UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
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 Number) | |
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 is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): ¨ Large accelerated filer ¨ Accelerated filer x Non-accelerated filer
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 issuer’s classes of common stock, as of the latest practicable date.
Shares outstanding as of November 1, 2007 | ||||
Class A Stock, par value $100 | 6,877,151 | |||
Class B Stock, par value $100 | 15,100,362 |
FEDERAL HOME LOAN BANK OF TOPEKA
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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” means the 12 Federal Home Loan Banks, including the FHLBank Topeka.
The information contained in this quarterly report is accurate only as of the date of this quarterly report and as of the dates specified herein.
The product and service names used in this quarterly report are the property of the FHLBank, and in some cases, the other FHLBanks. Where the context suggests otherwise, the products, services and company names mentioned in this quarterly report are the property of their respective owners.
The FHLBank filed an annual report on Form 10-K (referred in this report as “annual report on Form 10-K”) under the Securities Exchange Act of 1934 (“Exchange Act”) on March 30, 2007. Portions of the annual report on Form 10-K are incorporated by reference in this report.
Special Cautionary Notice Regarding Forward-looking Statements
The information included or incorporated by reference in this quarterly report on Form 10-Q contains certain forward looking statements with respect to our financial condition, results of operations, plans, objectives, projections, estimates, predictions, future financial performance and ongoing business, including without limitation: statements that are not historical in nature, or statements preceded by, followed by or that include words such as “believes,” “expects,” “may,” “will,” “should,” “could,” “anticipates,” “estimates,” “intends” or similar expressions. The FHLBank cautions that, by their nature, forward looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions and actual results may differ materially from those expressed, contemplated or implied by the forward looking statements or could affect the extent to which a certain plan, objective, projection, estimate or prediction is realized.
These forward-looking statements involve risks and uncertainties including, but not limited to, the following:
· | Economic and market conditions; |
· | Demand for FHLBank advances resulting from changes in FHLBank members’ deposit flows and/or credit demands; |
· | The volume of eligible mortgage loans originated and sold by participating members to the FHLBank through its various mortgage finance products (MPF Program1); |
· | Pricing of various mortgage finance products under the MPF Program by the MPF Provider since the FHLBank does not control pricing; |
· | Volatility of market prices, rates and indices that could affect the value of investments or collateral held by the FHLBank as security for the obligations of FHLBank stockholders and counterparties to derivatives and similar instruments; |
· | Political events, including legislative, regulatory, judicial, or other developments that affect the FHLBank, its stockholders, counterparties and/or investors in the consolidated obligations of the 12 FHLBanks; |
· | Competitive forces including, without limitation, other sources of funding available to FHLBank members, other entities borrowing funds in the capital markets and the ability to attract and retain skilled individuals; |
· | The pace of technological change and the ability to develop and support technology and information systems, including the Internet, sufficient to manage the risks and operations of the FHLBank’s business effectively; |
· | Changes in domestic and foreign investor demand for consolidated obligations of the 12 FHLBanks and/or the terms of derivatives and similar instruments including, without limitation, changes in the relative attractiveness of consolidated obligations as compared to other investment opportunities; |
· | Timing and volume of market activity; |
· | Ability to introduce new FHLBank products and services, and successfully manage the risks associated with those products and services, including new types of collateral used to secure advances; |
· | Risks related to the operations of the other 11 FHLBanks that could trigger our joint and several liability for debt issued by the other 11 FHLBanks; |
· | Risk of loss arising from litigation filed against the FHLBank; and |
· | Inflation/deflation. |
For additional information regarding these and other risks, see Item 1A – “Risk Factors” in the annual report on Form 10-K, incorporated by reference herein.
Any forward-looking statements made or incorporated by reference in this quarterly report on Form 10-Q or that we may make from time to time are representative only as of the date they are made, and we undertake no obligation to update any forward-looking statement.
1 “Mortgage Partnership Finance,” “MPF” and “eMPF” are registered trademarks of the Federal Home Loan Bank of Chicago.
3
FEDERAL HOME LOAN BANK OF TOPEKA
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 906 | $ | 375 | ||||
Interest-bearing deposits | 5,424,977 | 4,327,459 | ||||||
Federal funds sold | 6,233,000 | 8,054,500 | ||||||
Trading securities (Note 2) | 1,045,386 | 704,125 | ||||||
Available-for-sale securities1 (Note 3) | 0 | 101,668 | ||||||
Held-to-maturity securities2(Note 4) | 8,313,713 | 8,377,383 | ||||||
Advances (Note 5) | 32,980,591 | 28,445,245 | ||||||
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans of $845 and $854 (Note 8) | 2,331,126 | 2,372,939 | ||||||
Accrued interest receivable | 186,472 | 176,087 | ||||||
Premises, software and equipment, net | 18,697 | 19,797 | ||||||
Derivative assets (Note 12) | 120,415 | 66,623 | ||||||
Other assets | 85,052 | 92,766 | ||||||
TOTAL ASSETS | $ | 56,740,335 | $ | 52,738,967 |
LIABILITIES AND CAPITAL | ||||||||
Liabilities: | ||||||||
Deposits: | ||||||||
Interest-bearing: | ||||||||
Demand | $ | 102,491 | $ | 102,309 | ||||
Overnight | 793,500 | 1,005,500 | ||||||
Term | 9,500 | 1,051 | ||||||
Other | 40,500 | 1,400 | ||||||
Non-interest-bearing: | ||||||||
Demand | 42 | 16 | ||||||
Other | 6,693 | 8,130 | ||||||
Total deposits | 952,726 | 1,118,406 | ||||||
Consolidated obligations, net (Note 9): | ||||||||
Discount notes | 19,649,417 | 16,736,007 | ||||||
Bonds | 33,099,465 | 32,038,999 | ||||||
Total consolidated obligations, net | 52,748,882 | 48,775,006 | ||||||
Mandatorily redeemable capital stock (Note 10) | 40,786 | 46,232 | ||||||
Accrued interest payable | 386,133 | 336,743 | ||||||
Affordable Housing Program (Note 6) | 40,533 | 36,023 | ||||||
Payable to Resolution Funding Corp. (REFCORP) (Note 7) | 10,207 | 8,941 | ||||||
Derivative liabilities (Note 12) | 189,890 | 203,579 | ||||||
Other liabilities | 38,389 | 42,383 | ||||||
TOTAL LIABILITIES | 54,407,546 | 50,567,313 | ||||||
Commitments and contingencies (Note 14) | ||||||||
Capital (Note 10): | ||||||||
Capital stock outstanding – putable: | ||||||||
Class A ($100 par value; 6,142 and 5,323 shares issued and outstanding) | 614,180 | 532,321 | ||||||
Class B ($100 par value; 15,264 and 14,747 shares issued and outstanding) | 1,526,366 | 1,474,671 | ||||||
Total capital stock | 2,140,546 | 2,006,992 | ||||||
Retained earnings | 194,968 | 171,755 | ||||||
Accumulated other comprehensive income: | ||||||||
Net unrealized loss on available-for-sale securities (Note 3) | 0 | (4,437 | ) | |||||
Net unrealized loss relating to hedging activities | (48 | ) | (128 | ) | ||||
Defined benefit pension plan – prior service cost | 47 | 66 | ||||||
Defined benefit pension plan – net loss | (2,724 | ) | (2,594 | ) | ||||
TOTAL CAPITAL | 2,332,789 | 2,171,654 | ||||||
TOTAL LIABILITIES AND CAPITAL | $ | 56,740,335 | $ | 52,738,967 |
________
1 Amortized cost: $0 and $106,105 at September 30, 2007 and December 31, 2006, respectively.
2 Fair value: $8,241,196 and $8,314,299 at September 30, 2007 and December 31, 2006, respectively.
The accompanying notes are an integral part of these financial statements.
4
FEDERAL HOME LOAN BANK OF TOPEKA
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
INTEREST INCOME: | ||||||||||||||||
Interest bearing deposits | $ | 64,341 | $ | 63,382 | $ | 180,117 | $ | 181,727 | ||||||||
Federal funds sold and securities purchased under agreements to resell | 86,029 | 54,389 | 276,325 | 151,440 | ||||||||||||
Trading securities | 9,268 | 9,252 | 26,306 | 27,785 | ||||||||||||
Available-for-sale securities | 388 | 637 | 1,633 | 1,910 | ||||||||||||
Held-to-maturity securities | 120,327 | 104,036 | 333,959 | 293,403 | ||||||||||||
Advances | 406,404 | 378,689 | 1,116,901 | 1,033,005 | ||||||||||||
Prepayment fees on terminated advances | 70 | 67 | 526 | 1,076 | ||||||||||||
Mortgage loans held for portfolio | 30,330 | 30,504 | 91,126 | 91,804 | ||||||||||||
Overnight loans to other Federal Home Loan Banks | 36 | 20 | 84 | 53 | ||||||||||||
Other | 955 | 1,140 | 2,906 | 3,278 | ||||||||||||
Total interest income | 718,148 | 642,116 | 2,029,883 | 1,785,481 | ||||||||||||
INTEREST EXPENSE: | ||||||||||||||||
Deposits | 11,740 | 9,055 | 36,843 | 26,819 | ||||||||||||
Consolidated obligations: | ||||||||||||||||
Discount notes | 206,957 | 177,678 | 545,200 | 484,156 | ||||||||||||
Bonds | 438,064 | 400,562 | 1,275,401 | 1,111,413 | ||||||||||||
Overnight loans from other Federal Home Loan Banks | 41 | 42 | 146 | 82 | ||||||||||||
Other borrowings | 373 | 483 | 1,225 | 1,398 | ||||||||||||
Mandatorily redeemable capital stock (Note 10) | 504 | 624 | 1,714 | 1,961 | ||||||||||||
Total interest expense | 657,679 | 588,444 | 1,860,529 | 1,625,829 | ||||||||||||
NET INTEREST INCOME | 60,469 | 53,672 | 169,354 | 159,652 | ||||||||||||
Provision for (reversal of) credit losses on mortgage loans | 37 | 104 | (9 | ) | 191 | |||||||||||
NET INTEREST INCOME AFTER MORTGAGE LOAN CREDIT LOSS PROVISION/REVERSAL | 60,432 | 53,568 | 169,363 | 159,461 | ||||||||||||
OTHER INCOME: | ||||||||||||||||
Service fees | 372 | 342 | 1,094 | 1,024 | ||||||||||||
Net realized gain (loss) on sale of available-for-sale securities (Note 3) | (2,254 | ) | 0 | (2,254 | ) | 0 | ||||||||||
Net realized gain (loss) on sale or call of held-to-maturity securities (Note 4) | 0 | 0 | (962 | ) | 0 | |||||||||||
Net gain (loss) on trading securities (Note 2) | 14,205 | 14,773 | 6,641 | (6,153 | ) | |||||||||||
Net gain (loss) on derivatives and hedging activities (Note 12) | (9,837 | ) | (19,289 | ) | (2,648 | ) | 8,801 | |||||||||
Other | 997 | 984 | 2,963 | (2,013 | ) | |||||||||||
Total other income (loss) | 3,483 | (3,190 | ) | 4,834 | 1,659 | |||||||||||
OTHER EXPENSES: | ||||||||||||||||
Compensation and benefits | 4,510 | 4,644 | 14,594 | 13,579 | ||||||||||||
Other operating | 2,810 | 2,375 | 8,357 | 7,081 | ||||||||||||
Finance Board | 382 | 396 | 1,218 | 1,188 | ||||||||||||
Office of Finance | 339 | 304 | 1,160 | 1,022 | ||||||||||||
Other | 248 | 1,055 | 2,006 | 1,551 | ||||||||||||
Total other expenses | 8,289 | 8,774 | 27,335 | 24,421 | ||||||||||||
INCOME BEFORE ASSESSMENTS | 55,626 | 41,604 | 146,862 | 136,699 | ||||||||||||
Affordable Housing Program (Note 6) | 4,592 | 3,468 | 12,163 | 11,367 | ||||||||||||
REFCORP (Note 7) | 10,207 | 7,629 | 26,940 | 25,068 | ||||||||||||
Total assessments | 14,799 | 11,097 | 39,103 | 36,435 | ||||||||||||
NET INCOME | $ | 40,827 | $ | 30,507 | $ | 107,759 | $ | 100,264 |
The accompanying notes are an integral part of these financial statements.
5
FEDERAL HOME LOAN BANK OF TOPEKA
Accumulated | ||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||
Capital Stock Class A1 | Capital Stock Class B1 | Retained | Comprehensive | Total | ||||||||||||||||||||||||
Shares | Par Value | Shares | Par Value | Earnings | Income | Capital | ||||||||||||||||||||||
BALANCE – DECEMBER 31, 2005 | 4,977 | $ | 497,759 | 12,906 | $ | 1,290,582 | $ | 137,270 | $ | (7,434 | ) | $ | 1,918,177 | |||||||||||||||
Proceeds from sale of capital stock | 60 | 5,963 | 4,111 | 411,090 | 417,053 | |||||||||||||||||||||||
Repurchase/redemption of capital stock | (235 | ) | (23,526 | ) | (23,526 | ) | ||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | 100,264 | |||||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||
Net unrealized gain (loss) on available-for-sale (AFS) securities | 844 | |||||||||||||||||||||||||||
Reclassification adjustment for gain (loss) on hedging activities included in net income | 80 | |||||||||||||||||||||||||||
Total comprehensive income | 101,188 | |||||||||||||||||||||||||||
Net transfer of shares to mandatorily redeemable capital stock | (882 | ) | (88,242 | ) | (2,774 | ) | (277,367 | ) | (365,609 | ) | ||||||||||||||||||
Net transfer of shares between Class A and Class B | 858 | 85,845 | (858 | ) | (85,845 | ) | 0 | |||||||||||||||||||||
Dividends on capital stock (Class A – 4.2%, Class B – 6.0%): | ||||||||||||||||||||||||||||
Cash payment | (265 | ) | (265 | ) | ||||||||||||||||||||||||
Stock issued | 732 | 73,247 | (73,247 | ) | 0 | |||||||||||||||||||||||
BALANCE – SEPTEMBER 30, 2006 | 5,013 | $ | 501,325 | 13,882 | $ | 1,388,181 | $ | 164,022 | $ | (6,510 | ) | $ | 2,047,018 | |||||||||||||||
BALANCE – DECEMBER 31, 2006 | 5,323 | $ | 532,321 | 14,747 | $ | 1,474,671 | $ | 171,755 | $ | (7,093 | ) | $ | 2,171,654 | |||||||||||||||
Proceeds from sale of capital stock | 55 | 5,492 | 13,601 | 1,360,103 | 1,365,595 | |||||||||||||||||||||||
Repurchase/redemption of capital stock | (362 | ) | (36,233 | ) | (36,233 | ) | ||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | 107,759 | |||||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||
Net unrealized gain (loss) on AFS securities | 4,437 | |||||||||||||||||||||||||||
Reclassification adjustment for gain (loss) on hedging activities included in net income | 80 | |||||||||||||||||||||||||||
Amortization of prior service cost on defined benefit pension plan | (19 | ) | ||||||||||||||||||||||||||
Net loss on defined benefit pension plan | 201 | |||||||||||||||||||||||||||
Amortization of net loss on defined benefit pension plan | (331 | ) | ||||||||||||||||||||||||||
Total comprehensive income | 112,127 | |||||||||||||||||||||||||||
Net transfer of shares to mandatorily redeemable capital stock | (835 | ) | (83,556 | ) | (11,965 | ) | (1,196,511 | ) | (1,280,067 | ) | ||||||||||||||||||
Net transfer of shares between Class A and Class B | 1,599 | 159,923 | (1,599 | ) | (159,923 | ) | 0 | |||||||||||||||||||||
Dividends on capital stock (Class A – 4.5%, Class B – 6.6%): | ||||||||||||||||||||||||||||
Cash payment | (287 | ) | (287 | ) | ||||||||||||||||||||||||
Stock issued | 842 | 84,259 | (84,259 | ) | 0 | |||||||||||||||||||||||
BALANCE – SEPTEMBER 30, 2007 | 6,142 | $ | 614,180 | 15,264 | $ | 1,526,366 | $ | 194,968 | $ | (2,725 | ) | $ | 2,332,789 |
____________
1 Putable
The accompanying notes are an integral part of these financial statements.
6
FEDERAL HOME LOAN BANK OF TOPEKA
For the Nine Months Ended September 30, | ||||||||
2007 | 2006 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 107,759 | $ | 100,264 | ||||
Adjustments to reconcile income to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization: | ||||||||
Premiums and discounts on consolidated obligations, net | 12,588 | 28,290 | ||||||
Concessions on consolidated obligation bonds | 5,130 | 3,707 | ||||||
Premiums and discounts on investments, net | (4,203 | ) | (3,337 | ) | ||||
Premiums and discounts on advances | (39,630 | ) | (41,878 | ) | ||||
Discounts on Housing and Community Development advances | (5 | ) | (5 | ) | ||||
Premiums, discounts and deferred loan costs on mortgage loans, net | 718 | 884 | ||||||
Fair value adjustments on hedged assets or liabilities | 42,965 | 44,235 | ||||||
Other comprehensive income | (69 | ) | 80 | |||||
Premises, software and equipment | 2,656 | 2,193 | ||||||
Provision for (reversal of) credit losses on mortgage loans | (9 | ) | 191 | |||||
Non-cash interest on mandatorily redeemable capital stock | 1,705 | 1,956 | ||||||
Net realized (gain) loss on retirement of debt | 0 | 4,696 | ||||||
Net realized (gain) loss on sale of available-for-sales securities | 2,254 | 0 | ||||||
Net realized (gain) loss on sale or call of held-to-maturity securities | 962 | 0 | ||||||
Other (gains) losses | (68 | ) | (71 | ) | ||||
(Increase) decrease in trading securities | (341,261 | ) | 8,325 | |||||
(Gain) loss due to change in net fair value adjustment on derivative and hedging activities | (13,295 | ) | (8,138 | ) | ||||
(Increase) decrease in accrued interest receivable | (10,385 | ) | (5,816 | ) | ||||
(Increase) decrease in derivative asset – net accrued interest | (43,735 | ) | (26,004 | ) | ||||
(Increase) decrease in other assets | 1,502 | 389 | ||||||
Increase (decrease) in accrued interest payable | 49,390 | 60,196 | ||||||
(Increase) decrease in derivative liability – net accrued interest | (8,236 | ) | (24,061 | ) | ||||
Increase (decrease) in Affordable Housing Program liability | 4,510 | 4,570 | ||||||
Increase (decrease) in REFCORP liability | 1,266 | (5,334 | ) | |||||
Increase (decrease) in other liabilities | 1,007 | 1,151 | ||||||
Total adjustments | (334,243 | ) | 46,219 | |||||
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | (226,484 | ) | 146,483 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Net (increase) decrease in interest-bearing deposits | (1,097,518 | ) | (220,333 | ) | ||||
Net (increase) decrease in Federal funds sold | 1,821,500 | (2,575,200 | ) | |||||
Net (increase) decrease in short-term held-to-maturity securities | (46,191 | ) | (386,475 | ) | ||||
Proceeds from sale of available-for-sale securities | 102,377 | 0 | ||||||
Proceeds from sale or call of long-term held-to-maturity securities | 81,092 | 0 | ||||||
Proceeds from maturities of and principal repayments on long-term held-to-maturity securities | 1,097,008 | 1,076,156 | ||||||
Purchases of long-term held-to-maturity securities | (1,058,524 | ) | (1,024,405 | ) | ||||
Principal collected on advances | 371,446,009 | 329,852,368 | ||||||
Advances made | (375,898,289 | ) | (329,683,349 | ) | ||||
Principal collected on mortgage loans held for portfolio | 217,311 | 209,385 | ||||||
Mortgage loans held for portfolio originated or purchased | (176,329 | ) | (175,701 | ) | ||||
Principal collected on other loans made | 982 | 919 | ||||||
Purchases of premises, software and equipment | (1,556 | ) | (3,433 | ) | ||||
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | (3,512,128 | ) | (2,930,068 | ) |
The accompanying notes are an integral part of these financial statements.
7
FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CASH FLOWS (continued) – Unaudited
For the Nine Months Ended September 30, | ||||||||
2007 | 2006 | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net increase (decrease) in deposits | $ | (165,680 | ) | $ | (169,557 | ) | ||
Net proceeds from sale of consolidated obligation: | ||||||||
Discount notes | 584,693,027 | 637,710,474 | ||||||
Bonds | 13,616,318 | 6,982,758 | ||||||
Payments for maturing and retired consolidated obligation: | ||||||||
Discount notes | (581,784,555 | ) | (636,453,048 | ) | ||||
Bonds | (12,656,824 | ) | (5,293,960 | ) | ||||
Net increase (decrease) in other borrowings | (5,000 | ) | (5,000 | ) | ||||
Proceeds from issuance of capital stock | 1,365,595 | 417,053 | ||||||
Payments for repurchase/redemption of capital stock | (36,233 | ) | (23,526 | ) | ||||
Payments for repurchase of mandatorily redeemable capital stock | (1,287,218 | ) | (380,992 | ) | ||||
Cash dividends paid | (287 | ) | (265 | ) | ||||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 3,739,143 | 2,783,937 | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 531 | 352 | ||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 375 | 148 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 906 | $ | 500 | ||||
Supplemental disclosures: | ||||||||
Interest paid | $ | 1,798,985 | $ | 1,482,186 | ||||
Affordable Housing Program payments | $ | 7,919 | $ | 7,591 | ||||
REFCORP payments | $ | 25,674 | $ | 30,402 |
The accompanying notes are an integral part of these financial statements.
8
FEDERAL HOME LOAN BANK OF TOPEKA
September 30, 2007
NOTE 1 – FINANCIAL STATEMENT PRESENTATION
The accompanying interim financial statements of the Federal Home Loan Bank of Topeka (FHLBank) are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions 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, 2006. 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 30, 2007 (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.
Issuance of SFAS 157: In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (herein referred to as “SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS 157 applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value. Accordingly, SFAS 157 does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 (January 1, 2008 for the FHLBank), and interim periods within those fiscal years. The FHLBank does not expect the adoption of this statement to have a material impact on its financial condition, results of operations or cash flows.
Issuance of SFAS 159: In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115 (herein referred to as “SFAS 159”). SFAS 159 permits the FHLBank to choose to measure eligible financial instruments and certain other items at fair value at specified election dates. Changes in the fair values for the selected items will be recorded in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument, with a few exceptions, is irrevocable and is applied to the entire instrument. SFAS 159 is effective as of the beginning of the FHLBank’s first fiscal year that begins after November 15, 2007 (January 1, 2008 for the FHLBank). The FHLBank has not yet determined the effect that the implementation of SFAS 159 will have on its financial condition, results of operations or cash flows.
Issuance of FSP FIN 39-1: In May 2007, the FASB issued FASB Staff Position (FSP) FIN 39-1, “Amendment of FASB Interpretation No. 39” (herein referred to as “FSP FIN 39-1”). FSP FIN 39-1 amends FASB Interpretation Number (FIN) 39 “Offsetting of Amounts Related to Certain Contracts – An interpretation of APB Opinion No. 10 and FASB Statement No. 105” (herein referred to as “FIN 39”) to replace the terms conditional contracts and exchange contracts with the term derivative instruments as defined in SFAS 133, Accounting for Derivative Instruments and Hedging Activities (herein referred to as “SFAS 133”). FSP FIN 39-1 permits the FHLBank to offset fair value amounts recognized for cash collateral receivable or payable against fair value amounts recognized for derivative instruments executed with the same counterparty under master netting agreements in accordance with paragraph 10 of FIN 39. FSP FIN 39-1 requires the FHLBank to consistently offset the derivative fair value and the collateral fair value. The FHLBank will be required to recognize the effects of applying FIN 39-1 through retrospective application to all financial statements presented unless it is impracticable to do so. The FHLBank, upon adoption of FSP FIN 39-1, will be permitted to change its accounting policy to offset or not offset fair value amounts recognized for derivative instruments. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007 (January 1, 2008 for the FHLBank). The FHLBank is currently assessing the impact that adoption of this statement will have on its financial condition, results of operations and cash flows.
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. Many of the estimates and assumptions, including those used in financial models, are based on financial market conditions as of the date of the financial statements. Because of the volatility of the financial markets, as well as other factors that affect management estimates, actual results may vary from these estimates.
Reclassifications: Certain amounts in the 2006 financial statements have been reclassified to conform to the 2007 presentations. Such reclassifications have no impact on net income or capital.
