income/
Expense
Yield
Average
Balance
Interest
Income/
Expense
Yield
Interest-earning assets:
 

 

 

 

 

 

Interest-bearing deposits
$
390,291

$
648

0.67
%
$
372,738

$
332

0.36
%
Securities purchased under agreements to resell
2,510,667

4,150

0.67

2,658,791

3,029

0.46

Federal funds sold
2,410,322

4,290

0.72

1,556,451

1,395

0.36

Investment securities1,2
8,457,699

34,213

1.64

7,473,309

31,735

1.71

Advances2,3
29,990,390

73,757

1.00

29,008,281

53,688

0.74

Mortgage loans2,4,5
6,659,065

52,578

3.20

6,394,616

52,301

3.29

Other interest-earning assets
30,435

301

4.01

22,909

327

5.75

Total earning assets
50,448,869

169,937

1.36

47,487,095

142,807

1.21

Other non-interest-earning assets
166,517

 

 

120,511

 

 

Total assets
$
50,615,386

 

 

$
47,607,606

 

 

 
 
 
 
 
 
 
Interest-bearing liabilities:
 

 

 

 

 

 

Deposits
$
551,534

582

0.43

$
604,204

226

0.15

Consolidated obligations2:
 

 

 

 

 

 

Discount Notes
26,066,721

35,488

0.55

25,770,232

20,907

0.33

Bonds
21,385,696

67,103

1.27

18,701,468

56,729

1.22

Other borrowings
6,176

92

6.09

7,764

75

3.89

Total interest-bearing liabilities
48,010,127

103,265

0.87

45,083,668

77,937

0.70

Capital and other non-interest-bearing funds
2,605,259

 

 

2,523,938

 

 

Total funding
$
50,615,386

 

 

$
47,607,606

 

 

 
 
 
 
 
 
 
Net interest income and net interest spread6
 

$
66,672

0.49
%
 

$
64,870

0.51
%
 
 
 
 
 
 
 
Net interest margin7
 

 

0.54
%
 

 

0.55
%
                   
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.
3 
Advance income includes prepayment fees on terminated advances.
4 
CE fee payments are netted against interest earnings on the mortgage loans. The expense related to CE fee payments to PFIs was $1.4 million and $1.3 million for the three months ended March 31, 2017 and 2016, 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.


53


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

Table 6
 
Three Months Ended
 
03/31/2017 vs. 03/31/2016
 
Increase (Decrease) Due to
 
Volume1,2
Rate1,2
Total
Interest Income:
 

 

 

Interest-bearing deposits
$
16

$
300

$
316

Securities purchased under agreements to resell
(177
)
1,298

1,121

Federal funds sold
1,034

1,861

2,895

Investment securities
4,034

(1,556
)
2,478

Advances
1,874

18,195

20,069

Mortgage loans
2,122

(1,845
)
277

Other assets
91

(117
)
(26
)
Total earning assets
8,994

18,136

27,130

Interest Expense:
 

 

 

Deposits
(21
)
377

356

Consolidated obligations:
 

 

 

Discount notes
243

14,338

14,581

Bonds
8,368

2,006

10,374

Other borrowings
(18
)
35

17

Total interest-bearing liabilities
8,572

16,756

25,328

Change in net interest income
$
422

$
1,380

$
1,802

                   
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).


54


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

Table 7
 
Three Months Ended 03/31/2017
 
Advances
Investments
Mortgage Loans
Consolidated Obligation Discount Notes
Consolidated Obligation Bonds
Other
Total
Impact of derivatives and hedging activities in net interest income:
 
 
 
 
 
 
 
Net amortization/accretion of hedging activities
$
(1,342
)
$

$
(456
)
$

$

$

$
(1,798
)
Net interest received (paid)
(15,149
)
(2,715
)

(15
)
5,519


(12,360
)
Subtotal
(16,491
)
(2,715
)
(456
)
(15
)
5,519


(14,158
)
Net gain (loss) on derivatives and hedging activities:
 

 

 

 
 

 

 

Fair value hedges:
 
 
 
 
 
 
 
Interest rate swaps
(112
)
(547
)

(36
)
(635
)

(1,330
)
Economic hedges – unrealized gain (loss) due to fair value changes:
 
 
 
 
 
 
 
Interest rate swaps

7,468



780


8,248

Interest rate caps

(1,608
)




(1,608
)
Mortgage delivery commitments


490




490

Economic hedges – net interest received (paid)

(6,930
)


1,747


(5,183
)
Price alignment amount on derivatives for which variation margin is daily settled





(14
)
(14
)
Subtotal
(112
)
(1,617
)
490

(36
)
1,892

(14
)
603

Net impact of derivatives and hedging activities
(16,603
)
(4,332
)
34

(51
)
7,411

(14
)
(13,555
)
Net gain (loss) on trading securities hedged on an economic basis with derivatives

2,885





2,885

TOTAL
$
(16,603
)
$
(1,447
)
$
34

$
(51
)
$
7,411

$
(14
)
$
(10,670
)


55


Table 8
 
Three Months Ended 03/31/2016
 
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
$
(1,216
)
$

$
(440
)
$

$

$
(1,656
)
Net interest received (paid)
(24,218
)
(2,337
)

(60
)
11,547

(15,068
)
Subtotal
(25,434
)
(2,337
)
(440
)
(60
)
11,547

(16,724
)
Net gain (loss) on derivatives and hedging activities:
 

 

 

 
 

 

Fair value hedges:
 

 

 

 
 

 

Interest rate swaps
(434
)
(1,353
)

(287
)
(416
)
(2,490
)
Economic hedges – unrealized gain (loss) due to fair value changes:
 

 

 

 

 

 
Interest rate swaps

(46,639
)

(4
)
3,435

(43,208
)
Interest rate caps/floors

(2,093
)



(2,093
)
Mortgage delivery commitments


1,549



1,549

Economic hedges – net interest received (paid)

(13,749
)

4

1,501

(12,244
)
Subtotal
(434
)
(63,834
)
1,549

(287
)
4,520

(58,486
)
Net impact of derivatives and hedging activities
(25,868
)
(66,171
)
1,109

(347
)
16,067

(75,210
)
Net gain (loss) on trading securities hedged on an economic basis with derivatives

49,317




49,317

TOTAL
$
(25,868
)
$
(16,854
)
$
1,109

$
(347
)
$
16,067

$
(25,893
)

As reflected in Tables 7 and 8, 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 does not reflect the full economic impact of the swaps on yields, especially for trading investments that are swapped to variable rates. Ineffectiveness on fair value hedges contributes to unrealized gains and losses on derivatives, but to a much lesser degree. Net unrealized gains or losses on derivatives are generally a function of the 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). The fair values of derivatives are also 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).


56


For the three-month period ended March 31, 2017, net unrealized gains and losses on derivatives and hedging activities increased net income by $59.1 million compared to the same period in 2016. The majority of the positive fair value fluctuations were related to the economic interest rate swaps hedging the multi-family GSE MBS. LIBOR increased between periods, which had a positive impact on the net interest settlements on interest rate swaps, resulting in an increase of $7.1 million in net income. Increases in swap spreads during the first half of 2016 caused fair value decreases for many of our derivatives, but especially interest rate swaps economically hedging multi-family GSE MBS recorded as trading securities, resulting in unrealized losses of $36.1 million for the three months ended March 31, 2016. These spreads improved significantly towards the end of 2016 and into the first quarter of 2017, resulting in unrealized gains of $3.6 million for the current quarter. The fair values of the swapped multi-family GSE MBS investments decreased due to an increase in interest rates, resulting in a decrease in net unrealized gains of $35.6 million for the three months ended March 31, 2017, which are recorded in net gain (loss) on trading securities. 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 $3.9 million for the three months ended March 31, 2017 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), changes in interest rates for their respective maturities (pay fixed rate swap) and increases in three-month LIBOR (receive variable rate swap). These fluctuations were offset by net unrealized losses of $0.1 million for the first quarter of 2017 attributable to the swapped GSE debentures, which are recorded in net gain (loss) on trading securities. Table 9 presents the relationship between the swapped trading securities and the associated interest rate swaps that do not qualify for hedge accounting treatment by investment type (in thousands):

Table 9
 
Three Months Ended
 
03/31/2017
03/31/2016
 
Gain (Loss) on Derivatives
Gain (Loss) on Trading Securities
Net
Gain (Loss) on Derivatives
Gain (Loss) on Trading Securities
Net
GSE debentures
$
3,912

$
(801
)
$
3,111

$
(10,507
)
$
10,045

$
(462
)
GSE MBS
3,556

3,686

7,242

(36,132
)
39,272

3,140

TOTAL
$
7,468

$
2,885

$
10,353

$
(46,639
)
$
49,317

$
2,678


See Tables 36 and 37 under Item 3 – “Quantitative and Qualitative Disclosures About Market Risk” for additional detail regarding notional and fair value amounts of derivative instruments.


