EDGAR 10-K Filing

Company CIK: 1325878
Filing Year: 2024
Filename: 1325878_10-K_2024_0001325878-24-000063.json

---

ITEM 1. BUSINESS
Item 1: Business
General
One of 11 FHLBanks, FHLBank Topeka is a federally chartered corporation organized on October 13, 1932 under the authority of the Bank Act. Our mission is to be a reliable provider of funding, liquidity, and services for our members so that they can meet the housing, business, and economic development needs of the communities they serve. Our primary business is making collateralized loans, known as advances, to member institutions (members) and certain qualifying non-members (housing associates) and acquiring residential mortgage loans from members. We also provide members and housing associates with letters of credit and certain correspondent services, such as safekeeping, wire transfers, and cash management. We are a cooperative owned by our members and are generally limited to providing products and services only to those members. Each FHLBank operates as a separate corporate entity with its own management, employees, and board of directors. Section 1433 of the Bank Act provides that we and the other FHLBanks are exempt from federal, state, and local taxation, except for real property taxes. Management has identified FHLBank Topeka as a single operating segment and allocates resources and assesses financial performance on that basis. We do not have any wholly- or partially-owned subsidiaries and do not have an equity position in any partnerships, corporations, or off-balance sheet special purpose entities.
We are supervised and regulated by the FHFA, an independent agency in the executive branch of the U.S. government. The FHFA’s mission is to ensure the housing GSEs fulfill their mission by operating in a safe and sound manner to serve as a reliable source of liquidity and funding for housing finance and community investment.
Any federally insured depository institution, non-federally insured credit union, insurance company, or depository community development financial institution (CDFI) certified by the U.S. Department of the Treasury’s CDFI fund, whose principal place of business is located in Colorado, Kansas, Nebraska, or Oklahoma is eligible to become one of our members. (See Table 37 under Item 7 - "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for counts and balances by member type.) Except for community financial institutions (CFIs), applicants for membership must demonstrate they are engaged in residential housing finance or otherwise support our housing mission, and have a significant business presence in our district. CFIs are defined in the Housing and Economic Recovery Act of 2008 (Recovery Act) as those institutions that have, as of the date of the transaction at issue, less than a specified amount of average total assets over the three years preceding that date (subject to annual adjustment by the FHFA director based on the consumer price index). For 2023, this specified amount was $1.4 billion.
Our members are required to purchase and hold our capital stock as a condition of membership and as a result of certain business activities with us. All capital stock transactions are governed by our capital plan, which was developed under, is subject to, and operates within specific regulatory and statutory requirements. Our capital stock is not publicly traded and is owned entirely by current or former members and certain non-members that own our capital stock as a result of a merger with or acquisition of a member. As a result of the stock purchase requirements, we conduct business with related parties in the normal course of business. For disclosure purposes, we include in our definition of a related party any member institution (or successor) that is known to be the beneficial owner of more than five percent of any class of our voting stock and any person who is, or at any time since the beginning of our last fiscal year (January 1) was, one of our directors or executive officers, among others. Information on business activities with related parties is provided in Tables 63 and 64 under Item 12 - “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
FHFA regulations require that our strategic business plan describes how our business activities will achieve our mission, consistent with the FHFA’s core mission achievement guidance. Our strategic business plan includes a balance sheet management strategy consistent with this guidance, which includes emphasis on the issuance of advances and acquisition of member mortgage loans through the MPF Program. The Primary Mission Asset ratio, as defined by the FHFA, is calculated as average advances and average mortgage loans to average consolidated obligations less average U.S. Treasury securities classified as trading or available for sale with maturities of ten years or less utilizing par balances. As of December 31, 2023, our Primary Mission Asset ratio was 81 percent. We generally intend to maintain the Primary Mission Asset ratio within the range of 70 to 80 percent, which exceeds the FHFA's recommended minimum ratio of 70 percent. However, because this ratio is dependent on several variables, such as member demand for our advance and mortgage loan products, it is possible that we may be unable to maintain the ratio at this level indefinitely.
Our primary funding source is consolidated obligations issued through the FHLBanks’ Office of Finance. The Office of Finance is a joint office of the FHLBanks that facilitates the issuance and servicing of the consolidated obligations. The FHFA and the U.S. Secretary of the Treasury oversee the issuance of all FHLBank debt. Consolidated obligations are debt instruments that constitute the joint and several obligations of all FHLBanks. Additional funds are provided by deposits (received from both member and non-member financial institutions), other borrowings, and the issuance of capital stock.
Products and Services
Advances: We fulfill our mission by making advances to our members and housing associates. A brief description of our standard advance product offerings is as follows:
▪Overnight line of credit advances are draws under an established line of credit confirmation, with outstanding amounts re-pricing and maturing daily. Overnight line of credit advances are not prepayable;
▪Short-term fixed rate advances are non-amortizing, non-prepayable loans with terms to maturity from 3 to 93 days;
▪Regular fixed rate advances are non-amortizing loans, prepayable with a fee, with terms to maturity from 94 days to 360 months;
▪Symmetrical fixed rate advances are non-amortizing loans with terms to maturity from 94 days to 360 months, prepayable with a fee, but the borrower also has the contractual ability to realize a gain from the market movement of interest rates upon prepayment;
▪Adjustable rate advances are non-amortizing loans with terms to maturity from 4 to 120 months, which are prepayable potentially with a fee on interest rate reset dates, and a variable interest rate that is tied to any one of a number of standard indices including the Secured Overnight Financing Rate (SOFR);
▪Callable advances can have a fixed or variable rate of interest for the term of the advance and contain an option(s) that allows for the prepayment of the advance in whole or in part without a fee on specified dates, with terms to maturity of 12 to 360 months for fixed rate loans or terms to maturity of 4 to 180 months for variable rate loans;
▪Amortizing advances are fixed rate loans with terms to maturity of 12 to 360 months, prepayable with a fee or callable with an embedded call option, that contain a set of predetermined principal payments to be made during the life of the advance;
▪Putable advances provide fixed rates that are lower costing than fixed rate advances with the same maturity due to the member selling an option(s) that allows the advance to be put (called away) after a predetermined lockout period. Maturities range from 4 to 120 months with initial lock-out periods typically ranging between 3 and 60 months; and
▪Forward settling advance commitments lock in the rate and term of future funding of regular and amortizing fixed rate advances up to 24 months prior to the settlement of the advance.
Advances are required by FHFA regulation to be priced no lower than the cost to issue debt with matching terms and conditions in the marketplace plus the administrative and operating expenses associated with making such advances.
We also offer a variety of specialized advance products to address housing and community development needs. These advance products address needs for low-cost funding to create affordable rental and homeownership opportunities, and for commercial and economic development activities, including those that benefit low- and moderate-income neighborhoods. Refer to Item 1 - “Business - Other Mission-Related Activities” for more details.
In addition to members, we also make advances to housing associates. To qualify as a housing associate, the applicant must: (1) be approved under Title II of the National Housing Act of 1934; (2) be a chartered institution having succession; (3) be subject to the inspection and supervision of some governmental agency; (4) lend its own funds as its principal activity in the mortgage field; and (5) have a financial condition that demonstrates that advances may be safely made. Housing associates are not subject to certain provisions of the Bank Act that are applicable to members, such as the capital stock purchase requirements, but the same regulatory lending requirements generally apply to them as apply to members. Restrictive collateral provisions apply if the housing associate does not qualify as a state housing finance agency (HFA). We currently have three housing associates who are customers and all three are state HFAs.
We are required by regulation to obtain sufficient collateral to fully secure advances. A member's lending limit is based on the collateral lending value of their residential mortgages and other eligible collateral, which is calculated by applying discounts, or haircuts, to the unpaid principal or market value, as applicable, of the collateral. As additional security for a member’s indebtedness, we have a statutory lien on that member’s FHLBank stock. Additional collateral may be required to secure a member’s or housing associate’s outstanding credit obligations at any time (whether or not such collateral would be eligible to originate an advance), at our discretion. A description of our credit risk management and collateral practices as they relate to advance activity is contained in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Credit Risk Management - Lending and AMA Activities.
Tables 21 and 22 under Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition” present information on our five largest borrowers as of December 31, 2023 and 2022 and the accrued interest income associated with the five borrowers providing the highest amount of interest income for the years ended December 31, 2023 and 2022.
Standby Letters of Credit: We issue standby letters of credit on behalf of members to support certain obligations of the members to third-party beneficiaries, often as collateral for deposits from public sector entities or for residential housing financing and community lending. Generally, the term of a letter of credit is one year renewable annually with a final expiration date of up to ten years after issuance. Members are required to fully collateralize the face amount of any letter of credit issued. Members are charged a fee based on the face amount of the letter of credit. If we are required to make a payment for a beneficiary’s draw, the amount must be reimbursed by the member immediately or, subject to our discretion, may be converted into an advance to the member. The underwriting and collateral requirements for letters of credit are the same as they are for advances. Letters of credit are subject to an activity stock purchase requirement. For additional details on our letters of credit, see Note 15 of the Notes to Financial Statements under Item 8 -” Financial Statements and Supplementary Data”.
Mortgage Loans: We purchase residential mortgage loan products from members and housing associates, referred to as participating financial institutions (PFIs), through the MPF Program, a secondary mortgage market structure developed by FHLBank Chicago. Under the MPF Program, we invest in qualifying 5- to 30-year conventional conforming and government-guaranteed or -insured fixed rate mortgage loans. The MPF Program helps fulfill our housing mission and provides an additional source of liquidity to our members that choose to sell mortgage loans into the secondary market rather than holding them in their own portfolios. MPF Program portfolio mortgage loans are considered acquired member assets (AMAs), a core mission activity of the FHLBanks, as defined by FHFA regulations. Our AMA risk tolerance limit for our investment in mortgage loans held for portfolio is 20 percent of total assets.
MPF Original, MPF 125, and MPF Government are closed loan products in which we purchase loans acquired or originated by the PFI. Under these MPF portfolio products, the PFI performs all traditional retail loan origination functions. In addition to the MPF portfolio products, we also offer MPF Xtra and MPF Government MBS. MPF Xtra is an off-balance sheet product structured to facilitate a loan sale from the PFI to FHLBank Chicago and simultaneously to Federal National Mortgage Association (Fannie Mae). MPF Government MBS is an off-balance sheet product structured to facilitate a loan sale of government-guaranteed or -insured loans from the PFI to FHLBank Chicago for securitization into Government National Mortgage Association (Ginnie Mae) MBS. We receive a counterparty fee from our PFIs for our role in MPF Xtra and MPF Government MBS.
Table 24 under Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition” presents the outstanding balances of mortgage loans sold to us from our top five PFIs and the percentage of those loans to total mortgage loans outstanding.
PFI Eligibility - Members and housing associates may apply to become PFIs. We review the general eligibility of the member or housing associate, its servicing qualifications, and its ability to supply documents, data, and reports required to be delivered by PFIs under the MPF Program.
MPF Provider - FHLBank Chicago serves as the MPF Provider and master servicer for the MPF Program. It maintains the structure of MPF residential mortgage loan products and the eligibility rules for MPF loans, including MPF Xtra loans and MPF Government MBS loans, which primarily fall under the rules and guidelines provided by Fannie Mae and Ginnie Mae, respectively. In addition, the MPF Provider manages the pricing and delivery mechanism for MPF loans and the back-office processing of MPF loans in its role as master servicer and program custodian. The MPF Provider publishes and maintains documentation (referred to as Guides) that details the requirements PFIs must follow in originating, underwriting or selling and servicing MPF loans. The MPF Provider also monitors compliance with MPF Program rules and requirements. The MPF Provider maintains the infrastructure through which we can fund or purchase MPF loans through our PFIs. We pay the MPF Provider a fee for providing these services.
MPF Servicing - PFIs selling residential mortgage loans under the MPF Program may either retain the servicing function or release the servicing and the servicing rights to an MPF Program-approved servicer. If a PFI chooses to retain the servicing, it receives a servicing fee. If a PFI chooses to release the servicing rights, it will receive a servicing-released premium. PFIs that retain the servicing may utilize approved subservicers to perform the servicing duties, while maintaining the servicing rights.
Mortgage Standards - PFIs are required to deliver residential mortgage loans that meet the eligibility requirements in the MPF Guides. The eligibility guidelines in the MPF Guides applicable to the conventional mortgage loans in our portfolio are broadly summarized as follows:
▪Mortgage characteristics: MPF loans must be qualifying 5- to 30-year conforming conventional, fixed rate, fully amortizing mortgage loans, secured by first liens on owner-occupied 1- to 4-unit single-family residential properties and single-unit second homes.
▪Loan-to-value (LTV) ratio and private mortgage insurance (PMI): Conventional MPF mortgage loans with LTVs greater than 80 percent are insured by PMI from a mortgage insurance company that has successfully passed an internal credit review and is approved under the MPF Program. Generally, the maximum LTV for conventional MPF loans is 95 percent. Affordable Housing Program (AHP) MPF mortgage loans may have LTVs up to 100 percent.
▪Conventional loans must have a minimum Fair Isaac Corporation (FICO®) score of 620.
▪Documentation and compliance: Mortgage documents and transactions are required to comply with all applicable laws. MPF mortgage loans are documented using standard Fannie Mae/Federal Home Loan Mortgage Corporation (Freddie Mac) uniform instruments.
▪Government loans: Government mortgage loans sold under the MPF Program have substantially the same parameters as conventional MPF mortgage loans except that their LTVs may not exceed the LTV limits set by the applicable government agency and they must meet all requirements to be insured or guaranteed by the applicable government agency (Federal Housing Administration, the Department of Veterans Affairs, the U.S. Department of Agriculture, or the Department of Housing and Urban Development).
Loans not eligible for sale under the MPF Program include residential mortgage loans unable to be rated by Standard & Poor's (S&P), loans not meeting eligibility requirements, loans classified as high cost, high rate, high risk, Home Ownership and Equity Protection Act loans or loans in similar categories defined under predatory or abusive lending laws, or subprime, non-traditional, or higher-priced mortgage loans.
Allocation of Risk - The MPF Program is designed to allocate risks associated with residential mortgage loans between the PFIs and FHLBank in accordance with the FHFA AMA regulation requirements. PFIs have direct knowledge of their mortgage markets and have developed expertise in underwriting and servicing residential mortgage loans. By allowing PFIs to originate residential mortgage loans, whether through retail or wholesale operations, and to retain or sell servicing rights of residential mortgage loans, the PFI retains control of the functions that impact credit quality the most. We are responsible for managing the interest rate, prepayment. and liquidity risks associated with holding residential mortgage loans in portfolio. To share the credit risk with our PFIs, a third-party model is used to determine the amount of credit enhancement obligation (CE obligation) needed to achieve credit quality that is permissible under the AMA regulation and consistent with our risk appetite. All loss allocations among us and our PFIs are based upon formulas specific to pools of loans covered by a specific MPF product and master commitment. PFIs’ CE obligations must be fully collateralized with assets considered eligible under our collateral policy. See Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Credit Risk Management - Lending and AMA Activities” for a discussion of eligible collateral.
For conventional MPF products held in portfolio, each mortgage loan delivered by a PFI is associated with a master commitment. Losses in excess of recorded unpaid principal balance and the total proceeds received from the sale of a residential mortgage property after expenses and PMI, if available, are allocated to the appropriate loss layer in that master commitment and are allocated between the PFI and FHLBank in the following order:
▪FHLBank's First Loss Account (FLA): The FLA is our first layer of credit loss exposure before the PFI's CE obligation. The amount of the FLA is determined by MPF product type and either builds over time by 4 basis points annually or is fixed at 100 basis points of the gross funded loan amount.
▪PFI's CE obligation: The PFI is responsible for participating in credit losses up to a specified amount, which may include proceeds from supplemental mortgage insurance (SMI). The CE obligation is determined by FHLBank consistent with the FHFA's AMA regulation.
▪FHLBank: After the CE obligation has been exhausted, FHLBank will absorb any remaining losses.
▪PFI's performance-based credit enhancement fees (CE fees): PFIs are paid a monthly fee for sharing credit risk, ranging from 6 to 14 basis points, depending on the product. Performance-based fees are withheld to reimburse the FHLBank for losses allocated to the FLA.
Investments
We maintain a portfolio of investments for liquidity and asset/liability management purposes and to enhance income. The type of investments we may purchase are limited by regulation. We may hold short-term investments in highly-rated institutions, including overnight Federal funds, term Federal funds, interest-bearing certificates of deposit and demand deposits, commercial paper, and securities purchased under agreements to resell (i.e., reverse repurchase agreements). Our long-term investment portfolio primarily includes securities issued or guaranteed by the U.S. government, U.S. government agencies and GSEs, as well as MBS issued by U.S. government agencies and housing GSEs (GSE securities are not explicitly guaranteed by the U.S. government). Regulation prohibits the purchase of additional MBS if the aggregate value of MBS owned exceeds 300 percent of our month-end total regulatory capital, as most recently reported to the FHFA, on the day we purchase the securities. Further, quarterly increases in holdings of MBS are restricted to no more than 50 percent of regulatory capital as of the beginning of such quarter. As of December 31, 2023, the aggregate value of our MBS portfolio represented 248 percent of our regulatory capital. For details on our investment portfolio, see Note 3 of the Notes to Financial Statements under Item 8 - “Financial Statements and Supplementary Data” and Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Investments.” For additional discussion of our investments and their related credit risk, see Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Credit Risk Management.”
Debt Financing - Consolidated Obligations
Consolidated obligations, consisting of bonds and discount notes, are our primary liabilities and represent our principal source of funding. Consolidated obligations are the joint and several obligations of the FHLBanks, backed only by the financial resources of the FHLBanks. Consolidated obligations are not obligations of the U.S. government, and the U.S. government does not guarantee them; however, the capital markets have traditionally viewed the FHLBanks’ obligations as “Federal agency” debt. As such, the FHLBanks historically have had reasonably stable access to funding at relatively favorable spreads to U.S. Treasury obligations. Our ability to access the capital markets through the sale of consolidated obligations, across the maturity spectrum and through a variety of debt structures, assists us in managing our balance sheet effectively and efficiently. S&P currently rates the long-term senior unsecured debt issues of the FHLBank System and all FHLBanks (including FHLBank Topeka) at AA+. S&P rates all FHLBanks and the FHLBank System’s short-term debt issues at A-1+. S&P’s rating outlook for the FHLBank System’s senior unsecured debt and all FHLBanks is stable. Moody’s Investor Service (Moody's) has affirmed the long-term Aaa rating on the senior unsecured debt issues of the FHLBank System and the FHLBanks and a short-term issuer rating of P-1, with a rating outlook of negative for senior unsecured debt. These ratings measure the likelihood of timely payment of principal and interest on consolidated obligations and also reflect the FHLBanks’ status as GSEs, which generally implies the expectation of a high degree of support by the U.S. government even though their obligations are not guaranteed by the U.S. government.
FHFA regulations govern the issuance of debt on behalf of the FHLBanks and related activities, and authorize the FHLBanks to issue consolidated obligations, through the Office of Finance as their agent, under the authority of Section 11(a) of the Bank Act. No FHLBank is permitted to issue individual debt under Section 11(a) without FHFA approval. We are primarily and directly liable for the portion of consolidated obligations issued on our behalf. In addition, we are jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all FHLBanks under Section 11(a). The FHFA, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations for which that 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 FHFA determines that the non-complying FHLBank is unable to satisfy its obligations, then the FHFA may allocate the non-complying FHLBank’s outstanding consolidated obligation debt among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis the FHFA may determine. If the principal or interest on any consolidated obligation issued on behalf of a specific FHLBank is not paid in full when due, that FHLBank may not pay dividends to, or redeem or repurchase shares of stock from, any member of that specific FHLBank.
Table 1 presents the par value of our consolidated obligations and the combined consolidated obligations of all the FHLBanks as of December 31, 2023 and 2022 (in millions):
Table 1
12/31/2023 12/31/2022
Par value of consolidated obligations of FHLBank Topeka $ 70,313 $ 68,104
Par value of consolidated obligations of all FHLBanks $ 1,204,316 $ 1,181,743
FHFA regulations provide that we must maintain aggregate assets of the following types, free from any lien or pledge, in an amount at least equal to the amount of our consolidated obligations outstanding:
▪Cash;
▪Obligations of, or fully guaranteed by, the U.S. government;
▪Secured advances;
▪Mortgages that have any guaranty, insurance or commitment from the U.S. government or any agency of the U.S. government; and
▪Investments described in Section 16(a) of the Bank Act, which, among other items, includes securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located.
Table 2 illustrates our compliance with the FHFA’s regulations for maintaining aggregate assets at least equal to the amount of consolidated obligations outstanding as of December 31, 2023 and 2022 (dollar amounts in thousands):
Table 2
12/31/2023 12/31/2022
Total non-pledged assets $ 74,514,009 $ 71,641,535
Total carrying value of consolidated obligations $ 69,790,738 $ 67,281,243
Ratio of non-pledged assets to consolidated obligations 1.07 1.06
The Office of Finance has responsibility for facilitating and executing the issuance of the consolidated obligations on behalf of the FHLBanks. It also prepares the FHLBanks’ Combined Quarterly and Annual Financial Reports, services all outstanding debt, serves as a source of information for the FHLBanks on capital market developments and manages the FHLBanks’ relationship with the nationally recognized statistical ratings organizations (NRSRO) with respect to ratings on consolidated obligations.
Consolidated Obligation Bonds: Consolidated obligation bonds are primarily used to satisfy our funding needs. Typically, the maturities of these bonds range from less than one year to 30 years, but the maturities are not subject to any statutory or regulatory limit. Consolidated obligation bonds can be issued and distributed through negotiated or competitively bid transactions with approved underwriters or selling group members.
Consolidated obligation bonds generally are issued with either fixed or variable rate payment terms that use a variety of standardized indices for interest rate resets including, but not limited to, SOFR and Three-Month U.S. Treasury Bill Auction Yield. In addition, to meet the specific needs of certain investors in consolidated obligations, both fixed and variable rate bonds may also contain certain embedded features, which result in complex coupon payment terms and call features.
Consolidated Obligation Discount Notes: The Office of Finance also sells consolidated obligation discount notes on behalf of the FHLBanks that generally are used to meet short-term funding needs. These securities have maturities up to one year and are offered daily through certain securities dealers in a discount note selling group. In addition to the daily offerings of discount notes, the FHLBanks auction discount notes with fixed maturity dates ranging from 4 to 26 weeks through competitive auctions held twice a week utilizing the discount note selling group. The amount of discount notes sold through the auctions varies based upon market conditions, investor demand, and/or on the funding needs of the FHLBanks. Discount notes are sold at a discount and mature at par.
Derivatives
FHLBank’s Risk Management Policy (RMP) establishes guidelines for our use of derivatives. Interest rate swaps, interest rate cap and floor agreements, calls, puts, and other derivatives can be used as part of our interest rate risk management and funding strategies. The RMP, along with FHFA regulations, prohibits trading in, or the speculative use of, derivatives and limits credit risk to counterparties that arises from derivatives. In general, we have the ability to use derivatives to reduce funding costs for consolidated obligations and to manage other risk elements such as interest rate risk and mortgage prepayment risk.
See Item 7A - “Quantitative and Qualitative Disclosures About Market Risk” for further information on derivatives.
Deposits
The Bank Act allows us to accept deposits from our members, housing associates, any institution for which we are providing correspondent services, other FHLBanks, and other government instrumentalities. We offer several types of deposit programs, including demand, overnight, and term deposits.
Liquidity Requirements: To support deposits, FHFA regulations require us to have at least an amount equal to current deposits received from our members invested in obligations of the U.S. government, deposits in eligible banks or trust companies, or advances with remaining maturities not exceeding five years. In addition, we must meet the additional liquidity policies and guidelines outlined in our RMP. See Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Liquidity Risk Management” for further discussion of our liquidity requirements.
Capital, Capital Rules and Dividends
FHLBank Capital Adequacy and Form Rules: We must comply with regulatory requirements for total regulatory capital, leverage capital, and risk-based capital. Our RMP requires that we also maintain a ratio of total regulatory capital to total assets of not less than 4.6 percent of total assets, total capital stock to total assets of 2 percent, and permanent capital must exceed our risk-based capital requirement. To satisfy these capital requirements, we maintain a capital plan. The Gramm-Leach-Bliley Act (GLB Act) allows us to have two classes of stock, and each class may have sub-classes. Under our capital plan, we have two classes of authorized stock - Class A Common Stock and Class B Common Stock. Both classes have $100 par value per share. Class A Common Stock is required for membership. Class B Common Stock supports member activities with us, to the extent Class A Common Stock is insufficient to support the calculated activity requirement. The GLB Act and the FHFA rules and regulations define total capital for regulatory capital adequacy purposes as the sum of an FHLBank’s permanent capital, plus the amounts paid in by its stockholders for Class A Common Stock; any general loss allowance, if consistent with U.S. generally accepted accounting principles (GAAP) and not established for specific assets; and other amounts from sources determined by the FHFA as available to absorb losses. The GLB Act and FHFA regulations define permanent capital for the FHLBanks as the amount paid in for Class B Common Stock plus the amount of an FHLBank’s retained earnings, as determined in accordance with GAAP.
Under the GLB Act and the FHFA rules and regulations, we are subject to risk-based capital rules. We may not redeem or repurchase any of our capital stock without FHFA approval if the FHFA or our board of directors determines that we have incurred, or are likely to incur, losses that result in, or are likely to result in, charges against our capital, even if we are in compliance with our minimum regulatory capital requirements. Therefore, a member’s right to have its excess shares of capital stock redeemed is conditional on, among other factors, the FHLBank maintaining compliance with regulatory capital requirements.
See Item 5 - “Market for Registrant’s Common Equity - Related Stockholder Matters and Issuer Purchases of Equity Securities,” Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Capital” and Note 11 of the Notes to Financial Statements under Item 8 - “Financial Statements and Supplementary Data” for additional information regarding capital.
Dividends: We may pay dividends from unrestricted retained earnings and current income. (For a discussion regarding restricted retained earnings, please see Joint Capital Enhancement Agreement under this Item 1.) Our board of directors may declare and pay dividends in either cash or capital stock. Under our capital plan, all dividends that are payable in capital stock must be paid in the form of Class B Common Stock, regardless of the class of stock upon which the dividend is being paid.
Consistent with FHFA guidance in Advisory Bulletin (AB) 2003-AB-08, Capital Management and Retained Earnings, and other respective guidance, we adopted guidelines to establish a minimum or threshold level for our retained earnings in light of alternative possible future financial and economic scenarios, which are currently included under our RMP. The calculation of our minimum (threshold) level of retained earnings incorporates regulatory-based estimates of market risk and credit risk, and includes estimates for risk exposure from operational risk, settlement risk related to unsettled consolidated obligations, and net income volatility. The retained earnings threshold level fluctuates from period to period because it is a function of the size and composition of our balance sheet and the risks contained therein at that point in time. As of December 31, 2023, our retained earnings threshold was $0.7 billion. Retained earnings of $1.4 billion exceeded our retained earnings threshold by $0.7 billion at December 31, 2023.