9
NOTE 2 – TRADING SECURITIES
Major Security Types: Trading securities as of September 30, 2007 and December 31, 2006 are summarized in the following table (in thousands):
Estimated Fair Values | ||||||||
September 30, 2007 | December 31, 2006 | |||||||
FHLBank obligations1 | $ | 15,009 | $ | 15,052 | ||||
Fannie Mae2 obligations | 107,340 | 181,611 | ||||||
Freddie Mac2 obligations | 508,713 | 503,406 | ||||||
Federal Farm Credit Bank2 obligations | 0 | 620 | ||||||
Subtotal | 631,062 | 700,689 | ||||||
Mortgage-backed securities: | ||||||||
Fannie Mae2 | 276,450 | 0 | ||||||
Freddie Mac2 | 135,183 | 0 | ||||||
Ginnie Mae3 | 2,691 | 3,436 | ||||||
Mortgage-backed securities | 414,324 | 3,436 | ||||||
TOTAL | $ | 1,045,386 | $ | 704,125 |
1 | See Note 16 for transactions with other FHLBanks. |
2 | Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal Farm Credit Bank are government-sponsored enterprises (GSE). GSE securities are not guaranteed by the U.S. government. |
3 | Government National Mortgage Association (Ginnie Mae) securities are guaranteed by the U.S. government. |
Redemption Terms: The estimated fair values of trading securities by contractual maturity as of September 30, 2007 and December 31, 2006 are shown in the following table (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.
September 30, 2007 | December 31, 2006 | |||||||
Due in one year or less | $ | 15,009 | $ | 90,890 | ||||
Due after one year through five years | 462,743 | 354,844 | ||||||
Due after five years through 10 years | 153,310 | 254,955 | ||||||
Due after 10 years | 0 | 0 | ||||||
Subtotal | 631,062 | 700,689 | ||||||
Mortgage-backed securities | 414,324 | 3,436 | ||||||
TOTAL | $ | 1,045,386 | $ | 704,125 |
For securities held as of September 30, 2007, the net gain (loss) on trading securities during the three-month periods ended September 30, 2007 and 2006 included an unrealized net gain (loss) of $10,392,000 and $14,884,000, respectively. For securities held as of September 30, 2007, the net gain (loss) on trading securities for the nine-month periods ended September 30, 2007 and 2006 included a net unrealized gain (loss) of $3,040,000 and $(4,894,000), respectively.
NOTE 3 – AVAILABLE-FOR-SALE SECURITIES
Major Security Types: The cost basis, unrealized gains and losses and estimated fair values of available-for-sale securities as of December 31, 2006 are as follows (in thousands). All securities as of December 31, 2006 were U.S. Treasury Obligations.
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
As of December 31, 2006 | $ | 106,105 | $ | 0 | $ | 4,437 | $ | 101,668 |
The FHLBank concluded that, based on the creditworthiness of the issuer, the unrealized loss on each security in the above table represented a temporary impairment and did not require adjustment to the carrying amount of any of the individual securities.
10
Redemption Terms: The amortized cost and estimated fair values of available-for-sale securities by contractual maturity as of December 31, 2006 are shown in the following table (in thousands). None of these securities were callable or prepayable.
December 31, 2006 | ||||||||
Amortized Cost | Estimated Fair Values | |||||||
Due in one year or less | $ | 50,432 | $ | 49,143 | ||||
Due after one year through five years | 55,673 | 52,525 | ||||||
Due after five years through 10 years | 0 | 0 | ||||||
Due after 10 years | 0 | 0 | ||||||
TOTAL | $ | 106,105 | $ | 101,668 |
Interest Rate Payment Terms: All securities classified as available-for-sale securities as of December 31, 2006, respectively, were fixed rate securities.
Gains and Losses: Net losses were realized on the sale of securities during the three and nine-month periods ended September 30, 2007 and are included in other income. There were no sales of available-for-sale securities during the three-month or nine-month periods ended September 30, 2006. Following are details of the 2007 sales (in thousands):
Three- and Nine-month periods ended September 30, 2007 | ||||
Total proceeds | $ | 102,377 | ||
Gross gains | $ | 0 | ||
Gross losses | (2,254 | ) | ||
NET LOSS | $ | (2,254 | ) |
NOTE 4 – HELD-TO-MATURITY SECURITIES
Major Security Types: Held-to-maturity securities as of September 30, 2007 are summarized in the following table (in thousands):
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Values | |||||||||||||
State or local housing agency obligations | $ | 197,347 | $ | 899 | $ | 639 | $ | 197,607 | ||||||||
Commercial paper | 1,825,241 | 0 | 0 | 1,825,241 | ||||||||||||
Subtotal | 2,022,588 | 899 | 639 | 2,022,848 | ||||||||||||
Mortgage-backed securities: | ||||||||||||||||
Fannie Mae1 | 1,477,298 | 1,478 | 12,319 | 1,466,457 | ||||||||||||
Freddie Mac1 | 1,685,578 | 3,439 | 17,835 | 1,671,182 | ||||||||||||
Ginnie Mae2 | 45,736 | 288 | 0 | 46,024 | ||||||||||||
Other3 | 3,082,513 | 1,728 | 49,556 | 3,034,685 | ||||||||||||
Mortgage-backed securities | 6,291,125 | 6,933 | 79,710 | 6,218,348 | ||||||||||||
TOTAL | $ | 8,313,713 | $ | 7,832 | $ | 80,349 | $ | 8,241,196 |
11
Held-to-maturity securities as of December 31, 2006 are summarized in the following table (in thousands):
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Values | |||||||||||||
Fannie Mae1 obligations | $ | 100,008 | $ | 0 | $ | 8 | $ | 100,000 | ||||||||
Freddie Mac1 obligations | 99,940 | 0 | 2 | 99,938 | ||||||||||||
State or local housing agency obligations | 238,873 | 1,444 | 4,211 | 236,106 | ||||||||||||
Commercial paper | 1,774,449 | 0 | 0 | 1,774,449 | ||||||||||||
Subtotal | 2,213,270 | 1,444 | 4,221 | 2,210,493 | ||||||||||||
Mortgage-backed securities: | ||||||||||||||||
Fannie Mae1 | 1,145,425 | 2,269 | 7,942 | 1,139,752 | ||||||||||||
Freddie Mac1 | 1,379,899 | 2,671 | 10,918 | 1,371,652 | ||||||||||||
Ginnie Mae2 | 17,118 | 186 | 0 | 17,304 | ||||||||||||
Other3 | 3,621,671 | 3,121 | 49,694 | 3,575,098 | ||||||||||||
Mortgage-backed securities | 6,164,113 | 8,247 | 68,554 | 6,103,806 | ||||||||||||
TOTAL | $ | 8,377,383 | $ | 9,691 | $ | 72,775 | $ | 8,314,299 |
_______
1 | Fannie Mae and Freddie Mac are GSEs. GSE securities are not guaranteed by the U.S. government. |
2 | Ginnie Mae securities are guaranteed by the U.S. government. |
3 | Primarily consists of private-label mortgage-backed securities |
The FHLBank concluded that, based on the creditworthiness of the issuers and/or any underlying collateral, the unrealized loss on each security in the above tables represents a temporary impairment and does not require adjustment to the carrying amount of any of the individual securities. Additionally, the FHLBank has the ability and the intent to hold such securities through to recovery of the unrealized losses.
The amortized cost of the FHLBank’s mortgage-backed securities included net discounts of $12,621,000 and $9,859,000 as of September 30, 2007 and December 31, 2006, respectively. Other investments included net discounts of $0 and $52,000 as of September 30, 2007 and December 31, 2006, respectively.
Redemption Terms: The amortized cost and estimated fair values of held-to-maturity securities by contractual maturity as of September 30, 2007 and December 31, 2006 are shown in the following table (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.
September 30, 2007 | December 31, 2006 | |||||||||||||||
Amortized Cost | Estimated Fair Values | Amortized Cost | Esimated Fair Values | |||||||||||||
Due in one year or less | $ | 1,825,241 | $ | 1,825,241 | $ | 1,974,397 | $ | 1,974,386 | ||||||||
Due after one year through five years | 10,305 | 10,778 | 10,000 | 10,539 | ||||||||||||
Due after five years through 10 years | 4,030 | 4,041 | 600 | 620 | ||||||||||||
Due after 10 years | 183,012 | 182,788 | 228,273 | 224,948 | ||||||||||||
Subtotal | 2,022,588 | 2,022,848 | 2,213,270 | 2,210,493 | ||||||||||||
Mortgage-backed securities | 6,291,125 | 6,218,348 | 6,164,113 | 6,103,806 | ||||||||||||
TOTAL | $ | 8,313,713 | $ | 8,241,196 | $ | 8,377,383 | $ | 8,314,299 |
Interest Rate Payment Terms: The following table details interest rate payment terms for held-to-maturity securities as of September 30, 2007 and December 31, 2006 (in thousands):
September 30, 2007 | December 31, 2006 | |||||||
Amortized cost of held-to-maturity securities other than mortgage-backed securities: | ||||||||
Fixed rate | $ | 1,924,523 | $ | 2,098,195 | ||||
Variable rate | 98,065 | 115,075 | ||||||
Subtotal | 2,022,588 | 2,213,270 | ||||||
Amortized cost of held-to-maturity mortgage-backed securities: | ||||||||
Pass-through securities: | ||||||||
Fixed rate | 1,309 | 26,621 | ||||||
Variable rate | 18,443 | 23,497 | ||||||
Collateralized mortgage obligations: | ||||||||
Fixed rate | 3,261,308 | 3,645,173 | ||||||
Variable rate | 3,010,065 | 2,468,822 | ||||||
Subtotal | 6,291,125 | 6,164,113 | ||||||
TOTAL | $ | 8,313,713 | $ | 8,377,383 |
12
Gains and Losses: Net gains (losses) were realized on the sale or call of securities during the three- and nine-month periods ended September 30, 2007 and are included in other income. All securities sold had paid down below 15 percent of the principal outstanding at acquisition. There were no sales of securities during the three- or nine-month periods ended September 30, 2006. Following are details of the 2007 sales (in thousands):
Three-month period ended September 30, 2007 | Nine-month period ended September 30, 2007 | |||||||
Total proceeds | $ | 5 | $ | 81,092 | ||||
Gross gains | $ | 0 | $ | 378 | ||||
Gross losses | 0 | (1,340 | ) | |||||
NET LOSS | $ | 0 | $ | (962 | ) |
NOTE 5 – ADVANCES
Redemption Terms: As of September 30, 2007 and December 31, 2006, the FHLBank had advances outstanding at interest rates ranging from zero percent (AHP advances, see Note 6) to 8.64 percent at both period ends as summarized in the following table (in thousands):
September 30, 2007 | December 31, 2006 | |||||||||||||||
Year of Maturity | Amount | Weighted Average Interest Rate | Amount | Weighted Average Interest Rate | ||||||||||||
Due in one year or less | $ | 19,454,222 | 4.91 | % | $ | 16,628,892 | 5.14 | % | ||||||||
Due after one year through two years | 2,351,163 | 4.74 | 1,815,262 | 4.57 | ||||||||||||
Due after two years through three years | 2,092,032 | 5.48 | 2,539,993 | 4.87 | ||||||||||||
Due after three years through four years | 1,449,156 | 5.21 | 1,788,008 | 5.46 | ||||||||||||
Due after four years through five years | 727,625 | 4.61 | 1,147,407 | 4.97 | ||||||||||||
Due after five years | 6,844,132 | 4.82 | 4,546,448 | 4.68 | ||||||||||||
Total par value | 32,918,330 | 4.92 | % | 28,466,010 | 5.02 | % | ||||||||||
Discounts on HCD advances | (46 | ) | (51 | ) | ||||||||||||
Premiums on other advances | 98 | 125 | ||||||||||||||
Discounts on other advances | (49,790 | ) | (89,406 | ) | ||||||||||||
Hedging basis adjustments | 111,999 | 68,567 | ||||||||||||||
TOTAL | $ | 32,980,591 | $ | 28,445,245 |
In general, a borrower is charged a prepayment fee when an advance is repaid before its stated maturity. Prepayment fees are calculated using methods that make the FHLBank financially indifferent to the advance prepayments. 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). The borrowers normally exercise their call options on these advances when interest rates decline (fixed rate advances) or spreads change (adjustable rate advances). The FHLBank’s advances as of September 30, 2007 and December 31, 2006 include callable advances totaling $5,076,339,000 and $3,781,912,000, respectively. Of these callable advances, there were $5,057,687,000 and $3,779,516,000 of adjustable rate advances as of September 30, 2007 and December 31, 2006, respectively. The table below summarizes the FHLBank’s advances by year of maturity, or by the next call date for callable advances (in thousands):
Year of Maturity or Next Call Date | September 30, 2007 | December 31, 2006 | ||||||
Due in one year or less | $ | 23,484,026 | $ | 18,956,544 | ||||
Due after one year through two years | 2,252,509 | 1,697,254 | ||||||
Due after two years through three years | 1,964,232 | 2,358,273 | ||||||
Due after three years through four years | 1,293,118 | 1,657,008 | ||||||
Due after four years through five years | 718,290 | 1,039,820 | ||||||
Due after five years | 3,206,155 | 2,757,111 | ||||||
TOTAL PAR VALUE | $ | 32,918,330 | $ | 28,466,010 |
13
The FHLBank’s advances outstanding also include advances that contain conversion options that may be exercised at the FHLBank’s discretion on specific dates (conversion dates) before the stated advance maturities (convertible advances). With convertible advances, the FHLBank effectively purchases put options from the borrowers that allow the FHLBank to convert the fixed rate advances to adjustable rate advances. In exchange for the options, borrowers are charged interest rates that are below those for fixed rate advances with comparable maturities. The FHLBank normally exercises its conversion options on these advances when interest rates increase. The FHLBank’s advances as of September 30, 2007 and December 31, 2006 included convertible advances totaling $4,205,941,000 and $3,996,241,000, respectively. The following table summarizes the FHLBank’s advances by year of maturity, or by the next conversion or put date for convertible advances (in thousands):
Year of Maturity or Next Conversion or Put Date | September 30, 2007 | December 31, 2006 | ||||||
Due in one year or less | $ | 22,969,012 | $ | 19,600,307 | ||||
Due after one year through two years | 2,209,863 | 2,324,512 | ||||||
Due after two years through three years | 1,822,192 | 2,242,244 | ||||||
Due after three years through four years | 785,431 | 1,207,667 | ||||||
Due after four years through five years | 297,825 | 591,682 | ||||||
Due after five years | 4,834,007 | 2,499,598 | ||||||
TOTAL PAR VALUE | $ | 32,918,330 | $ | 28,466,010 |
Interest Rate Payment Terms: The following table details additional interest rate payment terms for advances as of September 30, 2007 and December 31, 2006 (in thousands):
September 30, 2007 | December 31, 2006 | |||||||
Par amount of advances: | ||||||||
Fixed rate | $ | 25,963,436 | $ | 22,557,448 | ||||
Adjustable rate | 6,954,894 | 5,908,562 | ||||||
TOTAL | $ | 32,918,330 | $ | 28,466,010 |
NOTE 6 – AFFORDABLE HOUSING PROGRAM (AHP)
The Federal Home Loan Bank Act of 1932 (Bank Act), as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, requires each FHLBank to establish an AHP. As a part of its AHP, the FHLBank provides subsidies in the form of direct grants or below-market interest rate advances to members that use the funds to assist in the purchase, construction or rehabilitation of housing for very low-, low- and moderate-income households. To fund the AHP, the 12 district FHLBanks as a group must annually set aside the greater of $100,000,000 or 10 percent of the current year’s regulatory income. The AHP and REFCORP assessments are calculated simultaneously because of their interdependence on each other. The FHLBank accrues an AHP assessment monthly based on its regulatory income. Calculation of the REFCORP assessment is discussed in Note 7.
The following table details the change in the AHP liability for the three- and nine-month periods ended September 30, 2007 and 2006 (in thousands):
Three-month period ended | Nine-month period ended | |||||||||||||||
September 30, 2007 | September 30, 2006 | September 30, 2007 | September 30, 2006 | |||||||||||||
Appropriated and reserved AHP funds as of the beginning of the period | $ | 39,571 | $ | 33,656 | $ | 36,023 | $ | 30,567 | ||||||||
AHP set aside based on current period regulatory income | 4,592 | 3,468 | 12,163 | 11,367 | ||||||||||||
Direct grants disbursed | (3,485 | ) | (2,311 | ) | (7,919 | ) | (7,591 | ) | ||||||||
Recaptured funds1 | (145 | ) | 324 | 266 | 794 | |||||||||||
Appropriated and reserved AHP funds as of the end of the period | $ | 40,533 | $ | 35,137 | $ | 40,533 | $ | 35,137 |
_______
1 | Recaptured funds are direct grants returned to the FHLBank in those instances where the commitments associated with the approved use of funds are not met and repayment to the FHLBank is required by regulation. Recaptured funds are returned as a result of: (1) AHP-assisted homeowner’s transfer or sale of property within the five-year retention period that the assisted homeowner is required to occupy the property; or (2) unused grants. Recaptured funds are reallocated to future periods. |
14
NOTE 7 – RESOLUTION FUNDING CORPORATION (REFCORP)
Each FHLBank is required to pay 20 percent of income calculated in accordance with GAAP after the assessment for AHP, but before the assessment for REFCORP. The AHP and REFCORP assessments are calculated simultaneously because of their interdependence on each other. The FHLBank accrues its REFCORP assessment on a monthly basis.
Calculation of the AHP assessment is discussed in Note 6. The Resolution Funding Corporation has been designated as the calculation agent for AHP and REFCORP assessments. Each FHLBank provides its interest expense related to mandatorily redeemable capital stock and net income before AHP and REFCORP to the Resolution Funding Corporation, which then performs the calculations for each quarter end and levies the assessments to the FHLBanks for the quarter.
The following table details the change in the REFCORP liability for the three- and nine-month periods ended September 30, 2007 and 2006 (in thousands):
Three-month period ended | Nine-month period ended | |||||||||||||||
September 30, 2007 | September 30, 2006 | September 30, 2007 | September 30, 2006 | |||||||||||||
REFCORP obligation as of the beginning of the period | $ | 8,586 | $ | 8,227 | $ | 8,941 | $ | 12,962 | ||||||||
REFCORP assessments | 10,207 | 7,629 | 26,940 | 25,068 | ||||||||||||
REFCORP payments | (8,586 | ) | (8,228 | ) | (25,674 | ) | (30,402 | ) | ||||||||
REFCORP obligation as of the end of the period | $ | 10,207 | $ | 7,628 | $ | 10,207 | $ | 7,628 |
NOTE 8– MORTGAGE LOANS HELD FOR PORTFOLIO
The Mortgage Partnership Finance® (MPF®) Program involves the FHLBank investing in mortgage loans, which are either funded by the FHLBank through or purchased from its participating members. The total loans represent held-for-portfolio loans under the MPF Program whereby participating FHLBank members originate and credit enhance home mortgage loans that are owned by the FHLBank. Dependent upon a member’s business strategy, servicing rights can be retained or sold. The FHLBank does not buy or own any mortgage servicing rights.
The following table presents information as of September 30, 2007 and December 31, 2006 on mortgage loans held for portfolio (in thousands):
September 30, 2007 | December 31, 2006 | |||||||
Real Estate: | ||||||||
Fixed rate, medium-term1, single-family mortgages | $ | 765,636 | $ | 829,718 | ||||
Fixed rate, long-term, single-family mortgages | 1,563,444 | 1,540,466 | ||||||
Total par value | 2,329,080 | 2,370,184 | ||||||
Premiums | 13,620 | 14,999 | ||||||
Discounts | (10,328 | ) | (11,090 | ) | ||||
Deferred loan costs, net | 139 | 147 | ||||||
Hedging basis adjustments | (540 | ) | (447 | ) | ||||
Total before Allowance for Credit Losses on Mortgage Loans | 2,331,971 | 2,373,793 | ||||||
Allowance for Credit Losses on Mortgage Loans | (845 | ) | (854 | ) | ||||
Mortgage Loans, net | $ | 2,331,126 | $ | 2,372,939 |
_______
1 Medium-term defined as a term of 15 years or less.
The credit enhancement is an obligation on the part of the participating member that ensures the retention of credit risk on loans it originates on behalf of or sells to the FHLBank. The FHLBank pays the participating member a credit enhancement fee for managing this portion of the credit risk in the pool of loans. These fees are paid monthly based upon the remaining unpaid principal balance for the pool of loans. Credit enhancement fees paid by the FHLBank to participating members for assuming the credit enhancement obligation are netted against interest income when paid. Credit enhancement fees paid by the FHLBank to participating members totaled $535,000 and $613,000 for the three-month periods ended September 30, 2007 and 2006, respectively. During the nine-month periods ended September 30, 2007 and 2006, credit enhancement fees paid by the FHLBank to participating members totaled $1,749,000 and $1,877,000, respectively.
The allowance for credit losses on mortgage loans for the three- and nine-month periods ended September 30, 2007 and 2006 was as follows (in thousands):
Three-month period ended | Nine-month period ended | |||||||||||||||
September 30, 2007 | September 30, 2006 | September 30, 2007 | September 30, 2006 | |||||||||||||
Balance, beginning of period | $ | 852 | $ | 764 | $ | 854 | $ | 756 | ||||||||
Provision for (reversal of) credit losses on mortgage loans | 37 | 104 | (9 | ) | 191 | |||||||||||
Charge-offs | (44 | ) | (18 | ) | 0 | (97 | ) | |||||||||
Recoveries | 0 | 0 | 0 | 0 | ||||||||||||
Balance, end of period | $ | 845 | $ | 850 | $ | 845 | $ | 850 |
15
NOTE 9 – CONSOLIDATED OBLIGATIONS
Consolidated obligations consist of consolidated bonds and discount notes and, as provided by the Bank Act or Federal Housing Finance Board (Finance Board) regulation, are backed only by the financial resources of the FHLBanks. The FHLBanks jointly issue consolidated obligations with the Office of Finance acting as their agent. In connection with each debt issuance, each FHLBank specifies the amount of debt it wants issued on its behalf. The Office of Finance tracks the amounts of debt issued on behalf of each FHLBank. In addition, the FHLBank separately tracks and records as a liability its specific portion of consolidated obligations for which it is the primary obligor. The Finance Board and the U.S. Secretary of the Treasury have oversight over the issuance of FHLBank debt through the Office of Finance. Consolidated obligation bonds are issued primarily to raise intermediate- and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits as to maturities. Consolidated obligation discount notes, which are issued to raise short-term funds, are issued at less than their face amounts and redeemed at par when they mature.
Redemption Terms: Following is a summary of the FHLBank’s participation in consolidated obligation bonds outstanding as of September 30, 2007 and December 31, 2006 (in thousands):
September 30, 2007 | December 31, 2006 | |||||||||||||||
Year of Maturity | Amount | Weighted Average Interest Rate | Amount | Weighted Average Interest Rate | ||||||||||||
Due in one year or less | $ | 7,337,507 | 4.65 | % | $ | 7,279,075 | 4.15 | % | ||||||||
Due after one year through two years | 4,757,362 | 4.78 | 5,812,310 | 4.43 | ||||||||||||
Due after two years through three years | 4,024,272 | 4.96 | 2,919,046 | 4.58 | ||||||||||||
Due after three years through four years | 2,415,750 | 5.14 | 2,370,417 | 4.54 | ||||||||||||
Due after four years through five years | 2,650,220 | 5.10 | 2,489,170 | 4.66 | ||||||||||||
Due after five years | 12,204,350 | 5.31 | 11,546,082 | 4.97 | ||||||||||||
Total par value | 33,389,461 | 5.02 | % | 32,416,100 | 4.60 | % | ||||||||||
Premiums | 7,293 | 9,065 | ||||||||||||||
Discounts | (15,580 | ) | (15,937 | ) | ||||||||||||
Hedging basis adjustments | (281,709 | ) | (370,229 | ) | ||||||||||||
TOTAL | $ | 33,099,465 | $ | 32,038,999 |
The FHLBank’s participation in consolidated obligation bonds outstanding as of September 30, 2007 and December 31, 2006 includes callable bonds totaling $22,496,325,000 and $22,523,565,000, respectively. The FHLBank uses the unswapped callable bonds for financing its callable advances (Note 5), mortgage-backed securities (Notes 2 and 4) and mortgage loans (Note 8). Contemporaneous with a majority of its fixed rate callable bond issues, the FHLBank will also enter into interest rate swap agreements (in which the FHLBank generally pays a variable rate and receives a fixed rate) with call features that mirror the options in the callable bonds (a sold callable swap). The combined sold callable swap and callable debt transaction allows the FHLBank to obtain attractively priced variable rate financing.