57


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 7 and 8. Unrealized gains (losses) fluctuate as the fair value of our trading portfolio fluctuates. There are a number of factors that can impact the fair value of a trading security including the movement in interest rates, changes in credit spreads, the passage of time, and changes in price volatility. Table 10 presents the major components of the net gain (loss) on trading securities (in thousands):

Table 10
 
Three Months Ended
 
03/31/2017
03/31/2016
Trading securities not hedged:
 
 
GSE debentures
$
1,760

$
129

U.S. obligation and GSE MBS
36

(242
)
Short-term money market securities
6


Total trading securities not hedged
1,802

(113
)
Trading securities hedged on an economic basis with derivatives:
 
 
GSE debentures
(801
)
10,045

GSE MBS
3,686

39,272

Total trading securities hedged on an economic basis with derivatives
2,885

49,317

TOTAL
$
4,687

$
49,204


Our trading portfolio is comprised primarily of variable and fixed rate GSE debentures and fixed rate multi-family GSE MBS, with a small percentage of 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 (see Table 9 for the association between the gains (losses) on the fixed rate securities and the related economic hedges). The fair values of the GSE debentures are 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 fixed rate multi-family GSE MBS are affected by changes in mortgage rates and spreads, and these securities are swapped to one-month LIBOR. The unrealized gains on our fixed rate multi-family GSE MBS investments have decreased as a result of an increase in the general level of mortgage rates and mortgage-related spreads between periods. The changes in the relative level of interest rates and credit spreads since the first quarter of 2016 has also resulted in a decrease in unrealized gains on the GSE debentures for the three months ended March 31, 2017. 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 that 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 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.

Other Expenses: Other expenses, which include compensation and benefits and other operating expenses, increased $1.3 million to $14.9 million for the three months ended March 31, 2017 compared to $13.6 million for the same period in the prior year. The largest component of operating expenses, compensation and benefits, increased by $0.7 million, or 8.7 percent, for the three months ended March 31, 2017 compared to the prior year period. The increase in compensation was due to the hiring of additional employees and an increase in the base salaries of existing employees, with a corresponding increase in incentive compensation. We expect to remain at or near the same levels of compensation and benefits expense as 2016 for 2017. We expect a moderate increase in occupancy expense in 2017 as we complete construction of a new office building later this year, and as a result, experience duplicative maintenance costs for a brief period. Other operating expense, which is primarily related to new software, is expected to increase during 2017 due to planned software implementations.


58


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 strive to manage interest rate risk and prepayment risk utilizing 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 adjusted 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 our 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 $6.8 million for the three months ended March 31, 2017 compared to the same period in the prior year. The increase was due primarily to increased adjusted net interest income, which includes the impact of net interest settlements on derivatives not qualifying for hedge accounting, partially offset by an increase in other expenses. Adjusted net interest income increased for the first quarter of 2017 compared to the same period in 2016 due to the positive net impact of the increase in LIBOR on net interest settlements between periods. Tables 11 and 12 present a reconciliation of GAAP net income to adjusted income and GAAP net interest income to adjusted net interest income (in thousands):

Table 11
 
Three Months Ended
 
03/31/2017
03/31/2016
Net income, as reported under GAAP
$
53,716

$
40,474

AHP assessments
5,970

4,498

Income before AHP assessments
59,686

44,972

Derivative (gains) losses1
(5,786
)
46,242

Trading (gains) losses
(4,687
)
(49,204
)
Prepayment fees on terminated advances
(870
)
(489
)
Total excluded items
(11,343
)
(3,451
)
Adjusted income (a non-GAAP measure)
$
48,343

$
41,521

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

Table 12
 
Three Months Ended
 
03/31/2017
03/31/2016
Net interest income, as reported under GAAP
$
66,672

$
64,870

Net interest settlements on derivatives not qualifying for hedge accounting
(5,183
)
(12,244
)
Prepayment fees on terminated advances
(870
)
(489
)
Adjusted net interest income (a non-GAAP measure)
$
60,619

$
52,137



59


Table 13 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 increase in adjusted ROE between the comparative periods is mostly a function of increases in adjusted net interest income, despite the increase in average capital as a result of the increase in advances. Adjusted ROE spread for the three months ended March 31, 2017 and 2016 is calculated as follows (dollar amounts in thousands):

Table 13
 
Three Months Ended
 
03/31/2017
03/31/2016
Average GAAP total capital for the period
$
2,274,491

$
2,092,538

ROE, based upon GAAP net income
9.58
%
7.78
%
Adjusted ROE, based upon adjusted income
8.62
%
7.98
%
Average overnight Federal funds effective rate
0.70
%
0.37
%
Adjusted ROE as a spread to average overnight Federal funds effective rate
7.92
%
7.61
%

Financial Condition
Overall: Total assets increased $1.9 billion, or 4.1 percent, from December 31, 2016 to March 31, 2017. This growth was due to continued growth in advances, although to a lesser extent than in prior periods. The FHLBank has been actively promoting the impact of the dividend paid on outstanding capital stock on the effective borrowing cost of advances to increase member awareness of the benefit of higher dividends since 2014 (and raised again in 2017 for our Class B Common Stock), which has resulted in increased utilization of advances, especially the line of credit product. We strive to maintain a ratio of average advances and average mortgage loans to average consolidated obligations (CMA ratio) of over 70 percent, so increases in the average balance of both advances and mortgages allows for growth in non-mission assets while maintaining our desired CMA 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.

As a percentage of assets at March 31, 2017 compared to December 31, 2016, advances and investment securities increased slightly, while mortgage loans, and cash and short-term investments decreased. Advance balances fluctuate seasonally and tend to trend down at the end of a quarter, but the average balance of advances increased by $1.0 billion, or 3.4 percent, during the first quarter of 2017 compared to the first quarter of 2016. In terms of liabilities, the slight change in composition between discount notes and consolidated obligation bonds at March 31, 2017 compared to December 31, 2016 was due to an increase in the allocation of floating rate consolidated obligation bonds and a decrease in the allocation of discount notes in an effort to reduce our LIBOR basis risk. We were able to increase the allocation of consolidated obligation bonds due to an improvement in spreads during the last half of 2016 as a result of an increase in LIBOR rates and increased demand for consolidated obligations largely attributed to money market fund reforms. Table 14 presents the percentage concentration of the major components of our Statements of Condition:


60


Table 14
 
Component Concentration
 
03/31/2017
12/31/2016
Assets:
 
 
Cash and due from banks
0.2
%
0.5
%
Interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold
11.9

12.2

Investment securities
18.5

17.9

Advances
54.8

53.0

Mortgage loans, net
14.2

14.7

Overnight loans to other FHLBanks

1.3

Other assets
0.4

0.4

Total assets
100.0
%
100.0
%
 
 
 
Liabilities:
 
 
Deposits
1.2
%
1.3
%
Consolidated obligation discount notes, net
47.8

48.2

Consolidated obligation bonds, net
46.0

45.8

Other liabilities
0.5

0.4

Total liabilities
95.5

95.7

 
 
 
Capital:
 
 
Capital stock outstanding
2.9

2.7

Retained earnings
1.6

1.6

Accumulated other comprehensive income (loss)


Total capital
4.5

4.3

Total liabilities and capital
100.0
%
100.0
%


61


Table 15 presents changes in the major components of our Statements of Condition (dollar amounts in thousands):

Table 15
 
Increase (Decrease)
in Components
 
03/31/2017 vs. 12/31/2016
 
Dollar
Change
Percent
Change
Assets:
 
 
Cash and due from banks
$
(98,762
)
(47.7
)%
Investments1
676,490

5.0

Advances
1,837,110

7.7

Mortgage loans, net
60,223

0.9

Derivative assets, net
(8,902
)
(14.6
)
Overnight loans to other FHLBanks
(600,000
)
(100.0
)
Other assets
8,223

7.3

Total assets
$
1,874,382

4.1
 %
 
 
 
Liabilities:
 

 

Deposits
$
(19,126
)
(3.2
)%
Consolidated obligations, net
1,678,402

3.9

Derivative liabilities, net
(4,506
)
(62.8
)
Other liabilities
52,631

35.0

Total liabilities
1,707,401

3.9

 
 
 
Capital:
 
 
Capital stock outstanding
125,670

10.2

Retained earnings
32,360

4.4

Accumulated other comprehensive income (loss)
8,951

1,551.3

Total capital
166,981

8.5

Total liabilities and capital
$
1,874,382

4.1
 %
                   

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 typically 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.


