Federal Home Loan Bank of Topeka 8-K Fhlbank Topeka Announces Second Quarter 2013 Operating Results

FHLBANK TOPEKA ANNOUNCES SECOND QUARTER 2013 OPERATING RESULTS

July 29, 2013 –FHLBank Topeka (FHLBank) announces its operating results for the second quarter 2013. FHLBank is reporting net income of $28.8 million for the quarter ended June 30, 2013, compared to net income of $22.3 million for the quarter ended June 30, 2012. For the six months ended June 30, 2013 and 2012, FHLBank is reporting net income of $53.5 million and $53.8 million, respectively. FHLBank expects to file its Form 10-Q for the quarter ended June 30, 2013, with the Securities and Exchange Commission (SEC) on or about August 9, 2013.

President’s Comments

“We are pleased to announce another quarter of strong earnings,” said Andrew J. Jetter, president and CEO, “allowing the bank to pay an excellent dividend to members while continuing to build retained earnings. Advance balances increased significantly from year-end 2012 and members continue to find great value in the MPF Program.”

“Mortgage Partnership Finance,” “MPF” and MPF Xtra” are registered trademarks of the Federal Home Loan Bank of Chicago.

Net Income

Net income for the second quarter 2013 computed in accordance with U.S. generally accepted accounting principles (GAAP) was $28.8 million versus net income of $22.3 million for second quarter 2012. The largest component of net income is net interest income, which decreased between these two periods due to a decrease in net interest margin and net interest spread resulting from: (1) a decline in funding costs in 2012 through the refinancing of callable debt that was not achievable in 2013; and (2) a decline in asset yields in 2013 compared to 2012, which resulted in net interest margin and net interest spread starting to return to more historical and sustainable levels. Despite the moderate decrease in net interest income, net income from the second quarter 2012 to the second quarter 2013 significantly increased due to a gain recorded in the second quarter 2013 compared to a loss in the second quarter 2012 in FHLBank’s derivatives and hedging activities. The resulting increase in income was partially offset by an increase in a net loss on trading securities, resulting from a decrease in the market value of our trading securities portfolio during the second quarter 2013.

GAAP Income versus Adjusted Income and Adjusted Return on Equity

Adjusted income is a non-GAAP measure used by management to evaluate the quality of its ongoing earnings. FHLBank management believes that the presentation of income as measured for management purposes enhances the understanding of FHLBank’s performance by highlighting its underlying results and profitability. By removing volatility created by market value fluctuations and items such as prepayment fees, FHLBank can compare longer-term trends in earnings that might otherwise be indeterminable. Therefore, as part of evaluating its financial performance, FHLBank adjusts net income reported in accordance with GAAP for the impact of: (1) Affordable Housing Program (AHP) assessments (equivalent to an effective minimum income tax rate of 10%); (2) market value changes on derivatives and hedging activities (excludes net interest settlements related to derivatives not qualifying for hedge accounting); and (3) other items excluded because they are not considered a part of our routine operations or ongoing business model, such as prepayment fees, gain/loss on retirement of debt, gain/loss on mortgage loans held for sale and gain/loss on securities. The result is referred to as “adjusted income,” which is a non-GAAP measure of income. Adjusted income is used to compute an adjusted return on equity (ROE) that is then compared to the average overnight Federal funds effective rate, with the difference referred to as adjusted ROE spread. Because FHLBank is primarily a “hold-to-maturity” investor and does not trade derivatives, management believes that adjusted income, adjusted ROE and adjusted ROE spread are helpful in understanding its operating results and provide a meaningful period-to-period comparison in contrast to GAAP income, ROE based on GAAP income and ROE spread based on GAAP income, which can vary significantly from period to period because of market value changes on derivatives and certain other items that management excludes when evaluating operational performance because the added volatility does not provide a consistent measurement analysis.