The following table 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 September 30, 2007 and December 31, 2006 (in thousands):
Year of Maturity or Next Call Date | September 30, 2007 | December 31, 2006 | ||||||
Due in one year or less | $ | 25,970,582 | $ | 25,721,843 | ||||
Due after one year through two years | 2,886,362 | 2,722,032 | ||||||
Due after two years through three years | 1,883,897 | 1,229,700 | ||||||
Due after three years through four years | 554,400 | 716,905 | ||||||
Due after four years through five years | 235,220 | 530,820 | ||||||
Due after five years | 1,859,000 | 1,494,800 | ||||||
TOTAL PAR VALUE | $ | 33,389,461 | $ | 32,416,100 |
Interest Rate Payment Terms: The following table summarizes interest rate payment terms for consolidated obligation bonds as of September 30, 2007 and December 31, 2006 (in thousands):
September 30, 2007 | December 31, 2006 | |||||||
Par value of consolidated obligation bonds: | ||||||||
Fixed rate | $ | 21,373,150 | $ | 18,934,185 | ||||
Step ups | 6,756,000 | 8,264,430 | ||||||
Step downs | 165,000 | 150,000 | ||||||
Range bonds | 4,908,275 | 4,888,375 | ||||||
Zero coupon | 187,036 | 179,110 | ||||||
TOTAL PAR VALUE | $ | 33,389,461 | $ | 32,416,100 |
16
Discount Notes: The following table summarizes the FHLBank’s participation in consolidated obligation discount notes, all of which are due within one year (in thousands):
Book Value | Par Value | Weighted Average Interest Rates | ||||||||||
September 30, 2007 | $ | 19,649,417 | $ | 19,742,418 | 4.67 | % | ||||||
December 31, 2006 | $ | 16,736,007 | $ | 16,769,707 | 5.07 | % |
NOTE 10 – CAPITAL
The FHLBank is subject to three capital requirements (i.e., risk-based capital, total capital-to-asset ratio and leverage capital ratio) under the provisions of the Gramm-Leach-Bliley Act and the Finance Board’s capital structure regulation. The following table illustrates that the FHLBank was in compliance with its regulatory capital requirements as of September 30, 2007 and December 31, 2006 (in thousands):
September 30, 2007 | December 31, 2006 | |||||||||||||||
Required | Actual | Required | Actual | |||||||||||||
Regulatory capital requirements: | ||||||||||||||||
Risk-based capital | $ | 614,640 | $ | 1,721,841 | $ | 466,642 | $ | 1,647,068 | ||||||||
Total capital-to-asset ratio | 4.0 | % | 4.2 | % | 4.0 | % | 4.2 | % | ||||||||
Total capital | $ | 2,269,613 | $ | 2,376,300 | $ | 2,109,559 | $ | 2,224,979 | ||||||||
Leverage capital ratio | 5.0 | % | 5.7 | % | 5.0 | % | 5.8 | % | ||||||||
Leverage capital | $ | 2,837,017 | $ | 3,237,220 | $ | 2,636,948 | $ | 3,048,513 |
Note that for the purposes of the regulatory capital calculations in the above table, actual capital includes all capital stock subject to mandatory redemption that has been reclassified to a liability.
Mandatorily Redeemable Capital Stock: The FHLBank’s activity for mandatorily redeemable capital stock was as follows for the three- and nine-month periods ended September 30, 2007 and 2006 (in thousands).
Three-month period ended | Nine-month period ended | |||||||||||||||
September 30, 2007 | September 30, 2006 | September 30, 2007 | September 30, 2006 | |||||||||||||
Mandatorily redeemable capital stock at beginning of period | $ | 41,615 | $ | 61,266 | $ | 46,232 | $ | 64,355 | ||||||||
Capital stock subject to mandatory redemption reclassified from equity | 399,411 | 125,451 | 1,280,067 | 365,609 | ||||||||||||
Redemption or repurchase of mandatorily redeemable capital stock | (400,742 | ) | (136,412 | ) | (1,287,218 | ) | (380,992 | ) | ||||||||
Stock dividend classified as mandatorily redeemable capital stock | 502 | 623 | 1,705 | 1,956 | ||||||||||||
Mandatorily redeemable capital stock at end of period | $ | 40,786 | $ | 50,928 | $ | 40,786 | $ | 50,928 |
NOTE 11 – EMPLOYEE RETIREMENT PLANS
The FHLBank maintains a benefit equalization plan (BEP) covering certain senior officers. This non-qualified plan contains provisions for a deferred compensation component and a defined benefit pension component. The BEP is, in substance, an unfunded supplemental retirement plan.
Net periodic pension cost for the defined benefit portion of the FHLBank’s BEP was as follows for the three- and nine-month periods ended September 30, 2007 and 2006 (in thousands).
Three-month period ended | Nine-month period ended | |||||||||||||||
September 30, 2007 | September 30, 2006 | September 30, 2007 | September 30, 2006 | |||||||||||||
Service cost | $ | 19 | $ | 24 | $ | 142 | $ | 71 | ||||||||
Interest cost | 96 | 72 | 250 | 217 | ||||||||||||
Amortization of unrecognized prior service cost | (6 | ) | (6 | ) | (19 | ) | (18 | ) | ||||||||
Amortization of unrecognized net loss | 91 | 89 | 201 | 267 | ||||||||||||
Net periodic postretirement benefit cost | $ | 200 | $ | 179 | $ | 574 | $ | 537 |
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NOTE 12 – DERIVATIVES AND HEDGING ACTIVITIES
Nature of Business Activity: The FHLBank enters into interest rate swaps (including callable and putable swaps), swaptions, and interest rate cap and floor agreements (collectively, derivatives) to manage its exposure to changes in interest rates. The FHLBank may utilize derivatives to adjust the effective maturity, re-pricing frequency or option characteristics of financial instruments to achieve risk management objectives.
Effectiveness Measurements: Highly effective hedges that use interest rate swaps as the hedging instrument and that meet certain stringent criteria can qualify for “shortcut” fair value hedge accounting. Shortcut hedge accounting allows for the assumption of no ineffectiveness, which means that the change in fair value of the hedged item can be assumed to be equal to the change in fair value of the derivative. This is in contrast to fair value hedges designated under the “long haul” hedge accounting method, where the change in fair value of the hedged item must be measured separately from the derivative, and for which effectiveness testing must be performed regularly with results falling within established tolerances.
For hedge transactions that do not quality for shortcut hedge accounting, the FHLBank completes effectiveness testing at inception and on a monthly basis thereafter. The FHLBank utilizes the rolling regression method and the dollar-offset method to assess effectiveness. When a hedging relationship fails the effectiveness test, hedge accounting is discontinued. The FHLBank continues to mark the derivative to market on a monthly basis but no longer marks the hedged item to market. The fair value basis on the hedged item is amortized as a yield adjustment to income or expense.
Financial Statement Impact and Additional Financial Information: For the three- and nine-month periods ended September 30, 2007 and 2006, the FHLBank recorded net gain (loss) on derivatives and hedging activities as follows (in thousands):
Three-month period ended | Nine-month period ended | |||||||||||||||
September 30, 2007 | September 30, 2006 | September 30, 2007 | September 30, 2006 | |||||||||||||
Gain (loss) related to fair value hedge ineffectiveness | $ | (694 | ) | $ | (581 | ) | $ | (129 | ) | $ | 517 | |||||
Gain (loss) on economic hedges | (9,143 | ) | (18,708 | ) | (2,519 | ) | 8,284 | |||||||||
Net gain (loss) on derivatives and hedging activities | $ | (9,837 | ) | $ | (19,289 | ) | $ | (2,648 | ) | $ | 8,801 |
The following table represents outstanding notional balances and estimated fair values of the derivatives outstanding by type of derivative and by hedge designation as of September 30, 2007 and December 31, 2006 (in thousands):
September 30, 2007 | December 31, 2006 | |||||||||||||||
Notional | Estimated Fair Value | Notional | Estimated Fair Value | |||||||||||||
Interest rate swaps | ||||||||||||||||
Fair value | $ | 33,058,456 | $ | (258,016 | ) | $ | 31,789,398 | $ | (268,418 | ) | ||||||
Economic | 1,504,454 | (4,896 | ) | 2,394,758 | 1,025 | |||||||||||
Interest rate caps/floors | ||||||||||||||||
Fair value | 142,500 | 142 | 217,500 | 76 | ||||||||||||
Economic | 2,926,000 | 16,958 | 1,660,000 | 6,042 | ||||||||||||
Swaptions | ||||||||||||||||
Economic | 300,000 | 0 | 0 | 0 | ||||||||||||
Mortgage delivery commitments | ||||||||||||||||
Economic | 17,471 | 16 | 14,006 | (31 | ) | |||||||||||
TOTAL | $ | 37,948,881 | $ | (245,796 | ) | $ | 36,075,662 | $ | (261,306 | ) |
Total derivative fair value excluding accrued interest | $ | (245,796 | ) | $ | (261,306 | ) | |||
Accrued interest | 176,321 | 124,350 | |||||||
NET DERIVATIVE FAIR VALUE | $ | (69,475 | ) | $ | (136,956 | ) | |||
Net derivative asset balances | $ | 120,415 | $ | 66,623 | |||||
Net derivative liability balances | (189,890 | ) | (203,579 | ) | |||||
NET DERIVATIVE BALANCES | $ | (69,475 | ) | $ | (136,956 | ) |
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NOTE 13 – ESTIMATED FAIR VALUES
The following estimated fair values have been determined by the FHLBank using available market information and the FHLBank’s best judgment of appropriate valuation methodologies. These estimates are based on pertinent information available to the FHLBank as of September 30, 2007 and December 31, 2006. Although the FHLBank uses its best judgment in estimating the fair values of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for a portion of the FHLBank’s financial instruments, fair values in certain cases are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. Therefore, these estimated fair values are not necessarily indicative of the amounts that would be realized in current market transactions. The Fair Value Summary Tables 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. The estimated fair values of the FHLBank’s financial instruments are more fully discussed in Note 16 in the audited 2006 financial statements included in the FHLBank’s annual report on Form 10-K.
The carrying value, net unrealized gains (losses) and estimated fair values of the FHLBank’s financial instruments as of September 30, 2007 are summarized in the following table (in thousands):
Carrying Value | Net Unrealized Gains (Losses) | Estimated Fair Value | ||||||||||
Assets: | ||||||||||||
Cash and due from banks | $ | 906 | $ | 0 | $ | 906 | ||||||
Interest-bearing deposits | 5,424,977 | 0 | 5,424,977 | |||||||||
Federal funds sold | 6,233,000 | 0 | 6,233,000 | |||||||||
Trading securities | 1,045,386 | 0 | 1,045,386 | |||||||||
Available-for-sale securities | 0 | 0 | 0 | |||||||||
Held-to-maturity securities | 8,313,713 | (72,517 | ) | 8,241,196 | ||||||||
Advances | 32,980,591 | 2,837 | 32,983,428 | |||||||||
Mortgage loans held for portfolio, net of allowance | 2,331,126 | (73,949 | ) | 2,257,177 | ||||||||
Accrued interest receivable | 186,472 | 0 | 186,472 | |||||||||
Derivative assets | 120,415 | 0 | 120,415 | |||||||||
Liabilities: | ||||||||||||
Deposits | 952,726 | 0 | 952,726 | |||||||||
Consolidated obligation discount notes | 19,649,417 | (376 | ) | 19,649,793 | ||||||||
Consolidated obligation bonds | 33,099,465 | 4,014 | 33,095,451 | |||||||||
Mandatorily redeemable capital stock | 40,786 | 0 | 40,786 | |||||||||
Accrued interest payable | 386,133 | 0 | 386,133 | |||||||||
Derivative liabilities | 189,890 | 0 | 189,890 | |||||||||
Other Asset (Liability): | ||||||||||||
Standby letters of credit | (1,115 | ) | 0 | (1,115 | ) | |||||||
Standby bond purchase agreements | (87 | ) | 1,537 | 1,450 |
19
The carrying value, net unrealized gains (losses) and estimated fair values of the FHLBank’s financial instruments as of December 31, 2006, are summarized in the following table (in thousands):
Carrying Value | Net Unrealized Gains (Losses) | Estimated Fair Value | ||||||||||
Assets: | ||||||||||||
Cash and due from banks | $ | 375 | $ | 0 | $ | 375 | ||||||
Interest-bearing deposits | 4,327,459 | 0 | 4,327,459 | |||||||||
Federal funds sold | 8,054,500 | 0 | 8,054,500 | |||||||||
Trading securities | 704,125 | 0 | 704,125 | |||||||||
Available-for-sale securities | 101,668 | 0 | 101,668 | |||||||||
Held-to-maturity securities | 8,377,383 | (63,084 | ) | 8,314,299 | ||||||||
Advances | 28,445,245 | (4,729 | ) | 28,440,516 | ||||||||
Mortgage loans held for portfolio, net of allowance | 2,372,939 | (74,230 | ) | 2,298,709 | ||||||||
Accrued interest receivable | 176,087 | 0 | 176,087 | |||||||||
Derivative assets | 66,623 | 0 | 66,623 | |||||||||
Liabilities: | ||||||||||||
Deposits | 1,118,406 | 1 | 1,118,405 | |||||||||
Consolidated obligation discount notes | 16,736,007 | 38 | 16,735,969 | |||||||||
Consolidated obligation bonds | 32,038,999 | 101,015 | 31,937,984 | |||||||||
Mandatorily redeemable capital stock | 46,232 | 0 | 46,232 | |||||||||
Accrued interest payable | 336,743 | 0 | 336,743 | |||||||||
Derivative liabilities | 203,579 | 0 | 203,579 | |||||||||
Other Asset (Liability): | ||||||||||||
Standby letters of credit | (1,112 | ) | 0 | (1,112 | ) | |||||||
Standby bond purchase agreements | (62 | ) | 1,177 | 1,115 |
NOTE 14 – COMMITMENTS AND CONTINGENCIES
As described in Note 9, as provided by the Bank Act or Finance Board regulation, consolidated obligations are backed only by the financial resources of the FHLBanks. FHLBank Topeka is jointly and severally liable with the 11 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 $1,056,058,610,000 and $902,205,923,000 as of September 30, 2007 and December 31, 2006, respectively. To the extent that an FHLBank makes any consolidated obligation payment on behalf of another FHLBank, the paying FHLBank is entitled to reimbursement from the FHLBank with primary liability. However, if the Finance Board determines that the primary obligor is unable to satisfy its obligations, then the Finance Board may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis that the Finance Board may determine. No FHLBank has ever failed to make any payment on a consolidated obligation for which it was the primary obligor. As a result, the regulatory provisions for directing other FHLBanks to make payments on behalf of another FHLBank or allocating the liability among other FHLBanks have never been invoked.
Standby letters of credit are executed for members or non-member housing associates 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 September 30, 2007 and December 31, 2006, outstanding standby letters of credit totaled $1,992,972,000 and $2,125,187,000, respectively, and had original terms of eleven days to seven years and seven days to seven years, respectively, with a final expiration in 2011. Unearned fees, as well as the value of the guarantees related to standby letters of credit, are recorded in other liabilities and amounted to $1,115,000 and $1,112,000 as of September 30, 2007 and December 31, 2006, respectively. Based upon management’s credit analysis and collateral requirements, the FHLBank does not expect to incur any credit losses on the letters of credit.
Commitments that unconditionally obligate the FHLBank to fund/purchase mortgage loans from participating FHLBank Topeka members in the MPF Program totaled $17,728,000 and $14,006,000 as of September 30, 2007 and December 31, 2006, respectively. Commitments are generally for periods not to exceed 60 calendar days. In accordance with SFAS 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” certain commitments are recorded as derivatives at their fair values on the Statements of Condition. The FHLBank recorded mortgage delivery commitment derivative asset (liability) balances of $16,000 and $(31,000) as of September 30, 2007 and December 31, 2006, respectively.
20
The FHLBank has entered into standby bond purchase agreements with state housing authorities within its four-state district 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 bonds according to a schedule established by the standby agreement. Each standby agreement dictates the specific terms that would require the FHLBank to purchase the bonds. The bond purchase commitments entered into by the FHLBank expire no later than 2012, though some are renewable at the option of the FHLBank. Total commitments for bond purchases with two state housing authorities were $866,543,000 and $724,342,000 as of September 30, 2007 and December 31, 2006, respectively. The FHLBank was not required to purchase any bonds under these agreements during the three- and nine-month periods ended September 30, 2007 and 2006.
The FHLBank generally executes derivatives with counterparties having ratings of single-A or better by either Standard & Poor’s or Moody’s. These agreements are generally covered under bilateral collateral agreements between the FHLBank and the counterparties. As of September 30, 2007 and December 31, 2006, the FHLBank had delivered cash and securities with a book value of $69,940,000 and $67,430,000, respectively, as collateral to broker/dealers that have market-risk exposure to the FHLBank. As of September 30, 2007 and December 31, 2006, cash that has been pledged in the amount of $69,940,000 and $67,430,000, respectively, is classified as interest-bearing deposits on the Statements of Condition.
NOTE 15 – TRANSACTIONS WITH STOCKHOLDERS AND HOUSING ASSOCIATES
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 in accordance with SFAS No. 57, Related Party Disclosures (herein referred to as “SFAS 57”) as FHLBank directors’ financial institutions and members with investments in excess of 10 percent of 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: The following tables present information as of September 30, 2007 and December 31, 2006 on members that own more than 10 percent of outstanding FHLBank regulatory capital stock at either date (in thousands). None of the officers or directors of these members currently serve on the FHLBank’s board of directors.
September 30, 2007 | |||||||||||||||||||||||||
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 | ||||||||||||||||||
U.S. Central Federal Credit Union | KS | $ | 1,000 | 0.2 | % | $ | 316,111 | 20.7 | % | $ | 317,111 | 14.5 | % | ||||||||||||
MidFirst Bank | OK | 1,935 | 0.3 | 292,646 | 19.2 | 294,581 | 13.5 | ||||||||||||||||||
TOTAL | $ | 2,935 | 0.5 | % | $ | 608,757 | 39.9 | % | $ | 611,692 | 28.0 | % |
December 31, 2006 | |||||||||||||||||||||||||
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 | ||||||||||||||||||
U.S. Central Federal Credit Union | KS | $ | 1,000 | 0.2 | % | $ | 302,700 | 20.5 | % | $ | 303,700 | 14.8 | % | ||||||||||||
MidFirst Bank | OK | $ | 2,921 | 0.5 | % | $ | 287,587 | 19.5 | % | $ | 290,508 | 14.1 | % | ||||||||||||
TOTAL | $ | 3,921 | 0.7 | % | $ | 590,287 | 40.0 | % | $ | 594,208 | 28.9 | % |
Advance and deposit balances with members that own more than 10 percent of outstanding FHLBank regulatory capital stock as of September 30, 2007 and December 31, 2006 are summarized in the following table (in thousands). Information is only listed for the period in which the member owned more than 10 percent of outstanding FHLBank regulatory capital stock. If the member did not own more than 10 percent for one of the periods presented, the applicable column is left blank.
September 30, 2007 | December 31, 2006 | September 30, 2007 | December 31, 2006 | |||||||||||||||||||||||||||||
Member Name | Outstanding Advances | Percent of Total | Outstanding Advances | Percent of Total | Outstanding Deposits | Percent of Total1 | Outstanding Deposits | Percent of Total1 | ||||||||||||||||||||||||
U.S. Central Federal Credit Union | $ | 6,250,000 | 19.0 | % | $ | 4,000,000 | 14.1 | % | $ | 0 | 0.0 | % | $ | 40 | 0.0 | % | ||||||||||||||||
MidFirst Bank | 5,730,800 | 17.4 | 5,696,400 | 20.0 | 387 | 0.0 | 2,804 | 0.3 | ||||||||||||||||||||||||
TOTAL | $ | 11,980,800 | 36.4 | % | $ | 9,696,400 | 34.1 | % | $ | 387 | 0.0 | % | $ | 2,844 | 0.3 | % |
_______
1 | Excludes cash pledged as collateral by derivative counterparties, classified as interest-bearing deposits and Member Pass-through Deposit Reserves, classified as non-interest-bearing deposits. |
Neither member originated mortgage loans for or sold mortgages into the MPF program during the three- or nine–month periods ended September 30, 2007 or 2006.
21
Transactions with FHLBank Directors’ Financial Institutions: The following table presents summary information as of September 30, 2007 and December 31, 2006 for members that have an officer or director serving on the FHLBank’s board of directors (in thousands). Capital stock listed is regulatory capital stock, which includes mandatorily redeemable capital stock.
September 30, 2007 | December 31, 2006 | |||||||||||||||
Outstanding Amount | Percent of Total | Outstanding Amount | Percent of Total | |||||||||||||
Advances | $ | 184,268 | 0.6 | % | $ | 212,124 | 0.7 | % | ||||||||
Deposits | $ | 1,589 | 0.2 | % | $ | 7,853 | 0.7 | % | ||||||||
Class A Common Stock | $ | 7,065 | 1.1 | % | $ | 9,042 | 1.6 | % | ||||||||
Class B Common Stock | 8,521 | 0.6 | 11,742 | 0.8 | ||||||||||||
Total Capital Stock | $ | 15,586 | 0.7 | % | $ | 20,784 | 1.0 | % |
The following table presents summary information on mortgage loans funded or acquired during the three- and nine–month periods ended September 30, 2007 and 2006 for members that had an officer or director serving on the FHLBank’s board of directors at September 30, 2007 and September 30, 2006 (in thousands). Information is only included for the period in which an officer or director served on the FHLBank’s board of directors.
For the Three-month period ended | For the Nine-month period ended | |||||||||||||||||||||||||||||||
September 30, 2007 | September 30, 2006 | September 30, 2007 | September 30, 2006 | |||||||||||||||||||||||||||||
Mortgage Loans Acquired | Percent of Total | Mortgage Loans Acquired | Percent of Total | Mortgage Loans Acquired | Percent of Total | Mortgage Loans Acquired | Percent of Total | |||||||||||||||||||||||||
$ | 2,253 | 3.1 | % | $ | 2,305 | 4.0 | % | $ | 4,723 | 2.7 | % | $ | 6,250 | 3.6 | % |
NOTE 16 – TRANSACTIONS WITH OTHER FHLBANKS
FHLBank Topeka had the following business transactions with other FHLBanks during the three- and nine-month periods ended September 30, 2007 and 2006 (in thousands). All transactions occurred at market prices.
Three-month period ended | Nine-month period ended | |||||||||||||||
Business Activity | September 30, 2007 | September 30, 2006 | September 30, 2007 | September30, 2006 | ||||||||||||
Average overnight interbank loan balances to other FHLBanks1 | $ | 2,783 | $ | 1,522 | $ | 2,147 | $ | 1,410 | ||||||||
Average overnight interbank loan balances from other FHLBanks1 | 3,402 | 3,152 | 3,784 | 2,126 | ||||||||||||
Average deposit balance with FHLBank of Chicago for MPF transactions2 | 28 | 23 | 27 | 25 | ||||||||||||
Transaction charges paid to FHLBank of Chicago for transaction service fees3 | 240 | 241 | 719 | 719 | ||||||||||||
FHLBank system shared expenses4 | 264 | 170 | 414 | 328 |
_______
1 | Occasionally, the FHLBank loans (or borrows) short-term funds to (from) other FHLBanks. Interest income on loans to other FHLBanks and interest expense on borrowings from other FHLBanks are separately identified on the Statements of Income. |
2 | Balance is interest bearing and is classified on the Statements of Condition as interest-bearing deposits. |
3 | Fees are calculated monthly based on 5 basis points of outstanding loans funded since January 1, 2004 and are recorded in other expense. |
4 | These are fees paid by FHLBank of Chicago on behalf of the other FHLBanks (e.g., conference expenses, attorney expenses on joint issues) and are recorded in other operating expenses. |
22
This Management’s Discussion and Analysis of Financial Condition and Results of Operations reviews the financial condition of the FHLBank as of September 30, 2007 and December 31, 2006, and results of operations for the three- and nine-month periods ended September 30, 2007 and 2006. This discussion should be read in conjunction with the interim financial statements and notes presented under Part I Item 1 of this quarterly report on Form 10-Q and the annual report on Form 10-K, which includes audited financial statements and related notes for the year ended December 31, 2006.