The retained earnings threshold is calculated quarterly and considered by the board of directors as part of each quarterly dividend declaration. The RMP also provides that meeting the established retained earnings threshold has priority over the payment of dividends, but that the board of directors must balance dividends on capital stock against the period over which the retained earnings threshold is met. During the year ended December 31, 2023, the threshold did not significantly affect the amount of dividends declared and paid.
Joint Capital Enhancement Agreement (JCE Agreement) - We, along with the other FHLBanks, entered into a JCE Agreement intended to enhance the capital position of each FHLBank. More specifically, the intent of the JCE Agreement is to allocate a portion of each FHLBank’s earnings to a Separate Restricted Retained Earnings Account (RRE Account) at that FHLBank. Thus, in accordance with the JCE Agreement, each FHLBank allocates 20 percent of its net income to an RRE Account and will do so until the balance of the account equals at least one percent of that FHLBank’s average balance of outstanding consolidated obligations calculated as of the last day of each calendar quarter. Additionally, the JCE Agreement provides that amounts in restricted retained earnings in excess of 150 percent of an FHLBank's restricted retained earnings minimum (i.e., one percent of that FHLBank's average balance of outstanding consolidated obligations calculated as of the last day of each calendar quarter) may be released from restricted retained earnings. Restricted retained earnings are not available to pay dividends and are presented separately on the Statements of Condition.
Tax Status
Section 1433 of the Bank Act provides that we and the other FHLBanks are exempt from all federal, state and local taxation except for real property taxes.
Assessments
We are subject to a regulatory AHP assessment based on a percentage of our earnings. The FHLBanks are required to set aside annually the greater of an aggregate of $100 million or 10 percent of their current year’s income subject to assessment to be contributed to the following year's AHP. In accordance with FHFA guidance for the calculation of AHP expense, interest expense on mandatorily redeemable capital stock is added back to income before charges for AHP.
Other Mission-Related Activities
One of our core missions is to provide funding to support and sustain affordable housing and community lending in our district. We administer and fund a number of programs specifically designed to fulfill that mission. These programs provide housing opportunities for thousands of very low-, low- and moderate-income households and strengthen communities primarily in Colorado, Kansas, Nebraska, and Oklahoma.
As we continue to look for opportunities to support our members, we have made a growing commitment to our voluntary programs designed to support and sustain affordable housing and community lending in our district. In 2024, we are providing 2.5 percent of our 2023 net income before our AHP assessment. In 2025 and thereafter, the commitment will increase to 5 percent. The 2024 funds will support the Native American Housing Initiative (NAHI) program, Homeownership Possibilities Expanded (HOPE), and AHP Extra. Each of our programs are detailed below.
Affordable Housing Program: Amounts specified by the AHP requirements described in Item 1 - “Business - Assessments” are reserved for this program. AHP provides cash grants to members in partnership with sponsors (i.e., housing authorities, for-profit and not-for-profit organizations, developers, etc.) to finance the purchase, construction, or rehabilitation of very low-, low-, and moderate-income owner occupied or rental housing. As a competitive program, applications are scored based on commitments made to supports housing needs in our district.
We will provide additional funding beyond our regulatory requirement to support affordable housing projects in our district through AHP Extra. AHP Extra is a voluntary contribution to supplement FHLBank's statutory AHP. AHP Extra provides competitive grants to members in partnership with affordable housing developers, including non-profit and for-profit organizations, and housing authorities that are engaged in creating or rehabilitating affordable housing. AHP Extra extends the amount of funding available beyond the regulatory contribution to meet the needs of our district.
In addition to the competitive AHP program funds, we provide funding for TurnKey, a suite of products designed to support homeownership in our district in partnership with our members. The programs offered under TurnKey are as follows:
•Homeownership Set-aside Program (HSP): The HSP provides down payment, closing cost, and purchase-related repair assistance to very low-, low-, and moderate-income first-time households in Colorado, Kansas, Nebraska, and Oklahoma;
•Homeownership Set-aside Program Plus (HSP+): HSP+ provides additional subsidy to very low-, low-, and moderate-income first-time households in High-Cost Areas and non-metropolitan Difficult Development Areas in our district; and
•Homeownership Possibilities Expanded (HOPE): Providing access to homeownership to the “missing middle,” we will support households in our district that traditionally do not receive assistance but need subsidy to make homeownership accessible and affordable. HOPE is not limited to first-time homebuyers, and income limitations are expected to serve a wider range of households.
Community Investment Cash Advance (CICA) Program: CICA loans to members specifically target underserved markets in both rural and urban areas. CICA loans represented 1.2 percent, 1.4 percent and 3.0 percent of total advances outstanding as of December 31, 2023, 2022, and 2021, respectively. Programs offered during 2023 under the CICA Program, which is not funded through the AHP, include:
•Community Housing Program (CHP) - CHP makes loans available to members for financing the construction, acquisition, rehabilitation, and refinancing of owner-occupied housing for households whose incomes do not exceed 115 percent of the median income for the area and rental housing occupied by or affordable for households whose incomes do not exceed 115 percent of the median income for the area. For rental projects, at least 51 percent of the units must have tenants that meet the income guidelines, or at least 51 percent of the units must have rents affordable to tenants that meet the income guidelines. We provide advances for CHP-based loans to members at our estimated cost of funds for a comparable maturity plus a mark-up for administrative costs; and
•Community Development Program (CDP) - CDP provides advances to members to finance CDP-qualified member financing including loans to small businesses, small farms, small agribusiness or for community development purposes that meet one of the following criteria: (1) loans to firms that meet the Small Business Administration’s (SBA) definition of a small business concern; (2) financing for businesses or projects located in an urban neighborhood, Census tract or other area with a median income at or below 100 percent of the area median; (3) financing for businesses, farms, ranches, agribusinesses, or projects located in a rural community, neighborhood, Census tract, or unincorporated area with a median income at or below 115 percent of the area median; (4) firms or projects located in a Native American Area or any Federally Declared Disaster Area; (5) projects in urban areas in which at least 51 percent of the employees of the project, or at least 51 percent of the families benefiting from or receiving services from the project, earn at or below 100 percent of the area median; or (6) projects in rural areas in which at least 51 percent of the employees of the project, or at least 51 percent of the families benefiting from or receiving services from the project, earn at or below 115 percent of the area median. We provide advances for CDP-based loans to members at our estimated cost of funds for a comparable maturity plus a mark-up for administrative costs.
Native American Housing Initiatives Grants Program (NAHI): The NAHI program is a new, voluntary grant program that provides Native American tribes and tribally designated housing entities with access to grant funds intended to build their communities in support of housing for tribal members in FHLBank’s district. NAHI supports tribal organizations working at the grassroots level, which are in the best position to identify tribal needs. With a successful inaugural round in 2023, we will continue to offer the NAHI program to support the needs of tribal communities in our district.
Competition
Advances: Demand for advances is affected by, among other things, the cost of alternative sources of liquidity available to our members, including deposits from members’ customers and other sources of liquidity that are available to members, including the Federal Reserve Bank’s discount window. Members mostly access alternative funding other than advances through Federal funds purchased, the brokered deposit market, and repurchase agreements with financial counterparties. Large members may have broader access to funding through repurchase agreements with investment banks and commercial banks as well as access to the national and global credit markets. On March 12, 2023, the Federal Reserve announced a plan to make available additional funding to eligible depository institutions to help assure that they have the ability to meet the needs of all their depositors, through eased access to the discount window and the creation of a new Bank Term Funding Program (BTFP). The BTFP offers eligible banks an additional source of liquidity collateralized with high-quality securities at par to eliminate the need to sell securities to meet the needs of depositors. The BTFP is a temporary measure that is set to expire on March 11, 2024 and is intended to be utilized in conjunction with other liquidity sources to ensure banks have the ability meet liquidity needs resulting from the loss of deposits. The availability of alternative funding sources to members can influence member demand for advances, with the cost of the alternative funding relative to advances being the primary consideration when accessing alternative funding. Other considerations include product availability through FHLBank, dividend rates on FHLBank stock, the member’s creditworthiness, ease of execution, level of diversification, and availability of member collateral for other types of borrowings. We believe our advance product offerings are evolving to meet member demand as market conditions in the competitive environment change. All product development initiatives involve an evaluation of the market opportunity relative to the operational requirements of offering the product while maintaining high levels of risk management and regulatory compliance. Certain product initiatives may also require the filing of a New Business Activity Notice with and non-objection by our regulator.
Mortgage Loans: We are subject to competition in purchasing conventional, conforming fixed rate residential mortgage loans and government-guaranteed residential mortgage loans. We face competition in the prices paid for these assets, customer service, and in ancillary services such as automated underwriting. The most direct competition for purchasing residential mortgage loans comes from the other housing GSEs, which also purchase conventional, conforming fixed rate mortgage loans, specifically Fannie Mae and Freddie Mac. To a lesser extent, we also compete with regional and national financial institutions that buy and/or invest in mortgage loans. Depending on market conditions, these investors may seek to hold, securitize, or sell conventional, conforming fixed rate mortgage loans. We continuously reassess our potential for success in attracting and retaining members for our mortgage loan products and services, just as we do with our advance products. We compete for the purchase of mortgage loans primarily on the basis of price, products and product features, and services offered.
Debt Issuance: We compete with the U.S. government (including debt programs explicitly guaranteed by the U.S. government), U.S. government agencies, Fannie Mae, Freddie Mac, and other GSEs, as well as corporate, sovereign, and supranational entities for funds raised through the issuance of unsecured debt in the national and global capital markets. Collectively, Fannie Mae, Freddie Mac, and the FHLBanks are generally referred to as the housing GSEs, and the cost of the debt of each can be positively or negatively affected by political, financial, or other news that reflects upon government and government agency debt. If the supply of competing debt products increases without a corresponding increase in demand, our debt costs may increase. We compete for the issuance of debt primarily on the basis of rate, term, structure of the debt, liquidity of the instrument, and perceived risk of the issuer.
Derivatives: The issuance of callable debt and the simultaneous execution of callable interest rate swaps with options that mirror the options in the debt have been an important source of competitive funding for us. As such, the depth of the markets for callable debt and mirror-image derivatives is an important factor of our relative cost of funds. There is considerable competition among high-credit-quality issuers, especially among the three housing GSEs, for callable debt and for derivatives. There can be no assurance that the current breadth and depth of these markets will be sustained.
Regulatory Oversight, Audits and Examinations
General: Our business is subject to extensive regulation and supervision. As discussed throughout this Form 10-K, the laws, regulations, and regulatory guidance to which we are subject cover all key aspects of our business, and directly and indirectly affect our product and service offerings, collateral practices, pricing, competitive position, relationship with members and third parties, capital structure, and liquidity practices. As a result, such laws and regulations have a significant effect on our results of operations and financial condition. For a discussion of risks relating to the complex body of laws and regulations to which we are subject, see Item 1A - “Risk Factors - Business Risk - Legislative and Regulatory”. For a discussion of recent regulatory and legislative developments impacting us, see “Legislative and Regulatory Developments” under this Item 1.
We are supervised and regulated by the FHFA, an independent agency in the executive branch of the U.S. government. The FHFA is responsible for providing supervision, regulation and housing mission oversight of the FHLBanks to ensure they fulfill their mission by operating in a safe and sound manner to serve as a reliable source of liquidity and funding for housing finance and community investment. The FHFA is funded in part through assessments from the FHLBanks, with the remainder of its funding provided by Fannie Mae and Freddie Mac; no tax dollars or other appropriations support the operations of the FHFA or the FHLBanks. To assess our safety and soundness, the FHFA conducts comprehensive annual examinations, as well as periodic reviews. Additionally, we are required to submit monthly information about our financial condition and results of operations to the FHFA. This information is available to all FHLBanks.
Before a government corporation issues and offers obligations to the public, the Government Corporation Control Act provides that the Secretary of the Treasury will prescribe the form, denomination, maturity, interest rate, and conditions of the obligations; the manner and time issued; and the selling price. The Bank Act also authorizes the Secretary of the Treasury, at their discretion, to purchase consolidated obligations up to an aggregate principal amount of $4 billion. No borrowings under this authority have been outstanding since 1977.
The U.S. Treasury receives the FHFA’s annual report to Congress, monthly reports reflecting securities transactions of the FHLBanks, and other reports reflecting the operations of the FHLBanks. We must submit annual management reports to Congress, the President of the United States, the Office of Management and Budget, and the Comptroller General. These reports include a statement of financial condition, a statement of operations, a statement of cash flows, a statement of internal accounting and administrative control systems, and the report of the independent public accounting firm on the financial statements.
Audits and Examinations: We have an internal audit department and our board of directors has an audit committee. The Chief Audit Executive reports directly to the audit committee. In addition, an independent registered public accounting firm audits our annual financial statements and effectiveness of internal controls over financial reporting. The independent registered public accounting firm conducts these audits following standards of the Public Company Accounting Oversight Board (United States) and Government Auditing Standards issued by the Comptroller General of the United States. The FHLBanks, the FHFA, and Congress all receive the audit reports.
The Comptroller General has authority under the Bank Act to audit or examine the FHFA and the individual FHLBanks and to decide the extent to which they fairly and effectively fulfill the purposes of the Bank Act. Furthermore, the Government Corporation Control Act provides that the Comptroller General may review any audit of the financial statements conducted by an independent registered public accounting firm. If the Comptroller General conducts such a review, the results of the review and any recommendations must be reported to Congress, the Office of Management and Budget, and the applicable FHLBank. The Comptroller General may also conduct an audit of any financial statements of any individual FHLBank.
Human Capital Resources
Our workforce is a vital contributor to the success of our strategic business objectives. In managing our people, we focus on our workforce profile and the various programs and philosophies described below.
Workforce Profile: Our workforce is primarily comprised of corporate employees, with our principal operations in one location. As of December 31, 2023, we had 253 full-time and 5 part-time employees. As of December 31, 2023, approximately 49 percent of our workforce identifies as female and 50 percent identifies as male. As of December 31, 2023, 86 percent are non-minority and 14 percent are minority. Our workforce is appropriately staffed, and generally includes a number of longer-tenured employees. We strive to both develop talent from within the organization and supplement with external hires. We believe that developing talent internally results in institutional strength and continuity and also promotes loyalty and commitment in our employee base, which strengthens our success. Adding new employees contributes to new ideas, continuous improvement, and our goals of having a diverse and inclusive workforce with a sense of belonging and an equitable workplace. As of December 31, 2023, the average tenure of our employees was 9.8 years. There are no collective bargaining agreements with our employees.
Total Rewards: We seek to attract, develop and retain talented employees to achieve our strategic business initiatives, enhance business performance, increase shareholder value and provide members a reasonable return on their investment in FHLBank. To achieve this objective, we focus on a combination of development programs, benefits and employee wellness programs and strive to recognize and reward performance. Specifically, our programs include:
•Cash compensation - competitive base salary, performance-based incentives and other cash subsidies;
•Benefits - health insurance, life and accidental death and dismemberment insurance, supplemental life insurance, and a 401(k) retirement savings plan with a competitive employer match;
•Wellness program - employee assistance program, interactive education sessions focused on employee total health, and sporting events sponsorships;
•Time away from work - including paid time off for vacation, illness, personal, holiday, and volunteer opportunities;
•Culture and Development - various cultural and inclusion initiatives and leadership development opportunities; internal educational and development opportunities and fee reimbursement for external development programs; employee engagement opportunities to drive our Employer of Choice vision; and educational assistance programs;
•Work/Life balance - flexible work arrangements, including a hybrid work schedule allowing a balance between in-office and remote work, two-thirds paid salary continuation for short-term disability, 100 percent paid parental, military, bereavement, jury duty and court appearances leave;
•Management succession planning - our board of directors and leadership actively engage in management succession planning, with a defined plan for our Executive Team, which is reviewed and adjusted annually, to support a smooth transition of operations in the event of an unplanned or planned absence of executives and to help assure the successor executives are fully qualified to assume responsibility for ongoing operations; and
•Our Performance Management framework includes planned quarterly, documented discussions coordinated between manager and employee. At the start of every quarter, managers and employees work together to set new goals or update existing goals and review the previous quarter’s goals. In addition to encouraging goal alignment with ever-changing business needs, this quarterly framework also is intended to provide a natural opportunity for feedback and development conversations to occur between employee and manager throughout the year.
Diversity, Equity, Inclusion and Belonging: Diversity, Equity, Inclusion and Belonging (DEIB) is a strategic business priority for us and one of our defined corporate Values. Our Office of Minority and Women Inclusion (OMWI) Officer, Chief Human Resources and Inclusion Officer, is a member of our Executive Team, reports to our Chief Executive Officer (CEO), and serves as a liaison to the board of directors. We believe that diversity increases capacity for innovation and creativity; equity helps ensure that we are intentional in recognizing and addressing our employees’ individual needs and in providing opportunities to optimize success; inclusion is how we create an environment where all employees feel like they can be themselves authentically to leverage the unique perspectives of all employees to help ensure optimal decision-making and strengthen our retention efforts; and belonging is the outcome where employees feel like they are integral and necessary to our overall success. We operationalize our commitment through the development and execution of a three-year DEIB strategic plan that includes quantifiable metrics to measure success and we report regularly on our performance to management and the board of directors. We offer a range of opportunities for our employees to connect and grow personally and professionally through our DEIB Program including our Inclusion, Diversity, and Equity Advisory council. We consider learning an important component of our DEIB strategy and regularly offer educational opportunities to our employees and strive to evaluate equitable and inclusive behaviors as part of our recruiting, promotion and succession planning processes. We also incorporate DEIB as a key component of our incentive plan framework to recognize our organizational focus and individual and collective accountability.
Where to Find Additional Information
We file our annual, quarterly, and current reports and related information with the Securities and Exchange Commission (SEC). You can find our SEC filings at the SEC’s website at www.sec.gov. Additionally, on our website at www.fhlbtopeka.com, you can find a link to the SEC’s website which can be used to access free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 (Exchange Act), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Except for the documents specifically incorporated by reference into this Annual Report on Form 10-K, information contained on our website or that can be accessed through our website is not incorporated by reference into this Annual Report on Form 10-K. Reference to our website is made as an inactive textual reference.
Legislative and Regulatory Developments
Significant regulatory actions and developments for the period covered by this report not previously disclosed are summarized below.
FHFA’s Review and Analysis of the FHLBank System. Commencing in the fall of 2022, and over a period of several months, the FHFA undertook a review and analysis of the FHLBank System, in part through a series of public listening sessions, regional roundtable discussions, and receipt of comments from stakeholders and the public. This review covered such areas as the FHLBanks’ mission and purpose in a changing marketplace; their organization, operational efficiency, and effectiveness; their role in promoting affordable, sustainable, equitable, and resilient housing and community investment; their role in addressing the unique needs of rural and financially vulnerable communities; member products, services, collateral requirements; and membership eligibility and requirements.
On November 7, 2023, the FHFA issued its written report titled “FHLBank System at 100: Focusing on the Future”, presenting its review and analysis of the FHLBank System and the actions and recommendations that it plans to pursue in service of its vision for the future of the FHLBank System.The report focused on four broad themes: (1) the mission of the FHLBank System; (2) the FHLBank System as a stable and reliable source of liquidity; (3) housing and community development; and (4) FHLBank System operational efficiency, structure, and governance. The FHFA expects its initiative to continue as a multi-year, collaborative effort with the FHLBanks, their member institutions, and other stakeholders to address the recommended actions in the report and has stated that it can implement some of the recommendations from the report through ongoing supervision, guidance, or rulemaking, as well as through statutory changes by proposing specific requests for Congressional action.
Among other things, the FHFA has indicated that it plans to:
▪Update and clarify its regulatory statement of the FHLBanks’ mission to explicitly incorporate its view of the core objectives of the FHLBanks’ mission, which are: (1) providing stable and reliable liquidity to members; and (2) supporting housing and community development;
▪Clarify the FHLBanks’ liquidity role and take steps that the FHFA believes will better position the FHLBanks to perform their liquidity function, including enhancing FHFA oversight of FHLBank credit risk evaluation of their members and establishing protocols for large depository members to borrow from the Federal Reserve discount window;
▪Expand the FHLBanks’ housing and community development focus by requiring the establishment of mission-oriented collateral programs, re-evaluating the definition of long-term advances, exploring revisions to the Community Support Requirements, and reviewing the AHP, Community Investment Programs, and CICA Programs to encourage greater use in a safe and sound manner. FHFA will also recommend that Congress consider amending the FHLBank Act to at least double the statutory minimum required annual AHP contributions by the FHLBanks; and
▪Review the FHLBanks’ operational efficiencies through encouraging collaboration among the FHLBanks, evaluating the size and structure of FHLBank boards, considering the structure of FHLBank districts and composition of their membership, and studying whether realignment or consolidation are necessary for the efficiency of the FHLBank System.
We continue to evaluate the report and are not able to predict what actions will ultimately result from the FHFA’s recommendations in the report, the timing of these actions, the extent of any changes to FHLBank or the FHLBank System, or the ultimate effect on FHLBank or the FHLBank System in the future. We plan to continue to engage with the FHFA and other stakeholders to ensure that the FHLBank System remains well positioned to serve its members and their communities. For a further discussion of related risks, see “Part I. Item 1A - Risk Factors.”
Federal Reserve Bank Term Funding Program. On March 12, 2023, in response to prevailing concerns about the ability of banks to meet the needs of all their depositors, the Federal Reserve announced the implementation of a BTFP as an additional source of liquidity for eligible borrowers, including any U.S. federally insured depository institution or U.S. branch or agency of a foreign bank that is eligible for primary credit with the Federal Reserve. The BTFP offers up to one-year term loans to be secured by eligible collateral owned by eligible borrowers as of March 12, 2023. Such loans can be requested until March 11, 2024. The BTFP is subject to $25 billion in credit protection by the U.S. Department of Treasury. On January 24, 2024, the Federal Reserve announced that the BTFP will cease making new loans as scheduled on March 11, 2024.
Consumer Financial Protection Bureau (CFPB) Final Rule. On March 30, 2023, the CFPB issued a final rule requiring certain covered financial institutions to collect and report small business lending data. Small businesses are businesses with $5 million or less in gross annual revenue in the preceding fiscal year. An FHLBank will be subject to data collection and reporting obligations if the FHLBank has originated a minimum of 100 “covered credit transactions” to small businesses in each of the two preceding calendar years. The final rule implements phased-in compliance dates, beginning on October 1, 2024, based on the number of originations the covered financial institution makes to small businesses within a specified timeframe. FHLBank is assessing to which extent the obligations will be triggered for FHLBank and what operational changes will be necessary for compliance. While FHLBank is still analyzing the impact of the final rule, it does not believe these changes will have a material effect on its financial condition or results of operations. Under a federal court order in a related litigation, the CFPB has been enjoined from implementing and enforcing the final rule against covered financial institutions nationwide and all deadlines for compliance with the final rule have been stayed.
FHFA Proposed Rule on Fair Lending, Fair Housing, and Equitable Housing Finance Plans. On April 26, 2023, the FHFA published a proposed rule that specifies requirements related to FHLBank compliance with fair housing and fair lending laws and prohibitions on unfair or deceptive acts or practices. The fair housing and fair lending laws would be the Fair Housing Act, the Equal Credit Opportunity Act, and those acts’ implementing regulations. Further, the proposed rule would outline the FHFA’s enforcement authority. We are evaluating the potential impact of the proposed rule on the FHLBank and its operations.
Office of the Comptroller of the Currency, Federal Reserve, and Federal Deposit Insurance Corporation Joint Proposed Rule to Revise Capital Requirements for Certain Large Banking Organizations. On September 18, 2023, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) published a joint notice of proposed rulemaking that would substantially revise the regulatory capital requirements applicable to certain large banking organizations and banking organizations with significant trading activity (Covered Banks), generally consistent with changes to international capital standards issued by the Basel Committee on Banking Supervision, known as Basel III. The proposed rulemaking will amend the calculation of risk-based capital requirements in an attempt to better reflect the risks of these banking organizations’ exposures, reduce the complexity of the framework, enhance the consistency of requirements across these banking organizations, and facilitate more effective supervisory and market assessments of capital adequacy. For certain collateralized transactions under existing capital requirements, debt securities issued by a GSE such as the FHLBanks are afforded a lower market price volatility haircut than higher risk non-GSE investment-grade securities. The proposed rules would increase the market price volatility haircuts applicable to the debt securities of the GSEs (including the FHLBanks) by applying to these debt securities the same haircuts as non-GSE investment-grade securities. FHLBank continues to evaluate the potential impact of the proposed rulemaking on its financial condition and results of operation. The proposed change to market price volatility haircuts applicable to debt securities of the FHLBanks may harm liquidity for FHLBank debt securities in the market, impact general demand for FHLBank debt securities, and increase the FHLBanks’ cost of funding due to potential higher interest rates as a result of the foregoing. The proposal was open for public comment through January 16, 2024, and the FHLBank System submitted a comment letter.
SEC Final Rule on the Enhancement and Standardization of Climate-Related Disclosures for Investors. On March 6, 2024, the SEC adopted a final rule that will require registrants to disclose certain climate-related information in annual reports. The final rule requires disclosure of, among other things: material climate-related risks and their material impacts; activities to mitigate or adapt to such risks; information about a registrant’s board of directors’ oversight of climate-related risks and management’s role in managing material climate-related risks; and information on any climate-related targets or goals that are material to the registrant’s business, results of operations, or financial condition. In addition, certain disclosures related to severe weather events and other natural conditions will be required in a registrant’s audited financial statements. We will be subject to the applicable requirements of the rule in our annual reports for fiscal years beginning in 2027. We continue to review the final rule and evaluate its impact on FHLBank or FHLBank’s financial condition or results of operations, including the effect on costs and complexities associated with SEC reporting.