Derivative and hedge accounting affects the timing of income or expense from derivatives, but not the economic income or expense from these derivatives when held to maturity or call date. For example, interest rate caps are purchased with an upfront fixed cost to provide protection against the risk of rising interest rates. Under derivative accounting guidance, these instruments are then marked to market each month, which can result in having to recognize significant gains and losses from year to year, producing volatility in FHLBank’s GAAP income. However, the sum of such gains and losses over the term of a derivative will equal its original purchase price if held to maturity. At June 30, 2013, the carrying value of the FHLBank’s interest rate caps used to hedge adjustable rate mortgage-backed securities with embedded caps was $40.0 million. Because of the monthly mark-to-market on the caps, FHLBank’s GAAP income will continue to be subject to volatility as both gains and losses on the caps are likely to be recorded in future periods.

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

Calculation of Adjusted Income:	Three months ended					Six months ended
	June 30,					June 30,
	(Amounts in thousands)					(Amounts in thousands)
	Unaudited					Unaudited
		2013			2012		2013		2012
Net Income, as reported under GAAP for the period	$	28,833		$	22,295	$	53,481	$	53,798
AHP assessments		3,204			2,479		5,944		5,981
Income before assessments		32,037			24,774		59,425		59,779
Derivative-related and other excluded items1		(1,584	)		8,751		824		9,611
Adjusted income (a non-GAAP measure)2	$	30,453		$	33,525	$	60,249	$	69,390

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

² Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. To mitigate these limitations, FHLBank has procedures in place to calculate these measures using the appropriate GAAP components. Although these non-GAAP measures are frequently used by FHLBank’s stakeholders in the evaluation of our performance, 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.

FHLBank uses adjusted ROE (a non-GAAP measure) compared to the average overnight Federal funds rate as a key measure of effective use and management of members’ capital. The impact of the decline in net interest margin is more apparent with adjusted ROE spread because it excludes the volatility in market values mentioned above.

	Three months ended						Six months ended
	June 30,						June 30,
Calculation of Adjusted ROE Spread:	(Amounts in thousands)						(Amounts in thousands)
	Unaudited						Unaudited
	2013			2012			2013			2012
Average GAAP total capital for the period	$	1,897,229		$	1,784,715		$	1,845,813		$	1,759,447
ROE, based upon GAAP net income		6.10	%		5.02	%		5.84	%		6.15	%
Adjusted ROE, based upon adjusted income1		6.44	%		7.56	%		6.58	%		7.93	%
Average overnight Federal funds effective rate		0.12	%		0.15	%		0.13	%		0.13	%
Adjusted ROE as a spread to average overnight Federal funds effective rate1		6.32	%		7.41	%		6.45	%		7.80	%

¹ Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. To mitigate these limitations, FHLBank has procedures in place to calculate these measures using the appropriate GAAP components. Although these non-GAAP measures are frequently used by FHLBank’s stakeholders in the evaluation of our performance, 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.

Attached are highlights from the unaudited Statements of Condition and Statements of Income for the three and six months ending June 30, 2013 and 2012. The Form 10-Q for the quarter ended June 30, 2013 will be available on the SEC website (www.sec.gov), as well as FHLBank’s website (www.fhlbtopeka.com), as soon as FHLBank files the Form 10-Q with the SEC in August 2013.

The information contained in this announcement 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 FHLBank’s operations. These statements may be identified by the use of forward-looking terminology such as “believe,” “will,” “likely,” “continue,” “strive” or other variations on these terms. FHLBank cautions that by their nature forward-looking statements involve risk or uncertainty 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: political events, including legislative, regulatory, judicial or other developments that affect FHLBank, its members, counterparties or investors; regulatory actions and determinations, including those resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act; changes in economic and market conditions, including conditions in the mortgage, housing and capital markets; changes in the U.S. government’s long-term debt rating and the long-term debt rating of FHLBank and/or other Federal Home Loan Banks; changes in demand for advances or consolidated obligations of FHLBank and/or of the FHLBank System; effects of derivative accounting treatment, OTTI accounting treatment and other accounting rule requirements; the effects of amortization/accretion; gains/losses on derivatives or on trading investments; volatility of market prices, rates and indices and the timing and volume of market activity; changes in FHLBank’s capital structure; membership changes, including changes resulting from member failures, mergers or changes in principal place of business; soundness of other financial institutions, including FHLBank’s members, nonmember borrowers and the other FHLBanks; changes in the value or liquidity of collateral underlying advances to FHLBank’s members or nonmember borrowers or collateral pledged by derivative counterparties; changes in the fair value and economic value of, impairment of, and risks associated with FHLBank’s investments in mortgage loans and mortgage-backed securities or other assets and the related credit enhancement protections; competitive forces, including the availability of other sources of funding for members; the willingness of members to do business with FHLBank; the ability of FHLBank to introduce new products and services to meet market demand and to manage successfully the risks associated with new products and services; the ability of 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 FHLBank has joint and several liability; and adverse developments or events affecting or involving other FHLBanks, housing GSEs or the FHLBank System in general. Additional risks that might cause FHLBank’s results to differ from these forward-looking statements are provided in detail in FHLBank’s filings with the SEC, which are available atwww.sec.gov.