Overview
The FHLBank Topeka is a regional wholesale bank that makes advances (loans) to, purchases mortgages from, and provides other financial services to our member institutions. We are one of 12 district FHLBanks which, together with the Office of Finance, a joint office of the FHLBanks, make up the “FHLBank System.” As independent, member-owned cooperatives, the FHLBanks seek to maintain a balance between their public purpose and their ability to provide adequate returns on the capital supplied by their members. The Federal Housing Finance Board (Finance Board), an independent agency in the executive branch of the United States Government, supervises and regulates the FHLBanks and the Office of Finance. The Finance Board ensures that the FHLBanks operate in a safe and sound manner, carry out their housing finance mission, remain adequately capitalized and are able to raise funds in the capital markets.
The FHLBank serves eligible financial institutions in Colorado, Kansas, Nebraska and Oklahoma (collectively, the Tenth District of the FHLBank System). Initially, members are required to purchase shares of Class A Common Stock to give them access to advance borrowings or to enable them to sell mortgage loans to the FHLBank under the Mortgage Partnership Finance® (MPF®) Program. The FHLBank’s capital increases when its members are required to purchase additional capital stock in the form of Class B Common Stock to support an increase in advance borrowings from the FHLBank or the sale of additional mortgage loans to the FHLBank. At its discretion, the FHLBank may repurchase excess capital stock from time to time if a member’s advances or mortgage loan balances decline. Despite fluctuations in total assets, liabilities and capital in recent quarters, the FHLBank has been able to: (1) achieve its housing mission by meeting member credit needs even during the capital market disruptions during August and September 2007, and (2) pay market-rate dividends.
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Table 1 summarizes selected financial data for the periods indicated.
Table 1
09/30/2007 | 06/30/2007 | 03/31/2007 | 12/31/2006 | 09/30/2006 | ||||||||||||||||
Statement of Condition (at period end) | ||||||||||||||||||||
Total assets | $ | 56,740,335 | $ | 52,632,560 | $ | 49,765,055 | $ | 52,738,967 | $ | 49,863,846 | ||||||||||
Investments1 | 21,017,076 | 21,407,350 | 20,338,392 | 21,565,135 | 20,291,024 | |||||||||||||||
Advances | 32,980,591 | 28,510,094 | 26,715,893 | 28,445,245 | 26,884,116 | |||||||||||||||
Mortgage loans held for portfolio, net | 2,331,126 | 2,337,228 | 2,348,612 | 2,372,939 | 2,387,378 | |||||||||||||||
Deposits | 952,726 | 1,079,890 | 1,307,684 | 1,118,406 | 731,156 | |||||||||||||||
Consolidated obligations, net2 | 52,748,882 | 48,576,344 | 45,826,766 | 48,775,006 | 46,390,017 | |||||||||||||||
Capital | 2,332,789 | 2,139,424 | 2,024,424 | 2,171,654 | 2,047,018 | |||||||||||||||
Statement of Income (for the quarterly period ended) | ||||||||||||||||||||
Net interest income before provision for credit losses on mortgage loans | 60,469 | 54,636 | 54,249 | 54,995 | 53,672 | |||||||||||||||
Provision for (reversal of) credit losses on mortgage loans | 37 | (3 | ) | (43 | ) | 167 | 104 | |||||||||||||
Other income (loss) | 3,483 | 2,130 | (779 | ) | 2,711 | (3,190 | ) | |||||||||||||
Other expenses | 8,289 | 9,962 | 9,084 | 8,790 | 8,774 | |||||||||||||||
Income before assessments | 55,626 | 46,807 | 44,429 | 48,749 | 41,604 | |||||||||||||||
Assessments | 14,799 | 12,464 | 11,840 | 12,985 | 11,097 | |||||||||||||||
Net income | 40,827 | 34,343 | 32,589 | 35,764 | 30,507 | |||||||||||||||
Ratios and Other Financial Data (for the quarterly period ended) | ||||||||||||||||||||
Dividends paid in cash3 | 84 | 89 | 114 | 89 | 91 | |||||||||||||||
Dividends paid in stock3 | 30,429 | 26,877 | 26,953 | 27,942 | 26,113 | |||||||||||||||
Class A Stock dividend rate | 4.55 | % | 4.45 | % | 4.45 | % | 4.45 | % | 4.45 | % | ||||||||||
Class B Stock dividend rate | 6.70 | % | 6.50 | % | 6.50 | % | 6.50 | % | 6.25 | % | ||||||||||
Weighted average dividend rate4 | 6.19 | % | 6.00 | % | 6.03 | % | 6.04 | % | 5.87 | % | ||||||||||
Dividend payout ratio | 74.74 | % | 78.52 | % | 83.06 | % | 78.38 | % | 85.90 | % | ||||||||||
Return on average equity | 7.33 | % | 6.76 | % | 6.46 | % | 6.87 | % | 6.13 | % | ||||||||||
Return on average assets | 0.30 | % | 0.28 | % | 0.27 | % | 0.28 | % | 0.25 | % | ||||||||||
Average equity to average assets | 4.13 | % | 4.11 | % | 4.11 | % | 4.14 | % | 4.11 | % | ||||||||||
Net interest margin5 | 0.45 | % | 0.44 | % | 0.44 | % | 0.44 | % | 0.45 | % | ||||||||||
Total capital ratio at period end6 | 4.11 | % | 4.06 | % | 4.07 | % | 4.12 | % | 4.11 | % | ||||||||||
Ratio of earnings to fixed charges7 | 1.08 | 1.08 | 1.07 | 1.08 | 1.07 |
1 | Investments also include interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold. |
2 | Consolidated obligations are bonds and discount notes that the FHLBank is primarily liable to repay. See Note 9 to the quarterly financial statements for a description of the total consolidated obligations of all FHLBanks for which the FHLBank is jointly and severally liable under the requirements of the Finance Board, which govern the issuance of debt for all FHLBanks in the FHLBank System. |
3 | Dividends classified as interest expense on mandatorily redeemable capital stock and not included as dividends under GAAP were $504,000, $560,000, $650,000, $633,000 and $624,000 for the quarters ended September 30, 2007, June 30, 2007, March 31, 2007, December 31, 2006 and September 30, 2006, respectively. |
4 | 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. |
5 | Net interest margin is net interest income before provision for (reversal of) credit losses on mortgage loans as a percentage of average earning assets. |
6 | Total capital ratio is GAAP capital stock, which excludes mandatorily redeemable capital stock, plus retained earnings and accumulated other comprehensive income as a percentage of total assets at period end. |
7 | The ratio of earnings to fixed charges (interest expense including amortization of premiums, discounts and capitalized expenses related to indebtedness) is computed by dividing total earnings by fixed charges. |
Total assets increased during the first nine months of 2007 by 7.6 percent to $56.7 billion at September 30, 2007 from $52.7 billion at December 31, 2006. Changes in the mix of assets for the nine-month period included a $1.8 billion decrease in Federal funds sold that was offset by a $1.1 billion increase in interest-bearing deposits and a $4.5 billion increase in advances. On the liability side of the balance sheet, discount notes, which are typically used to fund short-term advances and Federal funds sold, increased by $2.9 billion while longer term consolidated obligation bonds increased by $1.1 billion.
The FHLBank’s net income for the three-month period ended September 30, 2007 was $40.8 million compared to $30.5 million for the three-month period ended September 30, 2006. The increase was primarily attributable to the following:
· | $6.8 million increase in net interest income (increase income); |
· | $2.3 million net realized loss on the sale of available-for-sale securities in 2007 (decrease income); |
· | $0.6 million decrease in net income related to net gain (loss) on trading securities (decrease income); |
· | $9.5 million increase in net income related to net gain (loss) on derivatives and hedging activities (increase income); |
· | $0.5 million decrease in total other expenses (increase income); and |
· | $3.7 million increase in assessments (decrease income). |
24
Net income for the nine-month period ended September 30, 2007 was $107.8 million compared to $100.3 million for the nine-month period ended September 30, 2006. The increase was primarily attributable to the following:
· | $9.7 million increase in net interest income (increase income); |
· | $2.3 million net realized loss on the sale of available-for-sale securities in 2007 (decrease income); |
· | $1.0 million net realized loss on sale of held-to-maturity securities in 2007 (decrease income); |
· | $12.8 million increase in net income related to net gain (loss) on trading securities (increase income); |
· | $11.4 million decrease in net income related to net gain (loss) on derivatives and hedging activities (decrease income); |
· | $5.0 million increase in other income (increase income); |
· | $2.9 million increase in total other expenses (decrease income); and |
· | $2.7 million increase in assessments (decrease income). |
The FHLBank’s net income for the third quarter of 2007 compared to the third quarter of 2006 was positively influenced by the change related to net gain (loss) on derivatives and hedging activities and the increase in net interest income, which were partially offset by the realized loss on the sale of available-for-sale securities and the increase in total assessments. For the first nine months of 2007 compared to the first nine months of 2006, net income was positively influenced by the increase in the net gain (loss) on trading securities and increases in net interest income and other income, which were partially offset by the realized losses on sales of available-for-sale and held-to-maturity securities, the negative effect of the decrease in net gain (loss) on derivatives and hedging activities and the increases in other expenses and assessments. Since a significant portion of the FHLBank’s equity capital, as evidenced by its relatively short duration of equity (DOE), is invested in assets with a short duration and thus earns the equivalent of a short-term money market rate, this part of equity continues to earn a short-term interest rate that was higher than most long-term interest rates because of the inversion of the yield curve for most of the nine-month period ended September 30, 2007. See “Quantitative and Qualitative Disclosures about Market Risk – Interest Rate Risk Management” under Item 3 for additional discussion on the FHLBank’s DOE. The FHLBank’s net interest margin remained constant at 0.45 percent for the three-month periods ended September 30, 2007 and 2006. The FHLBank’s return on equity (ROE) increased to 7.33 percent for the third quarter of 2007 compared to 6.13 percent for the same period of 2006. This was primarily due to an increase in net gain (loss) on derivatives and hedging activities as mentioned previously. The FHLBank’s net interest margin remained unchanged at 0.45 percent for the nine months ended September 30, 2007 and 2006. ROE also remained unchanged at 6.86 percent for the first nine months of 2007 and the first nine months of 2006. This is primarily attributable to offsetting changes in gains (losses) on derivatives and hedging activities and gain (losses) on trading securities (i.e., $12.8 million increase in net income related to net gain (loss) on trading securities offset by $11.4 million decrease in net income related to net gain (loss) on derivatives and hedging activities).
Dividends paid for the third quarter of 2007 were 4.55 percent and 6.70 percent per annum for Class A Common Stock and Class B Common Stock, respectively. This was an increase over dividends paid for the third quarter of 2006 of 4.45 percent and 6.25 percent per annum for Class A Common Stock and Class B Common Stock, respectively. The increase in dividend rates generally corresponds with the increase in net income between the periods, but as reflected in Table 1 the payout ratio actually decreased from 86 percent during the third quarter of 2006 to 75 percent during the third quarter of 2007. Refer to this Item 2 – “Liquidity and Capital Resources – Capital Distributions” for further information regarding FHLBank dividend payments.
The primary source of the FHLBank’s earnings is net interest income (NII), which is the interest earned on advances, mortgage loans, investments and invested capital less interest paid on consolidated obligations, deposits, and other borrowings. The increase in NII for the third quarter of 2007 over the third quarter of 2006 and for the first nine months of 2007 over the first nine months of 2006 is primarily attributable to a combination of the overall increase in the FHLBank’s average balance of total assets and the increase in short-term interest rates on these assets. See Tables 4 through 7 for further information regarding average balances and yields and changes in interest income.
Table 2 presents selected market interest rates as of the dates or periods shown for reference purposes.
Table 2
Market Instrument | September 30, 2007 Three-Month Average | September 30, 2006 Three-Month Average | September 30, 2007 Nine-Month Average | September 30, 2006 Nine-Month Average | ||||||||||||
Overnight Federal funds effective rate1 | 5.09 | % | 5.25 | % | 5.20 | % | 4.87 | % | ||||||||
3-month Treasury bill1 | 4.44 | 5.03 | 4.80 | 4.78 | ||||||||||||
3-month LIBOR1 | 5.44 | 5.43 | 5.39 | 5.14 | ||||||||||||
2-year U.S. Treasury note1 | 4.39 | 4.93 | 4.65 | 4.84 | ||||||||||||
5-year U.S. Treasury note1 | 4.51 | 4.84 | 4.64 | 4.79 | ||||||||||||
10-year U.S. Treasury note1 | 4.73 | 4.89 | 4.75 | 4.84 | ||||||||||||
30-year residential mortgage note rate2 | 6.45 | 6.46 | 6.30 | 6.45 |
Market Instrument | September 30, 2007 Ending Rate | December 31, 2006 Ending Rate | September 30, 2006 Ending Rate | |||||||||
Federal Open Market Committee (FOMC) target rate for overnight Federal funds | 4.75 | % | 5.25 | % | 5.25 | % | ||||||
3-month Treasury bill1 | 3.80 | 5.01 | 4.88 | |||||||||
3-month LIBOR1 | 5.23 | 5.36 | 5.37 | |||||||||
2-year U.S. Treasury note1 | 3.99 | 4.81 | 4.69 | |||||||||
5-year U.S. Treasury note1 | 4.25 | 4.70 | 4.58 | |||||||||
10-year U.S. Treasury note1 | 4.59 | 4.70 | 4.63 | |||||||||
30-year residential mortgage note rate2 | 6.38 | 6.22 | 6.24 |
__________
1 | Source is Bloomberg. |
2 | Mortgage Bankers Association weekly 30-year fixed rate mortgage contract rate obtained from Bloomberg. |
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Net income is subject to volatility not only from changes in the average balance of total assets and interest rates but also from gains (losses) on trading securities and derivatives. See “Net Gain (Loss) on Derivative and Hedging Activities” and “Net Gain (Loss) on Trading Securities” in this Item 2 for a discussion of the impact of these activities by period.
Earnings Analysis – Table 3 presents changes in the major components of the FHLBank’s earnings for the third quarter of 2007 compared to the third quarter of 2006 and for the first nine months of 2007 compared to the first nine months of 2006 (in thousands):
Table 3
Increase (Decrease) in Earnings Components | ||||||||||||||||
For the Three Months Ended September 30, 2007 vs. 2006 | For the Nine Months Ended September 30, 2007 vs. 2006 | |||||||||||||||
Dollar Change | Percent Change | Dollar Change | Percent Change | |||||||||||||
Total interest income | $ | 76,032 | 11.8 | % | $ | 244,402 | 13.7 | % | ||||||||
Total interest expense | 69,235 | 11.8 | 234,700 | 14.4 | ||||||||||||
Net interest income before provision for (reversal of) credit losses on mortgage loans | 6,797 | 12.7 | 9,702 | 6.1 | ||||||||||||
Provision for (reversal of) credit losses on mortgage loans | (67 | ) | (64.4 | ) | (200 | ) | (104.7 | ) | ||||||||
Net interest income after provision for (reversal of) credit losses on mortgage loans | 6,864 | 12.8 | 9,902 | 6.2 | ||||||||||||
Net realized gain (loss) on sale or call of securities | (2,254 | ) | (100.0 | ) | (3,216 | ) | (100.0 | ) | ||||||||
Net gain (loss) on trading securities | (568 | ) | (3.8 | ) | 12,794 | 207.9 | ||||||||||
Net gain (loss) on derivatives and hedging activities | 9,452 | 49.0 | (11,449 | ) | (130.1 | ) | ||||||||||
Other non-interest income | 43 | 3.2 | 5,046 | 510.2 | ||||||||||||
Total non-interest income | 6,673 | 209.2 | 3,175 | 191.4 | ||||||||||||
Operating expenses | 301 | 4.3 | 2,291 | 11.1 | ||||||||||||
Other non-interest expense | (786 | ) | (44.8 | ) | 623 | 16.6 | ||||||||||
Total other expense | (485 | ) | (5.5 | ) | 2,914 | 11.9 | ||||||||||
AHP assessments | 1,124 | 32.4 | 796 | 7.0 | ||||||||||||
REFCORP assessments | 2,578 | 33.8 | 1,872 | 7.5 | ||||||||||||
Total assessments | 3,702 | 33.4 | 2,668 | 7.3 | ||||||||||||
Net income | $ | 10,320 | 33.8 | % | $ | 7,495 | 7.5 | % |
Net Interest Income– Net interest income increased 12.7 percent from $53.7 million in the third quarter of 2006 to $60.5 million in the third quarter of 2007, while the FHLBank’s net interest margin remained unchanged at 0.45 percent for the third quarters of 2007 and 2006. Interest income on interest-earning assets increased from the third quarter of 2006 to the third quarter of 2007 primarily because of an increase in the volume of interest-earning assets as reflected in Table 5. Similar volume effects occurred in interest-bearing liabilities. While there were similar changes in volumes for both interest-earning assets and interest-bearing liabilities, the net interest spread reflected in Table 4 increased from 0.17 percent for the third quarter of 2006 to 0.19 percent for the third quarter of 2007 as the FHLBank experienced a slight increase between its returns on money market investments and advances and its cost of funds during the third quarter of 2007 (Table 5 reflects an increase in interest income attributable to rate but a decrease in interest expense attributable to rate). Table 5 indicates that the increase in NII for the third quarter of 2007 was almost equally attributable to volume and rate.
Net interest income increased 6.1 percent from $159.7 million for the first nine months of 2006 to $169.4 million for the first nine months of 2007 primarily because of the impact of increasing interest rates on invested capital and the change in the composition of the balance sheet. Interest income on interest-earning assets increased from the first nine months of 2006 to the first nine months of 2007 because of the combination of an increase in the volume of interest-earning assets and an increase in interest rates as reflected in Table 7. Similar volume/rate effects occurred in interest-bearing liabilities. However, the FHLBank’s net interest margin remained unchanged at 0.45 percent for the nine months ended September 30, 2007 and 2006. As reflected in Table 6, the FHLBank’s net interest spread also remained unchanged at 0.19 percent for the first nine months of 2007 and 2006. Table 7 demonstrates that the increase in interest rates between the periods was the primary factor in the increase in net interest income from 2006 to 2007.
As explained in more detail in “Quantitative and Qualitative Disclosures about Market Risk – Interest Rate Risk Management” under Item 3, the FHLBank’s DOE is relatively short. The short DOE is the result of the short maturities (or short reset periods) on the majority of the FHLBank’s assets and liabilities. Accordingly, the FHLBank’s net interest income is quite sensitive to the level of short-term interest rates. As short-term interest rates rose from the first nine months of 2006 to first nine months of 2007, so did the FHLBank’s net interest income attributable to invested capital during that period.
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Table 4 presents average balances and annualized yields of major earning asset categories and the sources funding those earning assets for the quarters ended September 30, 2007 and 2006 (in thousands):
Table 4
For the Three-Month Periods Ended | ||||||||||||||||||||||||
September 30, 2007 | September 30, 2006 | |||||||||||||||||||||||
Average Balance | Interest Income/ Expense | Yield | Average Balance | Interest Income/ Expense | Yield | |||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Interest-bearing deposits | $ | 4,692,994 | $ | 64,341 | 5.44 | % | $ | 4,755,469 | $ | 63,382 | 5.29 | % | ||||||||||||
Federal funds sold and resale agreements | 6,464,006 | 86,029 | 5.28 | 4,045,073 | 54,389 | 5.33 | ||||||||||||||||||
Investments6 | 9,617,275 | 129,983 | 5.36 | 8,519,268 | 113,925 | 5.31 | ||||||||||||||||||
Advances1,7 | 30,094,828 | 406,474 | 5.36 | 28,062,335 | 378,756 | 5.35 | ||||||||||||||||||
Mortgage loans held for portfolio1,4,5 | 2,334,507 | 30,330 | 5.15 | 2,397,395 | 30,504 | 5.05 | ||||||||||||||||||
Other interest-earning assets | 61,739 | 991 | 6.37 | 66,768 | 1,160 | 6.89 | ||||||||||||||||||
Total earning assets | 53,265,349 | 718,148 | 5.35 | 47,846,308 | 642,116 | 5.33 | ||||||||||||||||||
Other non-interest-earning assets | 305,497 | 231,908 | ||||||||||||||||||||||
Total assets | $ | 53,570,846 | $ | 48,078,216 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Deposits | $ | 925,563 | $ | 11,740 | 5.03 | % | $ | 703,771 | $ | 9,055 | 5.10 | % | ||||||||||||
Consolidated obligations:1 | ||||||||||||||||||||||||
Discount Notes | 16,162,299 | 206,957 | 5.08 | 13,402,213 | 177,678 | 5.26 | ||||||||||||||||||
Bonds | 33,436,213 | 438,064 | 5.20 | 31,058,245 | 400,562 | 5.12 | ||||||||||||||||||
Other borrowings | 72,508 | 918 | 5.03 | 88,798 | 1,149 | 5.13 | ||||||||||||||||||
Total interest-bearing liabilities | 50,596,583 | 657,679 | 5.16 | 45,253,027 | 588,444 | 5.16 | ||||||||||||||||||
Capital and other non-interest-bearing funds | 2,974,263 | 2,825,189 | ||||||||||||||||||||||
Total funding | $ | 53,570,846 | $ | 48,078,216 | ||||||||||||||||||||
Net interest income and net interest spread2 | $ | 60,469 | 0.19 | % | $ | 53,672 | 0.17 | % | ||||||||||||||||
Net interest margin3 | 0.45 | % | 0.45 | % |
___________
1 | Interest income/expense and average rates include the effect of associated derivatives qualifying for hedge accounting under SFAS 133. |
2 | Net interest spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. |
3 | Net interest margin is net interest income as a percentage of average interest-earning assets. |
4 | The FHLBank nets credit enhancement fee (CE fee) payments against interest earnings on the mortgage loans held for portfolio. The expense related to CE fee payments to PFIs was $535,000 and $613,000 for the quarters ended September 30, 2007 and 2006, respectively. |
5 | Mortgage loans held for portfolio average balance includes outstanding principal for non-performing loans. However, these loans no longer accrue interest. |
6 | The fair value adjustment on available-for-sale securities is excluded from the average balance for calculation of yield since the change runs through equity. |
7 | Advance income includes prepayment fees on terminated advances. |
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Changes in the volume of interest-earning assets and the level of short-term interest rates influence changes in net interest income, net interest spread and net interest margin. Table 5 summarizes changes in interest income and interest expense between the third quarters of 2007 and 2006 (in thousands):
Table 5
For the Three Months Ended September 30, 2007 vs. 2006 | ||||||||||||
Increase (Decrease) Due to | ||||||||||||
Volume1 | Rate2 | Total | ||||||||||
Interest Income: | ||||||||||||
Interest-bearing deposits | $ | (833 | ) | $ | 1,792 | $ | 959 | |||||
Federal funds sold and resale agreements | 32,524 | (884 | ) | 31,640 | ||||||||
Investments | 14,683 | 1,375 | 16,058 | |||||||||
Advances | 27,433 | 285 | 27,718 | |||||||||
Mortgage loans held for portfolio | (801 | ) | 627 | (174 | ) | |||||||
Other assets | (87 | ) | (82 | ) | (169 | ) | ||||||
Total earning assets | 72,919 | 3,113 | 76,032 | |||||||||
Interest Expense: | ||||||||||||
Deposits | 2,854 | (169 | ) | 2,685 | ||||||||
Consolidated obligations: | ||||||||||||
Discount notes | 36,592 | (7,313 | ) | 29,279 | ||||||||
Bonds | 30,669 | 6,833 | 37,502 | |||||||||
Other borrowings | (211 | ) | (20 | ) | (231 | ) | ||||||
Total interest-bearing liabilities | 69,904 | (669 | ) | 69,235 | ||||||||
Change in net interest income | $ | 3,015 | $ | 3,782 | $ | 6,797 |
___________
1 | Volume changes are calculated by taking (current period average balance minus prior period average balance) multiplied by prior period calculated yield. |
2 | Rate changes are calculated by taking (current period average rate minus prior period average rate) multiplied by current period average balance. |
28
Table 6 presents average balances and annualized yields of major earning asset categories and the sources funding those earning assets for the nine months ended September 30, 2007 and 2006 (in thousands):
Table 6
For the Nine-Month Periods Ended | ||||||||||||||||||||||||
September 30, 2007 | September 30, 2006 | |||||||||||||||||||||||
Average Balance | Interest Income/ Expense | Yield | Average Balance | Interest Income/ Expense | Yield | |||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Interest-bearing deposits | $ | 4,462,041 | $ | 180,117 | 5.40 | % | $ | 4,892,033 | $ | 181,727 | 4.97 | % | ||||||||||||
Federal funds sold and resale agreements | 6,942,751 | 276,325 | 5.32 | 4,101,225 | 151,440 | 4.94 | ||||||||||||||||||
Investments6 | 9,028,821 | 361,898 | 5.36 | 8,367,439 | 323,098 | 5.16 | ||||||||||||||||||
Advances1,7 | 27,868,211 | 1,117,427 | 5.36 | 27,811,403 | 1,034,081 | 4.97 | ||||||||||||||||||
Mortgage loans held for portfolio1,4,5 | 2,346,980 | 91,126 | 5.19 | 2,406,522 | 91,804 | 5.10 | ||||||||||||||||||
Other interest-earning assets | 62,507 | 2,990 | 6.40 | 68,042 | 3,331 | 6.55 | ||||||||||||||||||
Total earning assets | 50,711,311 | 2,029,883 | 5.35 | 47,646,664 | 1,785,481 | 5.01 | ||||||||||||||||||
Other non-interest-earning assets | 296,838 | 220,894 | ||||||||||||||||||||||
Total assets | $ | 51,008,149 | $ | 47,867,558 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Deposits | $ | 963,742 | $ | 36,843 | 5.11 | % | $ | 761,018 | $ | 26,819 | 4.71 | % | ||||||||||||
Consolidated obligations:1 | ||||||||||||||||||||||||
Discount Notes | 14,085,291 | 545,200 | 5.18 | 13,337,011 | 484,156 | 4.85 | ||||||||||||||||||
Bonds | 33,098,498 | 1,275,401 | 5.15 | 30,882,246 | 1,111,413 | 4.81 | ||||||||||||||||||
Other borrowings | 79,664 | 3,085 | 5.18 | 96,248 | 3,441 | 4.78 | ||||||||||||||||||
Total interest-bearing liabilities | 48,227,195 | 1,860,529 | 5.16 | 45,076,523 | 1,625,829 | 4.82 | ||||||||||||||||||
Capital and other non-interest-bearing funds | 2,780,954 | 2,791,035 | ||||||||||||||||||||||
Total funding | $ | 51,008,149 | $ | 47,867,558 | ||||||||||||||||||||
Net interest income and net interest spread2 | $ | 169,354 | 0.19 | % | $ | 159,652 | 0.19 | % | ||||||||||||||||
Net interest margin3 | 0.45 | % | 0.45 | % |
___________
1 | Interest income/expense and average rates include the effect of associated derivatives qualifying for hedge accounting under SFAS 133. |
2 | Net interest spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. |
3 | Net interest margin is net interest income as a percentage of average interest-earning assets. |
4 | The FHLBank nets credit enhancement fee (CE fee) payments against interest earnings on the mortgage loans held for portfolio. The expense related to CE fee payments to PFIs was $1,749,000 and $1,877,000 for the nine months ended September 30, 2007 and 2006, respectively. |
5 | Mortgage loans held for portfolio average balance includes outstanding principal for non-performing loans. However, these loans no longer accrue interest. |
6 | The fair value adjustment on available-for-sale securities is excluded from the average balance for calculation of yield since the change runs through equity. |
7 | Advance income includes prepayment fees on terminated advances. |
29
Changes in the volume of interest-earning assets and the level of short-term interest rates influence changes in net interest income, net interest spread and net interest margin. Table 7 summarizes changes in interest income and interest expense between the first nine months of 2007 and 2006 (in thousands):
Table 7
For the Nine Months Ended September 30, 2007 vs. 2006 | ||||||||||||
Increase (Decrease) Due to | ||||||||||||
Volume1 | Rate2 | Total | ||||||||||
Interest Income: | ||||||||||||
Interest-bearing deposits | $ | (15,973 | ) | $ | 14,363 | $ | (1,610 | ) | ||||
Federal funds sold and resale agreements | 104,925 | 19,960 | 124,885 | |||||||||
Investments | 25,539 | 13,261 | 38,800 | |||||||||
Advances | 2,112 | 81,234 | 83,346 | |||||||||
Mortgage loans held for portfolio | (2,272 | ) | 1,594 | (678 | ) | |||||||
Other assets | (271 | ) | (70 | ) | (341 | ) | ||||||
Total earning assets | 114,060 | 130,342 | 244,402 | |||||||||
Interest Expense: | ||||||||||||
Deposits | 7,145 | 2,879 | 10,024 | |||||||||
Consolidated obligations: | ||||||||||||
Discount notes | 27,164 | 33,880 | 61,044 | |||||||||
Bonds | 79,760 | 84,228 | 163,988 | |||||||||
Other borrowings | (593 | ) | 237 | (356 | ) | |||||||
Total interest-bearing liabilities | 113,476 | 121,224 | 234,700 | |||||||||
Change in net interest income | $ | 584 | $ | 9,118 | $ | 9,702 |
___________
1 | Volume changes are calculated by taking (current period average balance minus prior period average balance) multiplied by prior period calculated yield. |
2 | Rate changes are calculated by taking (current period average rate minus prior period average rate) multiplied by current period average balance. |
Net Gain (Loss) on Derivative and Hedging Activities– The volatility in other income is predominately driven by derivative and hedging adjustments related to Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities – Deferral of Effective Date of Financial Accounting Standards Board (FASB) Statement No. 133, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, as amended by SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, and as amended by SFAS No. 155, Accounting for Certain Hybrid Financial Instruments (hereafter referred to as SFAS 133). The application of SFAS 133 resulted in a net gain (loss) on derivatives and hedging activities of $(9.8) million and $(19.3) million for the quarters ended September 30, 2007 and 2006, respectively. For the nine months ended September 30, 2007 and 2006, the net gain (loss) on derivatives and hedging activities was $(2.6) million and $8.8 million, respectively. The FHLBank’s net gains (losses) from derivatives and hedging are sensitive to the general level of interest rates during any three-, six-, nine-, or 12-month period. Most of the derivative gains and losses are related to economic hedges such as swaps matched to trading securities, caps, floors, etc. Because of the mix of these economic hedges, the FHLBank generally records gains on its derivatives when the general level of interest rates rises over the period and records losses on its derivatives when the general level of interest rates falls over the period.