62


Table 16 summarizes advances outstanding by product (dollar amounts in thousands):
 
Table 16
 
03/31/2017
12/31/2016
 
Dollar
Percent
Dollar
Percent
Adjustable rate:
 

 

 

 

Standard advance products:
 

 

 

 

Line of credit
$
10,059,381

39.0
%
$
9,634,491

40.2
%
Regular adjustable rate advances
105,000

0.4

75,000

0.3

Adjustable rate callable advances
1,777,335

6.9

6,161,835

25.7

Standard housing and community development advances:
 

 

 

 

Adjustable rate callable advances
103,002

0.4

99,002

0.4

Total adjustable rate advances
12,044,718

46.7

15,970,328

66.6

Fixed rate:
 

 

 

 

Standard advance products:
 

 

 

 

Short-term fixed rate advances
6,266,915

24.3

452,545

1.9

Regular fixed rate advances
5,221,646

20.2

5,084,882

21.2

Fixed rate callable advances
10,545


39,445

0.2

Standard housing and community development advances:
 

 

 

 
Regular fixed rate advances
394,043

1.5

400,412

1.7

Fixed rate callable advances
4,373


4,000


Total fixed rate advances
11,897,522

46.0

5,981,284

25.0

Convertible:
 

 

 

 

Standard advance products:
 

 

 

 

Fixed rate convertible advances
1,027,342

4.0

1,147,392

4.8

Amortizing:
 

 

 

 

Standard advance products:
 

 

 

 

Fixed rate amortizing advances
404,222

1.6

409,926

1.7

Fixed rate callable amortizing advances
23,202

0.1

23,239

0.1

Standard housing and community development advances:
 

 

 

 
Fixed rate amortizing advances
409,602

1.6

419,587

1.8

Fixed rate callable amortizing advances
8,565


8,759


Total amortizing advances
845,591

3.3

861,511

3.6

TOTAL PAR VALUE
$
25,815,173

100.0
%
$
23,960,515

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).

Advances are one of the primary ways we fulfill our mission of providing liquidity to our members and constituted the largest asset on of our balance sheet at March 31, 2017 and December 31, 2016. The 7.7 percent increase in advance par value from December 31, 2016 (see Table 16) was due to an increase in fixed rate advances, mostly short-term, which was partially offset by a decrease in adjustable rate callable advances. The growth in short-term fixed rate advances is primarily a result of a single large member moving from adjustable rate advances to short-term fixed rate advances in order to reduce borrowing costs. 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 remain near current levels 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 2), but we cannot predict member demand for our advance products.


63


As of March 31, 2017 and December 31, 2016, 63.2 percent and 65.7 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 since the latter half of 2014 is a result of a small number of large members increasing short-term advances, including line of credit advances, due to lower effective borrowing costs when considering the dividend rate on our Class B Common Stock, which we increased from 6.0 percent to 6.5 percent for the quarter ended March 31, 2017. We anticipate demand for advances to remain steady with these members. 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 our members reduce the volume of their advances, we expect to continue our past practice of repurchasing excess capital stock. 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 has occurred since the latter half of 2014.

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 88.0 percent and 87.5 percent of our total advance portfolio as of March 31, 2017 and December 31, 2016, respectively.

Table 17 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 17
 
03/31/2017
12/31/2016
Borrower Name
Advance
Par Value
Percent of Total
Advance Par
Advance
Par Value
Percent of Total
Advance Par
MidFirst Bank
$
5,600,000

21.7
%
$
4,340,000

18.1
%
Bank of Oklahoma, NA
5,200,000

20.1

4,800,000

20.0

Capitol Federal Savings Bank
2,275,000

8.8

2,275,000

9.5

United of Omaha Life Insurance Co.
849,273

3.3

670,000

2.8

Bellco Credit Union
696,000

2.7





Mutual of Omaha Bank




556,000

2.3

TOTAL
$
14,620,273

56.6
%
$
12,641,000

52.7
%


64


Table 18 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 18
 
Three Months Ended
 
03/31/2017
03/31/2016
Borrower Name
Advance Income
Percent of Total
Advance Income1
Advance Income
Percent of Total
Advance Income1
Capitol Federal Savings Bank
$
16,512

18.8
%
$
16,111

20.8
%
Bank of Oklahoma, NA
11,188

12.7

7,357

9.5

MidFirst Bank
10,554

12.0

5,644

7.3

American Fidelity Assurance Co.
3,645

4.1

4,054

5.2

United of Omaha Life Insurance Co.
2,194

2.5





Security Benefit Life Insurance Co.
 
 
1,924

2.5

TOTAL
$
44,093

50.1
%
$
35,090

45.3
%
                   
1 
Total advance income by borrower excludes net interest settlements on derivatives hedging the advances. Total advance income for all borrowers is net of interest receipts/(payments) on derivatives hedging advances of $(15.1) million and $(24.2) million for the three months ended March 31, 2017 and 2016, respectively.

Table 4 presents the amount of interest income on advances as a percentage of total interest income for the three months ended March 31, 2017 and 2016.

MPF Program: The MPF Program is a secondary mortgage market alternative for our members, especially utilized by 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 our balance sheet from our PFIs during the three months ended March 31, 2017 was $0.3 billion. These new originations and acquisitions, net of loan payments received, resulted in an increase of 0.9 percent in the outstanding net balance of our mortgage loan portfolio from December 31, 2016 to March 31, 2017. Net mortgage loans as a percentage of total assets decreased slightly from 14.7 percent as of December 31, 2016 to 14.2 percent as of March 31, 2017. Table 4 presents the amount of interest income on mortgage loans held for portfolio as a percentage of total interest income for the three months ended March 31, 2017 and 2016. Although mortgage loan balances have increased moderately over the last three years, the percentage of mortgage loan interest income to total interest income has declined, predominantly due to an increase in average advance balances as a percent of average total assets and the resulting increase in advance interest income.

The primary factors that may influence future growth in our 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. Recent reductions in the required CE obligation against current and past production may reduce our PFIs' risk-based capital requirements which may result in additional MPF portfolio growth. 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 March 31, 2017.


65


Historically, we have used the MPF Xtra product and mortgage loan participations with another FHLBank to effectively restrict the growth in mortgage loans held for portfolio and provide management with adequate means to control the amount of mortgage loan portfolio volume retained on our balance sheet to maintain our desired asset composition. The MPF Xtra product is a structure where our PFIs sell mortgage loans to FHLBank of Chicago and simultaneously to Fannie Mae. We also recently began offering an MPF Government MBS product that similarly allows our PFIs to sell mortgages to FHLBank of Chicago that are pooled into Ginnie Mae securities. Both products are intended to enhance our ability to manage mortgage volumes and receive a counterparty fee from FHLBank of Chicago based on mortgage volumes sold by our PFIs. We have the authority to offer participation interests in risk sharing MPF loan pools to member institutions, which may further enhance our ability to manage the size of our mortgage loan portfolio in the future.

The number of approved PFIs was 274 as of March 31, 2017 and December 31, 2016. During the three months ended March 31, 2017, we purchased loans from 151 PFIs with no one PFI accounting for more than 9.0 percent of the total dollar volume purchased. Although there is no guarantee, we anticipate that the number of PFIs delivering loans will increase during 2017 as we continue to educate our members about the improved execution and relative ease of use associated with the MPF Program and the previously discussed reduction in CE obligation available to PFIs. Table 19 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).