All forward-looking statements contained in this announcement are expressly qualified in their entirety by 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 FHLBank has no obligation and does not undertake publicly to update, revise or correct any forward-looking statement for any reason.

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FHLBANK TOPEKA
Financial Highlights (unaudited)

Selected Financial Data (dollar amounts in thousands):

	June 30,		December 31,		June 30,
	2013		2012		2012
Statements of Condition(as of period end)
Investments1	$	10,720,934	$	10,774,411	$	11,182,572
Advances		18,817,468		16,573,348		17,729,556
Mortgage loans held for portfolio, net		5,958,984		5,940,517		5,548,633
Total assets		35,708,766		33,818,627		35,145,881
Deposits		918,360		1,181,957		1,711,570
Consolidated obligations, net2		32,487,699		30,642,961		31,251,156
Total liabilities		33,808,148		32,098,146		33,395,360
Total capital stock		1,404,501		1,264,456		1,338,120
Retained earnings		518,306		481,282		440,682
Total capital		1,900,618		1,720,481		1,750,521
Regulatory capital3		1,928,217		1,751,403		1,786,863

	Three months ended						Six months ended
	June 30,						June 30,
	2013			2012				2013			2012
Statements of Income(for the period)
Interest income	$	110,429		$	124,379			$	223,203		$	252,442
Interest expense		58,411			69,296				119,101			139,021
Net interest income before loan loss provision		52,018			55,083				104,102			113,421
Provision (reversal) for credit losses on mortgage loans		(416	)		417				1,531			1,456
Net other-than-temporary impairment losses on held-to-maturity securities recognized in earnings		(73	)		(632	)			(152	)		(1,221	)
Net gain (loss) on trading securities		(21,223	)		(681	)			(30,919	)		(11,447	)
Net gain (loss) on derivatives and hedging activities		11,525			(18,171	)			8,467			(18,106	)
Other income		2,497			2,733				4,856			5,208
Other expenses		13,123			13,141				25,398			26,620
Income (loss) before assessments		32,037			24,774				59,425			59,779
AHP assessments		3,204			2,479				5,944			5,981
Net income		28,833			22,295				53,481			53,798
Net interest margin4		0.59	%		0.64	%			0.60	%		0.67	%
Weighted average dividend rate5		2.48			2.19				2.44			2.16

1	Investments include held-to-maturity securities, trading securities, interest-bearing deposits, Federal funds sold and securities purchased under agreements to resell.
2	Consolidated obligations are bonds and discount notes that FHLBank is primarily liable to repay.
3	Regulatory capital is defined as the sum of FHLBank’s permanent capital, plus the amounts paid in by its stockholders for Class A stock; any general loss allowance, if consistent with GAAP and not established for specific assets; and other amounts from sources determined by the Federal Housing Finance Agency as available to absorb losses. Permanent capital is defined as the amount paid in for Class B stock plus the amount of FHLBank’s retained earnings, as determined in accordance with GAAP. Regulatory capital includes all capital stock subject to mandatory redemption that has been reclassified to a liability.
4	Net interest income as a percentage of average earning assets.
5	Weighted average dividend rates are dividends paid in cash and stock on both classes of stock divided by the average capital stock eligible for dividends.

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