Net Gain (Loss) on Trading Securities – Prior to the third quarter of 2007, all of our trading securities related to economic hedges. In September 2007, the FHLBank purchased $419.6 million in adjustable rate MBS/CMOs, which were not related to economic hedges, and placed them in a trading portfolio for asset/liability management purposes. All gains (losses) related to trading securities are recorded in other income as net gain (loss) on trading securities; however, only gains (losses) relating to trading securities that are related to economic hedges are included in Tables 8 through 11. Unrealized gains (losses) fluctuate as the fair value of our trading securities portfolio fluctuates. As noted above, the FHLBank’s trading securities related to economic hedges are sensitive to the general level of interest rates. Gains (losses) in this category move in the opposite direction of and partially offset the net gain (loss) on derivative and hedging activities. Gains (losses) in the MBS/CMO portfolio also move in the opposite direction of the movement in interest rates but with no offsetting hedge. The FHLBank generally records gains on its trading securities when the general level of interest rates falls over the period and records losses on its trading securities when the general level of interest rates rises over the period.
30
Table 8 categorizes the earnings impact by product for derivative hedging activities and trading securities for the third quarter of 2007 (in thousands):
Table 8
Advances | Investments | Mortgage Loans | Consolidated Obligation Discount Notes | Consolidated Obligation Bonds | Intermediary Positions | Total | ||||||||||||||||||||||
Amortization/accretion of hedging activities in net margin | $ | (11,402 | ) | $ | (1 | ) | $ | 103 | $ | 0 | $ | (1,349 | ) | $ | 0 | $ | (12,649 | ) | ||||||||||
Net gain (loss) on derivative and hedging activities: | ||||||||||||||||||||||||||||
Fair value hedges | 2,266 | 0 | 0 | 0 | (2,960 | ) | 0 | (694 | ) | |||||||||||||||||||
Economic hedges – unrealized gain (loss) due to fair value changes | 0 | (9,996 | ) | 248 | 75 | (343 | ) | (13 | ) | (10,029 | ) | |||||||||||||||||
Economic hedges – net interest received (paid) | 0 | 692 | 0 | 79 | 89 | 26 | 886 | |||||||||||||||||||||
Subtotal | 2,266 | (9,304 | ) | 248 | 154 | (3,214 | ) | 13 | (9,837 | ) | ||||||||||||||||||
Net gain (loss) on trading securities hedged on an economic basis with derivatives | 0 | 13,542 | 0 | 0 | 0 | 0 | 13,542 | |||||||||||||||||||||
Total | $ | (9,136 | ) | $ | 4,237 | $ | 351 | $ | 154 | $ | (4,563 | ) | $ | 13 | $ | (8,944 | ) |
Table 9 categorizes the earnings impact by product for derivative hedging activities and trading securities for the third quarter of 2006 (in thousands):
Table 9
Advances | Investments | Mortgage Loans | Consolidated Obligation Discount Notes | Consolidated Obligation Bonds | Intermediary Positions | Total | ||||||||||||||||||||||
Amortization/accretion of hedging activities in net margin | $ | (13,925 | ) | $ | 0 | $ | 9 | $ | 0 | $ | (1,058 | ) | $ | 0 | $ | (14,974 | ) | |||||||||||
Net gain (loss) on derivative and hedging activities: | ||||||||||||||||||||||||||||
Fair value hedges | 1,300 | 0 | 0 | 0 | (1,881 | ) | 0 | (581 | ) | |||||||||||||||||||
Economic hedges – unrealized gain (loss) due to fair value changes | 0 | (18,921 | ) | 367 | (629 | ) | (568 | ) | (44 | ) | (19,795 | ) | ||||||||||||||||
Economic hedges – net interest received (paid) | 0 | 412 | 0 | 521 | 99 | 55 | 1,087 | |||||||||||||||||||||
Subtotal | 1,300 | (18,509 | ) | 367 | (108 | ) | (2,350 | ) | 11 | (19,289 | ) | |||||||||||||||||
Net gain (loss) on trading securities hedged on an economic basis with derivatives | 0 | 14,773 | 0 | 0 | 0 | 0 | 14,773 | |||||||||||||||||||||
Total | $ | (12,625 | ) | $ | (3,736 | ) | $ | 376 | $ | (108 | ) | $ | (3,408 | ) | $ | 11 | $ | (19,490 | ) |
31
Table 10 categorizes the earnings impact by product for derivative hedging activities and trading securities for the first nine months of 2007 (in thousands):
Table 10
Advances | Investments | Mortgage Loans | Consolidated Obligation Discount Notes | Consolidated Obligation Bonds | Intermediary Positions | Total | ||||||||||||||||||||||
Amortization/accretion of hedging activities in net margin | $ | (39,043 | ) | $ | (2 | ) | $ | 1 | $ | 0 | $ | (4,000 | ) | $ | 0 | $ | (43,044 | ) | ||||||||||
Net gain (loss) on derivative and hedging activities: | ||||||||||||||||||||||||||||
Fair value hedges | 1,341 | 0 | 0 | 0 | (1,470 | ) | 0 | (129 | ) | |||||||||||||||||||
Economic hedges – unrealized gain (loss) due to fair value changes | 0 | (3,792 | ) | (47 | ) | (58 | ) | (328 | ) | (75 | ) | (4,300 | ) | |||||||||||||||
Economic hedges – net interest received (paid) | 0 | 1,510 | 0 | (89 | ) | 265 | 95 | 1,781 | ||||||||||||||||||||
Subtotal | 1,341 | (2,282 | ) | (47 | ) | (147 | ) | (1,533 | ) | 20 | (2,648 | ) | ||||||||||||||||
Net gain (loss) on trading securities hedged on an economic basis with derivatives | 0 | 5,956 | 0 | 0 | 0 | 0 | 5,956 | |||||||||||||||||||||
Total | $ | (37,702 | ) | $ | 3,672 | $ | (46 | ) | $ | (147 | ) | $ | (5,533 | ) | $ | 20 | $ | (39,736 | ) |
Table 11 categorizes the earnings impact by product for derivative hedging activities and trading securities for the first nine months of 2006 (in thousands):
Table 11
Advances | Investments | Mortgage Loans | Consolidated Obligation Discount Notes | Consolidated Obligation Bonds | Intermediary Positions | Total | ||||||||||||||||||||||
Amortization/accretion of hedging activities in net margin | $ | (41,245 | ) | $ | (2 | ) | $ | 85 | $ | 0 | $ | (3,153 | ) | $ | 0 | $ | (44,315 | ) | ||||||||||
Net gain (loss) on derivative and hedging activities: | ||||||||||||||||||||||||||||
Fair value hedges | 780 | 0 | 0 | 0 | (263 | ) | 0 | 517 | ||||||||||||||||||||
Economic hedges – unrealized gain (loss) due to fair value changes | 0 | 4,354 | (69 | ) | (316 | ) | 4,511 | (154 | ) | 8,326 | ||||||||||||||||||
Economic hedges – net interest received (paid) | 0 | (1,184 | ) | 0 | 524 | 444 | 174 | (42 | ) | |||||||||||||||||||
Subtotal | 780 | 3,170 | (69 | ) | 208 | 4,692 | 20 | 8,801 | ||||||||||||||||||||
Net gain (loss) on trading securities hedged on an economic basis with derivatives | 0 | (6,153 | ) | 0 | 0 | 0 | 0 | (6,153 | ) | |||||||||||||||||||
Total | $ | (40,465 | ) | $ | (2,985 | ) | $ | 16 | $ | 208 | $ | 1,539 | $ | 20 | $ | (41,667 | ) |
Other Non-interest Income– Included in other non-interest income are realized gains (losses) from the sale or call of available-for-sale and held-to-maturity securities. In the first quarter of 2007, several held-to-maturity securities were sold. All securities sold had paid down below 15 percent of the principal outstanding at acquisition. The FHLBank realized a net loss of $1.0 million on these held-to-maturity securities for the nine months ended September 30, 2007. All outstanding available-for-sale securities, which were originally acquired for asset/liability management purposes, were sold at a realized net loss of $2.3 million in the third quarter of 2007. There were no sales of securities during the three or nine months ended September 30, 2006.
32
Return on Equity – Return on equity was 7.33 percent (annualized) in the third quarter of 2007, an increase of 120 basis points from 6.13 percent for the third quarter of 2006. This increase reflects the 33.8 percent increase in net income, from $30.5 million in the third quarter of 2006 to $40.8 million in the third quarter of 2007 which was partially offset by a higher average balance of equity for the third quarter of 2007. As discussed previously in “Results of Operations – Net Interest Income” in this Item 2 and reflected in Table 3, the primary contributors to the increase in ROE were the increases in net interest income and in net income related to net gain (loss) on derivatives and hedging activities from the third quarter 2006 to the third quarter 2007.
Return on equity was 6.86 percent (annualized) for the first nine months of 2007, unchanged from the first nine months of 2006. As discussed previously in “Results of Operations – Net Interest Income” in this Item 2 and reflected in Table 3, the increases in non-interest income categories were almost entirely offset by the increases in other expenses. Average capital grew a modest 7.3 percent from $2.0 billion for the nine-month period ended September 30, 2006 to $2.1 billion for the nine-month period ended September 30, 2007. The growth in capital along with the modest growth in net income of 7.5 percent contributed to the unchanged ROE for the first nine months of 2007 over the first nine months of 2006.
Overall – Table 12 presents changes in the major components of the FHLBank’s Statements of Condition from December 31, 2006 to September 30, 2007 (in thousands):
Table 12
Increase (Decrease) in Components | ||||||||
September 30, 2007 vs. December 31, 2006 | ||||||||
Dollar Change | Percent Change | |||||||
Assets: | ||||||||
Cash and due from banks | $ | 531 | 141.6 | % | ||||
Investments1 | (548,059 | ) | (2.5 | ) | ||||
Advances | 4,535,346 | 15.9 | ||||||
Mortgage loans held for portfolio, net | (41,813 | ) | (1.8 | ) | ||||
Derivatives assets | 53,792 | 80.7 | ||||||
Other assets | 1,571 | 0.5 | ||||||
Total assets | $ | 4,001,368 | 7.6 | % | ||||
Liabilities: | ||||||||
Deposits | $ | (165,680 | ) | (14.8 | )% | |||
Consolidated obligations, net | 3,973,876 | 8.1 | ||||||
Mandatorily redeemable capital stock | (5,446 | ) | (11.8 | ) | ||||
Derivative liabilities | (13,689 | ) | (6.7 | ) | ||||
Other liabilities | 51,172 | 12.1 | ||||||
Total liabilities | 3,840,233 | 7.6 | ||||||
Capital: | ||||||||
Capital stock outstanding | 133,554 | 6.7 | ||||||
Retained earnings | 23,213 | 13.5 | ||||||
Accumulated other comprehensive income | 4,368 | 61.6 | ||||||
Total capital | 161,135 | 7.4 | ||||||
Total liabilities and capital | $ | 4,001,368 | 7.6 | % |
__________
1 | Investments also include interest-bearing deposits, Federal funds sold and securities purchased under agreements to resell. |
Advances– Outstanding advances increased by 15.9 percent from $28.4 billion on December 31, 2006 to $33.0 billion on September 30, 2007 (see Table 12). While most advance products increased in volume over the nine-month period, the mix of products has changed significantly, with short-term fixed rate advances decreasing to 33.5 percent and long-term fixed rate advances increasing to 28.8 percent of the total as of September 30, 2007, compared to 38.4 and 22.8 percent, respectively, as of December 31, 2006 (see Table 13). The par value of total fixed rate advances increased by $3.4 billion and the par value of total adjustable rate advances, including lines of credit, increased by $1.1 billion (see Table 13). From December 31, 2006 to September 30, 2007, SFAS 133 basis adjustments on advances increased primarily as a result of the increased level of convertible advances and other advances which are hedged by the FHLBank with derivatives.
We expect that the FHLBank’s total advances to existing members will decline during the fourth quarter as members’ originations of mortgage loans held in portfolio slow due to the slowdown in the housing market and the decreasing need for liquidity from several of the FHLBank’s largest members. The credit crisis that occurred in the third quarter of 2007 resulted in a substantial increase in advance demand from some of the FHLBank’s largest members and these members have tentatively indicated that they do not believe that they will need as much liquidity by year end. The FHLBank expects that new FHLBank members, primarily new or recent insurance company members, will continue to increase their demand for advances, but this increase will be more than offset by the expected declines in advance balances discussed above.
33
Table 13 summarizes the par value of the FHLBank’s advances outstanding by product as of September 30, 2007 and December 31, 2006 (in thousands):
Table 13
September 30, 2007 | December 31, 2006 | |||||||||||||||
Dollar | Percent | Dollar | Percent | |||||||||||||
Standard advance products: | ||||||||||||||||
Line of credit | $ | 1,145,277 | 3.5 | % | $ | 1,196,241 | 4.2 | % | ||||||||
Short-term fixed rate advances | 11,014,132 | 33.5 | 10,944,904 | 38.4 | ||||||||||||
Long-term fixed rate advances | 9,505,271 | 28.8 | 6,470,905 | 22.8 | ||||||||||||
Fixed rate callable advances | 16,625 | 0.1 | 125 | 0.0 | ||||||||||||
Fixed rate amortizing advances | 501,231 | 1.5 | 521,289 | 1.8 | ||||||||||||
Fixed rate callable amortizing advances | 1,902 | 0.0 | 2,140 | 0.0 | ||||||||||||
Fixed rate convertible advances | 4,205,941 | 12.8 | 3,996,241 | 14.0 | ||||||||||||
Adjustable rate advances | 603,330 | 1.8 | 715,305 | 2.5 | ||||||||||||
Adjustable rate callable advances | 5,005,903 | 15.2 | 3,765,216 | 13.2 | ||||||||||||
Customized advances: | ||||||||||||||||
Advances with embedded caps or floors | 142,500 | 0.4 | 217,500 | 0.8 | ||||||||||||
Standard housing and community development advances: | ||||||||||||||||
Fixed rate | 361,655 | 1.1 | 319,207 | 1.1 | ||||||||||||
Fixed rate amortizing advances | 356,536 | 1.1 | 302,484 | 1.1 | ||||||||||||
Fixed rate callable amortizing advances | 125 | 0.0 | 131 | 0.0 | ||||||||||||
Adjustable rate advances | 6,100 | 0.0 | 0 | 0.0 | ||||||||||||
Adjustable rate callable advances | 51,784 | 0.2 | 14,300 | 0.1 | ||||||||||||
Fixed rate amortizing advances funded through AHP | 18 | 0.0 | 22 | 0.0 | ||||||||||||
Total Par Value | $ | 32,918,330 | 100.0 | % | $ | 28,466,010 | 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 or conversion of an advance.
Total advances as a percentage of total assets increased from 53.9 percent as of December 31, 2006 to 58.1 percent as of September 30, 2007. The percentage of total advances to total assets is expected to remain relatively steady within a range from 53 to 60 percent in future periods as any growth in the FHLBank’s mortgage loan portfolio is accommodated on the balance sheet through a reduction in money market and other short-term investments. The average yield on advances was 5.36 percent for the three months ended September 30, 2007, compared to 5.35 percent for the three months ended September 30, 2006. Additionally, the average yield on advances was 5.36 percent and 4.97 percent for the nine months ended September 30, 2007 and 2006, respectively.
As detailed in Table 13, 67.4 percent of the FHLBank’s advance portfolio as of September 30, 2007, reprices within three months compared to 73.2 percent as of December 31, 2006. Because of the relatively short nature of the FHLBank’s advance portfolio, the average yield in this portfolio typically responds quickly to changes in the general level of short-term interest rates. The level of short-term interest rates is primarily driven by FOMC decisions on the level of its overnight Federal funds target, but is also influenced by the expectations of capital market participants related to the strength of the economy, future inflationary pressure and other factors. See Tables 4 through 7 under “Results of Operations – Net Interest Income” in this Item 2 for further information regarding average balances and yields/rates and changes in interest income.
The FHLBank’s potential credit risk from advances is concentrated in commercial banks, thrift institutions and credit unions, but also includes credit risk exposure to a limited number of insurance companies and housing associates. Table 14 presents information on the FHLBank’s five largest borrowers as of September 30, 2007 and December 31, 2006 (in thousands). Table 15 presents the interest income associated with these advances for the three- and nine-month periods ended September 30, 2007 and 2006 (in thousands). The FHLBank had rights to collateral with an estimated fair value in excess of the book value of these advances and, therefore, does not expect to incur any credit losses on these advances.
Table 14
September 30, 2007 | December 31, 2006 | |||||||||||||||||
Borrower Name | City | State | Advance Par Value | Percent of Total Advances | Advance Par Value | Percent of Total Advances | ||||||||||||
U.S. Central Federal Credit Union | Lenexa | KS | $ | 6,250,000 | 19.0 | % | $ | 4,000,000 | 14.1 | % | ||||||||
MidFirst Bank | Oklahoma City | OK | 5,730,800 | 17.4 | 5,696,400 | 20.0 | ||||||||||||
Security Life of Denver Ins. Co. | Denver | CO | 3,134,000 | 9.5 | 2,334,000 | 8.2 | ||||||||||||
Capitol Federal Savings Bank | Topeka | KS | 2,746,000 | 8.4 | 3,296,000 | 11.5 | ||||||||||||
Security Benefit Life Insurance Co. | Topeka | KS | 1,394,330 | 4.2 | 1,269,330 | 4.5 | ||||||||||||
Total | $ | 19,255,130 | 58.5 | % | $ | 16,595,730 | 58.3 | % |
34
Table 15
Three Months Ended September 30, 2007 | Three Months Ended September 30, 2006 | Nine Months Ended September 30, 2007 | Nine Months Ended September 30, 2006 | |||||||||||||||||||||||||||||
Borrower Name | Advance Income | Percent of Total Advance Income1 | Advance Income | Percent of Total Advance Income1 | Advance Income | Percent of Total Advance Income1 | Advance Income | Percent of Total Advance Income1 | ||||||||||||||||||||||||
U.S. Central Federal Credit Union | $ | 72,642 | 18.6 | % | $ | 49,308 | 13.8 | % | $ | 147,067 | 13.8 | % | $ | 126,979 | 12.8 | % | ||||||||||||||||
MidFirst Bank | 69,421 | 17.8 | 73,154 | 20.5 | 211,787 | 19.9 | 200,095 | 20.2 | ||||||||||||||||||||||||
Security Life of Denver Insurance Co. | 42,100 | 10.8 | 23,043 | 6.4 | 114,361 | 10.7 | 51,035 | 5.2 | ||||||||||||||||||||||||
Capitol Federal Savings Bank | 33,472 | 8.6 | 37,003 | 10.4 | 103,015 | 9.7 | 110,288 | 11.1 | ||||||||||||||||||||||||
Security Benefit Life Insurance Co. | 19,053 | 4.9 | 16,407 | 4.6 | 54,701 | 5.2 | 44,549 | 4.5 | ||||||||||||||||||||||||
Total | $ | 236,688 | 60.7 | % | $ | 198,915 | 55.7 | % | $ | 630,931 | 59.3 | % | $ | 532,946 | 53.8 | % |
___________
1 | Total advance income excludes net interest settlements on derivatives. |
MPF Program– The FHLBank participates in the MPF Program through the MPF Provider, which is the Federal Home Loan Bank of Chicago. Under this program, participating members of an FHLBank either sell fixed rate, size-conforming, single-family mortgage loans to the FHLBank (closed loans) or originate these same loans on behalf of the FHLBank (table funded loans). There was a slight reduction in the MPF portfolio during 2007, as new loans acquired from in-district participating financial institutions (PFIs) were not quite enough to offset the amount of loans paid down during the three- and nine-month periods ended September 30, 2007. The FHLBank devoted resources during the first nine months of 2007 to increase the volume of mortgage loans acquired from in-district PFIs and is committed to increasing the volume of acquired in-district mortgage loans during the remainder of 2007 and into 2008. The FHLBank did not acquire any out-of-district mortgage loans during the first nine months of 2007 and is unlikely to do so during the remainder of 2007 unless the relative value of fixed rate mortgage loans to its cost of funds improves significantly.