---

ITEM 1A. RISK FACTORS
Item 1A: Risk Factors
Business Risk - General
Changes in economic conditions, or federal fiscal and monetary policy could impact our business. Our net income is sensitive to changes in market conditions that can impact the interest we earn and pay and introduce volatility in other income (loss). These conditions include, but are not limited to, the following: (1) changes in interest rates; (2) fluctuations in both debt and equity capital markets; (3) conditions in the financial, credit, mortgage, and housing markets; (4) the willingness and ability of financial institutions to expand lending; and (5) the strength of the U.S. economy and the local economies in which we conduct business. Our financial condition, results of operations, and ability to pay dividends could be negatively affected by changes in one or more of these conditions. Additionally, our business and results of operations and that of our members may be affected by the fiscal and monetary policies of the federal government and its agencies, including the Federal Reserve, which regulates the supply of money and credit in the U.S. The Federal Reserve’s policies directly and indirectly influence the yield on interest-earning assets and the cost of interest-bearing liabilities for us and our members, which could adversely affect our financial condition, results of operations, and ability to pay dividends. The Federal Open Market Committee (FOMC) has maintained the target Federal funds rate into 2024, citing lower inflation and stable employment statistics. FOMC economic projections indicate that further tightening of monetary policy is unlikely in 2024, but decreases in the policy rate will be dependent on trends in employment levels and inflation and financial and international developments. Adverse trends in regional or national economic activity, prolonged inflation, extended U.S. government shutdown, geopolitical instability or conflicts (including Russia’s ongoing war against Ukraine, the war in Gaza between Israel and Hamas, and tensions or conflicts between China and Taiwan and/or China and the U.S.), trade disruptions, pandemics, and economic or other sanctions could adversely affect overall economic conditions (including on a state or local level). If economic and market conditions deteriorate, it could have an adverse effect on our business, including the demand for our products and services, and the value of the collateral securing advances, investments, and mortgage loans held for portfolio.
The impacts of climate change and/or natural disasters in the FHLBank’s region could have a material adverse impact on our members and our business. Portions of our region are subject to risks from tornadoes, floods, drought, or other natural disasters. Climate change is increasing the frequency and intensity of these weather events. These natural disasters, including those resulting from significant climate changes, could damage or destroy our properties (headquarters or business resiliency center), damage or dislocate the facilities of our members, damage or destroy collateral that members have pledged to secure advances or mortgages, damage or destroy collateral securing certain securities, disrupt business for us or our members, negatively impact the livelihood of borrowers of members, or otherwise could cause significant economic dislocation in the affected areas of our region. Any of these situations may adversely impact our financial condition and results of operations.
Climate change regulation and market reactions to climate change could adversely impact our members and our business, including the potential for an increase in climate risk assessment, disclosure, and supervision by our regulators. Furthermore, increased focus on climate change and other environmental, social, and governance matters has led to heightened legislative and regulatory attention in these areas, including the potential for new requirements on climate change-related risk assessment, risk management, and disclosure. New or modified laws and regulations, along with increased stakeholder expectations, related to these matters may increase the costs of compliance for us and our members and alter the environment in which they conduct their businesses, which could adversely affect our business. The shift toward a lower-carbon economy, driven by policy regulations, low-carbon technology advancement, consumer sentiment, and/or liability risks, may negatively impact our business model and/or the business models of our members, asset valuations, and operating costs.
Business Risk - Legislative and Regulatory
Our business has been, and may continue to be, adversely impacted by legislation and other ongoing actions by the U. S. government in response to periodic disruptions in the financial markets. To the extent that any actions by the U.S. government in response to an economic downturn, recession, inflation or other macro-level events or conditions cause a significant decrease in the aggregate amount of advances, investments, or mortgage loans or increase our operating costs, our financial condition and results of operations may be adversely affected. Our primary regulator, the FHFA, also continues to issue proposed and final regulatory and other requirements. Additionally, potential legislative and regulatory changes affecting our members, investors, and dealers of consolidated obligations could adversely affect our business activities, financial condition, and results of operations. Policymakers and regulators have been examining potential policy measures intended to improve the resilience of money market funds and broader short-term funding markets in recent years, including in response to the market stress experienced in the short-term funding markets in March 2020 caused by the COVID-19 pandemic. In December 2021, the SEC proposed additional money market fund reform in an effort to improve the resilience and transparency of money market funds. We cannot predict the effect of any new regulations or other regulatory guidance, including money market reforms, on our operations. Changes in regulatory requirements could result in, among other things, an increase in our cost of funding or overall cost of doing business, or a decrease in the size, scope or nature of our membership base, or our lending, investment, or mortgage loan activity, which could negatively affect our financial condition and results of operations. See Item 1 - “Business - Legislative and Regulatory Developments” for more information on potential future legislation and other regulatory activity affecting us.
We are subject to a complex body of laws and regulatory and other requirements that could change in a manner detrimental to our operations. The FHLBanks are GSEs organized under the authority of the Bank Act, and, as such, are governed by federal laws, regulations and other guidance adopted and applied by the FHFA, which serves as the federal regulator of the FHLBanks and the Office of Finance, Fannie Mae, and Freddie Mac. There is a risk that actions by the FHFA toward Fannie Mae and Freddie Mac may have an unfavorable impact on the FHLBanks’ operations and/or financial condition because of the significant difference in their business models compared to ours. In addition, Congress may amend the Bank Act or pass other legislation that significantly affects the rights, obligations, and permissible activities of the FHLBanks and the manner in which the FHLBanks carry out their housing-finance and liquidity missions and business operations. The U.S. Congress is considering broad legislation for reform of GSEs as a result of the disruptions in the financial and housing markets and the conservatorships of Fannie Mae and Freddie Mac. We do not know how, when, or to what extent GSE reform legislation will be adopted, and if adopted, how it would impact the business or operations of FHLBank or the FHLBank System. We are, or may also become, subject to further regulations promulgated by the SEC, Commodity Futures Trade Commission (CFTC), Federal Reserve Bank, Financial Crimes Enforcement Network, or other regulatory agencies. In addition, there is a risk that our funding costs and access to funds could be adversely affected by changes in investors’ perception of the systemic risks associated with Fannie Mae and Freddie Mac.
Following a comprehensive review that began in the fall of 2022, the FHFA issued the “FHLBank System at 100: Focusing on the Future” report on November 7, 2023, presenting its review and analysis of the FHLBank System and the actions and recommendations that it plans to pursue over a multi-year effort, in service of its vision for the FHLBank System. The report focused on four broad themes: (1) the mission of the FHLBank System; (2) the FHLBank System as a stable and reliable source of liquidity; (3) housing and community development; and (4) FHLBank System operational efficiency, structure, and governance. Many of the recommendations from the report may be implemented by the FHFA through ongoing supervision, guidance, or rulemaking within its existing statutory authority, while other recommendations may require legislative action for further study. We are not able to predict what actions will ultimately result from the FHFA’s recommendations, the timing of any actions, the extent of any changes to FHLBank or the FHLBank System, or the ultimate effect on FHLBank or the FHLBank System in the future. Potential changes resulting from the FHFA’s recommendations (including changes relating to the FHLBanks’ mission, liquidity role, membership and lending requirements, affordable housing contributions, and support for community investment, or operations, structure, and governance) could increase our operational costs and expenses, result in heightened scrutiny of the FHLBanks and their mission and activities, and impact our business, which may affect our financial condition, or results of operations, and/or the value of membership in the FHLBanks. The extent to which the report ultimately results in changes to regulatory requirements or supervisory expectations that impact or limit the use of our advances by members or our ability to lend to members may have a significant negative impact on our financial condition or results of operations.
For more details on this FHFA report, see “Part I. Item 1: Business - Recent Regulatory and Legislative Developments - FHFA’s Review and Analysis of the Federal Home Loan Bank System.”
A majority of the states, and some municipalities, have enacted laws prohibiting mortgage loans considered predatory or abusive. Some of these laws impose liability for violations not only on the originator, but also upon purchasers and assignees of mortgage loans. We take measures that we consider reasonable and appropriate to reduce our exposure to potential liability under these laws and are not aware of any potential or pending claim, action, or proceeding asserting that we are liable under these laws. However, there can be no assurance that we will never have any liability under predatory or abusive lending laws. This may negatively impact our financial condition and results of operations and potentially negatively impact our reputation.
Business Risk - Strategic
We face competition for loan demand, purchases of mortgage loans and access to funding, which could adversely affect our earnings. Our primary business is making advances to our members. We compete with other suppliers of wholesale funding, both secured and unsecured, including investment banks, commercial banks, and, in certain circumstances, other FHLBanks. Our members have access to alternative funding sources that may offer more favorable terms than we offer on our advances, including more flexible credit or collateral standards. In addition, many of our competitors are not subject to the same regulations that are applicable to us. This enables those competitors to offer products and terms that we are not able to offer.
The availability of alternative funding sources to our members may significantly decrease the demand for our advances. Any change we might make in pricing our advances, to compete more effectively with competitive funding sources, may decrease our profitability on advances. A decrease in the demand for our advances or a decrease in our profitability on advances, would negatively affect our financial condition and results of operations.
Likewise, our acquisition of mortgage loans is subject to competition. The most direct competition for purchases of mortgage loans comes from other buyers of conventional, conforming, fixed rate mortgage loans, such as Fannie Mae and Freddie Mac. Increased competition can result in the acquisition of a smaller market share of the mortgage loans available for purchase and, therefore, lower income from this business activity.
We also compete in the capital markets with Fannie Mae, Freddie Mac, and other GSEs, as well as corporate, sovereign, and supranational entities for funds raised through the issuance of consolidated obligations and other debt instruments. Our ability to obtain funds through the issuance of debt depends in part on prevailing market conditions in the capital markets (including investor demand), such as effects on the reduction in liquidity in financial markets, which are beyond our control. Accordingly, we may not be able to obtain funding on terms that are acceptable to us. Increases in the supply of competing debt products in the capital markets may, in the absence of increases in demand, result in higher debt costs to us or lesser amounts of debt issued at the same cost than otherwise would be the case. Although our supply of funds through issuance of consolidated obligations has always kept pace with our funding needs, we cannot guarantee that this will continue in the future, especially in the case of financial market disruptions when the demand for advances by our members typically increases.
Member mergers or consolidations, failures, changes in member eligibility, or other changes in member business with us may adversely affect our financial condition and results of operations. The financial services industry periodically experiences consolidation, which may occur as a result of various factors including adjustments in business strategies and increasing expense and compliance burdens. If future consolidation occurs within our district, it may reduce the number of current and potential members in our district, resulting in a loss of business to us and a potential reduction in our profitability. Member failures and out-of-district consolidations, as well as members being deemed ineligible for continued FHLBank membership, also can reduce the number of current and potential members in our district. The resulting loss of business could negatively impact our financial condition and the results of operations, as well as our operations generally. If our advances are concentrated in a smaller number of members, our risk of loss resulting from a single event (such as the loss of a member’s business due to the member’s acquisition by a non-member or a member being deemed ineligible for continued membership) would become proportionately greater.
Further, while member failures may cause us to liquidate pledged collateral if the outstanding advances are not repaid, historically, failures have been resolved either through repayment directly from the FDIC or through the purchase and assumption of the advances by another surviving financial institution. Liquidation of pledged collateral by us may cause financial statement losses. Additionally, if members become financially distressed, we may, at the request of their regulators, decrease lending limits or, in certain circumstances, cease lending activities to certain members if they do not have adequate eligible collateral to support additional borrowings. If members are unable to obtain sufficient liquidity from us, that member's financial position may continue to deteriorate. This may negatively impact our reputation and, therefore, negatively impact our financial condition and results of operations.
A high proportion of advances and capital is concentrated with a few members, and a loss of, or change in business activities with, such institutions could adversely affect us. We have a concentration of advances (see Table 21) and capital with a few institutions. A reduction in advances by such institutions, or the loss of membership by such institutions, whether through merger, consolidation, withdrawal, or other action, may result in a reduction in our total assets and a possible reduction of capital as a result of the repurchase or redemption of capital stock. The reduction in assets and capital may also reduce our net income.
Changes in our credit ratings may adversely affect our business operations. As of February 29, 2024, we are rated Aaa with a negative outlook by Moody’s and AA+ with a stable outlook by S&P. Adverse revisions to or the withdrawal of our credit ratings could adversely affect us in a number of ways. It might influence counterparties to limit the types of transactions they would be willing to enter into with us or cause counterparties to cease doing business with us. We have issued letters of credit to support deposits of public unit funds with our members. In some circumstances, loss of or reduction in any of our current ratings could result in our letters of credit no longer being acceptable to collateralize public unit deposits or other transactions. We have also executed various standby bond purchase agreements (SBPA) in which we provide a liquidity facility for bonds issued by the HFAs by agreeing to purchase the bonds in the event they are tendered and cannot be remarketed in accordance with specified terms and conditions. If our current short-term ratings are reduced, suspended, or withdrawn, the issuers will have the right to terminate these SBPAs, resulting in the loss of future fees that would be payable to us under these agreements.
Changes in the credit standing of the U.S. Government or other FHLBanks, including the credit ratings assigned to the U.S. Government or those FHLBanks, could adversely affect us. Pursuant to criteria used by S&P and Moody’s, the FHLBank System’s debt is linked closely to the U.S. sovereign rating because of the FHLBanks’ status as GSEs and the public perception that the FHLBank System would be likely to receive U.S. government support in the event of a crisis. The U.S. government’s fiscal challenges could impact the credit standing or credit rating of the U.S. government, which could in turn result in a revision of the rating assigned to us or the consolidated obligations of the FHLBank System.
The FHLBanks issue consolidated obligations that are the joint and several liability of all FHLBanks. Significant developments affecting the credit standing of one or more of the other FHLBanks, including revisions in the credit ratings of one or more of the other FHLBanks, could adversely affect the cost of consolidated obligations. An increase in the cost of consolidated obligations would adversely affect our cost of funds and negatively affect our financial condition. As of February 29, 2024, the consolidated obligations of the FHLBanks are rated Aaa/P-1 by Moody’s and AA+/A-1+ by S&P. All of the FHLBanks are rated Aaa with a negative outlook by Moody’s and AA+ with a stable outlook by S&P. Moody’s negative outlook for the FHLBank’s aligns with Moody’s negative outlook on the ratings of the U.S. government. Changes in the credit standing or credit ratings of one or more of the other FHLBanks could result in a revision or withdrawal of the ratings of the consolidated obligations by the rating agencies at any time, which may negatively affect our cost of funds and our ability to issue consolidated obligations for our benefit. A negative rating action on the U.S. government would likely result in the same rating action for the FHLBanks.
We may become liable for all or a portion of the consolidated obligations of one or more of the other FHLBanks. We are jointly and severally liable with the other FHLBanks for all consolidated obligations issued on behalf of all FHLBanks through the Office of Finance. We cannot pay any dividends to members or redeem or repurchase any shares of our capital stock unless the principal and interest due on all our consolidated obligations have been paid in full. If another FHLBank were to default on its obligation to pay principal or interest on any consolidated obligation, the FHFA may allocate the outstanding liability among one or more of the remaining FHLBanks on a pro rata basis or on any other basis the FHFA may determine. As a result, our ability to pay dividends to our members or to redeem or repurchase shares of our capital stock could be affected not only by our own financial condition, but also by the financial condition of one or more of the other FHLBanks.
Credit Risk
Declines in U.S. home prices or in activity in the U.S. housing market or rising delinquency or default rates on mortgage loans could result in credit losses and adversely impact our business operations and/or financial condition. A deterioration of the U.S. housing market and national decline in home prices could adversely impact the financial condition of a number of our borrowers, particularly those whose businesses are concentrated in the mortgage industry. One or more of our borrowers may default on their obligations to us for a number of reasons, such as changes in financial condition, a reduction in liquidity, operational failures, or insolvency. In addition, the value of residential mortgage loans pledged to us as collateral may decrease. If a borrower defaults, and we are unable to obtain additional collateral to make up for the reduced value of such residential mortgage loan collateral, we could incur losses. A default by a borrower lacking sufficient collateral to cover its obligations to us could result in significant financial losses, which would adversely impact our results of operations and financial condition.
Defaults by one or more of our institutional counterparties on its obligations to us could adversely affect our results of operations or financial condition. We have a high concentration of credit risk exposure to financial institutions as counterparties, some of which are outside of the United States. Our primary exposures to institutional counterparty risk are with: (1) obligations of mortgage servicers that service the loans we have as collateral on our credit obligations; (2) third-party providers of credit enhancements on the MBS that we hold in our investment portfolio, including mortgage insurers, bond insurers, and financial guarantors; (3) third-party providers of PMI and SMI for mortgage loans purchased under the MPF Program; (4) uncleared derivative counterparties; (5) third-party custodians and futures commission merchants associated with cleared derivatives; and (6) unsecured money market and Federal funds investment transactions. A default by a counterparty with significant obligations to us could adversely affect our ability to conduct operations efficiently and at cost-effective rates, which in turn could adversely affect our results of operations and financial condition.
A default by a derivatives clearinghouse on its obligations could adversely affect our results of operations or financial condition. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and implementing CFTC regulations require all clearable derivatives transactions to be cleared through a derivatives clearinghouse. As a result of such statutes and regulations, we are required to centralize our risk with the derivatives clearinghouses as opposed to the pre-Dodd-Frank Act methods of entering into derivatives transactions that allowed us to distribute our risk among various counterparties. A default by a derivatives clearinghouse could: (1) adversely affect our financial condition in the event the derivatives clearinghouse is unable to make payments owed to us or return our posted initial margin; (2) jeopardize the effectiveness of derivatives hedging transactions; and (3) adversely affect our operations as we may be unable to enter into certain derivatives transactions or do so at cost-effective rates.