Table 19
 
03/31/2017
12/31/2016
 
Mortgage
Loan Balance
Percent of Total
Mortgage Loans
Mortgage
Loan Balance
Percent of Total
Mortgage Loans
FirstBank of Colorado
$
287,119

4.4
%
$
273,386

4.2
%
Tulsa Teachers Credit Union
246,029

3.7

242,312

3.7

Mutual of Omaha Bank
145,579

2.2

152,264

2.3

SAC Federal Credit Union
141,647

2.1

141,992

2.2

Mid-America Bank
134,719

2.0

131,419

2.0

TOTAL
$
955,093

14.4
%
$
941,373

14.4
%

Two indications of credit quality are scores provided by Fair Isaac Corporation (FICO®) and loan-to-value (LTV) ratios. FICO is a widely used credit industry indicator to assess borrower credit quality with scores typically ranging from 300 to 850 with the low end of the scale indicating greater credit risk. The MPF Program requires a minimum FICO score of 620 for all conventional loans. LTV is a primary variable in credit performance. Generally speaking, a higher LTV ratio means greater risk of loss in the event of a default and also means higher loss severity. The weighted average FICO score and LTV recorded at origination for conventional mortgage loans outstanding as of March 31, 2017 was 750 and 73.9 percent, respectively. See Note 6 of the Notes to Financial Statements under Item 1 for additional information regarding credit quality indicators.

Allowance for Credit Losses on Mortgage Loans Held for Portfolio – The slight decrease in the allowance for credit losses as of March 31, 2017 was primarily attributable to a decrease in delinquent loans during the first quarter of 2017, despite an increase in the historical loss factor. We believe that policies and procedures are in place to effectively manage the credit risk on mortgage loans held in portfolio. See Note 6 of the Notes to Financial Statements under Item 1 for a summary of the allowance for credit losses on mortgage loans, and delinquency aging and key credit quality indicators for our mortgage loan portfolio.

Investments: Investments are used to provide liquidity and primary and secondary market support for the U.S. housing securities market. Total investments increased from December 31, 2016 to March 31, 2017 largely due to an increase in investment securities, primarily in MBS and, to a smaller extent, in certificates of deposit. The increase in long-term securities coincided with the increase in advances and mortgage loans, as growth in core mission assets, and corresponding increase in capital, allows for growth in non-mission assets while maintaining our desired core mission assets ratio. 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.


66


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 2 for a discussion of our liquidity management.

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

Table 20 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 20
 
03/31/2017
12/31/2016
Interest-bearing deposits
$
400,000

$
385,148

Federal funds sold
2,705,000

2,725,000

Certificates of deposit
200,006


TOTAL UNSECURED INVESTMENT CREDIT EXPOSURE1
$
3,305,006

$
3,110,148

                   
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: (1) include limits on the amount of unsecured credit an individual FHLBank may extend to a counterparty or to a group of affiliated counterparties; (2) permit us to extend additional unsecured credit for overnight extensions of credit, subject to limitations; and (3) prohibit us from investing in financial instruments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks. For additional information on our management of unsecured credit exposure, see Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Investments” in our Form 10-K for the year ended December 31, 2016. As of March 31, 2017, we were in compliance with all Finance Agency regulations relating to unsecured credit exposure.

We manage our credit risk by conducting pre-purchase credit due diligence and on-going surveillance described previously and generally investing in unsecured investments of highly-rated counterparties. From time to time, we extend unsecured credit to qualified members by investing in overnight Federal funds issued by them. In general, we treat members as any other market participant. However, since they are members and we have more access to specific financial information about our members, we have a lower capital requirement than for non-members, but members must still meet our credit ratings requirements. As of March 31, 2017, all unsecured investments were rated as investment grade based on NRSROs (see Table 24).


67


Table 21 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 March 31, 2017 (in thousands). We also mitigate the credit risk on investments by generally investing in investments that have short-term maturities.

Table 21
Domicile of Counterparty
Overnight
Due 2 – 30
days
Total
Domestic
$
475,000

$

$
475,000

U.S. subsidiaries of foreign commercial banks



Total domestic and U.S. subsidiaries of foreign commercial banks
475,000


475,000

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

 

 

Sweden
1,030,000


1,030,000

Canada
400,000

200,006

600,006

Germany
400,000


400,000

Netherlands
400,000


400,000

Norway
400,000


400,000

Total U.S. Branches and agency offices of foreign commercial banks
2,630,000

200,006

2,830,006

TOTAL UNSECURED INVESTMENT CREDIT EXPOSURE1
$
3,105,000

$
200,006

$
3,305,006

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

Unsecured credit exposure continues to be cautiously placed, with exposure concentrated in the United States, Canada, Germany, 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 MBS and GSE debentures. Our Risk Management Policy (RMP) restricts the acquisition of investments to highly rated long-term securities. The majority of these long-term securities are GSE MBS, which provide an alternative means to promote liquidity in the mortgage finance markets while providing acceptable returns. We hold fixed and variable rate GSE debentures in our long-term investment portfolio and we swap the fixed rate GSE debentures 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, no additional MBS purchases can be made if the amortized cost of our mortgage securities exceeds 300 percent of our regulatory capital. Further, quarterly increases in holdings of mortgage securities are restricted to no more than 50 percent of regulatory capital. As of March 31, 2017, the amortized cost of our MBS portfolio represented 321 percent of our regulatory capital due to capital stock repurchases that occurred prior to year end. As of March 31, 2017, we held $4.8 billion of par value in MBS in our held-to-maturity portfolio, $1.1 billion of par value in MBS in our available-for-sale portfolio, and $0.9 billion of par value in MBS in our trading portfolio. The majority of the MBS in the held-to-maturity portfolio are variable rate GSE securities. The majority of the MBS in the trading and available-for-sale portfolios are fixed rate GSE securities, which are swapped from fixed to variable rates.


68


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, generally for liquidity purposes, to provide a fair value offset to the gains (losses) on the interest rate swaps tied to swapped securities, and for asset/liability management purposes. 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.

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 newly acquired 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 3 of the Notes to Financial Statements under Item 1 of 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 22 (in thousands).

Table 22
 
03/31/2017
12/31/2016
Trading securities:
 
 
Certificates of deposit
$
200,006

$

GSE debentures
1,564,310

1,563,351

Mortgage-backed securities:
 
 
U.S. obligation MBS
665

690

GSE MBS
937,335

938,747

Total trading securities
2,702,316

2,502,788

Available-for-sale securities:
 
 
GSE MBS
1,124,924

1,091,721

Total available-for-sale securities
1,124,924

1,091,721

Held-to-maturity securities:
 
 
State or local housing agency obligations
95,580

105,780

Mortgage-backed or asset-backed securities:
 
 
U.S. obligation MBS
117,025

36,331

GSE MBS
4,542,231

4,250,547

Private-label residential MBS
97,906

109,566

Total held-to-maturity securities
4,852,742

4,502,224

Total securities
8,679,982

8,096,733

 
 
 
Interest-bearing deposits
401,161

387,920

 
 
 
Federal funds sold
2,705,000

2,725,000

 
 
 
Securities purchased under agreements to resell
2,500,000

2,400,000

TOTAL INVESTMENTS
$
14,286,143

$
13,609,653



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The contractual maturities of our investments are summarized by security type in Table 23 (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 23
 
03/31/2017
 
Due in
one year
or less
Due after
one year
through five years
Due after
five years
through 10 years
Due after
10 years
Carrying
Value
Trading securities:
 

 

 

 

 

Certificates of deposit
$
200,006

$

$

$

$
200,006

GSE debentures
359,199

796,403

408,708


1,564,310

Mortgage-backed securities:
 
 
 
 
 

U.S. obligation MBS


114

551

665

GSE MBS


645,604

291,731

937,335

Total trading securities
559,205

796,403

1,054,426

292,282

2,702,316

Yield on trading securities
2.59
%
0.88
%
2.86
%
2.85
%
 

Available-for-sale securities:
 
 
 
 
 
GSE MBS


882,250

242,674

1,124,924

Total available-for-sale securities


882,250

242,674

1,124,924

Yield on available-for-sale securities
%
%
2.46
%
2.93
%
 
Held-to-maturity securities:
 

 

 

 

 

State or local housing agency obligations

2,565


93,015

95,580

Mortgage-backed securities:
 

 

 

 

 

U.S. obligation MBS



117,025

117,025

GSE MBS

287,877

1,647,087

2,607,267

4,542,231

Private-label residential MBS
196

6,487

3,395

87,828

97,906

Total held-to-maturity securities
196

296,929

1,650,482

2,905,135

4,852,742

Yield on held-to-maturity securities
4.29
%
1.51
%
1.96
%
1.81
%
 

 
 
 
 
 
 
Total securities
559,401

1,093,332

3,587,158

3,440,091

8,679,982

Yield on total securities
2.59
%
1.05
%
2.34
%
1.98
%
 

 
 