Table 16 presents the top five PFIs of the FHLBank, the outstanding balances (in thousands) of mortgage loans acquired from them as of September 30, 2007 and December 31, 2006 and the percentage of those loans to total MPF loans outstanding as of each date:
Table 16
PFI Name | MPF Loan Balance as of September 30, 2007 | Percent of Total MPF Loans | MPF Loan Balance as of December 31, 2006 | Percent of Total MPF Loans | ||||||||||||
LaSalle National Bank, N.A.1 | $ | 540,661 | 23.2 | % | $ | 601,399 | 25.4 | % | ||||||||
TierOne Bank | 497,982 | 21.4 | 495,211 | 20.9 | ||||||||||||
Bank of the West2 | 435,307 | 18.7 | 476,467 | 20.1 | ||||||||||||
Sunflower Bank, NA | 59,998 | 2.6 | 64,233 | 2.7 | ||||||||||||
Golden Belt Bank, FSA | 37,155 | 1.6 | 38,520 | 1.6 | ||||||||||||
Total | $ | 1,571,103 | 67.5 | % | $ | 1,675,830 | 70.7 | % |
___________
1 | Out-of-district loans acquired from Federal Home Loan Bank of Chicago. |
2 | Formerly Commercial Federal Bank headquartered in Omaha, NE. Bank of the West acquired Commercial Federal Bank on December 2, 2005. Bank of the West is a member of the Federal Home Loan Bank of San Francisco. |
The average yield on mortgage loans for the third quarter of 2007 was 5.15 percent compared to 5.05 percent for the third quarter of 2006. For the nine-month periods ended September 30, 2007 and 2006, the average yield on mortgage loans was 5.19 percent and 5.10 percent, respectively. The average yield on mortgage loans increased due primarily to the increase in mortgage interest rates and a decrease in the net write-off of the amortization of premium as a result of the decline in mortgage loan prepayments and the increase in estimated lives of existing mortgage loans because of the increase in mortgage interest rates. The average yield on mortgage loans is expected to remain relatively stable as mortgage interest rates during the remainder of 2007 are not expected to change significantly. See Tables 4 through 7 under “Results of Operations – Net Interest Income” in this Item 2 for further information regarding average balances and yields/rates and changes in interest income.
Asset Quality: The FHLBank classifies conventional real estate mortgage loans as “non-performing” when they are contractually past due 90 days or more and interest is no longer accrued. Interest continues to accrue on government-insured real estate mortgage loans (e.g., Federal Housing Administration, Veterans’ Affairs, USDA Guaranteed Rural Housing Section 502, and HUD Section 184 Indian Home Loan Guarantee Program loans) that are contractually past due 90 days or more. The weighted average FICO®score2 and loan-to-value ratio (LTV)3 recorded at origination for conventional mortgage loans held in portfolio at September 30, 2007 was 740.7 with a 72.2 percent LTV. The FHLBank believes it has minimal exposure to sub-prime loans due to its unique business model, conservative policies pertaining to advances collateral and investments, and reduced credit risk due to the design of its mortgage loan programs. Under the MPF Program, the FHLBank does not fund or purchase mortgage loans that are originated as sub-prime or nontraditional loans (e.g., adjustable loans with teaser rates, low FICO scores/high loan-to-values, interest-only loans, negative amortization loans, etc.). Even though the mortgage loans on its books are not classified sub-prime or nontraditional, management has added supplemental monitoring processes to review all mortgage loans where the borrower’s original FICO score was equal to or less than 660.
____________
2 | FICO® is a widely used credit industry model developed by Fair Isaac Corporation to assess borrower credit quality with scores typically ranging from 300 to 850 with the low end of the scale indicating a poor credit risk. A credit score of 620 is frequently cited as a cutoff point, with credit scores below that typically considered “sub-prime.” |
3 | LTV is a primary variable in credit performance. Generally speaking, higher loan-to-value means greater risk of loss generating a default and also means higher loss severity. |
35
Table 17 presents the unpaid principal balance for conventional and government-insured mortgage loans as of September 30, 2007 and December 31, 2006 (in thousands):
Table 17
September 30, 2007 | December 31, 2006 | |||||||
Conventional mortgage loans | $ | 2,252,904 | $ | 2,307,079 | ||||
Government-insured mortgage loans | 76,176 | 63,105 | ||||||
Total outstanding mortgage loans | $ | 2,329,080 | $ | 2,370,184 |
Table 18 presents the unpaid principal balance for performing mortgage loans, non-performing mortgage loans and mortgage loans 90 days or more past due and accruing as of September 30, 2007 and December 31, 2006 (in thousands):
Table 18
September 30, 2007 | December 31, 2006 | |||||||
Performing mortgage loans | $ | 2,323,525 | $ | 2,365,122 | ||||
Non-performing mortgage loans | 5,123 | 4,379 | ||||||
Mortgage loans 90 days or more past due and accruing | 432 | 683 | ||||||
Total outstanding mortgage loans | $ | 2,329,080 | $ | 2,370,184 |
MPF Allowance for Credit Losses on Mortgage Loans: The FHLBank bases its allowance on management’s estimate of probable credit losses inherent in the FHLBank’s mortgage loan portfolio as of the statement of condition date. The estimate is based on an analysis of industry statistics for similar mortgage loan portfolios. Management believes that policies and procedures are in place to manage the credit risk on MPF mortgage loans.
Table 19 details the change in the allowance for mortgage loan losses for the three- and nine-month periods ended September 30, 2007 and 2006 (in thousands):
Table 19
Three-month periods ended | Nine-month periods ended | |||||||||||||||
September 30, 2007 | September 30, 2006 | September 30, 2007 | September 30, 2006 | |||||||||||||
Balance, beginning of period | $ | 852 | $ | 764 | $ | 854 | $ | 756 | ||||||||
Provision for (reversal of) credit losses on mortgage loans | 37 | 104 | (9 | ) | 191 | |||||||||||
Charge-offs | (44 | ) | (18 | ) | 0 | (97 | ) | |||||||||
Recoveries | 0 | 0 | 0 | 0 | ||||||||||||
Balance, end of period | $ | 845 | $ | 850 | $ | 845 | $ | 850 |
The ratio of net charge-offs to average loans outstanding was less than one basis point for the three- and nine-month periods ended September 30, 2007 and 2006.
Investments– As indicated in Table 12, total investments (including long term investments, interest-bearing deposits, Federal funds sold and securities purchased under agreements to resell) decreased 2.5 percent from December 31, 2006 to September 30, 2007. Investments are generally used by the FHLBank for liquidity purposes as well as to leverage capital during periods when advances decline and capital stock is not likewise reduced. The average yield on investments was 5.35 percent during the third quarter of 2007, compared to 5.31 percent during the third quarter of 2006. For the nine months ended September 30, 2007 and 2006, the average yield on investments was 5.35 percent and 5.05 percent, respectively. The FOMC lowered the target overnight Federal funds rate 50 basis points to 4.75 percent in September 2007. This change, together with the steepening of the U.S. Treasury curve from the 2-year to the 10-year Treasury bond yield, resulted in a widening of spreads between the yield on investments and the FHLBank’s cost of funds for the quarter ended September 30, 2007. Much of the increase in spreads during the third quarter of 2007 can be attributed to a decrease in the FHLBank’s borrowing costs in the short-term consolidated obligation discount note market as there was a “flight to quality” during the credit crisis in the financial markets and FHLBank short-term discount notes were viewed favorably by market participants because of the FHLBanks’ GSE status. Prior to this last quarter, spreads had generally tightened as interest rates increased. The current wider spreads are expected to return to more normal levels (closer to historical averages) before the end of the fourth quarter of 2007 as financial market conditions stabilize and the flight to quality abates. See Tables 4 through 7 under “Results of Operations – Net Interest Income” in this Item 2 for further information regarding average balances and yields and changes in interest income.
36
Short-term investments used for liquidity purposes consisted primarily of deposits in banks, overnight and term Federal funds, and commercial paper. Short-term investments, which include investments with remaining maturities of one year or less, were $13.5 billion at September 30, 2007, compared to $14.5 billion at December 31, 2006. The decrease was primarily due to a decrease in Federal funds sold, which was partially offset by an increase in interest-bearing deposits. The decrease in the short-term liquidity portfolios was the result of the increase in assets created from increased demand for advances in the quarter ended September 30, 2007. The FHLBank’s long-term investment portfolio, consisting of U.S. government agency and government sponsored enterprise (GSE) securities, MBS/CMO and taxable state or local housing finance agency securities, increased from $7.1 billion at December 31, 2006 to $7.5 billion at September 30, 2007 primarily due to an increase in the FHLBank’s capital as we continue to utilize our authority to leverage capital when it is not supporting advances. Also during the third quarter, the FHLBank purchased $419.6 million in GSE issued adjustable rate MBS/CMOs, which were placed in a trading portfolio for asset/liability management purposes. The FHLBank does not intend to actively trade these securities but desires the ability to adjust its risk position as necessary through the potential future sale of these MBS/CMOs if necessary. We anticipate that this trading portfolio will be limited to adjustable rate MBS/CMOs because of the lower price volatility relative to fixed rate MBS/CMOs. For similar reasons (i.e., limiting income volatility), FHLBank management does not expect that this portfolio of adjustable rate MBS/CMOs classified as trading securities will exceed $1.0 billion in the future.
The carrying value and contractual maturity of the FHLBank’s investments as of September 30, 2007 and December 31, 2006 are summarized by security type in Tables 20 and 21 (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 20
September 30, 2007 | ||||||||||||||||||||
SecurityType | Carrying Value | Due in one year or less | Due after one year through five years | Due after five years through 10 years | Due after 10 years | |||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||
CDs | $ | 5,120,012 | $ | 5,120,012 | $ | 0 | $ | 0 | $ | 0 | ||||||||||
Bank notes | 235,000 | 235,000 | 0 | 0 | 0 | |||||||||||||||
Swap cash collateral | 69,940 | 69,940 | 0 | 0 | 0 | |||||||||||||||
MPF deposits | 25 | 25 | 0 | 0 | 0 | |||||||||||||||
Total interest-bearing deposits | 5,424,977 | 5,424,977 | 0 | 0 | 0 | |||||||||||||||
Federal funds sold: | ||||||||||||||||||||
Overnight Federal funds sold | 4,923,000 | 4,923,000 | 0 | 0 | 0 | |||||||||||||||
Term Federal funds sold | 1,310,000 | 1,310,000 | 0 | 0 | 0 | |||||||||||||||
Total Federal funds sold | 6,233,000 | 6,233,000 | 0 | 0 | 0 | |||||||||||||||
Trading securities: | ||||||||||||||||||||
Non-mortgage-backed securities: | ||||||||||||||||||||
FHLBank obligations | 15,009 | 15,009 | 0 | 0 | 0 | |||||||||||||||
Fannie Mae obligations1 | 107,340 | 0 | 52,340 | 55,000 | 0 | |||||||||||||||
Freddie Mac obligations1 | 508,713 | 0 | 410,403 | 98,310 | 0 | |||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||
Fannie Mae obligations1 | 276,450 | 0 | 0 | 0 | 276,450 | |||||||||||||||
Freddie Mac obligations1 | 135,183 | 0 | 0 | 0 | 135,183 | |||||||||||||||
Ginnie Mae obligations2 | 2,691 | 0 | 0 | 0 | 2,691 | |||||||||||||||
Total trading securities | 1,045,386 | 15,009 | 462,743 | 153,310 | 414,324 | |||||||||||||||
Held-to-maturity securities: | ||||||||||||||||||||
Non-mortgage-backed securities: | ||||||||||||||||||||
Commercial paper | 1,825,241 | 1,825,241 | 0 | 0 | 0 | |||||||||||||||
State or local housing agencies | 197,347 | 0 | 10,305 | 4,030 | 183,012 | |||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||
Fannie Mae obligations1 | 1,477,298 | 0 | 0 | 0 | 1,477,298 | |||||||||||||||
Freddie Mac obligations1 | 1,685,578 | 0 | 0 | 19,148 | 1,666,430 | |||||||||||||||
Ginnie Mae obligations2 | 45,736 | 0 | 0 | 1,310 | 44,426 | |||||||||||||||
Other – non-government | 3,082,513 | 0 | 0 | 10,690 | 3,071,823 | |||||||||||||||
Total held-to-maturity securities | 8,313,713 | 1,825,241 | 10,305 | 35,178 | 6,442,989 | |||||||||||||||
Total | $ | 21,017,076 | $ | 13,498,227 | $ | 473,048 | $ | 188,488 | $ | 6,857,313 |
_______
1 | Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) are government-sponsored enterprises (GSE). GSE securities are not guaranteed by the U.S. government. |
2 | Government National Mortgage Association (Ginnie Mae) securities are guaranteed by the U.S. government. |
37
Table 21
December 31, 2006 | ||||||||||||||||||||
SecurityType | Carrying Value | Due in one year or less | Due after one year through five years | Due after five years through 10 years | Due after 10 years | |||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||
CDs | $ | 3,985,000 | $ | 3,985,000 | $ | 0 | $ | 0 | $ | 0 | ||||||||||
Bank notes | 275,000 | 275,000 | 0 | 0 | 0 | |||||||||||||||
Swap cash collateral | 67,430 | 67,430 | 0 | 0 | 0 | |||||||||||||||
MPF deposits | 29 | 29 | 0 | 0 | 0 | |||||||||||||||
Total interest-bearing deposits | 4,327,459 | 4,327,459 | 0 | 0 | 0 | |||||||||||||||
Federal funds sold: | ||||||||||||||||||||
Overnight Federal funds sold | 5,935,500 | 5,935,500 | 0 | 0 | 0 | |||||||||||||||
Term Federal funds sold | 2,119,000 | 2,119,000 | 0 | 0 | 0 | |||||||||||||||
Total Federal funds sold | 8,054,500 | 8,054,500 | 0 | 0 | 0 | |||||||||||||||
Trading securities: | ||||||||||||||||||||
Non-mortgage-backed securities: | ||||||||||||||||||||
Federal Farm Credit Bank obligations1 | 620 | 620 | 0 | 0 | 0 | |||||||||||||||
FHLBank obligations | 15,052 | 15,052 | 0 | 0 | 0 | |||||||||||||||
Fannie Mae obligations1 | 181,611 | 75,218 | 52,063 | 54,330 | 0 | |||||||||||||||
Freddie Mac obligations1 | 503,406 | 0 | 302,781 | 200,625 | 0 | |||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||
Ginnie Mae obligations2 | 3,436 | 0 | 0 | 0 | 3,436 | |||||||||||||||
Total trading securities | 704,125 | 90,890 | 354,844 | 254,955 | 3,436 | |||||||||||||||
Available-for-sale securities: | ||||||||||||||||||||
Non-mortgage-backed securities: | ||||||||||||||||||||
U.S. Treasury obligations | 101,668 | 49,143 | 52,525 | 0 | 0 | |||||||||||||||
Total available-for-sale securities | 101,668 | 49,143 | 52,525 | 0 | 0 | |||||||||||||||
Held-to-maturity securities: | ||||||||||||||||||||
Non-mortgage-backed securities: | ||||||||||||||||||||
Commercial paper | 1,774,449 | 1,774,449 | 0 | 0 | 0 | |||||||||||||||
State or local housing agencies | 238,873 | 0 | 10,000 | 600 | 228,273 | |||||||||||||||
Fannie Mae obligations1 | 100,008 | 100,008 | 0 | 0 | 0 | |||||||||||||||
Freddie Mac obligations1 | 99,940 | 99,940 | 0 | 0 | 0 | |||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||
Fannie Mae obligations1 | 1,145,425 | 0 | 536 | 2,395 | 1,142,494 | |||||||||||||||
Freddie Mac obligations1 | 1,379,899 | 0 | 0 | 3,664 | 1,376,235 | |||||||||||||||
Ginnie Mae obligations2 | 17,118 | 0 | 275 | 2,093 | 14,750 | |||||||||||||||
Other – non-government | 3,621,671 | 0 | 0 | 0 | 3,621,671 | |||||||||||||||
Total held-to-maturity securities | 8,377,383 | 1,974,397 | 10,811 | 8,752 | 6,383,423 | |||||||||||||||
Total | $ | 21,565,135 | $ | 14,496,389 | $ | 418,180 | $ | 263,707 | $ | 6,386,859 |
_______
1 | Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) are government-sponsored enterprises (GSE). GSE securities are not guaranteed by the U.S. government. |
2 | Government National Mortgage Association (Ginnie Mae) securities are guaranteed by the U.S. government. |
Deposits– The FHLBank offers deposit programs for the benefit of its members and certain other qualifying non-members. Deposit products offered include demand and overnight deposits, short-term CDs and a limited number of non-interest-bearing products. The annualized average rate paid on deposits was 5.03 percent for the third quarter of 2007 and 5.10 percent for the third quarter of 2006. For the nine months ended September 30, 2007 and 2006, the annualized average rate paid on interest-bearing deposits was 5.11 percent and 4.71 percent, respectively. The average rate paid on deposits changed in tandem with changing short-term interest rates during and between those periods. Most deposits are demand or overnight deposits, and the FHLBank, as a matter of prudence, holds short-term assets with maturities similar to the deposits.
38
Consolidated Obligations– Consolidated obligations are the joint and several debt obligations of the 12 FHLBanks and consist of bonds and discount notes. Consolidated obligations represent the primary source of liabilities used by the FHLBank to fund advances, mortgage loans and investments. As noted under “Quantitative and Qualitative Disclosures about Market Risk – Interest Rate Risk Management” under Item 3, the FHLBank uses debt with a variety of maturities and option characteristics to manage its DOE and interest rate risk profile. The FHLBank makes extensive use of derivative transactions, executed in conjunction with specific consolidated obligation debt issues, to synthetically reconfigure funding terms and costs.
During the first nine months of 2007, the FHLBank’s total consolidated obligation balances increased as funding needs for advances and investments increased. While outstanding consolidated obligations increased 8.1 percent from December 31, 2006 to September 30, 2007 (see Table 12), the mix between discount notes and bonds changed over the period. Discount notes increased by $2.9 billion and bonds increased by $1.1 billion from December 31, 2006 to September 30, 2007. The reason for the change in the funding mix was that the cost relative to one- or three-month LIBOR of consolidated obligation bonds hedged with an interest rate swap was higher than the cost of discount notes with similar terms (refer to previous comments in this Item 2 on the cost of FHLBank discount notes during the recent credit crisis in the financial markets). The average annualized effective rate paid on consolidated obligations was 5.16 percent for the three months ended September 30, 2007 and 2006. For the nine months ended September 30, 2007 and 2006, the average annualized effective rates paid on consolidated obligations were 5.16 percent and 4.82 percent, respectively. The average effective rate paid on consolidated obligations increased in response to increasing market interest rates and increased volume in issuances of long-term fixed rate debt. The FHLBank has consciously increased the optionality in the liability portfolios used to fund assets with prepayment characteristics. However, during the last half of 2006 and first nine months of 2007, the FHLBank shifted its investment strategy from acquiring fixed rate MBS/CMOs to purchasing adjustable rate MBS/CMOs with embedded caps. The FHLBank also began purchasing interest rate caps and swaptions as economic hedges to mitigate a portion of the cap risk embedded in the adjustable rate MBS/CMOs. Management expects that the net interest spread on its MBS/CMO portfolio, adjusted for the cost of economic hedges, may decline somewhat during the remainder of 2007 unless the widening of MBS/CMO spreads relative to the FHLBank’s cost of funds as a result of uncertainties in the sub-prime mortgage market that started late in the second quarter of 2007 and continued into the third quarter persists. The FHLBank’s decline in MBS/CMO spreads during 2006 and into the first half of 2007 was the result of: (1) the extension of fixed rate MBS/CMOs coupled with the maturity of low-cost debt funding the MBS/CMO portfolio; (2) the increased costs of consolidated obligation debt with optionality relative to the yield on fixed rate and adjustable rate MBS/CMOs; and (3) the cost of caps and swaptions necessary to hedge the cap risk associated with adjustable rate MBS/CMOs. See Tables 4 through 7 under “Results of Operations – Net Interest Income” in this Item 2 for further information on the effect of interest rates on the three- and nine-month periods ended September 30, 2007.
Derivatives– All derivatives are marked to estimated fair values, netted by counterparty with any associated accrued interest and included on the statements of condition as an asset when there is a net fair value gain or as a liability when there is a net fair value loss. Fair values of the FHLBank’s derivatives fluctuate as both the interest rates and the type/term/notional amount of outstanding derivative transactions fluctuate. See Tables 32 through 35 for detailed information regarding the notional amounts and estimated fair values (excluding accrued interest) of derivative instruments.
The notional amount of total derivatives outstanding increased from $36.1 billion at December 31, 2006 to $37.9 billion at September 30, 2007. Increases occurred in interest rate swaps executed to hedge consolidated obligations (from $23.7 billion at December 31, 2006 to $25.0 billion at September 30, 2007), caps purchased as economic hedges of the caps embedded in adjustable rate MBS/CMOs (from $1.5 billion at December 31, 2006 to $2.6 billion at September 30, 2007) and swaptions purchased as economic hedges of the extension of MBS/CMOs (from $0.0 billion at December 31, 2006 to $0.3 billion at September 30, 2007). As discussed previously in this Item 2, there was a $1.1 billion increase in consolidated obligation bonds swapped to LIBOR because of the increase in adjustable rate MBS/CMO investments that reset based upon LIBOR, which accounts for much of the increase in interest rate swaps hedging consolidated obligation bonds. Also, as reflected in Tables 32 and 34, there has been a shift in the structure of interest rate swaps hedging consolidated obligation bonds with the more complex structures (fixed rate callable step-up or step-down and complex fixed rate bonds) decreasing from $13.3 billion at December 31, 2006 to $11.8 billion at September 30, 2007 and other less-complex structures (fixed rate non-callable bonds, fixed rate callable bonds, etc.) increasing from $10.4 billion at December 31, 2006 to $13.2 billion at September 30, 2007. The decrease in the complex structures, which usually represent the most favorable funding levels, is the result of both increased competition from other GSEs for issuance of these structures and a decrease in the market demand for these more complex structures.