Securities or loans pledged as collateral by our members or collateral securing mortgage loans or MBS investments could be adversely affected by the devaluation of, or inability to liquidate, the collateral in the event of a default. Although we seek to obtain sufficient collateral on our credit obligations to protect ourselves from credit losses, changes in market conditions, uninsured or underinsured natural disasters, or other factors may cause the collateral to deteriorate in value, which could lead to a credit loss in the event of a default by a member or a borrower and adversely affect our financial condition and results of operations. If borrowers are unable to pledge additional collateral to fully secure their obligations, whether due to significant financial stress, market volatility, or otherwise, advance levels could decrease and/or credit risk could increase. During economic downturns or periods of significant economic and financial disruptions and uncertainties, the number of members exhibiting significant financial stress may increase, which may expose us to additional member credit risk. A reduction in liquidity in the financial markets or otherwise could have the same effect.
Our funding depends on our ability to access the capital markets. Our primary source of funds is the sale of consolidated obligations in the capital markets, including the short-term discount note market. Our ability to obtain funds through the sale of consolidated obligations depends in part on prevailing conditions in the capital markets (including investor demand) at the time. Our counterparties in the capital markets are also subject to regulations that could alter the balance sheet composition, market activities, and behavior of our counterparties in a way that could be detrimental to our access to the capital markets and overall financial market liquidity, which could have a negative impact on our funding costs and results of operations. Further, we rely on the Office of Finance for the issuance of consolidated obligations, and a failure or interruption of services provided by the Office of Finance could hinder our ability to access the capital markets. Accordingly, we cannot make any assurance that we will be able to obtain funding on terms acceptable to us in the future, if we are able to obtain funding at all in the case of future severe financial, economic, geopolitical, or other disruptions. If we cannot access funding when needed, our ability to support and continue our operations would be adversely affected, negatively affecting our financial condition and results of operations.
Market Risk
Our profitability may be adversely affected if we are not successful in managing our interest rate risk. Like most financial institutions, our results of operations are significantly affected by our ability to manage interest rate risk. We use a number of tools to monitor and manage interest rate risk, including income simulations and duration/market value sensitivity analyses. Key assumptions used in our market value sensitivity analyses include interest rate volatility, mortgage prepayment projections and the future direction of interest rates, among other factors. Key assumptions used in our income simulations include projections of advance volumes and pricing, mortgage loan volumes and pricing, market conditions for our debt, prepayment speeds and cash flows on mortgage-related assets, the level of short-term interest rates, and other factors. These assumptions are inherently uncertain and, as a result, the measures cannot precisely estimate net interest income or the market value of our equity nor can they precisely predict the effect of higher or lower interest rates or changes in other market factors on net interest income or the market value of our equity. Actual results will most likely differ from simulated results due to the timing, magnitude, and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. The increase in interest rates from 2022 to 2023 resulted in spread compression between the interest earned on our interest-earning assets and the interest paid on our interest-bearing liabilities. Our ability to maintain a positive spread between the interest earned on our earning assets and the interest paid on our interest-bearing liabilities may be affected by the unpredictability of changes in interest rates.
Prepayment risk is the risk that the principal amount or a portion thereof outstanding of a mortgage loan or debt security is paid back prior to maturity, which can reduce income if we are unable to reinvest prepaid cash flows at favorable rates. Extension risk is the risk that the expected life of a loan will lengthen, typically observed in rising rate environments, thereby creating fair value and funding risk. The direction of interest rate changes, either actual or perceived, can impact prepayment and extension risk on fixed rate mortgage loans and mortgage-related securities and callable advances. Residential mortgage-related assets typically have no restrictions on prepayment, while commercial mortgage-related assets typically charge a yield maintenance or prepayment fee structured to compensate the security holder for the loss of income resulting from the prepayment and thereby reduce reinvestment risk. Other external factors, such as property values or credit scores, can also impact prepayment and extension risk, as both impact the ability of the borrower to refinance. Although the factors impacting prepayments are observable and we generally expect prepayment and extension behavior in certain environments, the timing and volume of prepayments, particularly in commercial mortgage-related assets, can be difficult to predict.
We rely on derivatives to lower our cost of funds and reduce our interest rate, option and prepayment risk, and we may not be able to enter into effective derivative instruments on acceptable terms; thus, these derivatives may adversely affect our results of operations. We use derivatives to: (1) obtain funding at more favorable rates; and (2) reduce our interest rate risk, option risk and mortgage prepayment risk. Management determines the nature and quantity of hedging transactions using derivatives based on various factors, including market conditions and the expected volume and terms of advances or other transactions. As a result, our effective use of derivatives depends on management’s ability to determine the appropriate hedging positions considering: (1) our assets and liabilities; and (2) prevailing and anticipated market conditions. In addition, the effectiveness of our hedging strategies depends on our ability to enter into derivatives with acceptable counterparties, or through derivative clearinghouses, on terms desirable to us and in the quantities necessary to hedge our corresponding obligations, interest rate risk or other risks. If we are unable to manage our hedging positions properly, or are unable to enter into derivative hedging instruments on desirable terms or at all, we may incur higher funding costs, be required to limit certain advance product offerings, and be unable to effectively manage our interest rate risk and other risks, which could negatively affect our financial condition and results of operations.
The use of derivatives also subjects us to earnings volatility caused primarily by the changes in the fair values of derivatives that do not qualify for hedge accounting and, to a lesser extent, by hedge ineffectiveness, which is the difference in the amounts recognized in our earnings for the changes in fair value of a derivative and the related hedged item. If we are unable to apply hedge accounting due to changes in accounting guidance or other changes in circumstances that impact our ability to utilize hedge accounting, the result could be an increase in the volatility of our earnings from period to period. Such increases in earnings volatility could affect our ability to pay dividends, our ability to meet our retained earnings threshold, and our members’ willingness to hold the capital stock necessary for membership and/or lending activities with us.
Liquidity and Capital Risk
We may not be able to meet our obligations as they come due or meet the credit and liquidity needs of our members in a timely and cost-effective manner. We seek to be in a position to meet our members’ credit and liquidity needs and to pay our obligations without maintaining excessive holdings of low-yielding liquid investments or being forced to incur unnecessarily high borrowing costs. In addition, we are subject to various regulatory liquidity requirements, including a contingency funding plan designed to protect against temporary access disruptions to the FHLBank debt markets in response to a rise in capital market volatility. Our efforts to manage our liquidity position, including carrying out our contingency funding plan and the related costs, may not enable us to meet our obligations and the credit and liquidity needs of our members, which could have an adverse effect on our net interest income, and thereby, our financial condition and results of operations.
An increase in required AHP contributions could adversely affect our results of operations, our ability to pay dividends, or our ability to redeem or repurchase capital stock. The Bank Act requires each FHLBank to contribute to its AHP the greater of: (1) 10 percent of that FHLBank’s net earnings for the previous year; or (2) that FHLBank’s pro rata share of an aggregate of $100 million, the proration of which is based on the net earnings of the FHLBanks for the previous year. A failure of the FHLBanks to make the minimum $100 million annual AHP contribution in a given year or new or modified legislation could result in an increase in our required AHP contribution, which could adversely affect our results of operations, our ability to pay dividends, or our ability to redeem or repurchase capital stock.
We may not be able to pay dividends at rates consistent with past practices. Our board of directors may only declare dividends on our capital stock, payable to members, from our unrestricted retained earnings and current net income. Our ability to pay dividends also is subject to statutory and regulatory requirements, including meeting all regulatory capital requirements. The potential promulgation of regulations or other requirements by the FHFA that would require higher levels of required or restricted retained earnings could lead to higher levels of retained earnings, and thus, lower amounts of unrestricted retained earnings available to be paid out to our members as dividends. Failure to meet any of our regulatory capital requirements would prevent us from paying any dividend.
Events such as changes in our market risk profile, credit quality of assets held, and increased volatility of net income caused by the application of certain GAAP may affect the adequacy of our retained earnings and may require us to increase our threshold level of retained earnings and correspondingly reduce our dividends from historical payout ratios to achieve and maintain the threshold amounts of retained earnings under our RMP. Additionally, FHFA regulations on capital classifications could restrict our ability to pay dividends. Further, our ability to pay dividends at historical rates is impacted directly by our net income, so a decline in net income could result in a decline in dividend rates. A decline in dividend rates may diminish members’ interest in holding FHLBank capital stock and could decrease demand for advances, AMA, or letters of credit.
Lack of a public market and restrictions on transferring our stock could result in an illiquid investment for the holder. Under the GLB Act, FHFA regulations and our capital plan, our Class A Common Stock may be redeemed upon the expiration of a six-month redemption period and our Class B Common Stock after a five-year redemption period following our receipt of a redemption request. Only capital stock in excess of a member’s minimum investment requirement, capital stock held by a member that has submitted a notice to withdraw from membership, or capital stock held by a member whose membership has been terminated may be redeemed at the end of the redemption period. Further, we may elect to repurchase excess capital stock of a member at any time at our sole discretion.
We cannot guarantee, however, that we will be able to redeem capital stock even at the end of the redemption periods. The redemption or repurchase of our capital stock is prohibited by FHFA regulations and our capital plan if the redemption or repurchase of the capital stock would cause us to fail to meet our minimum regulatory capital requirements. Likewise, under such regulations and the terms of our capital plan, we could not honor a member’s capital stock redemption request if the redemption would cause the member to fail to maintain its minimum capital stock investment requirement. Moreover, since our capital stock may only be owned by our members (or, under certain circumstances, former members and certain successor institutions), and our capital plan requires our approval before a member may transfer any of its capital stock to another member, we can provide no assurance that a member would be allowed to sell or transfer any excess capital stock to another member at any point in time.
We may also suspend the redemption of capital stock if we reasonably believe that the redemption would prevent us from maintaining adequate capital against a potential risk, or would otherwise prevent us from operating in a safe and sound manner. In addition, approval from the FHFA for redemptions or repurchases is required if the FHFA or our board of directors were to determine that we have incurred, or are likely to incur, losses that result in, or are likely to result in, charges against our capital. Under such circumstances, we cannot guarantee that the FHFA would grant such approval or, if it did, upon what terms it might do so. We may also be prohibited from repurchasing or redeeming our capital stock if the principal and interest due on any consolidated obligations that we issued through the Office of Finance has not been paid in full or if we become unable to comply with regulatory liquidity requirements to satisfy our current obligations.
Accordingly, there are a variety of circumstances that would preclude us from redeeming or repurchasing our capital stock that is held by a member. Since there is no public market for our capital stock and transfers require our approval, we cannot guarantee that a member’s purchase of our capital stock would not effectively become an illiquid investment.
Operational Risk
We rely on financial models to manage our market and credit risk, to make business decisions, and for financial accounting and reporting purposes. The impact of financial models and the underlying assumptions used to value financial instruments may have an adverse impact on our financial condition and results of operations. We make significant use of financial models for managing risk. For example, we use models to measure and monitor exposures to interest rate and other market risks, including prepayment risk and credit risk. We also use models in determining the fair value of financial instruments for which independent price quotations are not available or reliable. The degree of management judgment in determining the fair value of a financial instrument is dependent on the availability of quoted market prices or observable market parameters. For financial instruments that are actively traded and have quoted market prices or parameters readily available, there is little to no subjectivity in determining fair value. If market quotes are not available, fair values are based on discounted cash flows using market estimates of interest rates and volatility or on dealer prices or prices of similar instruments. Pricing models and their underlying assumptions are based on management's best estimates for discount rates, prepayments, market volatility, and other factors. These assumptions may have a significant effect on the reported fair values of assets and liabilities, including derivatives, the related income and expense, and the expected future behavior of assets and liabilities. While the models we use to value instruments and measure risk exposures are subject to regular validation by independent parties, rapid changes in market conditions could impact the value of our instruments. The use of different models and assumptions, as well as changes in market conditions, could impact our financial condition and results of operations.
The information provided by these models is also used in making business decisions relating to strategies, initiatives, transactions, and products, and in financial statement reporting. We have adopted policies, procedures, and controls to monitor and manage assumptions used in these models. However, models are inherently imperfect predictors of actual results because they are based on assumptions about future performance. Changes in any models or in any of the assumptions, judgments, or estimates used in the models may cause the results generated by the model to be materially different. If the results are not reliable due to inaccurate assumptions, judgments, or estimates, we could make poor business decisions, including asset and liability management, or other decisions, which could result in an adverse financial impact. Furthermore, any strategies that we employ to attempt to manage the risks associated with the use of models may not be effective.
We rely heavily on information systems and other technology. A failure, interruption, or security breach, including events caused by cyberattacks, of our information systems or those of critical vendors and third parties, such as the Federal Reserve Banks, could disrupt our business or adversely affect our reputation. We rely heavily on information systems and other technology to conduct and manage our business, and we rely on vendors and other third parties to perform certain critical services. If key technology platforms become obsolete, if we fail to keep pace with technological changes or innovation, including artificial intelligence and/or machine learning, or if we experience disruptions, including difficulties in our ability to process transactions, our revenue and results of operations could be materially adversely affected. To the extent that we or one of our critical vendors experience a failure or interruption in any of these systems or other technology, including events caused by cyberattacks, we may be unable to conduct and manage our business effectively, including, without limitation, our funding, hedging, and advance activities. Additionally, such failure or breach could disrupt our systems or data necessary for the operation of our business and/or result in the disclosure or misuse of confidential or proprietary information, or the unavailability of systems or data that are necessary for the operation of our business. While we have implemented business resiliency and legacy software reduction plans, we can make no assurance that these plans will be able to prevent, timely and adequately address, or mitigate the negative effects of any such failure or interruption. Cyberattacks, in particular those on financial institutions or financial market infrastructures, have become more frequent, sophisticated, and difficult to detect or prevent. There may be an increased risk of cyberattacks as a result of geopolitical conflicts. A failure to maintain or keep pace with current technology, systems, and facilities or an operational failure or interruption could significantly harm our customer relations, risk management, and profitability, which could negatively affect our financial condition and results of operations. There were no material failures or breaches to disclose for the period.
For additional information on information system and security threats, see “Risk Management - Operations Risk Management” under Item 7. For additional information on cybersecurity, see “Item 1C - “Cybersecurity.”
Our controls and procedures may fail or be circumvented, and risk management policies and procedures may be inadequate. We may fail to identify and manage risks related to a variety of aspects of our business, including without limitation, operational risk, legal and compliance risk, human capital risk, liquidity risk, market risk, and credit risk. We have adopted controls, procedures, policies, and systems to monitor and manage these risks. Our management cannot provide complete assurance that such controls, procedures, policies, and systems are adequate to identify and manage the risks inherent in our business and because our business continues to evolve, we may fail to fully understand the implications of changes in our business, and therefore, we may fail to enhance our risk governance framework to timely or adequately address those changes. Failed or inadequate controls and risk management practices could have an adverse effect on our financial condition, results of operations or reputation.
For additional information on internal controls, see “Risk Management - Operations Risk Management” under Item 7.
We may be unable to attract and retain a highly qualified and diverse workforce, including key management. Our success depends on the talents and efforts of our employees, and particularly our management. We have experienced higher employee turnover and increased competition in hiring and retaining skilled key personnel in 2023, attributed to the disruptions and changes to the U.S. labor market triggered by the COVID-19 pandemic. We may be unable to retain key management or to attract other highly qualified and diverse employees, particularly if we do not offer employment terms that are competitive with the rest of the market. Failure to attract and retain highly qualified and diverse employees, or failure to develop and implement an adequate succession plan for key members of management, could adversely affect our financial condition and results of operations.
Reliance on FHLBank Chicago as MPF Provider could have a negative impact on our business if FHLBank Chicago were to default on its contractual obligations owed to us. As part of our business, we participate in the MPF Program with FHLBank Chicago. In its role as MPF Provider, FHLBank Chicago provides the infrastructure, operational support, and maintenance of investor relations for the MPF Program and is also responsible for publishing and maintaining the MPF Guides, which include the requirements PFIs must follow in originating or selling and servicing MPF mortgage loans. If FHLBank Chicago changes its MPF Provider role, ceases to operate the MPF Program, or experiences a failure or interruption in its information systems and other technology, our mortgage loan assets could be adversely affected, and we could experience a related decrease in our net interest margin and profitability. In the same way, we could be adversely affected if any of FHLBank Chicago's third-party vendors engaged in the operation of the MPF Program, or investors that purchase mortgages under the MPF Program, were to experience operational or other difficulties that prevent the fulfillment of their contractual obligations.