 
 
 
 
Interest-bearing deposits
401,161




401,161

 
 
 
 
 
 
Federal funds sold
2,705,000




2,705,000

 
 
 
 
 
 
Securities purchased under agreements to resell
2,500,000




2,500,000

TOTAL INVESTMENTS
$
6,165,562

$
1,093,332

$
3,587,158

$
3,440,091

$
14,286,143



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Securities Ratings – Tables 24 and 25 present the carrying value of our investments by rating as of March 31, 2017 and December 31, 2016 (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 24
 
03/31/2017
 
Carrying Value1
 
Investment Grade
Below Triple-B
Unrated
Total
 
Triple-A
Double-A
Single-A
Triple-B
Interest-bearing deposits2
$

$
1,161

$
400,000

$

$

$

$
401,161

 
 
 
 
 
 
 
 
Federal funds sold2

630,000

2,075,000




2,705,000

 
 
 
 
 
 
 
 
Securities purchased under agreements to resell3





2,500,000

2,500,000

 
 
 
 
 
 
 
 
Investment securities:
 

 

 

 

 

 

 

Non-mortgage-backed securities:
 

 

 

 

 

 

 

Certificates of deposit2

200,006





200,006

GSE debentures

1,564,310





1,564,310

State or local housing agency obligations
65,580

30,000





95,580

Total non-mortgage-backed securities
65,580

1,794,316





1,859,896

Mortgage-backed or asset-backed securities:
 

 

 

 

 

 

 

U.S. obligation MBS

117,690





117,690

GSE MBS

6,604,490





6,604,490

Private label residential MBS
189

2,724

6,841

39,586

48,543

23

97,906

Total mortgage-backed securities
189

6,724,904

6,841

39,586

48,543

23

6,820,086

 
 
 
 
 
 
 
 
TOTAL INVESTMENTS
$
65,769

$
9,150,381

$
2,481,841

$
39,586

$
48,543

$
2,500,023

$
14,286,143

                   
1 
Investment amounts represent the carrying value and do not include related accrued interest receivable of $14.4 million at March 31, 2017.
2 
Amounts include unsecured credit exposure with original maturities ranging between overnight to 91 days.
3 
Amounts represent collateralized overnight borrowings by counterparty rating.



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Table 25
 
12/31/2016
 
Carrying Value1
 
Investment Grade
Below Triple-B
Unrated
Total
 
Triple-A
Double-A
Single-A
Triple-B
Interest-bearing deposits2
$
148

$
2,772

$
385,000

$

$

$

$
387,920

 
 
 
 
 
 
 
 
Federal funds sold2

600,000

2,125,000




2,725,000

 
 
 
 
 
 
 
 
Securities purchased under agreements to resell3





2,400,000

2,400,000

 
 
 
 
 
 
 
 
Investment securities:
 

 

 

 

 

 

 

Non-mortgage-backed securities:
 

 

 

 

 

 

 

GSE debentures

1,563,351





1,563,351

State or local housing agency obligations
65,725

30,000

10,055




105,780

Total non-mortgage-backed securities
65,725

1,593,351

10,055




1,669,131

Mortgage-backed or asset-backed securities:
 

 

 

 

 

 

 

U.S. obligation MBS

37,021





37,021

GSE MBS

6,281,015





6,281,015

Private label residential MBS

666

9,089

43,379

56,393

39

109,566

Total mortgage-backed securities

6,318,702

9,089

43,379

56,393

39

6,427,602

 
 
 
 
 
 
 
 
TOTAL INVESTMENTS
$
65,873

$
8,514,825

$
2,529,144

$
43,379

$
56,393

$
2,400,039

$
13,609,653

                   
1 
Investment amounts represent the carrying value and do not include related accrued interest receivable of $13.3 million at December 31, 2016.
2 
Amounts include unsecured credit exposure with overnight original maturities.
3 
Amounts represent collateralized overnight borrowings by counterparty rating.


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Table 26 details interest rate payment terms for the carrying value of our investment securities as of March 31, 2017 and December 31, 2016 (in thousands). We manage the interest rate risk associated with our fixed rate MBS and non-MBS trading securities as well as our fixed rate MBS available-for-sale securities by entering into interest rate swaps that convert the investment's fixed rate to a variable rate index (see Tables 36 and 37 under Item 3 – “Quantitative and Qualitative Disclosures About Market Risk)."

Table 26
 
03/31/2017
12/31/2016
Trading securities:
 
 
Non-mortgage-backed securities:
 
 
Fixed rate
$
817,628

$
618,423

Variable rate
946,688

944,928

Non-mortgage-backed securities
1,764,316

1,563,351

Mortgage-backed securities:
 
 
Fixed rate
854,994

851,774

Variable rate
83,006

87,663

Mortgage-backed securities
938,000

939,437

Total trading securities
2,702,316

2,502,788

Available-for-sale securities:
 
 
Mortgage-backed securities:
 
 
Fixed rate
1,124,924

1,091,721

Total available-for-sale securities
1,124,924

1,091,721

Held-to-maturity securities:
 
 
Non-mortgage-backed securities:
 
 
Variable rate
95,580

105,780

Non-mortgage-backed securities
95,580

105,780

Mortgage-backed securities:
 
 
Fixed rate
220,173

236,612

Variable rate
4,536,989

4,159,832

Mortgage-backed securities
4,757,162

4,396,444

Total held-to-maturity securities
4,852,742

4,502,224

TOTAL
$
8,679,982

$
8,096,733


Private-label Mortgage-backed and Asset-backed Securities – The carrying value of our portfolio of private-label MBS is less than one percent of total assets. We classify private-label MBS 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.

Table 27 presents a summary of the UPB of private-label MBS by interest rate type and by type of collateral (in thousands):

Table 27
 
03/31/2017
12/31/2016
 
Fixed
Rate1
Variable
Rate1
Total
Fixed
Rate1
Variable
Rate1
Total
Private-label residential MBS:
 

 

 

 

 

 

Prime
$
9,078

$
54,948

$
64,026

$
10,924

$
58,725

$
69,649

Alt-A
13,554

29,658

43,212

16,361

33,497

49,858

TOTAL
$
22,632

$
84,606

$
107,238

$
27,285

$
92,222

$
119,507

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


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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 28 presents statistical information for our private-label MBS by rating (dollar amounts in thousands):

Table 28
 
03/31/2017
Private-label residential MBS:
 
UPB by credit rating:
 
Triple-A
$
189

Double-A
2,725

Single-A
6,848

Triple-B
39,742

Double-B
15,548

Single-B
12,940

Triple-C
8,655

Double-C
2,128

Single-D
18,441

Unrated
22

TOTAL
$
107,238

 
 
Amortized cost
$
103,338

Unrealized losses
(5,292
)
Fair value
99,465

 
 
OTTI:
 
Credit-related OTTI charge taken year-to-date
$
37

Non-credit-related OTTI charge taken year-to-date
(33
)
TOTAL
$
4

 
 
Weighted average percentage of fair value to UPB
92.8
%
Original weighted average credit support1
5.1

Weighted average credit support1
12.6

Weighted average collateral delinquency2
10.0

                   
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.


Deposits: Total deposits decreased $19.1 million from December 31, 2016 to March 31, 2017. Deposit products offered primarily include demand and overnight deposits and short-term certificates of deposit. Demand deposit programs are offered primarily to facilitate customer transactions with us, such as cash flows associated with advances and mortgage loan transactions. Overnight deposits provide an alternative short-term investment option to members. The majority of deposits are in overnight or demand accounts that generally re-price daily based upon a market index such as overnight Federal funds. 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 if demand for loans at member institutions increases, if members choose to de-leverage their balance sheets, or if decreases in the general level of liquidity of members should occur. Fluctuations in deposits have little impact on our ability to obtain liquidity. We historically have had stable and ready access to the capital markets through consolidated obligations and can replace any reduction in deposits with similarly or even lower priced borrowings.
 

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Consolidated Obligations: Consolidated obligations are the joint and several debt obligations of the FHLBanks and consist of bonds and discount notes. Consolidated obligations represent the primary source of liabilities we use to fund advances, mortgage loans and investments. As noted under Item 3 – “Quantitative and Qualitative Disclosures About Market Risk,” we use debt with a variety of maturities and option characteristics to manage our interest rate risk profile. We make use of derivative transactions, executed in conjunction with specific consolidated obligation debt issues, to synthetically structure funding terms and costs.
 