The notional amount serves as a factor in determining periodic interest payments or cash flows received and paid, and does not represent the actual amount exchanged or the FHLBank’s exposure to credit and market risk. The amount potentially subject to credit loss is much less. See “Risk Management – Credit Risk Management” in this Item 2 for further information. Table 22 categorizes the notional amount and the estimated fair value of derivatives, excluding accrued interest, by product and type of accounting treatment. The “Fair Value” category represents hedge strategies qualifying for hedge accounting treatment. The “Economic” category represents hedge strategies not qualifying for hedge accounting treatment. Amounts at September 30, 2007 and December 31, 2006 are as follows (in thousands):
39
Table 22
September 30, 2007 | December 31, 2006 | |||||||||||||||
Notional Amount | Estimated Fair Value | Notional Amount | Estimated Fair Value | |||||||||||||
Advances: | ||||||||||||||||
Fair value | $ | 8,231,785 | $ | (59,845 | ) | $ | 8,262,752 | $ | 21,257 | |||||||
Investments: | ||||||||||||||||
Economic | 3,846,000 | 11,417 | 2,359,018 | 5,961 | ||||||||||||
Mortgage loans: | ||||||||||||||||
Fixed rate mortgage purchase commitments | 17,471 | 16 | 14,006 | (31 | ) | |||||||||||
Consolidated obligation discount notes: | ||||||||||||||||
Economic | 250,000 | 36 | 1,000,000 | 94 | ||||||||||||
Consolidated obligation bonds: | ||||||||||||||||
Fair value | 24,969,171 | (198,029 | ) | 23,744,146 | (289,599 | ) | ||||||||||
Economic | 450,000 | 487 | 450,000 | 815 | ||||||||||||
Subtotal | 25,419,171 | (197,542 | ) | 24,194,146 | (288,784 | ) | ||||||||||
Intermediary: | ||||||||||||||||
Economic | 184,454 | 122 | 245,740 | 197 | ||||||||||||
Total | $ | 37,948,881 | $ | (245,796 | ) | $ | 36,075,662 | $ | (261,306 | ) |
Total derivative fair value excluding accrued interest | $ | (245,796 | ) | $ | (261,306 | ) | |||
Net accrued interest receivable | 176,321 | 124,350 | |||||||
Net Derivative Fair Value | $ | (69,475 | ) | $ | (136,956 | ) | |||
Net derivative assets balance | $ | 120,415 | $ | 66,623 | |||||
Net derivative liabilities balance | (189,890 | ) | (203,579 | ) | |||||
Net Derivative Fair Value | $ | (69,475 | ) | $ | (136,956 | ) |
Liquidity – To meet its mission of serving as an economical short-term and long-term funding source for its members and housing associates, the FHLBank must maintain high levels of liquidity. The FHLBank is required to maintain liquidity in accordance with certain Finance Board regulations and with policies established by management and the board of directors. The FHLBank also needs liquidity to repay maturing consolidated obligations, to meet other financial obligations and to repurchase excess capital stock at its discretion, whether upon the request of a member or at its own initiative.
A primary source of the FHLBank’s 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, the FHLBank has ready access to funding at relatively favorable spreads to U.S. Treasury rates. The FHLBank is primarily and directly liable for its portion of consolidated obligations (i.e., those obligations issued on its behalf). In addition, the FHLBank is jointly and severally liable with the other 11 FHLBanks for the payment of principal and interest on the consolidated obligations of all 12 FHLBanks. The Finance Board, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations for which the FHLBank is not the primary obligor. Although it has never occurred, to the extent that an FHLBank would be required to make a payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank would be entitled to reimbursement from the non-complying FHLBank. However, if the Finance Board determines that the non-complying FHLBank is unable to satisfy its obligations, then the Finance Board may allocate the non-complying FHLBank’s outstanding consolidated obligation debt among the remaining FHLBanks on a prorata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis the Finance Board may determine.
The FHLBank’s other primary sources of liquidity include deposit inflows, repayments of advances or mortgage loans, maturing investments and interest income. Primary uses of liquidity include issuing advances, funding or purchasing mortgage loans, purchasing investments, deposit withdrawals, maturing consolidated obligations and interest expense.
40
Cash and short-term investments, including commercial paper, totaled $13.5 billion and $14.2 billion as of September 30, 2007 and December 31, 2006, respectively. The maturities of these short-term investments are structured to provide periodic cash flows to support the FHLBank’s ongoing liquidity needs. The FHLBank also maintains a portfolio of U.S. Treasury and GSE debentures that can be pledged as collateral for financing in the repurchase/resell agreement market, although the U.S. Treasury debentures were sold during the third quarter of 2007. U.S. Treasury and GSE investments totaled $0.6 billion and $1.0 billion in par value at September 30, 2007 and December 31, 2006, respectively. In order to ensure that the FHLBank can take advantage of those sources of liquidity that will affect its leverage capital requirements, the FHLBank manages its average capital ratio to stay sufficiently above its minimum regulatory and RMP requirements so that it can utilize the excess capital capacity should the need arise. While the minimum regulatory total capital requirement is 4.00 percent (25:1 asset to capital leverage), and its RMP minimum is 4.04 percent (24.75:1 asset to capital leverage), the FHLBank manages capital in such a way as to keep its total capital ratio at or above 4.17 percent (24:1 asset to capital leverage). As a result, should the need arise, the FHLBank has the capacity to borrow an amount approximately equal to at least three-quarters of its current capital position before it reaches any leverage limitation as a result of the minimum regulatory or RMP capital requirements.
In addition to the balance sheet sources of liquidity discussed previously, the FHLBank has established lines of credit with numerous counterparties in the Federal funds market as well as with the other 11 FHLBanks. The FHLBank expects to maintain a sufficient level of liquidity for the foreseeable future.
Capital – Total capital consists of Class A Common Stock, Class B Common Stock, accumulated other comprehensive income and retained earnings. Total capital increased by 7.4 percent from December 31, 2006 to September 30, 2007 (see Table 12). The majority of the increase in capital is due to the additional purchase of capital stock to support the increase in advances and to a lesser extent the increase in earnings in the third quarter of fiscal year 2007.
On May 22, 2007, the FHLBank informed its stockholders that it was making a change in how excess stock would be managed in response to the Finance Board rule on excess stock that was published in the Federal Register on December 9, 2006. See Item 1 – “Legislation and Regulatory Developments – Proposed Finance Board Rules Regarding Excess Stock and Retained Earnings” in the annual report on Form 10-K, incorporated by reference herein, for additional discussion. Under the change in its procedures, the FHLBank implemented: (1) an exchange of all excess Class B Common Stock to Class A Common Stock on May 31, 2007, thus causing each stockholder to start at the same point with no excess Class B Common Stock, and (2) an exchange of all Class B Common Stock in excess of $50,000 to Class A Common Stock on each Wednesday (or following business day if a holiday) beginning in July 2007. In addition, at the end of each quarter the FHLBank may exercise its rights under the capital plan to execute a mandatory repurchase of excess stock if there is a risk of exceeding the one percent of FHLBank assets limitation on excess stock established by the Finance Board that would prevent the FHLBank from paying its quarterly dividend in the form of capital stock. See Item 1 – “Legislation and Regulatory Developments – Proposed Finance Board Rules Regarding Excess Stock and Retained Earnings” in the annual report on Form 10-K, incorporated by reference herein, for additional discussion. In connection with this announcement, the FHLBank began the weekly exchanges on July 25, 2007 and has conducted an exchange on each Wednesday thereafter.
Table 23 presents information on member institutions holding five percent or more of the total outstanding capital stock, which includes mandatorily redeemable capital stock, of the FHLBank as of September 30, 2007.
Table 23
Borrower Name | Address | City | State | Number of Shares | Percent of Total | ||||||
U.S. Central Federal Credit Union | 9701 Renner Blvd | Lenexa | KS | 3,171,105 | 14.5 | % | |||||
MidFirst Bank | 501 NW Grand Blvd | Oklahoma City | OK | 2,945,807 | 13.5 | ||||||
Security Life of Denver Ins. Co. | 1290 Broadway | Denver | CO | 1,593,825 | 7.3 | ||||||
Capitol Federal Savings Bank | 700 S Kansas Ave | Topeka | KS | 1,396,608 | 6.4 | ||||||
Total | 9,107,345 | 41.7 | % |
Table 24 presents information on member institutions holding five percent or more of the total outstanding capital stock, which includes mandatorily redeemable capital stock, of the FHLBank as of December 31, 2006.
Table 24
Borrower Name | Address | City | State | Number of Shares | Percent of Total | ||||||
U.S. Central Federal Credit Union | 9701 Renner Blvd | Lenexa | KS | 3,036,998 | 14.8 | % | |||||
MidFirst Bank | 501 NW Grand Blvd | Oklahoma City | OK | 2,905,081 | 14.1 | ||||||
Capitol Federal Savings Bank | 700 S Kansas Ave | Topeka | KS | 1,678,291 | 8.2 | ||||||
Security Life of Denver Ins. Co. | 1290 Broadway | Denver | CO | 1,183,382 | 5.8 | ||||||
TOTAL | 8,803,752 | 42.9 | % |
The FHLBank is subject to three capital requirements under provisions of the Gramm-Leach-Bliley (GLB) Act, the Finance Board’s capital structure regulation and the FHLBank’s capital plan: (1) a risk-based capital requirement, (2) a total capital requirement and (3) a leverage capital requirement. The FHLBank was in compliance with all three capital requirements as of September 30, 2007 (see Note 10 in the Notes to Financial Statements under Item 1).
41
Capital Distributions – Dividends may be paid in cash or Class B Common Stock as authorized by the FHLBank’s board of directors. Quarterly dividends can be paid out of current and previously retained earnings, subject to Finance Board regulation and the FHLBank’s capital plan. Dividends were paid at average annualized rates of 6.19 percent and 5.87 percent for the quarters ended September 30, 2007 and 2006, respectively.
The FHLBank has the ability under its capital plan to pay different dividend rates to the holders of Class A Common Stock and Class B Common Stock. This differential is implemented through a mechanism referred to as the dividend parity threshold. The current dividend parity threshold is equal to the average three-month LIBOR for a dividend period minus 100 basis points. In September 2007, the FHLBank’s board of directors changed the dividend parity threshold to be equal to the average effective overnight Federal funds rate minus 100 basis points. In accordance with the announcement to members and the provisions of the FHLBank’s capital plan, this revised dividend parity threshold will be used to calculate any FHLBank dividends paid on or after December 27, 2007.
FHLBank management anticipates that dividend rates on Class A Common Stock will be close to or equal to the newly established dividend parity threshold for future dividend periods and that the differential between the two classes of stock will stay the same or increase slightly, subject to sufficient FHLBank earnings to meet retained earnings targets and still pay such dividends. While there is no assurance that the FHLBank’s board of directors will not change the dividend parity threshold in the future, the capital plan requires that the FHLBank 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.
Table 25 presents dividends paid by type for the three- and nine-month periods ended September 30, 2007 and 2006 (in thousands):
Table 25
For the Three-Month Periods Ended | For the Nine-Month Periods Ended | |||||||||||||||||||||||
Period End | Dividends Paid in Cash | Dividends Paid in Capital Stock | Total Dividends Paid | Dividends Paid in Cash | Dividends Paid in Capital Stock | Total Dividends Paid | ||||||||||||||||||
September 30, 20071,2 | $ | 84 | $ | 30,429 | $ | 30,513 | $ | 287 | $ | 84,259 | $ | 84,546 | ||||||||||||
September 30, 20061,2 | 91 | 26,113 | 26,204 | 265 | 73,247 | 73,512 |
___________
1 | The cash dividends listed for 2006 and 2007 represent cash dividends paid for partial shares. Stock dividends are paid in whole shares. |
2 | The FHLBank implemented SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, effective January 1, 2004. For purposes of this table, dividends paid for any shares that are mandatorily redeemable have been treated as interest expense and are not treated as dividends. |
The FHLBank expects to continue paying dividends primarily in capital stock for the remainder of 2007, but this may change depending on the impact of the Finance Board rule on excess stock that was published in the Federal Register on December 9, 2006. See Item 1 – “Legislation and Regulatory Developments – Proposed Finance Board Rules Regarding Excess Stock and Retained Earnings” in the annual report on Form 10-K, incorporated by reference herein, for additional discussion. If the FHLBank were to change its prior practice and pay dividends in the form of cash, it would utilize liquidity resources. Payment of cash dividends would not have a significant impact on the FHLBank’s liquidity position.
Proper identification, assessment and management of risks enables stakeholders to have confidence in the FHLBank’s ability to serve its members, earn a profit, compete in the industry and prosper over the long term. Active risk management continues to be an essential part of the FHLBank’s operations and a key determinant of its ability to maintain earnings to meet retained earnings targets and return a reasonable dividend to its stockholders. The FHLBank maintains comprehensive risk management processes to facilitate, control and monitor risk taking. Periodic reviews by internal auditors, Finance Board examiners and independent accountants subject the FHLBank’s practices to additional scrutiny, further strengthening the process.
Effective risk management programs include not only conformance to risk management best practices by management but also incorporate board of director oversight. The FHLBank’s board of directors plays an active role in the enterprise risk management (ERM) process by regularly reviewing risk management policies and reports on controls. In addition to the annual and business unit risk assessment reports, the board of directors reviews the RMP on at least an annual basis. Various management committees, including the Financial Risk Analysis Committee (FRAC) and the Asset/Liability Committee (ALCO), oversee the FHLBank’s risk management process. For more detailed information, see Item 7A – “Quantitative and Qualitative Disclosures About Market Risk” in the annual report on Form 10-K, incorporated by reference herein.
Credit Risk Management– Credit risk is defined as the risk that counterparties to the FHLBank’s transactions will not meet their contractual obligations. The FHLBank manages credit risk by following established policies, evaluating the creditworthiness of its counterparties and utilizing collateral agreements and settlement netting for derivative transactions. The most important step in the management of credit risk is the initial decision to extend credit. Continuous monitoring of counterparties is performed for all areas where the FHLBank is exposed to credit risk, whether that is through lending, investing or derivative activities.
The FHLBank’s credit exposure to derivative counterparties, before considering collateral, was approximately $120.4 million and $66.6 million at September 30, 2007 and December 31, 2006, respectively. In determining credit exposure, the FHLBank considers accrued interest receivables and payables as well as the legal right to net swap transactions by counterparty. The FHLBank held collateral from its derivative counterparties valued at $43.2 million and $4.8 million at September 30, 2007 and December 31, 2006, respectively. The FHLBank’s net credit exposure after collateral was approximately $77.2 million and $61.8 million at September 30, 2007 and December 31, 2006, respectively. Additionally, collateral with respect to derivatives with member institutions includes collateral assigned to the FHLBank, as evidenced by a written security agreement and held by the member institution for the benefit of the FHLBank.
42
Derivative counterparty credit exposure by whole-letter rating (in the event of a split rating, the FHLBank uses the lowest rating published by Moody’s or S&P) as of September 30, 2007 is indicated in Table 26 (in thousands):
Table 26
AAA | AA | A | Member1 | Total | ||||||||||||||||
Total net exposure at fair value | $ | 2,723 | $ | 109,186 | $ | 5,942 | $ | 2,564 | $ | 120,415 | ||||||||||
Collateral held | 0 | 40,679 | 0 | 2,564 | 43,243 | |||||||||||||||
Net exposure after collateral | $ | 2,723 | $ | 68,507 | $ | 5,942 | $ | 0 | $ | 77,172 | ||||||||||
Notional amount | $ | 978,194 | $ | 29,030,389 | $ | 7,830,600 | $ | 109,698 | $ | 37,948,881 |
_______
1 | Collateral held with respect to derivatives with member institutions represents either collateral physically held by or on behalf of the FHLBank or collateral assigned to the FHLBank as evidenced by a written security agreement and held by the member institution for the benefit of the FHLBank. |
Derivative counterparty credit exposure by whole-letter rating (in the event of a split rating, the FHLBank uses the lowest rating published by Moody’s or S&P) as of December 31, 2006 is indicated in Table 27 (in thousands):
Table 27
AAA | AA | A | Member1 | Total | ||||||||||||||||
Total net exposure at fair value | $ | 205 | $ | 62,977 | $ | 0 | $ | 3,441 | $ | 66,623 | ||||||||||
Collateral held | 0 | 1,405 | 0 | 3,441 | 4,846 | |||||||||||||||
Net exposure after collateral | $ | 205 | $ | 61,572 | $ | 0 | $ | 0 | $ | 61,777 | ||||||||||
Notional amount | $ | 1,123,194 | $ | 26,677,692 | $ | 8,137,900 | $ | 136,876 | $ | 36,075,662 |
1 | Collateral held with respect to derivatives with member institutions represents either collateral physically held by or on behalf of the FHLBank or collateral assigned to the FHLBank as evidenced by a written security agreement and held by the member institution for the benefit of the FHLBank. |
Table 28 presents the counterparties that represent five percent or more of net exposure after collateral and their ratings (in the event of a split rating, the FHLBank uses the lowest rating published by Moody’s or S&P) as of September 30, 2007:
Table 28
Counterparty Name | Counterparty Rating | Percent of Total Net Exposure at Fair Value | Percent of Net Exposure After Collateral | ||||||
Barclays Bank PLC | AA | 12.6 | % | 19.7 | % | ||||
Goldman Sachs Capital Markets | AA- | 45.4 | 18.1 | ||||||
Credit Suisse International | AA- | 8.4 | 13.1 | ||||||
Royal Bank of Scotland PLC | AA | 7.3 | 11.4 | ||||||
ABN-AMRO Bank NV | AA- | 5.4 | 8.4 | ||||||
Dresdner Bank | A+ | 4.9 | 7.6 | ||||||
Bank of New York | AA- | 3.6 | 5.7 | ||||||
Royal Bank of Canada | AA- | 3.3 | 5.1 | ||||||
All other counterparties | 9.1 | 10.9 |
43
Table 29 presents the counterparties that represent five percent or more of net exposure after collateral and their ratings (in the event of a split rating the FHLBank uses the lowest rating published by Moody’s or S&P) as of December 31, 2006:
Table 29
Counterparty Name | Counterparty Rating | Percent of Total Net Exposure at Fair Value | Percent of Net Exposure After Collateral | ||||||
Barclays Bank PLC | AA | 22.5 | % | 24.3 | % | ||||
Credit Suisse International | AA- | 22.4 | 24.1 | ||||||
Goldman Sachs Capital Markets | AA- | 22.2 | 21.6 | ||||||
ABN-AMRO Bank NV | AA- | 11.3 | 12.2 | ||||||
Royal Bank of Canada | AA- | 7.2 | 7.8 | ||||||
All other counterparties | 14.4 | 10.0 |
Liquidity Risk Management– Maintaining the ability to meet obligations as they come due and to meet the credit needs of the FHLBank’s members and housing associates in a timely and cost-efficient manner is the primary objective of managing liquidity risk. The FHLBank seeks to be in a position to meet its customers’ credit 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 defined as sources of cash from both the FHLBank’s ongoing access to the capital markets and its holding of liquid assets. The FHLBank manages its exposure to operational liquidity risk by maintaining appropriate daily average liquidity levels above the thresholds established by the RMP. The FHLBank is also required to manage its contingency liquidity needs by maintaining a daily liquidity level above certain thresholds also outlined in the RMP and by Finance Board regulations. The FHLBank maintained ready access to the capital markets during the third quarter of 2007 at very favorable rates in spite of the liquidity/credit crisis in the financial markets and increased member borrowing needs. We experienced no liquidity issues and, in fact, the FHLBank System’s borrowing costs decreased relative to other AAA-rated investment alternatives. As reflected in Tables 4 and 5, the FHLBank’s net interest spreads improved during the quarter. The current favorable borrowing costs are expected to return to more normal levels relative to other AAA-rated alternatives (closer to historical averages) before the end of the fourth quarter of 2007 as capital market conditions stabilize and the flight to quality subsides. For more detailed information on the FHLBank’s liquidity risk management, see Item 7A – “Quantitative and Qualitative Disclosures About Market Risk – Risk Management – Liquidity Risk Management” in the annual report on Form 10-K, incorporated by reference herein.
The preparation of the FHLBank’s financial statements in accordance with GAAP requires management to make a number of judgments and assumptions that affect the FHLBank’s reported results and disclosures. Several of the FHLBank’s accounting policies are inherently subject to valuation assumptions and other subjective assessments and are more critical than others in terms of their importance to the FHLBank’s results. These assumptions and assessments include the following:
· | Accounting related to derivatives; |
· | Fair-value determinations; |
· | Projecting mortgage prepayments to calculate the amortization of the deferred price components of mortgages and mortgage-related securities held in portfolio; and |
· | Determining the adequacy of the allowance for credit losses. |
Changes in any of the estimates and assumptions underlying the FHLBank’s critical accounting policies could have a material effect on the FHLBank’s financial statements.
The FHLBank’s accounting policies that management believes are the most critical to an understanding of the FHLBank’s 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 the annual report on Form 10-K, incorporated by reference herein. There were no substantial changes to the FHLBank’s critical accounting policies and estimates during the quarter ended September 30, 2007.
Issuance of SFAS 157: In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (herein referred to as “SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS 157 applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value. Accordingly, SFAS 157 does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 (January 1, 2008 for the FHLBank), and interim periods within those fiscal years. The FHLBank does not expect the adoption of this statement to have a material impact on its financial condition, results of operations or cash flows.
Issuance of SFAS 159: In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115 (herein referred to as “SFAS 159”). SFAS 159 permits the FHLBank to choose to measure eligible financial instruments and certain other items at fair value at specified election dates. Changes in the fair value for the selected items will be recorded in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument, with a few exceptions, is irrevocable and is applied to the entire instrument. SFAS 159 is effective as of the beginning of the FHLBank’s first fiscal year that begins after November 15, 2007 (January 1, 2008 for the FHLBank). The FHLBank has not yet determined the effect that the implementation of SFAS 159 will have on its financial condition, results of operations or cash flows.
44
Issuance of FSP FIN 39-1: In May 2007, the FASB issued FASB Staff Position (FSP) FIN 39-1 “Amendment of FASB Interpretation No. 39” (herein referred to as “FSP FIN 39-1”). FSP FIN 39-1 amends FASB Interpretation Number (FIN) 39 “Offsetting of Amounts Related to Certain Contracts – An interpretation of APB Opinion No. 10 and FASB Statement No. 105” (herein referred to as “FIN 39”), to replace the terms conditional contracts and exchange contracts with the term derivative instruments as defined in SFAS 133. FSP FIN 39-1 permits the FHLBank to offset fair value amounts recognized for cash collateral receivable or payable against fair value amounts recognized for derivative instruments executed with the same counterparty under master netting agreements in accordance with paragraph 10 of FIN 39. FSP FIN 39-1 requires the FHLBank to consistently offset the derivative fair value and the collateral fair value. The FHLBank will be required to recognize the effects of applying FSP FIN 39-1 through retrospective application to all financial statements presented unless it is impracticable to do so. The FHLBank, upon adoption of FSP FIN 39-1, will be permitted to change its accounting policy to offset or not offset fair value amounts recognized for derivative instruments. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007 (January 1, 2008 for the FHLBank). The FHLBank is currently assessing the impact that adoption of this statement will have on its financial condition, results of operations and cash flows.
There were no material changes to the previously disclosed legislation and regulatory developments during the quarter ended September 30, 2007.
Interest Rate Risk Management– The FHLBank measures interest rate risk exposure by various methods, including the calculation of duration of equity and market value of equity.
Duration of Equity (DOE): DOE aggregates the estimated sensitivity of market value for each of the FHLBank’s financial assets and liabilities to changes in interest rates. In essence, DOE indicates the sensitivity of theoretical market value of equity to changes in interest rates. A positive DOE generally indicates that the FHLBank has a degree of interest rate risk exposure in a rising interest rate environment, and a negative DOE indicates a degree of interest rate risk exposure in a declining interest rate environment. Higher DOE numbers, whether positive or negative, indicate greater volatility of market value of equity in response to changing interest rates.
The FHLBank’s duration of equity for recent quarter end dates is indicated in Table 30.
Table 30
Duration of Equity | ||||||||||||||||||||
Date | Up 200 Bps | Up 100 Bps | Base | Down 100 Bps | Down 200 Bps | |||||||||||||||
09/30/2007 | 4.2 | 4.0 | 2.8 | 0.6 | -2.3 | |||||||||||||||
06/30/2007 | 5.0 | 4.6 | 3.7 | 1.1 | -2.6 | |||||||||||||||
03/31/2007 | 5.4 | 4.3 | 2.3 | -1.3 | -3.9 | |||||||||||||||
12/31/2006 | 5.4 | 4.5 | 2.8 | -0.6 | -3.0 | |||||||||||||||
09/30/2006 | 5.6 | 4.7 | 2.9 | -0.7 | -3.5 |
The DOE for September 30, 2007 of +2.8 in the base scenario is outside management’s typical operating range of ±2.5, but is well within the board of directors’ approved limits of ±5.0. The base scenario DOE returned to the level that it had been on December 31, 2006, primarily because of asset/liability actions taken by management (primarily the issuance of both callable and non-callable fixed rate consolidated obligations) as well as the change in interest rates from December to September. The yield on the 10-year U.S. Treasury note decreased from 4.70 percent at December 31, 2006 to 4.59 percent at September 30, 2007. Along with the decrease in interest rates and the shift to a positively sloping yield curve during the period, there was also an increase in the volatility of interest rates which tended to increase the FHLBank’s risk exposure to the caps embedded in adjustable rate MBS/CMOs. FHLBank management issued long-term, fixed rate consolidated obligations and purchased out-of-the-money interest rate caps and swaptions to help offset the extension in the duration of its assets and thus ensure that DOE remains well within the approved limits, especially in the up shock scenarios. The FHLBank also purchased interest rate caps and floors to partially offset the negative convexity of the FHLBank’s mortgage assets and the effects of the interest rate caps embedded in the adjustable rate CMOs acquired during the first nine months of the year. Management continues to closely monitor the FHLBank’s DOE and expects to take additional steps in the fourth quarter of 2007 to manage the base and up-shock scenario DOEs, including the issuance of both callable and non-callable fixed rate consolidated obligations. Any asset/liability actions, such as entering into derivatives or issuing additional callable and non-callable fixed rate consolidated obligations, will be targeted to reduce the FHLBank’s overall risk profile, but over time such actions are likely to increase the FHLBank’s cost of funds and thus negatively affect its future profitability.