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B: Unresolved Staff Comments
Not applicable.

---

ITEM 2. PROPERTIES
Item 2: Properties
We own our primary facility located at 500 SW Wanamaker Road, Topeka, Kansas. Our facility has Leadership in Energy and Environment Design Certified Gold status, in alignment with our commitment to sustainability, energy efficiency, and natural resource conservation.

---

ITEM 3. LEGAL PROCEEDINGS
Item 3: Legal Proceedings
We are subject to various pending legal proceedings arising in the normal course of business. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material adverse effect on our financial condition or results of operations. Additionally, management does not believe that we are subject to any material pending legal proceedings outside of ordinary litigation incidental to our business.

---

ITEM 4. MINE SAFETY DISCLOSURE
Item 4: Mine Safety Disclosures
Not applicable.
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
As a cooperative, members own almost all of our Class A Common Stock and Class B Common Stock with the remainder of the capital stock held by former members that are required to retain capital stock ownership to support outstanding advance and mortgage loan activity the former members executed while they were members. However, the portion of our capital stock subject to mandatory redemption is treated as a liability and not as capital, including the capital stock of former members. There is no public trading market for our capital stock.
All of our member directors are elected by and from the membership, and we conduct our business in advances and mortgage loan acquisitions almost exclusively with our members. Depending on the class of capital stock, it may be redeemed at par value either six months (Class A Common Stock) or five years (Class B Common Stock) after we receive a written request by a member, subject to regulatory limits and to the satisfaction of any ongoing stock investment requirements applying to the member under our capital plan. We may repurchase shares held by members in excess of the members’ required stock holdings at our discretion at any time at par value. Par value of all common stock is $100 per share. As of February 29, 2024, we had 679 stockholders of record and 3,298,033 shares of Class A Common Stock and 20,687,257 shares of Class B Common Stock outstanding, including 2,677 shares of Class A Common Stock and no shares of Class B Common Stock subject to mandatory redemption by members or former members. “Classes” of stock are not registered under the Securities Act of 1933, as amended. The Recovery Act amended the Exchange Act to require the registration of a class of common stock of each FHLBank under Section 12(g) of the Exchange Act and for each FHLBank to maintain such registration and to be treated as an “issuer” under the Exchange Act, regardless of the number of members holding such a class of stock at any given time. Pursuant to an FHFA regulation, we voluntarily registered one of our classes of stock pursuant to Section 12(g)(1) of the Exchange Act.
Dividends may be paid in cash or shares of Class B Common Stock as authorized under our capital plan and approved by our board of directors. FHFA regulation prohibits any FHLBank from paying a stock dividend if excess stock outstanding will exceed one percent of its total assets after payment of the stock dividend. We consistently manage our excess capital stock position to be able to pay stock dividends.
Base stock dividends on Class A Common Stock and Class B Common Stock are anticipated to remain at or near current levels in 2024 relative to what was paid in 2023. Dividend rates are influenced by capital levels and the balance of the rates we offer members on advances and the dividend rates we pay on activity-based stock. Historically, dividend rates have moved directionally with short-term interest rates but the pace of interest rate increases slowed at the end of 2023, so further increases in dividend rates may be limited. Market conditions and movements in short-term interest rates can be unpredictable. Adverse changes in FHLBank’s financial results may result in lower dividend rates in future periods. See Item 1 - “Business - Capital, Capital Rules and Dividends” for more information regarding our retained earnings policy, and also see Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Capital” for a discussion of restrictions on dividend payments in the form of capital stock.

---

ITEM 6. SELECTED FINANCIAL DATA
Item 6: [Reserved]