Bonds are primarily used to fund longer-term (one year or greater) advances, mortgage loans and investments. To the extent that the bonds are funding variable rate assets, we typically either issue bonds that have variable rates matching the variable rate asset index or utilize an interest rate swap to change the bonds' characteristics in order to match the assets' 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 3.9 percent from December 31, 2016 to March 31, 2017. Discount notes decreased from 51.2 percent of total outstanding consolidated obligations as of December 31, 2016 to 50.9 percent as of March 31, 2017 as we increased our allocation of floating rate consolidated obligation bonds in an effort to reduce our LIBOR basis risk (i.e., the risk created by the difference between the amount of assets indexed to LIBOR compared to the amount of liabilities indexed to LIBOR). As discussed previously, we were able to replace some maturing and unswapped callable bonds with lower cost bonds during the second and third quarters of 2016, which has partially offset the increased cost of short-term debt. Replacing callable debt generally increases interest costs in the short term due to the acceleration of the unamortized concessions on the called debt because concession costs are amortized to contractual maturity. However, this increase is offset by the lower rate on the new debt and the funding benefit due to the timing differences between the date the debt is called and the forward settlement date of the new debt (conventionally not exceeding 30 days).

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

Liquidity and Capital Resources
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 three months ended March 31, 2017, proceeds (net of premiums and discounts) from the issuance of bonds and discount notes were $2.9 billion and $229.0 billion, respectively, compared to $1.4 billion and $140.3 billion for the same period in 2016. The large increase between periods reflects the cumulative effect of using a higher allocation of overnight discount notes during the first quarter of 2017. We generally use short-term discount notes to fund short-term advances and our short-term liquidity portfolio, but we funded a larger percentage of our assets with discount notes since the first half of 2016 due to market conditions that increased the cost of consolidated obligation bonds indexed or swapped to LIBOR. 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.


75


At March 31, 2017, 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 $0.4 billion, from $5.9 billion as of December 31, 2016 to $6.3 billion as of March 31, 2017, primarily due to increases in certificates of deposit and reverse repurchase agreements. 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. The par value of these debentures was $1.5 billion at both March 31, 2017 and December 31, 2016. We held GSE MBS with a par value of $935.5 million and $940.6 million as of March 31, 2017 and December 31, 2016, 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 strive to 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.

Our 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 three months ended March 31, 2017, advance disbursements totaled $118.1 billion compared to $35.0 billion for the same period in 2016. During the three months ended March 31, 2017, investment purchases (excluding overnight investments) totaled $1.0 billion compared to $0.5 billion for the same period in 2016. During the three months ended March 31, 2017, payments on consolidated obligation bonds and discount notes were $2.0 billion and $228.3 billion, respectively, compared to $4.1 billion and $137.0 billion for the same period in 2016, 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 a higher allocation of overnight discount notes during the first quarter of 2017.

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. Our net liquidity in excess of contingency liquidity over a cumulative five-business-day period was $11.8 billion as of March 31, 2017. 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 Bank 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.

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 the first quarter of 2017. See “Risk Management - Liquidity Risk Management” under this Item 2 for additional discussion on our liquidity requirements.


76


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 liquid investment balances. The weighted average remaining days to maturity of discount notes outstanding increased to 38 days as of March 31, 2017 from 32 days at December 31, 2016 as we issued discount notes with an original maturity of approximately one year during the first quarter of 2017 to fund longer term assets, in anticipation of an increase in interest rates. 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 3 days as of both March 31, 2017 and December 31, 2016 because we held primarily short-term investments with overnight maturities as of those dates. The mismatch of discount notes and our money market investment portfolio increased from 29 days on December 31, 2016 to 35 days on March 31, 2017 as a result of the increase in the weighted average remaining days to maturity of our 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.

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

Capital stock outstanding increased 10.2 percent from December 31, 2016 to March 31, 2017, 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.

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 is no longer required under our capital plan to hold the same amount 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.

Our activity-based stock purchase requirements are consistent with our cooperative structure; members’ stock ownership requirements and the dollar amount of dividends paid to members 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.
 

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Table 29 provides a summary of member capital requirements under our current capital plan as of March 31, 2017 and December 31, 2016 (in thousands):

Table 29
Requirement
03/31/2017
12/31/2016
Asset-based (Class A Common Stock only)
$
154,591

$
156,291

Activity-based (additional Class B Common Stock)1
1,069,131

980,747

Total Required Stock2
1,223,722

1,137,038

Excess Stock (Class A and B Common Stock)
130,887

92,307

Total Stock2
$
1,354,609

$
1,229,345

 
 
 
Activity-based Requirements:
 

 

Advances3
$
1,158,975

$
1,075,517

AMA assets (mortgage loans)4
1,129

1,192

Total Activity-based Requirement
1,160,104

1,076,709

Asset-based Requirement (Class A Common Stock) not supporting member activity1
63,618

60,329

Total Required Stock2
$
1,223,722

$
1,137,038

                   
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 11 of the Notes to Financial Statements under Item 1 for additional information and compliance as of March 31, 2017 and December 31, 2016.

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

Within our capital plan, we have the ability to pay different dividend rates to the holders of Class A Common Stock and Class B Common Stock. This differential is implemented through a methodology 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).


78


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 2016 and 2017 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 30 presents the dividend rates per annum paid on capital stock under our capital plan for the periods indicated:

Table 30
Applicable Rate per Annum
03/31/2017
12/31/2016
09/30/2016
06/30/2016
03/31/2016
Class A Common Stock
1.00
 %
1.00
 %
1.00
 %
1.00
 %
1.00
 %
Class B Common Stock
6.50

6.00

6.00

6.00

6.00

Weighted Average1
5.73

5.28

5.28

5.30

5.32

Dividend Parity Threshold:
 
 
 
 
 
Average effective overnight Federal funds rate
0.70
 %
0.45
 %
0.40
 %
0.37
 %
0.37
 %
Spread to index
(1.00
)
(1.00
)
(1.00
)
(1.00
)
(1.00
)
TOTAL (floored at zero percent)
0.00
 %
0.00
 %
0.00
 %
0.00
 %
0.00
 %
                   
1 
Weighted average dividend rates are dividends paid in cash and stock on both classes of stock divided by the average of capital stock eligible for dividends.

We increased the dividend rate to 6.50 percent on Class B Common Stock in the first quarter of 2017 to provide a higher percentage payout of quarterly earnings to our members. Adverse changes in market conditions 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 2017, but future dividends may be paid in cash. The payment of cash dividends instead of stock dividends should not have a significant impact from a liquidity perspective, as the subsequent redemption of excess stock created by stock dividends would utilize liquidity resources in the same manner as a cash dividend.

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

Credit Risk Management: Credit risk is defined as the 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 largely 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.


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

Investments – Our RMP restricts the acquisition of investments to high-quality, short-term money market instruments and highly rated long-term securities. The short-term investment portfolio represents unsecured credit and reverse repurchase agreements. 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 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 and private-label MBS rated triple-A at the time of purchase. Most of our MBS/CMO portfolio is securitized by Fannie Mae or Freddie Mac. Almost all of our private-label MBS have been downgraded below triple-A subsequent to purchase (see Table 28), but the downgraded securities have been and are currently paying according to contractual agreements with the exception of seven securities that have experienced immaterial cash flow shortfalls. Other long-term investments include unsecured GSE debentures and 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) that acts on our behalf to clear and settle derivative transactions through a Derivatives 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 for unsecured credit exposure 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. As a result of these risk mitigation initiatives, we do not anticipate any credit losses on our uncleared derivative transactions as of March 31, 2017.

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 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 and/or payments are posted daily for changes in the value of cleared derivatives through a clearing agent. We do not anticipate any credit losses on our cleared derivatives as of March 31, 2017.