In calculating DOE, the FHLBank also calculates its duration gap, which is the difference between the duration of its assets and the duration of its liabilities. The FHLBank’s base duration gap was 1.5 months and 1.3 months at September 30, 2007 and December 31, 2006, respectively. The increase in duration gap during the first nine months of the year was the result of a slight decrease in the leverage ratio based on market values. All 12 FHLBanks are required to submit a duration gap number to the Office of Finance as part of the quarterly reporting process created by the Finance Board. Management believes that the potential exists for duration gap to substantially understate the level of interest rate risk being taken and that DOE is a more reliable measure of the FHLBank’s interest rate risk.
45
Market Value of Equity: Market value of equity is the net value of the FHLBank’s assets and liabilities. Estimating sensitivity of the FHLBank’s market value of equity to changes in interest rates is another measure of interest rate risk. However, market value of equity should not be considered indicative of the market value of the FHLBank as a going concern or the value of the FHLBank in a liquidation scenario. The FHLBank maintains a market value of equity within limits specified by the board of directors in the RMP, which specifies that the market value of equity under a ±200 basis-point instantaneous shock in interest rates shall not decline by more than 15 percent from the market value of equity measured in the unchanged interest rate scenario. Table 31 expresses the market value of equity as a percent of book value of equity for the base case and for ±100 basis-point and ±200 basis-point instantaneous interest rate shock scenarios. In all cases, based on the ±200 basis-point shocks, the market value as a percent of book value equals or exceeds 85 percent of the market value of equity measured in the unchanged interest rate scenario. The decrease in this ratio in almost all scenarios from December 31, 2006 to September 30, 2007 is a function of: (1) the issuance of long-term, fixed rate consolidated obligations funding the fixed rate MBS and mortgage loan portfolios, (2) a decrease in the market value of MBS/CMOs and MPF loans as a result of credit concerns related to sub-prime and Alt-A mortgages, and (3) reduced consolidated obligation borrowing costs, which, while it is favorable for future business and spreads, results in unrealized losses on existing consolidated obligation debt. The FHLBank has minimal exposure to sub-prime and Alt-A mortgage loans in its MBS/CMO and MPF portfolios, but the prices of all mortgage assets are currently depressed. The FHLBank was in compliance with its RMP limitation at the end of each quarter shown.
Table 31 presents market value of equity as a percent of the book value of equity for the quarter end dates indicated.
Table 31
Market Value of Equity as a Percent of Book Value of Equity | ||||||||||||||||||||
Date | Up 200 Bps | Up 100 Bps | Base | Down 100 Bps | Down 200 Bps | |||||||||||||||
09/30/2007 | 85 | 89 | 92 | 94 | 93 | |||||||||||||||
06/30/2007 | 85 | 89 | 93 | 95 | 95 | |||||||||||||||
03/31/2007 | 88 | 92 | 95 | 96 | 93 | |||||||||||||||
12/31/2006 | 87 | 92 | 95 | 96 | 94 | |||||||||||||||
09/30/2006 | 86 | 91 | 95 | 96 | 93 |
Detail of Derivative Instruments by Type of Instrument by Type of Risk: Various types of derivative instruments are utilized by the FHLBank to mitigate the interest rate risks described in the preceding section. The FHLBank currently employs derivative instruments by designating them as either a fair value or cash flow hedge of an underlying financial instrument or a forecasted transaction; by acting as an intermediary; or in asset/liability management (i.e., an economic hedge). An economic hedge is defined as a derivative hedging specific or non-specific underlying assets, liabilities or firm commitments that does not qualify for hedge accounting but is an acceptable hedging strategy under the FHLBank’s RMP. Hedges, designated as fair value or cash flow, are further evaluated to determine whether shortcut hedge accounting, as permitted under SFAS 133, paragraph 68, can be applied. For hedging relationships that do not meet the established criteria for shortcut hedge accounting, the FHLBank formally assesses (both at the hedge’s inception and monthly on an ongoing basis) whether the derivatives that are used have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. The FHLBank typically uses rolling regression analyses to assess the effectiveness of its long haul hedges. See Note 15 – Derivatives and Hedging Activities in the Notes to Financial Statements in the annual report on Form 10-K for information on effectiveness methods used by the FHLBank. The FHLBank determines the hedge accounting to be applied when the hedge is entered into by completing detailed documentation, which includes a checklist with criteria for hedge accounting and additional criteria for shortcut hedge accounting.
46
Table 32 presents the notional amount, accounting designation and effectiveness method for derivative instruments by risk and by type of derivative used to address the noted risk as of September 30, 2007 (in thousands):
Table 32
Notional Amount | ||||||||||||||||||||||
Risk Hedged | Accounting Designation | Effectiveness Method | Interest Rate Swaps | Caps/Floors | Swaptions | Purchase Commitments | Total | |||||||||||||||
Advances | ||||||||||||||||||||||
Interest rate risk associated with embedded caps and floors | Fair Value Hedge | Dollar Offset | $ | 0 | $ | 142,500 | $ | 0 | $ | 0 | $ | 142,500 | ||||||||||
Interest rate risk associated with fixed rate non-callable advances | Fair Value Hedge | Shortcut | 2,840,000 | 0 | 0 | 0 | 2,840,000 | |||||||||||||||
Interest rate risk associated with fixed rate callable advances | Fair Value Hedge | Rolling Regression | 16,500 | 0 | 0 | 0 | 16,500 | |||||||||||||||
Interest rate risk associated with fixed rate convertible advances | Fair Value Hedge | Rolling Regression | 5,232,785 | 0 | 0 | 0 | 5,232,785 | |||||||||||||||
Investments | ||||||||||||||||||||||
Fair value risk associated with fixed rate non-MBS trading investments | Economic Hedge | Not Applicable | 620,000 | 0 | 0 | 0 | 620,000 | |||||||||||||||
Risk of changes in interest rates associated with adjustable rate MBS with embedded caps | Economic Hedge | Not Applicable | 0 | 2,626,000 | 0 | 0 | 2,626,000 | |||||||||||||||
Floors hedging duration of equity risk in a declining interest rate environment | Economic Hedge | Not Applicable | 0 | 300,000 | 0 | 0 | 300,000 | |||||||||||||||
Interest rate risk associated with duration changes in a rising interest rate environment | Economic Hedge | Not Applicable | 0 | 0 | 300,000 | 0 | 300,000 | |||||||||||||||
Mortgage Loans Held for Portfolio | ||||||||||||||||||||||
Fair value risk associated with fixed rate mortgage purchase commitments | Economic Hedge | Not Applicable | 0 | 0 | 0 | 17,471 | 17,471 | |||||||||||||||
Consolidated Obligation Discount Notes | ||||||||||||||||||||||
Risk of changes in interest rates created by asset/liability mismatches | Economic Hedge | Not Applicable | 250,000 | 0 | 0 | 0 | 250,000 | |||||||||||||||
Consolidated Obligation Bonds | ||||||||||||||||||||||
Risk of changes in interest rates creating unacceptable duration changes or increasing costs of funds | Economic Hedge | Not Applicable | 450,000 | 0 | 0 | 0 | 450,000 | |||||||||||||||
Interest rate risk associated with fixed rate callable consolidated obligations | Fair Value Hedge | Rolling Regression | 5,311,000 | 0 | 0 | 0 | 5,311,000 | |||||||||||||||
Interest rate risk associated with fixed rate callable consolidated obligations | Fair Value Hedge | Shortcut | 4,260,100 | 0 | 0 | 0 | 4,260,100 | |||||||||||||||
Interest rate risk associated with fixed rate non-callable consolidated obligations | Fair Value Hedge | Rolling Regression | 375,000 | 0 | 0 | 0 | 375,000 | |||||||||||||||
Interest rate risk associated with fixed rate non-callable consolidated obligations | Fair Value Hedge | Shortcut | 3,089,260 | 0 | 0 | 0 | 3,089,260 | |||||||||||||||
Interest rate risk associated with fixed rate callable step-up or step-down consolidated obligations | Fair Value Hedge | Rolling Regression | 6,921,000 | 0 | 0 | 0 | 6,921,000 | |||||||||||||||
Interest rate risk associated with zero-coupon callable consolidated obligations | Fair Value Hedge | Rolling Regression | 104,536 | 0 | 0 | 0 | 104,536 | |||||||||||||||
Interest rate risk associated with complex fixed rate consolidated obligations | Fair Value Hedge | Rolling Regression | 4,908,275 | 0 | 0 | 0 | 4,908,275 | |||||||||||||||
Intermediary Derivatives | ||||||||||||||||||||||
Interest rate risk associated with intermediary derivative instruments with members | Economic Hedge | Not Applicable | 184,454 | 0 | 0 | 0 | 184,454 | |||||||||||||||
Total | $ | 34,562,910 | $ | 3,068,500 | $ | 300,000 | $ | 17,471 | $ | 37,948,881 |
47
Table 33
Fair Value | ||||||||||||||||||||||
Risk Hedged | Accounting Designation | Effectiveness Method | Interest Rate Swaps | Caps/Floors | Swaptions | Purchase Commitments | Total | |||||||||||||||
Advances | $ | |||||||||||||||||||||
Interest rate risk associated with embedded caps and floors | Fair Value Hedge | Dollar Offset | $ | 0 | $ | 142 | $ | 0 | $ | 0 | $ | 142 | ||||||||||
Interest rate risk associated with fixed rate non-callable advances | Fair Value Hedge | Shortcut | 5,803 | 0 | 0 | 0 | 5,803 | |||||||||||||||
Interest rate risk associated with fixed rate callable advances | Fair Value Hedge | Rolling Regression | 27 | 0 | 0 | 0 | 27 | |||||||||||||||
Interest rate risk associated with fixed rate convertible advances | Fair Value Hedge | Rolling Regression | (65,817 | ) | 0 | 0 | 0 | (65,817 | ) | |||||||||||||
Investments | ||||||||||||||||||||||
Fair value risk associated with fixed rate non-MBS trading investments | Economic Hedge | Not Applicable | (5,541 | ) | 0 | 0 | 0 | (5,541 | ) | |||||||||||||
Risk of changes in interest rates associated with adjustable rate MBS with embedded caps | Economic Hedge | Not Applicable | 0 | 12,463 | 0 | 0 | 12,463 | |||||||||||||||
Floors hedging duration of equity risk in a declining interest rate environment | Economic Hedge | Not Applicable | 0 | 4,495 | 0 | 0 | 4,495 | |||||||||||||||
Interest rate risk associated with duration changes in a rising interest rate environment | Economic Hedge | Not Applicable | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Mortgage Loans Held for Portfolio | ||||||||||||||||||||||
Fair value risk associated with fixed rate mortgage purchase commitments | Economic Hedge | Not Applicable | 0 | 0 | 0 | 16 | 16 | |||||||||||||||
Consolidated Obligation Discount Notes | ||||||||||||||||||||||
Risk of changes in interest rates created by asset/liability mismatches | Economic Hedge | Not Applicable | 36 | 0 | 0 | 0 | 36 | |||||||||||||||
Consolidated Obligation Bonds | ||||||||||||||||||||||
Risk of changes in interest rates creating unacceptable duration changes or increasing costs of funds | Economic Hedge | Not Applicable | 487 | 0 | 0 | 0 | 487 | |||||||||||||||
Interest rate risk associated with fixed rate callable consolidated obligations | Fair Value Hedge | Rolling Regression | (15,565 | ) | 0 | 0 | 0 | (15,565 | ) | |||||||||||||
Interest rate risk associated with fixed rate callable consolidated obligations | Fair Value Hedge | Shortcut | (6,886 | ) | 0 | 0 | 0 | (6,886 | ) | |||||||||||||
Interest rate risk associated with fixed rate non-callable consolidated obligations | Fair Value Hedge | Rolling Regression | 3,836 | 0 | 0 | 0 | 3,836 | |||||||||||||||
Interest rate risk associated with fixed rate non-callable consolidated obligations | Fair Value Hedge | Shortcut | 18,939 | 0 | 0 | 0 | 18,939 | |||||||||||||||
Interest rate risk associated with fixed rate callable step-up or step-down consolidated obligations | Fair Value Hedge | Rolling Regression | (69,040 | ) | 0 | 0 | 0 | (69,040 | ) | |||||||||||||
Interest rate risk associated with zero-coupon callable consolidated obligations | Fair Value Hedge | Rolling Regression | 72,330 | 0 | 0 | 0 | 72,330 | |||||||||||||||
Interest rate risk associated with complex fixed rate consolidated obligations | Fair Value Hedge | Rolling Regression | (201,643 | ) | 0 | 0 | 0 | (201,643 | ) | |||||||||||||
Intermediary Derivatives | ||||||||||||||||||||||
Interest rate risk associated with intermediary derivative instruments with members | Economic Hedge | Not Applicable | 122 | 0 | 0 | 0 | 122 | |||||||||||||||
Total | $ | (262,912 | ) | $ | 17,100 | $ | 0 | $ | 16 | $ | (245,796 | ) |
48
Table 34 presents the notional amount of derivative instruments by risk and by type of instrument used to address the noted risk as of December 31, 2006 (in thousands):
Table 34
Notional Amount | ||||||||||||||||||
Risk Hedged | Accounting Designation | Effectiveness Method | Interest Rate Swaps | Caps/Floors | Purchase Commitments | Total | ||||||||||||
Advances | ||||||||||||||||||
Interest rate risk associated with embedded caps and floors | Fair Value Hedge | Dollar Offset | $ | 0 | $ | 217,500 | $ | 0 | $ | 217,500 | ||||||||
Interest rate risk associated with fixed rate non-callable advances | Fair Value Hedge | Shortcut | 2,995,000 | 0 | 0 | 2,995,000 | ||||||||||||
Interest rate risk associated with fixed rate convertible advances | Fair Value Hedge | Rolling Regression | 5,050,252 | 0 | 0 | 5,050,252 | ||||||||||||
Investments | ||||||||||||||||||
Fair value risk associated with fixed rate trading investments | Economic Hedge | Not Applicable | 699,018 | 0 | 0 | 699,018 | ||||||||||||
Risk of changes in interest rates associated with adjustable rate MBS with embedded caps | Economic Hedge | Not Applicable | 0 | 1,460,000 | 0 | 1,460,000 | ||||||||||||
Floors hedging duration of equity risk in a declining interest rate environment | Economic Hedge | Not Applicable | 0 | 200,000 | 0 | 200,000 | ||||||||||||
Mortgage Loans Held for Portfolio | ||||||||||||||||||
Fair value risk associated with fixed rate mortgage purchase commitments | Economic Hedge | Not Applicable | 0 | 0 | 14,006 | 14,006 | ||||||||||||
Consolidated Obligation Discount Notes | ||||||||||||||||||
Risk of changes in interest rates created by asset/liability mismatches | Economic Hedge | Not Applicable | 1,000,000 | 0 | 0 | 1,000,000 | ||||||||||||
Consolidated Obligation Bonds | ||||||||||||||||||
Risk of changes in interest rates creating unacceptable duration changes or increasing costs of funds | Economic Hedge | Not Applicable | 450,000 | 0 | 0 | 450,000 | ||||||||||||
Interest rate risk associated with fixed rate callable consolidated obligations | Fair Value Hedge | Rolling Regression | 4,741,000 | 0 | 0 | 4,741,000 | ||||||||||||
Interest rate risk associated with fixed rate callable consolidated obligations | Fair Value Hedge | Shortcut | 3,635,100 | 0 | 0 | 3,635,100 | ||||||||||||
Interest rate risk associated with fixed rate non-callable consolidated obligations | Fair Value Hedge | Rolling Regression | 125,000 | 0 | 0 | 125,000 | ||||||||||||
Interest rate risk associated with fixed rate non-callable consolidated obligations | Fair Value Hedge | Shortcut | 1,835,705 | 0 | 0 | 1,835,705 | ||||||||||||
Interest rate risk associated with fixed rate callable step-up or step-down consolidated obligations | Fair Value Hedge | Rolling Regression | 8,414,430 | 0 | 0 | 8,414,430 | ||||||||||||
Interest rate risk associated with zero-coupon callable consolidated obligations | Fair Value Hedge | Rolling Regression | 104,536 | 0 | 0 | 104,536 | ||||||||||||
Interest rate risk associated with complex fixed rate consolidated obligations | Fair Value Hedge | Rolling Regression | 4,888,375 | 0 | 0 | 4,888,375 | ||||||||||||
Intermediary Derivatives | ||||||||||||||||||
Interest rate risk associated with intermediary derivative instruments with members | Economic Hedge | Not Applicable | 245,740 | 0 | 0 | 245,740 | ||||||||||||
Total | $ | 34,184,156 | $ | 1,877,500 | $ | 14,006 | $ | 36,075,662 |
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Table 35 presents the fair value (excluding accrued interest) of derivative instruments by risk and by type of instrument used to address the noted risk as of December 31, 2006 (in thousands):
Table 35
Fair Value | ||||||||||||||||||
Risk Hedged | Accounting Designation | Effectiveness Method | Interest Rate Swaps | Caps/Floors | Purchase Commitments | Total | ||||||||||||
Advances | ||||||||||||||||||
Interest rate risk associated with embedded caps and floors | Fair Value Hedge | Dollar Offset | $ | 0 | $ | 76 | $ | 0 | $ | 76 | ||||||||
Interest rate risk associated with fixed rate non-callable advances | Fair Value Hedge | Shortcut | 44,653 | 0 | 0 | 44,653 | ||||||||||||
Interest rate risk associated with fixed rate convertible advances | Fair Value Hedge | Rolling Regression | (23,472 | ) | 0 | 0 | (23,472 | ) | ||||||||||
Investments | ||||||||||||||||||
Fair value risk associated with fixed rate trading investments | Economic Hedge | Not Applicable | (81 | ) | 0 | 0 | (81 | ) | ||||||||||
Risk of changes in interest rates associated with adjustable rate MBS with embedded caps | Economic Hedge | Not Applicable | 0 | 4,294 | 0 | 4,294 | ||||||||||||
Floors hedging duration of equity risk in a declining interest rate environment | Economic Hedge | Not Applicable | 0 | 1,748 | 0 | 1,748 | ||||||||||||
Mortgage Loans Held for Portfolio | ||||||||||||||||||
Fair value risk associated with fixed rate mortgage purchase commitments | Economic Hedge | Not Applicable | 0 | 0 | (31 | ) | (31 | ) | ||||||||||
ConsolidatedObligation Discount Notes | ||||||||||||||||||
Risk of changes in interest rates created by asset/liability mismatches | Economic Hedge | Not Applicable | 94 | 0 | 0 | 94 | ||||||||||||
Consolidated Obligation Bonds | ||||||||||||||||||
Risk of changes in interest rates creating unacceptable duration changes or increasing costs of funds | Economic Hedge | Not Applicable | 815 | 0 | 0 | 815 | ||||||||||||
Interest rate risk associated with fixed rate callable consolidated obligations | Fair Value Hedge | Rolling Regression | (33,473 | ) | 0 | 0 | (33,473 | ) | ||||||||||
Interest rate risk associated with fixed rate callable consolidated obligations | Fair Value Hedge | Shortcut | (10,793 | ) | 0 | 0 | (10,793 | ) | ||||||||||
Interest rate risk associated with fixed rate non-callable consolidated obligations | Fair Value Hedge | Rolling Regression | 2,501 | 0 | 0 | 2,501 | ||||||||||||
Interest rate risk associated with fixed rate non-callable consolidated obligations | Fair Value Hedge | Shortcut | 1,946 | 0 | 0 | 1,946 | ||||||||||||
Interest rate risk associated with fixed rate callable step-up or step-down consolidated obligations | Fair Value Hedge | Rolling Regression | (117,239 | ) | 0 | 0 | (117,239 | ) | ||||||||||
Interest rate risk associated with zero-coupon callable consolidated obligations | Fair Value Hedge | Rolling Regression | 66,605 | 0 | 0 | 66,605 | ||||||||||||
Interest rate risk associated with complex fixed rate consolidated obligations | Fair Value Hedge | Rolling Regression | (199,146 | ) | 0 | 0 | (199,146 | ) | ||||||||||
Intermediary Derivatives | ||||||||||||||||||
Interest rate risk associated with intermediary derivative instruments with members | Economic Hedge | Not Applicable | 197 | 0 | 0 | 197 | ||||||||||||
Total | $ | (267,393 | ) | $ | 6,118 | $ | (31 | ) | $ | (261,306 | ) |
Disclosure Controls and Procedures. The FHLBank’s management is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by the FHLBank 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. The FHLBank’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the FHLBank in the reports that it files or submits under the Exchange Act is accumulated and communicated to the FHLBank’s management, including its 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. In designing and evaluating the FHLBank’s disclosure controls and procedures, the FHLBank’s 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.
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Management of the FHLBank evaluated the effectiveness of the design and operation of its disclosure controls and procedures with the participation of the President and Chief Executive Officer (CEO) and Chief Financial Officer (CFO) as of the end of the quarterly period covered by this report. Based upon that evaluation, the CEO and CFO have concluded that the FHLBank’s disclosure controls and procedures were effective as of the end of the fiscal quarter covered by this report.
Internal Control over Financial Reporting. There were no material changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2007.
The FHLBank is 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 the FHLBank’s financial condition or results of operations.
For a discussion of risks applicable to the FHLBank, see Item 1A –“Risk Factors” in the annual report on Form 10-K, incorporated by reference herein. There were no material changes during the quarter in the Risk Factors described in the annual report on Form 10-K.
Not applicable.
None.
Currently, the board is comprised of 15 directors, nine of whom are elected directors and six of whom are appointed directors. Members holding FHLBank capital stock on December 31 of the preceding year can participate in the annual election process for FHLBank directors. Eligible members may nominate and elect representatives from members in their state to serve three-year terms on the board of directors of the FHLBank. For each directorship to be filled in an election, each member institution that is located in the state to be represented by the directorship is entitled to cast one vote for each share of capital stock that the member was required to hold as of December 31 of the calendar year immediately preceding the election year; so long as the number of votes that any member may cast for any one directorship does not exceed the average number of shares of capital stock that were required to be held by all members located in the state to be represented on that date. The rules governing the election of directors were established by the Finance Board and are codified at 12 C.F.R. Section 915. Guidance specific to FHLBank Topeka, because of its use of the two-class capital stock structure, is contained in Section 10 of the FHLBank’s capital plan, which is consistent with 12 C.F.R. Section 915.
During the period of this report, directorships were open for election in the states of Kansas, Nebraska and Oklahoma. In each instance, incumbent directors were unopposed in the respective state election. As a result, each was re-elected without an election pursuant to 12 C.F.R. 915.8(c). On September 12, 2007, as reported by the FHLBank in its current report on Form 8-K filed on the same day, the FHLBank announced that the following incumbent directors were re-elected: Lawrence L. McCants, President, First National Bank, Goodland, Kansas; Thomas H. Olson, Chairman, Lisco State Bank, Lisco, Nebraska; and Lindel E. Pettigrew, President and CEO, Chickasha Bank & Trust Company, Chickasha, Oklahoma. Each will serve a three-year term beginning January 1, 2008 and ending December 31, 2010.
None.
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 (Registration No. 06838905) (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 Form 10 Registration Statement, Federal Home Loan Bank of Topeka Bylaws, is incorporated herein by reference as Exhibit 3.2. |
4.1 | Exhibit 4.1 to the Form 10 Registration Statement, Federal Home Loan Bank of Topeka Capital Plan, is incorporated herein by reference as Exhibit 4.1. |
31.1 | Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32 | Certification of President and Chief Executive Officer and Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and 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 | ||
Date: November 13, 2007 | By: /s/ Andrew J. Jetter | |
Andrew J. Jetter | ||
President and Chief Executive Officer | ||
Date: November 13, 2007 | By: /s/ Mark E. Yardley | |
Mark E. Yardley | ||
Executive Vice President and | ||
Chief Financial Officer |
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