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to assist the reader in understanding our business and assessing our operations both historically and prospectively. This discussion should be read in conjunction with our audited financial statements and related notes presented under Item 8 of this report. Our MD&A includes the following sections:
▪Executive Level Overview - tabular presentation of selected financial data and a general description of our business and financial highlights;
▪Financial Market Trends - a discussion of current trends in the financial markets and overall economic environment, including the related impact on our operations;
▪Critical Accounting Policies and Estimates - a discussion of accounting policies that require critical estimates and assumptions;
▪Results of Operations - an analysis of our operating results, including disclosures about the sustainability of our earnings;
▪Financial Condition - an analysis of our financial position;
▪Liquidity and Capital Resources - an analysis of our cash flows and capital position;
▪Risk Management - a discussion of our risk management strategies; and
▪Recently Issued Accounting Standards.
Additionally, refer to Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Annual Report on Form 10-K for our MD&A for the fiscal year 2022 compared to fiscal year 2021.
Executive Level Overview
Table 3 presents selected financial data for the periods indicated (dollar amounts in thousands):
Table 3
12/31/2023 12/31/2022 12/31/2021 12/31/2020 12/31/2019
Statement of Condition (as of period end):
Total assets $ 74,946,985 $ 71,992,842 $ 48,021,238 $ 52,591,712 $ 63,276,654
Investments1
20,486,846 19,261,151 16,058,574 17,251,975 20,086,473
Advances 45,444,769 44,262,750 23,484,288 21,226,823 30,241,315
Mortgage loans, net 8,352,713 7,905,135 8,135,046 9,205,207 10,633,009
Total liabilities 71,056,333 68,316,298 45,306,972 49,923,945 60,485,603
Deposits 752,200 711,061 946,207 1,229,361 790,640
Consolidated obligations, net2
69,790,738 67,281,244 44,199,598 48,530,494 59,461,225
Total capital 3,890,652 3,676,544 2,714,266 2,667,767 2,791,051
Capital stock 2,607,683 2,507,709 1,499,301 1,574,004 1,766,456
Retained earnings 1,401,940 1,253,105 1,142,650 1,051,455 999,809
Statement of Income (for the year ended):
Net interest income 460,051 362,991 296,648 251,012 256,064
Other income (loss) 47,947 (13,942) (41,434) (40,148) 22,973
Other expenses 97,008 80,854 77,529 80,407 72,816
Income before assessments 411,631 267,485 178,435 131,173 205,834
AHP 41,164 26,749 17,845 13,123 20,597
Net income 370,467 240,736 160,590 118,050 185,237
Selected Financial Ratios and Other Financial Data (for the year ended):
Dividends paid 221,632 130,281 69,395 70,824 99,450
Weighted average dividend rate3
8.47 % 6.47 % 4.49 % 4.38 % 6.46 %
Dividend payout ratio4
59.83 % 54.12 % 43.21 % 59.99 % 53.69 %
Return on average equity 9.56 % 7.47 % 5.88 % 4.50 % 7.32 %
Return on average assets 0.49 % 0.39 % 0.33 % 0.21 % 0.33 %
Average equity to average assets 5.10 % 5.28 % 5.54 % 4.59 % 4.45 %
Net interest margin5
0.61 % 0.60 % 0.61 % 0.44 % 0.45 %
Total capital ratio6
5.19 % 5.11 % 5.65 % 5.07 % 4.41 %
Regulatory capital ratio7
5.35 % 5.22 % 5.50 % 5.00 % 4.38 %
1 Includes trading securities, available-for-sale securities, held-to-maturity securities, interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold.
2 Consolidated obligations are bonds and discount notes that we are primarily liable to repay. See Note 15 to the financial statements for a description of the par amount of consolidated obligations of all FHLBanks for which we are jointly and severally liable.
3 Dividends paid in cash and stock on both classes of stock as a percentage of average capital stock eligible for dividends.
4 Ratio disclosed represents dividends declared and paid during the year as a percentage of net income for the period presented. FHFA regulation requires dividends be paid out of known income prior to declaration date.
5 Net interest income as a percentage of average earning assets.
6 GAAP capital stock, which excludes mandatorily redeemable capital stock, plus retained earnings and accumulated other comprehensive income (AOCI) as a percentage of total assets.
7 Regulatory capital (i.e., permanent capital and Class A Common Stock) as a percentage of total assets.
We are a regional wholesale bank that makes advances (loans) to, purchases mortgage loans from, and provides limited other financial services primarily to our members. Our mission is to be a reliable source of liquidity and low-cost funding for our members in support of residential mortgage lending and related housing and economic development needs of the communities served by our members. As an independent, member-owned cooperative, we seek to maintain a balance between our public purpose and our ability to provide adequate returns on the capital supplied by our members. Our members include commercial banks, savings institutions, credit unions, insurance companies, and CDFIs.
2023 Financial Highlights:
•Net interest income/margin: Net interest income increased $97.1 million to $460.1 million for the year ended December 31, 2023 compared to $363.0 million for the year ended December 31, 2022. The increase in net interest income resulted from increased average balances on advances and investments at higher interest rates, combined with the impact of higher interest rates on fair value hedges and a continued decline in premium amortization on mortgage-related assets. Net interest margin increased one basis point for the current quarter, from 0.60 percent for the year ended December 31, 2022 to 0.61 percent for the year ended December 31, 2023.
•Total assets: Total assets increased from $72.0 billion as of December 31, 2022 to $74.9 billion as of December 31, 2023, driven by the $1.8 billion increase in long-term investments between periods and a $1.1 billion increase in advances. The average balance of interest-earning assets increased $14.9 billion between the year ended December 31, 2023 and the same period in the prior year, driven by a $11.9 billion increase in the average balance of advances and $2.9 billion increase in the average balance of short- and long-term investments.
•Primary Mission Assets: Advances to members and housing associates and mortgage loans purchased from members are Primary Mission Assets because they are fundamental to the business and mission of FHLBank. The Primary Mission Asset ratio, as defined by the FHFA under its core mission achievement guidance, is calculated as average advances and average mortgage loans to average consolidated obligations (less certain U.S. Treasury securities), based on year-to-date averages. As of December 31, 2023 and December 31, 2022, our Primary Mission Asset ratio was 81 percent and 80 percent, respectively.
•Advances: Advances increased to $45.4 billion at December 31, 2023 compared to $44.3 billion at December 31, 2022, representing 60.6 percent of total assets as of December 31, 2023, compared to 61.5 percent as of December 31, 2022. The average balance of advances increased $11.9 billion, or 34.6 percent, to $46.2 billion for the year ended December 31, 2023 when compared to the prior year period. The increase in the average balance of advances between periods was largely attributed to the funding needs of depository members. FHLBank continues to execute its liquidity mission by serving as a reliable source of liquidity and funding for members.
•Mortgage loans: Mortgage loans increased $0.5 billion from $7.9 billion at December 31, 2022 to $8.4 billion as of December 31, 2023, representing 11.1 percent of total assets as of December 31, 2023, compared to 11.0 percent as of December 31, 2022. The average balance of mortgage loans increased $56.5 million to $8.1 billion for the year ended December 31, 2023 when compared to the prior year period. Interest income continues to be positively impacted by lower premium amortization and originations at interest rates higher than that of the existing portfolio.
•Performance ratios: Return on average equity (ROE) increased to 9.56 percent for the year ended December 31, 2023 compared to 7.47 percent for the prior year due to the increase in net income for the current year, partially offset by the increase in average capital.
•Dividends: The Class A Common Stock dividend rate of 4.26 percent per annum and the Class B Common Stock dividend rate of 9.12 percent per annum combined for a weighted average dividend rate of 8.47 percent for the year ended December 31, 2023 compared to a weighted average dividend rate of 6.47% for the year ended December 31, 2022.
Financial Market Trends
The primary external factors that affect net interest income are market interest rates and the general state of the economy, as discussed in greater detail below.
General discussion of the level of market interest rates:
Table 4 presents selected market interest rates as of the dates or for the periods shown.
Table 4
Market Instrument 2023 2022 12/31/2023 12/31/2022
Average Rate Average Rate Ending Rate Ending Rate
Secured Overnight Financing Rate1
5.01 % 1.64 % 5.38 % 4.30 %
Federal funds effective rate1
5.03 1.68 5.33 4.33
Federal Reserve interest rate on reserve balances1
5.10 1.76 5.40 4.40
3-month U.S. Treasury bill1
5.18 2.04 5.34 4.37
2-year U.S. Treasury note1
4.60 2.99 4.25 4.43
5-year U.S. Treasury note1
4.06 3.00 3.85 4.00
10-year U.S. Treasury note1
3.96 2.95 3.88 3.88
30-year residential mortgage note rate1,2
6.91 5.55 6.76 6.58
1 Source is Bloomberg.
2 Mortgage Bankers Association weekly 30-year fixed rate mortgage contract rate.
The deposit outflows and financial difficulties experienced by multiple U.S. banks at the end of the first quarter of 2023 created stress for the banking industry and the financial markets, keeping demand for liquidity elevated. Members have access to other wholesale funding sources, such as brokered deposits or Fed funds, which may impact the demand for advances. The Federal Reserve BTFP also offers eligible banks an additional source of liquidity collateralized with high-quality securities at par to eliminate the need to sell securities to meet the needs of depositors. While the BTFP is a temporary measure, it could replace advance demand for on-balance sheet liquidity for some members until the program ends March 11, 2024. We continue to monitor these and related developments and assess any effect on our business, results of operations, and financial condition.
In 2023, continued concerns about inflation and recession risks led the FOMC to initiate rate hikes of 25 basis points at the February, March, May, and July meetings. Noting improving financial conditions and progress toward lower inflation, the FOMC kept the target rate unchanged in September, November and December. Analysts anticipate that rate cuts could begin in 2024. Mortgage rates remained elevated compared to market conditions one year ago, resulting in declines in new mortgage origination activity and lower mortgage prepayments, which has reduced related premium amortization and increased yields on mortgage-related assets compared to 2022.
We issue debt at a spread above U.S. Treasury securities; as a result, the level of interest rates impacts the cost of issuing FHLBank consolidated obligations and the cost of advances to our members and housing associates. The cost of issuing short-term debt has increased in 2023 with the increases in market rates, but the high demand for short-term Agency debt has kept this spread to the comparable Treasury security relatively narrow. Congress passed legislation for a short-term funding bill to fund the U.S. government through March 22, 2024; however, the U.S. continues to face a possible government shutdown. Historically, the threat of a government shutdown has not had a significant impact on the demand or cost to issue FHLBank debt.
Volatility in the capital markets can also impact the demand for and cost of debt issued by the FHLBanks. Efforts of the Federal Reserve Board to ease inflation in the first half of 2023 contributed to volatility in the financial markets, financial difficulties experienced by some depository institutions, and uncertainties about the economic outlook. Robust consumer spending and low levels of unemployment kept inflation elevated throughout 2023. Continued inflation and higher interest rates could impact economic growth and member demand for advances. For further discussion, see this Item 7 - “Financial Condition - Consolidated Obligations.”
The publication of LIBOR on a representative basis ceased for one-week and two-month LIBOR effective January 1, 2022, and the remaining LIBOR tenors ceased immediately after June 30, 2023. Any remaining variable rate investments, derivative assets, derivative liabilities, and related collateral that were indexed to LIBOR followed the contractual or statutory fallback provisions in subsequent rate resets. In accordance with the recommendations of our regulator and the Alternative Reference Rates Committee (ARRC) and industry developments, we selected SOFR as our preferred primary replacement rate for LIBOR-indexed financial instruments.
Critical Accounting Policies and Estimates
The preparation of our financial statements in accordance with GAAP requires management to make a number of judgments, estimates, and assumptions that affect our reported results and disclosures. Several of our accounting policies are inherently subject to valuation assumptions and other subjective assessments and are more critical than others in terms of their importance to results. Given the assumptions and judgment used, we have identified the accounting for derivatives and hedging activities as a critical accounting estimate. Our financial condition and results of operations could be materially affected under different conditions or different assumptions related to this accounting estimate.
Accounting for Derivatives and Hedging Activities, including Valuation of Derivatives and Hedged Items: Derivative instruments are carried at fair value on the Statements of Condition. Any change in the fair value of a derivative is recorded each period in current period earnings or other comprehensive income (OCI), depending upon whether the derivative is designated as part of a hedging relationship and, if it is, the type of hedging relationship. Therefore, the assumptions and judgment most critical to the application of this accounting policy are those affecting the estimation of fair values of derivative instruments and the related hedged items, which may have a significant impact on the results reported. A majority of our derivatives are structured to offset some or all of the risk exposure inherent in our lending, mortgage purchase, investment, and funding activities. We seek to utilize hedging techniques that are effective under the hedge accounting requirements; however, in some cases, we have elected to enter into derivatives that are economically effective at reducing risk but do not meet hedge accounting requirements. The accounting framework introduces the potential for considerable income variability from period to period. Specifically, a mismatch can exist between the timing of income and expense recognition from assets or liabilities and the income effects of derivative instruments positioned to mitigate market risk and cash flow variability. Therefore, during periods of significant changes in interest rates and other market factors, reported earnings may exhibit considerable variability. At December 31, 2023, our derivatives portfolio included notional amounts of $44.8 billion accounted for as fair value hedges and $6.7 billion accounted for as economic hedges, the gross fair value of derivative assets and liabilities was $139.3 million and $410.8 million, respectively, and the net fair value of derivative assets and liabilities as of December 31, 2023 was $350.4 million and $0.9 million, respectively.
FHLBank bases the fair values of derivatives on instruments with similar terms or market prices, when available. However, active markets do not exist for many of FHLBank’s derivatives. Consequently, fair values for these instruments are generally estimated using standard valuation techniques such as comparisons to similar instruments and/or discounted cash flow analysis, which uses observable market inputs, such as discount rate, forward interest rates, and volatility assumptions. Observable market inputs are actively quoted and can be validated to external sources. See Note 14 of the Notes to Financial Statements under Item 8 - “Financial Statements and Supplementary Data” for discussion of the valuation methodologies and primary inputs used to develop the fair value measurement for these instruments.
A hedging relationship is created from the designation of a derivative financial instrument as hedging our exposure to changes in the fair value of a financial instrument. Fair value hedge accounting allows for the offsetting fair value of the hedged risk in the hedged item to also be recorded in current period earnings. Perfectly 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.
For derivative transactions that potentially qualify for long haul fair value hedge accounting treatment, management must assess how effective the derivatives have been, and are expected to be, in hedging offsetting changes in the estimated fair values attributable to the risks being hedged in the hedged items. Quantitative hedge effectiveness testing is performed at the inception of the hedging relationship and on an ongoing basis for long haul fair value hedges. We perform testing at hedge inception based on regression analysis of the hypothetical performance of the hedging relationship using historical market data. We then perform regression testing on an ongoing basis using accumulated actual values in conjunction with hypothetical values. For the hedging relationship to be considered effective, results must fall within established tolerances. If the hedge fails effectiveness testing, the hedge no longer qualifies for hedge accounting and the derivative is marked to estimated fair value through current period earnings without any offsetting change in estimated fair value related to the hedged item.
For derivative instruments and hedged items that meet the requirements as described above and are designated as fair value hedges, we do not anticipate any significant impact on our financial condition or operating performance. For derivative instruments not qualifying for hedge accounting or with no identified hedged item (economic derivatives or economic hedges), changes in the market value of the derivative are reflected in income without any offset. This portfolio of economic derivatives consisted primarily of: (1) interest rate swaps hedging fixed rate MBS and non-MBS trading investments; (2) interest rate caps hedging adjustable rate MBS with embedded caps; and (3) interest swaps hedging consolidated obligation discount notes with tenors less than six months. While the fair value of derivative instruments with no offsetting qualifying hedged item will fluctuate with changes in interest rates and the impact on our earnings can be material, the change in fair value of trading securities associated with economic hedges is expected to partially offset that impact. The estimated fair values of the derivatives and hedged items do not have any cumulative economic effect if the derivative and the hedged item are held to maturity, or contain mutual optional termination provisions at par. Since these fair values fluctuate throughout the hedge period and eventually return to zero (derivative) or par value (hedged item) on the maturity or option exercise date, the earnings impact of fair value changes is only a timing issue for hedging relationships that remain outstanding to maturity or the call termination date. See Tables 43 and 44 under Item 7A - “Quantitative and Qualitative Disclosures About Market Risk,” which present the notional amount and fair value amount for derivative instruments by hedged item, hedging instrument, hedging objective, and accounting designation. See Tables 10 through 12 under this Item 7, which show the relationship of gains/losses on economic hedges and gains/losses on the trading securities being hedged by economic derivatives. Our projections of changes in fair value of the derivatives have been consistent with actual results.
See Note 1 and Note 6 of the Notes to Financial Statements under Item 8 - “Financial Statements and Supplementary Data” for additional discussion of accounting for derivatives and types of hedging transactions.
Results of Operations
Earnings Analysis: Table 5 presents changes in the major components of our net income (dollar amounts in thousands):
Table 5
Increase (Decrease) in Earnings Components
2023 vs. 2022
Dollar Change Percentage Change
Total interest income $ 2,421,884 175.3 %
Total interest expense 2,324,824 228.3
Net interest income 97,060 26.7
Provision (reversal) for credit losses on mortgage loans (1,351) (190.3)
Net interest income after mortgage loan loss provision 98,411 27.2
Net gains (losses) on trading securities 132,102 117.4
Net gains (losses) on derivatives (71,569) (82.7)
Other non-interest income 1,356 11.2
Total other income (loss) 61,889 443.9
Operating expenses 11,802 18.6
Other non-interest expenses 4,352 25.1
Total other expenses 16,154 20.0
AHP assessments 14,415 53.9
NET INCOME $ 129,731 53.9 %
Net income increased $129.7 million, or 53.9 percent, to $370.5 million for the year ended December 31, 2023 compared to $240.7 million for the year ended December 31, 2022 primarily attributed to a $97.1 million increase in net interest income, as discussed in greater detail below, and a $60.5 million increase related to fluctuations in the fair value of derivatives and trading securities.
Net Interest Income: Net interest income increased $97.1 million, or 26.7 percent, to $460.1 million for the year ended December 31, 2023 compared to $363.0 million for the year ended December 31, 2022. Balance sheet composition, market interest rates and trends, and net interest spread affect net interest income and net interest margin on earning assets, including advances, mortgage loans, and investments. Net interest margin increased one basis point during 2023 compared to 2022, to 0.61 percent for the year ended December 31, 2023 from 0.60 percent for the prior year due to increased average balances on advances and investments at higher interest rates, combined with the impact of higher interest rates and spreads on fair value hedges (see Table 8). Additionally, prepayments continued to slow on mortgage-related assets, which also increased interest income due to less premium amortization between periods. However, slower prepayments generally extend the weighted average life of mortgages, which can result in long-term interest rate spread compression if funding needs to be reissued (or replaced) at higher interest rates, as our liabilities funding mortgage-related assets are generally shorter term.
Net interest margin increased despite the decreases in net interest spread between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. This compression of net interest spread was due to changes in balance sheet composition and the increase in the cost of rate-sensitive liabilities, primarily as it relates to the mortgage loan portfolio. Advances and short-term investments are typically our lowest spread assets, so net interest spread declines as short-term advance and short-term investment balances comprise a larger percentage of total assets. The mortgage loan portfolio is fixed rate and funded with a combination of callable debt, fixed rate debt, and short-term debt, and the increase in funding costs, especially short-term debt, reduced the net interest spread on the mortgage loan portfolio. The increase in funding costs was due to upward repricing of variable rate debt, including fixed rate debt swapped to a variable rate, and the issuance of fixed rate debt at higher market interest rates. For further discussion of investments, advances and mortgage loans, see this Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition.”
Net interest income and net interest margin are also impacted by derivative and hedging activities, as net interest settlements on derivatives and the changes in fair values of hedged assets and liabilities and the corresponding derivative instruments designated in fair value hedging relationships are recorded in net interest income. For 2023, net interest income increased $150.1 million due to net interest settlements received on fair value hedges compared to net interest paid in the prior year due to increases in interest rates between periods. Tables 6 and 7 present the impact of derivatives and hedging activities recorded in net interest income (in thousands):
Table 6
Advances Investments Mortgage Loans Consolidated Obligation Discount Notes Consolidated Obligation Bonds Total
Unrealized gains (losses) due to fair value changes
$ (6,037) $ 27,739 $ - $ (883) $ (4,256) $ 16,563
Net amortization/accretion of hedging activities