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


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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 31 and 32 present derivative notional amounts and counterparty credit exposure by whole-letter rating (in the event of a split rating, we use the lowest rating published by Moody's or Standard and Poor's) for derivative positions with counterparties to which we had credit exposure (in thousands):

Table 31
03/31/2017
Credit Rating
Notional Amount
Net Derivatives Fair Value Before Collateral and Variation Margin for Daily Settled Contracts
Cash Collateral Pledged From (To) Counterparty and Variation Margin for Daily Settled Contracts1
Net Credit Exposure to Counterparties
Asset positions with credit exposure:
 
 
 
 
Uncleared derivatives:
 
 
 
 
Single-A
$
3,254,350

$
25,218

$
20,633

$
4,585

Cleared derivatives2
669,563

10,702

3,299

7,403

Liability positions with credit exposure:
 
 
 
 
Uncleared derivatives3:
 
 
 
 
Single-A
2,590,954

(23,759
)
(27,823
)
4,064

Cleared derivatives2
2,839,122

(8,223
)
(43,802
)
35,579

TOTAL DERIVATIVE POSITIONS WITH CREDIT EXPOSURE
$
9,353,989

$
3,938

$
(47,693
)
$
51,631

                   
1 
Includes variation margin for daily settled contracts of $(10,292,000) as of March 31, 2017.
2 
Represents derivative transactions cleared with Clearinghouses, which are not rated.
3 
Exposure can change on a daily basis; thus, there is often a short lag time between the date the exposure is identified, collateral is requested and collateral is returned.



81


Table 32
12/31/2016
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
$
896,943

$
2,958

$

$
2,958

Single-A
2,424,306

22,615

20,408

2,207

Cleared derivatives1
819,470

9,427

782

8,645

Liability positions with credit exposure:
 
 
 
 
Uncleared derivatives2:
 
 
 
 
Single-A
2,646,762

(32,555
)
(39,401
)
6,846

Cleared derivatives1
2,957,331

(19,416
)
(59,446
)
40,030

TOTAL DERIVATIVE POSITIONS WITH CREDIT EXPOSURE
$
9,744,812

$
(16,971
)
$
(77,657
)
$
60,686

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

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

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


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Table 33 presents the fair value of cross-border outstandings to countries in which we do business that amounted to at least one percent of our total assets as of March 31, 2017 (dollar amounts in thousands):

Table 33
 
Sweden
Canada
Other1
Total
 
Amount
Percent of Total Assets
Amount
Percent of Total Assets
Amount
Percent of Total Assets
Amount
Percent of Total Assets
Federal funds sold2
$
1,030,000

2.2
%
$
400,000

0.9
%
$
1,200,000

2.5
%
$
2,630,000

5.6
%
 
 
 
 
 
 
 
 
 
Trading securities3


200,006

0.4



200,006

0.4

 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 

 

 
 
 
 
Net exposure at fair value

 

 
(21,458
)
 
(21,458
)
 
Cash collateral held

 

 
25,604

 
25,604

 
Net exposure after cash collateral




4,146


4,146


 
 
 
 
 
 
 
 
 
TOTAL
$
1,030,000

2.2
%
$
600,006

1.3
%
$
1,204,146

2.5
%
$
2,834,152

6.0
%
                   
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 March 31, 2017 were $1.2 billion (Netherlands, Norway, and Germany).
2 
Consists solely of overnight Federal funds sold.
3 
Consists of certificates of deposit with remaining maturities of less than three months.

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

Operational liquidity, or the ability to meet operational requirements in the normal course of business, is currently defined in our RMP as sources of cash from both our ongoing access to the capital markets and our holding of liquid assets. We manage exposure to operational liquidity risk by maintaining appropriate daily liquidity levels above the thresholds established by our RMP. We are also required to manage liquidity in order to meet statutory and contingency liquidity requirements and Finance Agency liquidity guidelines by maintaining a daily liquidity level above certain thresholds also outlined in the RMP, federal statutes, Finance Agency regulations and other Finance Agency guidance not issued in the form of regulations. We remained in compliance with each of these liquidity requirements throughout the first quarter of 2017.

We are focused on maintaining a liquidity and funding balance between our financial assets and financial liabilities. Within the FHLBank System guidelines, each FHLBank develops its own metrics and milestones for enhancing its liquidity risk management practices. However, the FHLBanks work collectively to manage the system-wide liquidity and funding management and jointly monitor the combined refinancing risk. In managing and monitoring the amounts of assets that require refunding, we may consider contractual maturities of the financial assets, as well as certain assumptions regarding expected cash flows (i.e., estimated prepayments and scheduled amortizations).  See the Notes to the Financial Statements under Item 1 for more detailed information regarding contractual maturities of certain of our financial assets and liabilities.

We generally maintained stable access to the capital markets for the quarter ended March 31, 2017. For additional discussion of the market for our consolidated obligations and the overall market affecting liquidity see “Financial Market Trends” under this Item 2.

Certain of our derivative instruments contain provisions that require us to post additional collateral with our counterparties if there is deterioration in our credit rating. See Note 7 of the Notes to Financial Statements under Item 1 for additional information on collateral posting requirements and credit-risk-related contingent features.

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


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Legislative and Regulatory Developments
None.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

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

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

We manage DOE within ranges approved by our Board of Directors as described under Item 7A - "Quantitative and Qualitative Disclosures About Market Risk" in the annual report on Form 10-K, incorporated by reference herein. All of our DOE measurements were inside Board of Director established policy limits and operating ranges as of March 31, 2017. On an ongoing basis, we actively monitor portfolio relationships and overall DOE dynamics as a part of our evaluation processes for determining acceptable future asset/liability management actions. Table 34 presents the DOE in the base case and the up and down 200 basis point interest rate shock scenarios as of the periods noted:

Table 34
Duration of Equity
Date
Up 200 Basis Points
Base
Down 200 Basis Points
03/31/2017
2.2
-1.0
2.3
12/31/2016
2.6
-1.0
3.0
09/30/2016
-0.1
-2.2
1.1
06/30/2016
2.1
-1.4
1.0
03/31/2016
1.8
0.9
1.1

The DOE as of March 31, 2017 decreased in the up and down 200 basis point shock scenarios and remained unchanged in the base scenario from December 31, 2016. The primary factors contributing to these changes in duration during the period were: (1) the slight decrease in long-term interest rates and the relative level of mortgage rates during the period; (2) the slight increase in the fixed rate mortgage loan portfolio during the period along with a slight decrease in the weighting of the portfolio as a percent of total assets; and (3) asset/liability actions taken by management throughout the period, including the continued call and re-issuance of long-term, unswapped callable consolidated obligation bonds with short lock-out periods and the continued issuance of discount notes to fund the growth in advances.


84


The decrease in long-term interest rates during the first quarter of 2017 generally indicates a shortening duration profile for both the fixed rate mortgage loan portfolio and the associated unswapped callable consolidated obligation bonds funding these assets. Even with the slight increase in our mortgage loan portfolio during the period, as discussed in Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – MPF Program,” the portfolio decreased as an overall percentage of assets as expected and as the balance sheet expanded, decreasing from 14.7 percent of total assets as of December 31, 2016 to 14.2 percent as of March 31, 2017. With this weighting decrease, the mortgage loan portfolio continues to represent a sizable portion of the balance sheet, and changes occurring with this portfolio tend to be magnified in terms of DOE. Since the mortgage loan portfolio continues to comprise a considerable percentage of overall assets and has such a high duration relative to our other assets, its behavior is quite visible in the duration risk profile and changes in this portfolio are typically magnified as the composition of assets change. This magnification occurs when a portfolio market value weighting as a percent of the overall net market value of the balance sheet changes, causing the remaining portfolios to be a smaller or larger component of the total balance sheet composition. For example, if advance balances decrease during a given period, this decrease will cause the mortgage loan portfolio weighting to increase as a total proportion of total assets. Further, if interest rates decrease, the market value gains in the mortgage loan portfolio will cause the mortgage loan portfolio to further increase its sizable percentage of overall market value of assets. This increase in market value of assets will cause the duration for this portfolio to have a greater impact on DOE. In other words, this relationship causes the duration of the mortgage loan portfolio to have a larger contribution impact to the overall DOE since DOE is a market value weighted measurement. With these balance sheet dynamics, we continue to actively manage and monitor the contributing factors of our risk profile, including DOE. As the relationship of the fixed rate mortgage loan assets and the associated callable liabilities vary based on market conditions, we evaluate and manage these market driven sensitivities as both portfolios change in balance level and overall proportion.