2,177 - 937 - 290 3,404
Net interest received (paid) 271,973 184,570 - (34,679) (319,386) 102,478
Price alignment amount (18,618) (18,091) - 698 444 (35,567)
TOTAL $ 249,495 $ 194,218 $ 937 $ (34,864) $ (322,908) $ 86,878
Table 7
Advances Investments Mortgage Loans Consolidated Obligation Discount Notes Consolidated Obligation Bonds Total
Unrealized gains (losses) due to fair value changes
$ 4,030 $ 21,246 $ - $ 2,421 $ 5,495 $ 33,192
Net amortization/accretion of hedging activities
(2,224) - 803 - - (1,421)
Net interest received (paid) 19,577 (3,554) - (15,373) (48,241) (47,591)
Price alignment amount (4,975) (4,785) - 490 67 (9,203)
TOTAL $ 16,408 $ 12,907 $ 803 $ (12,462) $ (42,679) $ (25,023)
Table 8 presents average balances and yields of major earning asset categories and the sources funding those earning assets (dollar amounts in thousands):
Table 8
Year Ended
12/31/2023 12/31/2022 12/31/2021
Average
Balance Interest
Income/Expense Yield Average
Balance Interest
Income/Expense Yield Average
Balance Interest
Income/Expense Yield
Interest-earning assets:
Interest-bearing deposits $ 2,817,399 $ 143,330 5.09 % $ 1,560,269 $ 33,548 2.15 % $ 955,851 $ 943 0.10 %
Securities purchased under agreements to resell
2,391,466 121,367 5.08 2,311,370 42,895 1.86 2,058,381 1,672 0.08
Federal funds sold 4,321,685 221,114 5.12 3,426,096 68,392 2.00 2,724,279 2,146 0.08
Investment securities1,2
11,838,703 644,726 5.45 11,129,636 264,278 2.37 11,490,425 116,673 1.02
Advances1,2
46,166,703 2,409,840 5.22 34,290,538 742,694 2.17 23,178,487 129,586 0.56
Mortgage loans3,4
8,080,282 261,352 3.23 8,023,766 228,583 2.85 8,481,472 211,770 2.50
Other interest-earning assets
50,302 1,430 2.84 47,418 885 1.87 39,120 938 2.40
Total earning assets 75,666,540 3,803,159 5.03 60,789,093 1,381,275 2.27 48,928,015 463,728 0.94
Other non-interest-earning assets
240,099 223,334 324,482
Total assets $ 75,906,639 $ 61,012,427 $ 49,252,497
Interest-bearing liabilities:
Deposits $ 685,032 32,921 4.81 $ 785,204 10,342 1.32 $ 1,032,746 400 0.04
Consolidated obligations1:
Discount Notes 22,070,185 1,102,702 5.00 18,092,988 368,075 2.03 10,760,061 5,481 0.05
Bonds 48,159,776 2,206,160 4.58 38,125,726 638,751 1.68 34,128,310 160,173 0.47
Other borrowings 46,359 1,325 2.86 46,803 1,116 2.39 46,896 1,026 2.19
Total interest-bearing liabilities
70,961,352 3,343,108 4.71 57,050,721 1,018,284 1.78 45,968,013 167,080 0.36
Capital and other non-interest-bearing funds
4,945,287 3,961,706 3,284,484
Total funding $ 75,906,639 $ 61,012,427 $ 49,252,497
Net interest income and net interest spread5
$ 460,051 0.32 % $ 362,991 0.49 % $ 296,648 0.58 %
Net interest margin6
0.61 % 0.60 % 0.61 %
1 Interest income/expense and average rates include the effect of associated derivatives that qualify for fair value hedge accounting treatment.
2 Interest income includes prepayment/yield maintenance fees.
3 Credit enhancement income payments made to PFIs are netted against interest earnings on the mortgage loans. The expense related to these payments was $6.5 million for the year ended December 31, 2023 and $6.4 million for the years ended December 31, 2022 and 2021.
4 Mortgage loans average balance includes outstanding principal for non-performing conventional loans. However, these loans no longer accrue interest.
5 Net interest spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
6 Net interest margin is defined as net interest income as a percentage of average interest-earning assets.
Changes in the volume of interest-earning assets and the level of interest rates influence changes in net interest income, net interest spread and net interest margin. Table 9 summarizes changes in interest income and interest expense (in thousands):
Table 9
2023 vs. 2022 2022 vs. 2021
Increase (Decrease) Due to Increase (Decrease) Due to
Volume1,2
Rate1,2
Total Volume1,2
Rate1,2
Total
Interest Income3:
Interest-bearing deposits $ 40,729 $ 69,053 $ 109,782 $ 963 $ 31,642 $ 32,605
Securities purchased under agreements to resell
1,538 76,934 78,472 230 40,993 41,223
Federal funds sold 21,882 130,840 152,722 694 65,552 66,246
Investment securities 17,860 362,588 380,448 (3,776) 151,381 147,605
Advances 328,744 1,338,402 1,667,146 87,651 525,457 613,108
Mortgage loans 1,621 31,148 32,769 (11,874) 28,687 16,813
Other assets 57 488 545 177 (230) (53)
Total earning assets 412,431 2,009,453 2,421,884 74,065 843,482 917,547
Interest Expense3:
Deposits (1,480) 24,059 22,579 (119) 10,061 9,942
Consolidated obligations:
Discount notes 96,362 638,265 734,627 6,237 356,357 362,594
Bonds 206,522 1,360,887 1,567,409 20,862 457,716 478,578
Other borrowings (10) 219 209 (2) 92 90
Total interest-bearing liabilities 301,394 2,023,430 2,324,824 26,978 824,226 851,204
Change in net interest income $ 111,037 $ (13,977) $ 97,060 $ 47,087 $ 19,256 $ 66,343
1 Changes in interest income and interest expense not identifiable as either volume-related or rate-related have been allocated to volume and rate based upon the proportion of the absolute value of the volume and rate changes.
2 Amounts used to calculate volume and rate changes are based on numbers in dollars. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same results.
3 Interest income/expense and average rates include the effect of associated derivatives that qualify for fair value hedge accounting treatment.
Net Gains (Losses) on Derivatives: Tables 10 and 11 present the earnings impact of derivatives by financial instrument as recorded in other non-interest income (in thousands):
Table 10
Advances Investments Mortgage Loans Consolidated Obligation Discount Notes Consolidated Obligation Bonds Total
Derivatives not designated as hedging instruments:
Economic hedges - unrealized gains (losses) due to fair value changes
$ 911 $ (23,874) $ - $ 3,624 $ 837 $ (18,502)
Mortgage delivery commitments - - (809) - - (809)
Economic hedges - net interest received (paid)
3,616 33,327 - (954) (956) 35,033
Price alignment amount (224) (594) - (10) 29 (799)
Net gains (losses) on derivatives 4,303 8,859 (809) 2,660 (90) 14,923
Net gains (losses) on trading securities hedged on an economic basis with derivatives
- 19,579 - - - 19,579
TOTAL $ 4,303 $ 28,438 $ (809) $ 2,660 $ (90) $ 34,502
Table 11
Advances Investments Mortgage Loans Consolidated
Obligation Discount Notes Consolidated
Obligation Bonds Total
Derivatives not designated as hedging instruments:
Economic hedges - unrealized gains (losses) due to fair value changes
$ 4,717 $ 108,115 $ - $ (3,037) $ (837) $ 108,958
Mortgage delivery commitments - - (8,619) - - (8,619)
Economic hedges - net interest received (paid) (172) (11,676) - (1,849) 36 (13,661)
Price alignment amount (15) (214) - 37 6 (186)
Net gains (losses) on derivatives 4,530 96,225 (8,619) (4,849) (795) 86,492
Net gains (losses) on trading securities hedged on an economic basis with derivatives
- (112,106) - - - (112,106)
TOTAL $ 4,530 $ (15,881) $ (8,619) $ (4,849) $ (795) $ (25,614)
The volatility in other income (loss) is driven predominantly by net gains (losses) on economic derivatives, which generally include interest rate swaps, caps and floors. Net gains (losses) from derivatives are sensitive to several factors, including: (1) the general level of interest rates; (2) the shape of the term structure of interest rates; and (3) implied volatilities of interest rates. The fair value of options, particularly interest rate caps and floors, are also impacted by the time value decay that occurs as the options approach maturity, but this factor represents the normal amortization of the cost of these options and flows through income irrespective of any changes in the other factors impacting the fair value of the options (level of rates, shape of curve, and implied volatility).
As reflected in Tables 10 and 11, the majority of the net unrealized gains and losses on derivatives are related to changes in the fair values of economic derivatives. Net interest payments or receipts on these economic derivatives flow through net gains (losses) on derivatives instead of net interest income, which does not reflect the full economic impact of the swaps on yields, especially for trading investments that are swapped to variable rates. We generally record net unrealized gains on derivatives when the overall level of interest rates rises over the period and record net unrealized losses when the overall level of interest rates falls over the period. Net unrealized gains or losses on derivatives will continue to be a function of the general level of swap rates but are also impacted by swap spreads in relationship to the relevant index rate.
For the year ended December 31, 2023 and 2022, net gains and losses on derivatives and hedging activities resulted in other income of $14.9 million and $86.5 million, respectively. The decrease between periods was attributed to fair value fluctuations resulting from an increase in the level of swap index rates. The increase in swap index rates between years positively impacted the net interest settlements on economic hedges, as they were in a pay position of $13.7 million for the prior year and a receive position of $35.0 million for the year ended December 31, 2023.
The fair value gains and losses (excluding related net interest settlements) on the economic interest rate swaps hedging the multifamily GSE MBS, U.S. Treasury obligations, and GSE debentures were largely offset by the fair value gains and losses attributable to the associated securities for the years ended December 31, 2023 and 2022, which are recorded in net gains (losses) on trading securities (see Table 12). Unrealized gains and losses on trading securities are generally driven by movements in intermediate interest rates between periods and are discussed in greater detail below.
Table 12
2023 2022
Gains (Losses) on Derivatives Gains (Losses) on Trading Securities Net Gains (Losses) on Derivatives Gains (Losses) on Trading Securities Net
U.S. Treasury obligations $ (4,384) $ 3,767 $ (617) $ 19,411 $ (21,239) $ (1,828)
GSE debentures (6,971) 4,983 (1,988) 25,412 (26,963) (1,551)
GSE MBS (11,431) 10,829 (602) 61,887 (63,904) (2,017)
TOTAL $ (22,786) $ 19,579 $ (3,207) $ 106,710 $ (112,106) $ (5,396)
For additional detail regarding gains and losses on trading securities, see Table 13 and related discussion under this Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations.”
See Tables 43 and 44 under Item 7A - “Quantitative and Qualitative Disclosures About Market Risk” for additional detail regarding notional and fair value amounts of derivative instruments.
Net Gains (Losses) on Trading Securities: Our trading portfolio is comprised primarily of fixed rate U.S. Treasury obligations, GSE debentures, and fixed rate multifamily GSE MBS, with a small percentage of variable rate single-family GSE MBS. Periodically, we also invest in short-term securities classified as trading. In general, the fixed rate securities are related to economic hedges in the form of interest rate swaps that convert fixed rates to variable rates on the fixed rate securities and the related economic hedges. The fair values of the fixed rate GSE debentures are affected by changes in intermediate term interest rates and credit spreads and are swapped on an economic basis to SOFR. The fair values of the fixed rate multifamily GSE MBS are affected by changes in mortgage rates and credit spreads are swapped on an economic basis to SOFR. The fair values of the U.S. Treasury obligations are affected by changes in intermediate term Treasury rates and swapped on an economic basis to the Overnight Index Swap rate (OIS) or SOFR.
All unrealized gains and losses related to trading securities are recorded in other income (loss) as net gains (losses) on trading securities; however, only gains and losses relating to trading securities that are related to economic hedges are included in Table 12. Unrealized gains (losses) fluctuate as the fair value of our trading portfolio fluctuates. There are a number of factors that can impact the fair value of a trading security including the movement in interest rates, changes in credit spreads, the passage of time, and changes in price volatility. Table 13 presents the major components of the net gains (losses) on trading securities (in thousands):
Table 13
2023 2022
Trading securities not hedged:
U.S. obligation MBS and GSE MBS $ (25) $ (419)
Short-term securities - (23)
Total trading securities not hedged (25) (442)
Trading securities hedged on an economic basis with derivatives:
U.S. Treasury obligations 3,767 (21,239)
GSE debentures 4,983 (26,963)
GSE MBS 10,829 (63,904)
Total trading securities hedged on an economic basis with derivatives
19,579 (112,106)
TOTAL $ 19,554 $ (112,548)
The unrealized losses on the securities in the trading portfolio for the current period reflect the increase in intermediate term Treasury and mortgage rates relative to the prevailing yields at the end of the prior period, especially relative to the unrealized losses recognized in the prior year periods. The increase in Treasury and mortgage rates was more substantial for the prior year period. In addition to interest rates and credit spreads, the value of these securities is affected by price convergence to par which results in a decrease in their current premium price (i.e., time decay).
Other Expenses: Other expenses, which includes compensation and benefits and other operating expenses, increased $16.1 million to $97.0 million for the year ended December 31, 2023, compared to $80.9 million for the year ended December 31, 2022. Compensation and benefits expenses increased $7.4 million due to hiring for new and open positions, contribution to the pension, and higher incentive accruals based on incentive plan goal attainment. Other operating expenses increased $4.4 million primarily due to software implementation costs, which are expected to decrease slightly in 2024 as the systems are placed into production. Further, in 2023, we committed $3.0 million to a voluntary grant program for Native American Tribes and Tribally Designated Housing Entities and announced an anticipated voluntary 50 percent increase to our annual contribution to affordable housing and community development initiatives throughout Colorado, Kansas, Nebraska, and Oklahoma in upcoming years.
Non-GAAP Measures: We fulfill our mission by: (1) providing liquidity to our members through the offering of advances to finance housing, economic development and community lending; (2) supporting residential mortgage lending through the MPF Program and purchases of MBS; and (3) providing regional affordable housing programs that create housing opportunities for very low-, low- and moderate-income families. To effectively accomplish our mission, we must obtain adequate funding at acceptable interest rate levels. We use derivatives as tools to reduce our funding costs and manage interest rate risk and prepayment risk. We also acquire and classify certain investments as trading securities for liquidity and asset-liability management purposes. Although we use these transactions to manage interest rate risk and prepayment risk, we do not manage the fair value fluctuations of our derivatives or trading securities. We are principally a “hold-to-maturity” investor, and we transact derivatives only for hedging purposes. Some derivative hedging relationships do not qualify for hedge accounting under GAAP (referred to as economic hedges) and therefore can add significant volatility to our GAAP net income.
We believe that certain non-GAAP financial measures are helpful for understanding our operating results and provide meaningful period-to-period comparison of our long-term economic value in contrast to GAAP results, which are impacted by fair value fluctuations, gains/losses on instrument sales, non-recurring transactions, or transactions that are not routine or are considered unpredictable. We report the following non-GAAP financial measures that we believe are useful to stakeholders as key measures of our operating performance: (1) adjusted income, (2) adjusted net interest income, (3) adjusted net interest margin, (4) adjusted ROE, and (5) adjusted ROE spread. We adjust net income reported in accordance with GAAP for the impact of: (1) AHP assessments (equivalent to an effective minimum income tax rate of 10 percent); (2) fair value changes on trading securities and derivatives and hedging activities (excluding net interest settlements); (3) prepayment and yield maintenance fees; (4) non-routine and/or unpredictable items, such as gains/losses on securities; and (5) non-recurring items, such as gains/losses on retirement of debt and gains/losses on mortgage loans held for sale. The result is referred to as “adjusted income,” which is a non-GAAP measure of income. Adjusted income is used to compute an adjusted ROE that is then compared to the average overnight Federal funds effective rate, with the difference referred to as “adjusted ROE spread.” Components of adjusted income and adjusted ROE spread are used: (1) to measure performance under our incentive compensation plans; (2) as a measure in determining the level of quarterly dividends; and (3) in strategic planning. We believe that adjusted income, adjusted ROE, and adjusted ROE spread are useful metrics for measurement and comparison because we generally hold securities to maturity and do not trade derivatives or trading securities speculatively. In contrast, the same metrics as calculated under GAAP can vary significantly from period to period because of the volatility caused by the aforementioned excluded items. Management believes such volatility hinders a consistent and comparable measurement analysis.
Derivative and hedge accounting under GAAP affects the timing of income or expense from derivatives. For example, interest rate caps are purchased with an upfront fixed cost to provide protection against the risk of rising interest rates. Under GAAP, these instruments are then marked to fair value each month, which can result in recognition of significant fair value gains and losses from year to year, producing volatility in our GAAP net income. However, if held to maturity, the sum of such gains and losses over the term of a derivative will equal its original purchase price. In addition to impacting the timing of income and expense, derivative accounting under GAAP impacts the presentation of fair value fluctuations (unrealized gains and losses) and net interest settlements on derivatives and hedging activities. Under GAAP, unrealized gains and losses and net interest settlements on economic hedges are recorded in net gains (losses) on derivatives while unrealized gains and losses and net interest settlements on qualifying fair value hedges are recorded in net interest income. Net interest settlements represent actual cash inflows or outflows and do not create fair value volatility. Therefore, for adjusted net interest income presentation purposes, unrealized gains and losses on designated hedges are removed from net interest income and net interest settlements on economic hedges are added to net interest income, the result of which is used to calculate adjusted net interest margin. Management uses adjusted net interest income and adjusted net interest margin to evaluate performance.
While we believe the non-GAAP measures contained in this report are useful to our stakeholders in the evaluation of our performance, such non-GAAP measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of financial information prepared in accordance with GAAP. Non-GAAP financial measures have no standardized measurement prescribed by GAAP, are not audited, and may not be comparable to similar non-GAAP financial measures used by other companies. We calculate our non-GAAP financial measures consistently from period to period using appropriate GAAP components. Reconciliations of these non-GAAP financial measures to the most comparable GAAP measure are included below.
Table 14 presents a reconciliation of GAAP net income to adjusted income (a non-GAAP measure) (in thousands):
Table 14
2023 2022
Net income, as reported under GAAP $ 370,467 $ 240,736
AHP assessments 41,164 26,749
Income before AHP assessments 411,631 267,485
Derivative (gains) losses1
2,748 (133,531)
Trading (gains) losses (19,554) 112,548
Prepayment/yield maintenance fees2
(88) (7,436)
Net (gains) losses on sale of held-to-maturity securities - 89
Total excluded items (16,894) (28,330)
Adjusted income (a non-GAAP measure) $ 394,737 $ 239,155
1 Consists of fair value changes on all derivatives and hedging activities excluding net interest settlements on economic hedges and price alignment amount.
2 Includes prepayment fees on advances and yield maintenance fees on debt securities.
Table 15 presents a reconciliation of GAAP net interest income and GAAP net interest margin to adjusted net interest income and adjusted net interest margin (non-GAAP measures) (in thousands):
Table 15
2023 2022
Net interest income, as reported under GAAP $ 460,051 $ 362,991
(Gains) losses on derivatives qualifying for hedge accounting recorded in net interest income
(16,563) (33,192)
Net interest received (paid) on derivatives not qualifying for hedge accounting 35,033 (13,661)
Prepayment/yield maintenance fees1
(88) (7,436)
Adjusted net interest income (a non-GAAP measure) $ 478,433 $ 308,702
Net interest margin, as calculated under GAAP 0.61 % 0.60 %
Adjusted net interest margin (a non-GAAP measure) 0.63 % 0.51 %
1 Includes prepayment fees on advances and yield maintenance fees on debt securities.
Table 16 presents a comparison of adjusted ROE (a non-GAAP measure) to the average overnight Federal funds rate, which we use as a key measure of effective utilization and management of members’ capital. Adjusted ROE spread (a non-GAAP measure) is calculated as follows (dollar amounts in thousands):
Table 16
2023 2022
Average GAAP total capital $ 3,873,461 $ 3,222,987
ROE, based upon GAAP net income 9.56 % 7.47 %
Adjusted ROE, based upon adjusted income (a non-GAAP measure) 10.19 % 7.42 %
Average overnight Federal funds effective rate 5.03 % 1.68 %
GAAP ROE as a spread to average overnight Federal funds effective rate 4.53 % 5.79 %
Adjusted ROE as a spread to average overnight Federal funds effective rate (a non-GAAP measure) 5.16 % 5.74 %
Financial Condition
Overall: Table 17 presents the percentage concentration of the major components of our Statements of Condition:
Table 17
Component Concentration
12/31/2023 12/31/2022
Assets:
Cash and due from banks 0.1 % 0.1 %
Interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold 10.1 11.3
Investment securities 17.2 15.4
Advances 60.6 61.5
Mortgage loans, net 11.1 11.0
Other assets 0.9 0.7
Total assets 100.0 % 100.0 %
Liabilities:
Deposits 1.0 % 1.0 %
Consolidated obligation discount notes, net 27.7 34.4
Consolidated obligation bonds, net 65.4 59.0
Other liabilities 0.7 0.5
Total liabilities 94.8 94.9
Capital:
Capital stock outstanding 3.5 3.5
Retained earnings 1.9 1.7
Accumulated other comprehensive income (loss) (0.2) (0.1)
Total capital 5.2 5.1
Total liabilities and capital 100.0 % 100.0 %
Table 18 presents changes in the major components of our Statements of Condition (dollar amounts in thousands):
Table 18
Increase (Decrease)
in Components
12/31/2023 vs. 12/31/2022
Dollar
Change Percent
Change
Assets:
Cash and due from banks $ 98 0.4 %
Interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold (579,863) (7.1)
Investment securities 1,805,558 16.2
Advances 1,182,019 2.7
Mortgage loans, net 447,578 5.7
Other assets 98,753 18.4
Total assets $ 2,954,143 4.1 %
Liabilities:
Deposits $ 41,139 5.8 %
Consolidated obligation discount notes, net (4,032,156) (16.3)
Consolidated obligation bonds, net 6,541,650 15.4
Other liabilities 189,402 58.5
Total liabilities 2,740,035 4.0
Capital:
Capital stock outstanding 99,974 4.0
Retained earnings 148,835 11.9
Accumulated other comprehensive income (loss) (34,701) (41.2)
Total capital 214,108 5.8
Total liabilities and capital $ 2,954,143 4.1 %
Total assets increased between periods, from $72.0 billion at December 31, 2022 to $74.9 billion at December 31, 2023, driven by the increase in investments and advances between those periods. Asset composition remained relatively consistent from December 31, 2022 to December 31, 2023, with a slight increase in long-term investments to 17.2 percent of total assets compared to 15.4 percent as of December 31, 2022. Mortgage loans increased by $447.6 million from December 31, 2022 to December 31, 2023, and increased slightly as a percent of total assets, from 11.0 percent as of December 31, 2022 to 11.1 percent of total assets as of December 31, 2023. Advances declined slightly as a percent of total assets compared to December 31, 2022 despite the increase in advance balances, as growth in investment securities exceeded growth in advances over the period. Total liabilities increased $2.7 billion from December 31, 2022 to December 31, 2023, which corresponded to the increase in assets, but the composition of debt shifted between periods. Consolidated obligation bonds and discount notes represented 63.2 percent and 36.8 percent of total consolidated obligations, respectively, at December 31, 2022 compared to 70.3 percent and 29.7 percent at December 31, 2023. This composition shift is mostly due to an increase in swapped callable and swapped bullet consolidated obligation bonds and a decrease in discount notes. Total capital increased $214.1 million, or 5.8 percent, from December 31, 2022 to December 31, 2023 due to an increase in required and excess capital stock and net income in excess of dividends paid.