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

As discussed above, while long-term interest rates decreased based on period-end dates, interest rates continued to remain historically low throughout the quarter and as we continued to experience prepayments of the fixed rate mortgage loan portfolio, the short lock-out periods of the callable bonds plus some maturities of non-callable bonds provided the opportunity to continue the refinancing of our liabilities. The decrease in long-term interest rates during the period also caused the duration profile of the existing portfolio of unswapped callable bonds to shorten along with the fixed rate mortgage loan portfolio. This liability shortening demonstrates the specific duration sensitivity to changes in interest rates at certain shock scenarios where the unswapped callable bonds are more or less sensitive to certain levels of declining interest rates, causing the overall DOE to increase or decrease, similar to the factors causing the changes in DOE for all interest rate shock scenarios. This sensitivity, or convexity, is further described under Item 7A – "Quantitative and Qualitative Disclosures About Market Risk" in the annual report on Form 10-K for the year ended December 31, 2016. In addition, issuance of discount notes continued in order to provide adequate liquidity sources to appropriately address customer short-term advance growth and associated capital stock activity during the period. The combination of all these factors contributed to the net DOE changes in all interest rate shock scenarios where the DOE decreased in the up and down 200 interest rate shock scenarios and remained unchanged in the base scenario. The down shock scenario continues to provide limited information since interest rates remain at historically low levels. This low interest rate environment essentially generates zero interest rates for the short- and mid-term interest rates along the down 200 shocked term structure of interest rates, causing valuation changes to be limited, generating DOE results with marginal information.


85


With respect to the GSE variable rate MBS portfolio, we generally purchase interest rate caps to offset the impact of embedded caps in this portfolio in rising interest rate scenarios. As expected, these interest rate caps are a satisfactory interest rate risk hedge to rising interest rates and provide an off-setting risk response to the risk profile changes in GSE variable rate MBS with embedded caps. We periodically assess derivative strategies to ensure that overall balance sheet risk is appropriately hedged within established risk appetite metrics and make adjustments to the derivative portfolio as needed. This evaluation is completed considering not only the par value of the variable rate MBS with embedded caps being hedged with purchased caps, but the composition of the purchased cap portfolio and expected prepayments of the variable rate MBS 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. During the quarter ended March 31, 2017, we purchased $494.9 million of variable rate single-family GSE and U.S. obligation MBS and $73.2 million of variable rate multi-family GSE MBS. However, we did not purchase additional interest rate caps during the first quarter of 2017 because the investments did not contain interest rate cap exposure. In addition, we purchased $30.0 million fixed rate multi-family GSE MBS during the current quarter. These fixed rate securities were effectively swapped to LIBOR and impacted DOE only slightly since they are reflected as variable rate instruments and are further described in Item 2 – "Management's Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Net Gain (Loss) on Trading Securities."

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 -0.6 months for March 31, 2017 and December 31, 2016. As discussed previously, the relatively stable performance was primarily the result of the changes in the fixed rate mortgage loan portfolio and the associated funding decisions made by management in response to changes in the interest rate environment and balance sheet during the first quarter of 2017. 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.

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 35 presents MVE as a percent of TRCS. As of March 31, 2017, all scenarios are well above the specified limits and much of the relative level in the ratios during the periods covered by the table can be attributed to the relative level of the fixed rate mortgage loan market values as rates have continued to remain historically low, the general value impact of the refinancing activities of the associated unswapped callable consolidated obligation bonds and the relative level of outstanding capital.

The MVE to TRCS ratios can be greatly impacted by the level of capital outstanding based on our capital management approach. Typically, as advances increase and the associated capital level increases, the ratio will generally decline since the new advances are primarily short-term with market values at or near par. Further, as advance balances decrease and the capital level decreases as capital stock is repurchased, the ratio will generally increase. These relationships primarily generate the changes in the MVE/TRCS levels and produce the changes in the ratios in all interest rate scenarios in the table below.

Table 35
Market Value of Equity as a Percent of Total Regulatory Capital Stock
Date
Up 200 Basis Points
Base
Down 200 Basis Points
03/31/2017
174
176
176
12/31/2016
177
181
179
09/30/2016
180
172
176
06/30/2016
169
170
170
03/31/2016
164
167
170


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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 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 36 and 37 present the notional amount and fair value amount (fair value includes net accrued interest receivable or payable on the derivative), excluding variation margin, for derivative instruments by hedged item, hedging instrument, hedging objective and accounting designation (in thousands):

Table 36
03/31/2017
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 
$
3,376,510

$
(2,091
)
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 
1,025,342

(10,620
)
Firm commitment to issue a fixed rate advance
Forward settling interest rate swap
Protect against fair value risk
Fair Value Hedge
95,475

2,489

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 
604,820

(12,210
)
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 
852,343

(5,221
)
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
1,125,633

17,641

Adjustable rate MBS with embedded caps
Interest rate cap
Offset the interest rate cap embedded in a variable rate investment
Economic Hedge 
2,487,400

3,252

Mortgage Loans Held for Portfolio
 
 
 
 
 
Fixed rate mortgage purchase commitments
Mortgage purchase commitment
Protect against fair value risk
Economic Hedge 
116,453

305

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 
758,700

25,735

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 
815,000

(1,080
)
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
40,000

(1,214
)
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 
490,000

(3,107
)
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 
630,000

(14,210
)
TOTAL
 
 
 
$
12,417,676

$
(331
)


87


Table 37
12/31/2016
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 
$
3,360,835

$
(14,485
)
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 
30,000

60

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 
1,145,392

(17,339
)
Firm commitment to issue a fixed rate advance
Forward settling interest rate swap
Protect against fair value risk
Fair Value Hedge
82,975

2,567

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 
604,820

(16,376
)
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 
852,810

(8,804
)
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
1,096,867

14,190

Adjustable rate MBS with embedded caps
Interest rate cap
Offset the interest rate cap embedded in a variable rate investment
Economic Hedge 
2,765,200

4,859

Mortgage Loans Held for Portfolio
 
 
 
 
 
Fixed rate mortgage purchase commitments
Mortgage purchase commitment
Protect against fair value risk
Economic Hedge 
90,013

(158
)
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 
149,361

370

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 
830,680

26,425

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 
750,000

(1,083
)
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
30,000

(1,174
)
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 
420,000

(4,319
)
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 
565,000

(14,995
)
TOTAL
 
 
 
$
12,773,953

$
(30,262
)


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Item 4: Controls and Procedures

Disclosure Controls and Procedures
Senior management is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed in the reports filed or submitted under the 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 March 31, 2017. 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 March 31, 2017.

Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended March 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

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

Item 1A: Risk Factors
There have been no material changes to the risk factors previously disclosed in our annual report on Form 10-K filed on March 9, 2017, and such risk factors are incorporated by reference herein.

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

Item 3: Defaults Upon Senior Securities
Not applicable.

Item 4: Mine Safety Disclosures
Not applicable.

Item 5: Other Information
None.



89


Item 6: Exhibits
Exhibit
No.
Description
3.1
Exhibit 3.1 to the FHLBank’s registration statement on Form 10, filed May 15, 2006, and made effective on July 14, 2006 (File No. 000-52004) (the “Form 10 Registration Statement”), Federal Home Loan Bank of Topeka Articles and Organization Certificate, is incorporated herein by reference as Exhibit 3.1.
3.2
Exhibit 3.2 to the 2015 Annual Report on Form 10-K, filed March 10, 2016, Federal Home Loan Bank of Topeka Amended and Restated Bylaws, is incorporated herein by reference as Exhibit 3.2.
4.1
Exhibit 99.2 to the Current Report on Form 8-K, filed August 5, 2011, Federal Home Loan Bank of Topeka Capital Plan, is incorporated herein by reference as Exhibit 4.1.
10.1
Exhibit 10.1 to the Current Report on Form 8-K, filed January 11, 2017, Severance Agreement and General Release, entered into on December 29, 2016, with Mr. Fisher, is incorporated by reference as Exhibit 10.1.
10.2
Exhibit 10.1 to the Current Report on Form 8-K, filed January 18, 2017, Federal Home Loan Bank of Topeka Benefit Equalization Plan, is incorporated herein by reference as Exhibit 10.2.
10.3
Exhibit 10.1 to the Current Report on Form 8-K, filed February 15, 2017, Federal Home Loan Bank of Topeka 2017 Executive Incentive Compensation Plan Targets, is incorporated herein by reference as Exhibit 10.3.
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.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document


90


SIGNATURES

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

 
Federal Home Loan Bank of Topeka
 
 
 
 
May 4, 2017
By: /s/ Mark E. Yardley
Date
Mark E. Yardley
 
President and Chief Executive Officer
 
 
 
 
May 4, 2017
By: /s/ William W. Osborn
Date
William W. Osborn
 
Senior Vice President and Chief Financial Officer


91