Advances: Advances are one of the primary ways we fulfill our mission of providing liquidity to our members and constituted the largest asset on our balance sheet at December 31, 2023 and 2022. Advance par value increased by 2.3 percent, from $44.7 billion at December 31, 2022 to $45.7 billion at December 31, 2023 (see Table 19). In March 2023, our members’ demand for advances increased temporarily in response to the stress placed on the banking industry and financial markets resulting from the financial difficulties experienced by some depository institutions. This stress has largely subsided; however, members continue to hold elevated levels of advances. Although members are shifting from overnight advances to term advances, the composition of the advance portfolio remains concentrated in advances that either reprice or mature on a relatively short-term basis. We began offering a new putable advance product in April of 2023 to further expand fixed rate advance offerings, the balance of which totaled $2.1 billion at December 31, 2023. Standard fixed rate advances also increased $2.1 billion from $10.3 billion at December 31, 2022 to $12.4 billion at December 31, 2023.
As of December 31, 2023 and 2022, 65.1 percent and 64.4 percent, respectively, of our members carried outstanding advance balances. Advance balances may be impacted by rising interest rates intended to curb inflationary pressures and the related inflationary effects on member balance sheets, including decreased loan demand and the inability to grow or retain deposit balances. Members also have access to other wholesale funding sources, including the BTFP, which may impact the demand for advances on the basis of relative cost.
Rather than match-funding long-term, fixed rate advances, we elect to swap a significant portion of advances with longer maturities to short-term indices to synthetically create adjustable rate advances. When coupled with the volume of our short-term advances, advances that effectively re-price at least every three months represent 95.9 percent and 92.9 percent of our total advance portfolio as of December 31, 2023 and 2022, respectively. We anticipate continuing the practice of swapping advances with longer maturities to short-term indices.
Table 19 summarizes advances outstanding by product (dollar amounts in thousands). An individual advance may be reclassified to a different product type between periods due to the occurrence of a triggering event such as the passing of a call date (i.e., from fixed rate callable advance to regular fixed rate advance) or conversion of an advance (i.e., from fixed rate convertible advance to adjustable rate callable advance).
Table 19
12/31/2023 12/31/2022
Dollar Percent Dollar Percent
Line of Credit:
Overnight line of credit1
$ 11,747,448 25.7 % $ 15,682,310 35.1 %
Adjustable rate:
Standard advance products:
Regular adjustable rate advances 4,418,750 9.7 2,504,950 5.6
Adjustable rate callable advances 1,616,400 3.5 1,700,299 3.8
Standard housing and community development advances:
Adjustable rate callable advances 22,262 0.1 22,262 0.1
Total adjustable rate term advances 6,057,412 13.3 4,227,511 9.5
Fixed rate:
Standard advance products:
Short-term fixed rate advances2
12,313,627 27.0 12,988,848 29.1
Regular fixed rate advances 12,359,319 27.1 10,290,760 23.1
Fixed rate callable advances 68,402 0.2 64,071 0.1
Fixed rate putable advances 2,071,800 4.5 - -
Fixed rate convertible advances 113,400 0.3 309,650 0.7
Standard housing and community development advances:
Regular fixed rate advances 291,064 0.6 356,035 0.8
Fixed rate callable advances 458 - 458 -
Total fixed rate term advances 27,218,070 59.7 24,009,822 53.8
Amortizing:
Standard advance products:
Fixed rate amortizing advances 415,568 0.9 465,181 1.0
Fixed rate callable amortizing advances 18,367 - 19,370 -
Standard housing and community development advances:
Fixed rate amortizing advances 202,036 0.4 238,773 0.6
Fixed rate callable amortizing advances 11,401 - 11,748 -
Total amortizing advances 647,372 1.3 735,072 1.6
TOTAL PAR VALUE $ 45,670,302 100.0 % $ 44,654,715 100.0 %
1 Represents fixed rate line of credit advances with daily maturities.
2 Represents non-amortizing, non-prepayable loans with terms to maturity from 3 to 93 days.
Our potential credit risk from advances is concentrated in commercial banks, savings institutions, and insurance companies in our four-state district, but also includes potential credit risk exposure to credit unions, housing associates and a small number of non-members. Table 20 presents advances outstanding by borrower type (in thousands):
Table 20
12/31/2023 12/31/2022
Member advances:
Commercial banks $ 21,969,321 $ 17,944,987
Savings institutions 12,842,164 14,368,319
Insurance companies 7,469,328 6,941,648
Credit unions 3,268,583 5,298,334
CDFIs 26,404 19,929
Total member advances 45,575,800 44,573,217
Non-member advances:
Housing associates 94,502 81,498
Total non-member advances 94,502 81,498
TOTAL PAR VALUE $ 45,670,302 $ 44,654,715
Table 21 presents information on our five largest borrowers (dollar amounts in thousands). We do not expect to incur any credit losses on these advances based on our rights to collateral with an estimated fair value in excess of the book value of these advances. We have not experienced a credit loss on an advance since the inception of FHLBank.
Table 21
12/31/2023 12/31/2022
Borrower Name Advance
Par Value Percent of Total
Advance Par
Advance
Par Value Percent of Total
Advance Par
MidFirst Bank $ 9,585,000 21.0 % $ 10,740,000 24.1 %
BOKF, N.A. 7,675,000 16.8 4,700,000 10.5
Capitol Federal Savings Bank 2,375,410 5.2 2,650,082 5.9
United of Omaha Life Insurance Co. 2,278,283 5.0 1,946,896 4.4
First United Bank & Trust Co. 1,881,516 4.1
Security Life of Denver Insurance Co. 1,650,000 3.7
TOTAL $ 23,795,209 52.1 % $ 21,686,978 48.6 %
Table 22 presents accrued interest income associated with the five borrowers with the highest interest income for the periods presented (dollar amounts in thousands). If the borrower was not one of our top five borrowers for whom we accrued the highest amount of interest income for one of the periods presented, the applicable columns are left blank.
Table 22
Year Ended
12/31/2023 12/31/2022
Borrower Name Advance Income Percent of Total
Advance Income1
Advance Income Percent of Total
Advance Income1
MidFirst Bank $ 585,147 27.1 % $ 179,164 24.8 %
BOKF, N.A. 314,616 14.5 37,990 5.3
Capitol Federal Savings Bank 107,137 5.0 73,661 10.2
United of Omaha Life Insurance Co. 81,285 3.8
Security Life of Denver Insurance Co. 79,684 3.6 26,901 3.7
Pacific Life Insurance Co. 32,484 4.5
TOTAL $ 1,167,869 54.0 % $ 350,200 48.5 %
1 Total advance income by borrower excludes: (1) changes in unrealized gains (losses) from qualifying fair value hedging relationships; (2) net interest settlements on derivatives hedging the advances; and (3) prepayment fees received.
Prepayment Fees - Advances are priced based on our marginal cost of issuing matched-maturity funding while considering our related administrative and operating costs, pricing on other funding alternatives available to members, and desired profitability targets. Advances with a maturity or repricing period greater than three months that do not include call features that can be exercised at the option of the member generally incorporate a fee sufficient to make us economically indifferent should the borrower decide to prepay the advance.
Letters of Credit - We also issue letters of credit for members. Members must collateralize letters of credit in accordance with the same requirements as for advances. Letters of credit are generally issued or confirmed on behalf of a member to: (1) collateralize public unit deposits: (2) facilitate residential housing finance; (3) facilitate community lending; (4) manage assets/liabilities; or (5) provide liquidity or other funding. Outstanding letters of credit balances totaled $7.2 billion and $6.5 billion as of December 31, 2023 and 2022, respectively.
Housing Associates - We are permitted under the Bank Act to make advances to housing associates, which are non-members that are approved mortgagees under Title II of the National Housing Act. All outstanding advances to housing associates are to state housing finance authorities. Totals as of December 31, 2023 and 2022, which are noted in Table 20, represent less than one percent of total advance par values for each period presented.
MPF Program: The MPF Program is a secondary mortgage market alternative for our members, predominately utilized by the smaller institutions in our district. We participate in the MPF Program through the MPF Provider, a division of FHLBank Chicago. Under the MPF Program, participating members can sell us conventional and government residential mortgage loans.
The mortgage loan portfolio increased $0.5 billion between periods, from $7.9 billion at December 31, 2022 to $8.4 billion at December 31, 2023. Mortgage rates continued to trend upward in response to market conditions, which has reduced origination volume and refinancing incentive for borrowers and slowed prepayments in recent periods, although purchase volume has exceeded principal repayments during 2023. Net mortgage loans as a percentage of total assets increased, from 11.0 percent as of December 31, 2022 to 11.1 percent as of December 31, 2023. Mortgage loans are generally one of the highest net spread assets on our balance sheet so shifts in the balance sheet concentration of mortgage loans will impact net interest income. The principal amount of new mortgage loans acquired and held on our balance sheet from our PFIs during the year ended December 31, 2023 was $1.2 billion.
Future growth in the MPF portfolio is a function of asset size and composition, most notably the balance of advances, and capital level, as growth in advances impacts our total assets and capital level, which allows the balance of mortgage loans to increase while maintaining our targeted AMA risk tolerance. The other factors that may influence future growth in our mortgage loans held for portfolio include: (1) the level of interest rates and the shape of the yield curve; (2) the mortgage loan origination volume of current PFIs; (3) refinancing activity; (4) the relative competitiveness of MPF pricing to the prices offered by other buyers of residential mortgage loans; (5) a PFI's level of excess risk-based capital relative to the required risk-based capital charge associated with the PFI's CE obligations on MPF mortgage loans; and (6) the number of new and delivering PFIs.
The MPF Xtra product is an off-balance sheet product structured to facilitate the sale of mortgage loans from our PFIs to FHLBank Chicago and simultaneously to Fannie Mae. During 2023 and 2022, we had MPF Xtra loan volume of $0.1 billion and $0.2 billion, respectively. The decrease in MPF Xtra volume from 2022 to 2023 reflects: (1) the relative attractiveness of our on-balance sheet MPF product; and (2) the level of market interest rates (reduction in refinance volume when mortgage rates move higher; increase in purchase and refinance volume when mortgage rates decline). The MPF Government MBS product is an off-balance sheet product structured to facilitate the sale of government loans from our PFIs to FHLBank Chicago, which are then aggregated and pooled into securities guaranteed by Ginnie Mae. We had volume of $0.1 billion and $0.2 billion in the MPF Government MBS product during 2023 and 2022, respectively.
Although we may determine to sell whole loans from time to time, we have not identified any specific loans to be sold as of December 31, 2023.
Table 23 presents the unpaid principal balance of mortgage loans according to the amortization schedule based on the contractual terms of the loan (in thousands). Scheduled repayments are reported in the maturity category in which the payment is due. Prepayments may shorten the amortization period and late payments may extend the principal amortization of the late payments to the maturity date.
Table 23
Redemption Term 12/31/2023 12/31/2022
Due in one year or less $ 310,706 $ 305,406
Due after one year through five years 1,279,640 1,267,141
Due after five years through fifteen years 3,232,396 3,147,613
Thereafter 3,460,409 3,110,018
TOTAL UNPAID PRINCIPAL BALANCE $ 8,283,151 $ 7,830,178
Table 24 presents the outstanding balances of mortgage loans sold to us, net of participations, from our top five PFIs and the percentage of those loans to total mortgage loans outstanding (dollar amounts in thousands). If the borrower was not one of our top five PFIs for one of the periods presented, the applicable columns are left blank.
Table 24
12/31/2023 12/31/2022
Mortgage
Loan Balance Percent of Total
Mortgage Loans
Mortgage
Loan Balance Percent of Total
Mortgage Loans
Fidelity Bank $ 366,733 4.4 % $ 325,530 4.2 %
Farmers Bank & Trust 338,745 4.1
Tulsa Teachers Credit Union 304,925 3.7 326,491 4.2
West Gate Bank 267,101 3.2 227,649 2.9
Community National Bank & Trust 226,466 2.7 233,975 3.0
Mid-America Bank 176,792 2.3
TOTAL $ 1,503,970 18.1 % $ 1,290,437 16.6 %
Table 25 presents mortgage loan portfolio credit ratios and the components of the ratio calculation for the periods presented (dollar amounts in thousands):
Table 25
12/31/2023 12/31/2022
Average loans outstanding during the period, unpaid principal balance $ 8,002,681 $ 7,934,465
Mortgage loans held for portfolio, unpaid principal balance 8,283,151 7,830,178
Nonaccrual loans, unpaid principal balance 19,002 22,095
Allowance for credit losses 5,531 6,378
Net charge-offs (recoveries) 206 (351)
Ratio of net charge-offs (recoveries) to average loans outstanding during the period - % - %
Ratio of allowance for credit losses to mortgage loans held for portfolio 0.07 0.08
Ratio of nonaccrual loans to mortgage loans held for portfolio 0.23 0.28
Ratio of allowance for credit losses to nonaccrual loans 29.11 28.87
Two indications of credit quality are FICO scores and LTV ratios. FICO is a widely used credit industry indicator to assess borrower credit quality with scores typically ranging from 300 to 850 with the low end of the scale indicating greater credit risk. In February 2010, the MPF Program instituted a minimum FICO score of 620 for all conventional loans. Table 26 provides the percentage distribution of FICO scores at origination for conventional mortgage loans outstanding in our traditional MPF products:
Table 26
FICO Score1
12/31/2023 12/31/2022
< 620 0.5 % 0.5 %
620 to < 660 4.2 4.5
660 to < 700 11.8 12.3
700 to < 740 19.4 19.4
>= 740 64.1 63.3
100.0 % 100.0 %
Weighted average 750 749
1 Represents the original FICO score of the lowest-scoring borrower for the related loan.
LTV is a primary variable in credit performance. Generally, a higher LTV ratio means greater risk of loss in the event of a default and higher loss severity. As noted previously, the maximum LTV for conventional MPF loans is 95 percent, though AHP MPF mortgage loans may have LTVs up to 100 percent. Table 27 provides LTV ratios at origination for conventional mortgage loans outstanding in our traditional MPF products:
Table 27
LTV 12/31/2023 12/31/2022
<= 60% 15.7 % 16.5 %
> 60% to 70% 14.0 14.6
> 70% to 80% 49.6 49.8
> 80% to 90% 11.4 10.4
> 90% to < 100% 9.3 8.7
100.0 % 100.0 %
Weighted average 74.5 % 73.9 %
Our mortgage loans held in portfolio were dispersed across all 50 states and the District of Columbia as of December 31, 2023 and 2022. Table 28 is a summary of the geographic concentration percentage of our conventional mortgage loan portfolio by state, highlighting the top five states with the highest concentration. If the state was not one of the top five states with the highest concentration for one of the periods presented, the applicable column is left blank.
Table 28
12/31/2023 12/31/2022
Kansas 36.3 % 38.0 %
Nebraska 24.1 24.6
Oklahoma 11.5 12.1
Colorado 10.9 11.2
Missouri 2.2 2.1
All other 15.0 12.0
TOTAL 100.0 % 100.0 %
The credit risk of conventional mortgage loans sold under the traditional MPF products is managed by structuring potential credit losses into certain layers. As is customary for conventional mortgage loans, PMI is required for MPF loans with LTVs greater than 80 percent. Losses beyond the PMI layer are absorbed by an FLA established for each pool of mortgage loans sold by a PFI up to the maximum amount of the remaining FLA net of credit losses.
Allowance for Credit Losses on Mortgage Loans Held for Portfolio - The allowance for credit losses on mortgage loans decreased $0.8 million from December 31, 2022 to December 31, 2023. Delinquencies of conventional loans remained at low levels relative to the portfolio, at 0.9 percent of the amortized cost of total conventional loans at December 31, 2023 and 1.0 percent at December 31, 2022. We believe that policies and procedures are in place to effectively manage the credit risk on mortgage loans held for portfolio. See Note 5 of the Notes to Financial Statements under Item 8 for a summary of the allowance for credit losses on mortgage loans as well as payment status and other delinquency statistics for our mortgage loan portfolio.
Investments: Investments are used to manage interest rate and duration risk, enhance income, and provide liquidity and primary and secondary market support for the U.S. housing securities market. Total investments increased $1.2 billion from December 31, 2022 to December 31, 2023 driven by increases in MBS securities.
Short-term Investments - Short-term investments, which are used to provide funds for our members, maintain liquidity, meet other financial obligations such as debt servicing, and enhance income, consist primarily of reverse repurchase agreements, interest-bearing deposits, Federal funds sold, and certificates of deposit.
Within our portfolio of short-term investments, counterparty credit risk arises from unsecured exposures. Our short-term unsecured credit investments have maturities generally ranging between overnight and three months and may include the following types:
•Interest-bearing deposits. Unsecured deposits that earn interest.
•Federal funds sold. Unsecured loans of reserve balances at the Federal Reserve Banks between financial institutions that are made on either an overnight or term basis, but typically made on an overnight basis.
•Certificates of deposit. Unsecured negotiable promissory notes issued by banks and payable to the bearer at maturity.
Table 29 presents the carrying value of our unsecured credit exposure with private counterparties by investment type (in thousands). The unsecured investment credit exposure presented may not reflect the average or maximum exposure during the period as the balances presented reflect the balances at period end.
Table 29
12/31/2023 12/31/2022
Interest-bearing deposits $ 1,604,423 $ 2,039,333
Federal funds sold 2,080,000 3,750,000
TOTAL UNSECURED INVESTMENT CREDIT EXPOSURE1
$ 3,684,423 $ 5,789,333
1 Excludes unsecured investment credit exposure to U.S. government, U.S. government agencies, instrumentalities, GSEs and supranational entities and does not include related accrued interest.
We actively monitor our credit exposures and the credit quality of our counterparties, including an assessment of each counterparty’s financial performance, capital adequacy, sovereign support and the current market perceptions of the counterparties. General macro-economic, political and market conditions may also be considered when deciding on unsecured exposure. As a result, we may further limit existing exposures.
FHFA regulations include limits on the amount of unsecured credit an individual FHLBank may extend to a counterparty or to a group of affiliated counterparties. This limit is based on a percentage of eligible regulatory capital and the counterparty’s overall credit rating. Under these regulations, the level of eligible regulatory capital is determined as the lesser of an individual FHLBank’s total regulatory capital or the eligible amount of regulatory capital of the counterparty. The eligible amount of regulatory capital is then multiplied by a stated percentage. The percentage that an FHLBank may offer for term extensions of unsecured credit ranges from 1 percent to 15 percent based on the counterparty’s internal credit rating. The calculation of term extensions of unsecured credit includes on-balance sheet transactions, off-balance sheet commitments and derivative transactions (derivative transactions cleared through a clearinghouse are excluded from the calculation and unsecured credit is limited with bilateral derivative counterparties due to the receipt of collateral based on zero collateral thresholds although there can be a lag between receipt and the calculation of exposure). See “Risk Management - Credit Risk Management” under this Item 7 for additional information related to derivative exposure.
FHFA regulation also permits us to extend additional unsecured credit for overnight extensions of credit. Our total overnight unsecured exposure to a counterparty may not exceed twice the regulatory limit for term exposures, or a total of 2 percent to 30 percent of the eligible amount of regulatory capital, based on the counterparty’s credit rating. We generally limit our unsecured exposure to any private counterparty to no more than the balance of our retained earnings, even if the counterparty limit under the previously discussed calculation would be higher. As of December 31, 2023, we were in compliance with the regulatory limits established for unsecured credit, and our unsecured credit exposure to any individual non-member private counterparty (excluding GSEs) did not exceed the balance of our retained earnings on that date.
We are prohibited by FHFA regulation from investing in financial instruments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks. Our unsecured credit exposures to U.S. branches and agency offices of foreign commercial banks include the risk that, as a result of political or economic conditions in a country, the counterparty may be unable to meet its contractual repayment obligations. Our unsecured credit exposures to domestic counterparties and U.S. subsidiaries of foreign commercial banks include the risk that these counterparties have extended credit to foreign counterparties. Throughout 2023, we were in compliance with the regulation and did not own any financial instruments issued by foreign sovereign governments, including those countries that are members of the European Union.
We manage our credit risk by conducting pre-purchase credit due diligence and ongoing surveillance described previously and generally investing in unsecured investments of highly-rated counterparties. From time to time, we extend unsecured credit to qualified members by investing in overnight Federal funds issued by them. As of December 31, 2023, all unsecured investments were rated as investment grade based on NRSROs (see Table 32).
Table 30 presents the amount of our unsecured investment credit exposure by remaining contractual maturity and by the domicile of the counterparty or the domicile of the counterparty’s parent for U.S. branches and agency offices of foreign commercial banks as of December 31, 2023 (in thousands). We also mitigate the credit risk on investments by purchasing instruments that have short-term maturities.
Table 30
Domicile of Counterparty Overnight
Domestic $ 1,684,423
U.S. Branches and agency offices of foreign commercial banks:
Australia 1,100,000
Canada 500,000
United Kingdom 400,000
Total U.S. Branches and agency offices of foreign commercial banks
2,000,000
TOTAL UNSECURED INVESTMENT CREDIT EXPOSURE1
$ 3,684,423
1 Excludes unsecured investment credit exposure to U.S. government, U.S. government agencies, instrumentalities, GSEs and supranational entities, and does not include related accrued interest.
Unsecured credit exposure continues to be conservatively placed. In addition, we anticipate continued future investment in reverse repurchase agreements, which are secured investments. To enhance our liquidity position, we classify our unsecured short-term investment securities in our trading portfolio, which allows us to sell these securities if necessary.
Long-term investments - Our long-term investment portfolio consists primarily of GSE MBS and U.S. Treasury obligations. Our RMP restricts the acquisition of investments to highly rated long-term securities. Generally, fixed rate U.S. Treasury obligations are either classified as trading securities and economically swapped to variable rates or classified as available-for-sale securities and swapped to variable rates in qualifying fair value hedging relationships. In addition to serving as excellent collateral, U.S. Treasury obligations also help satisfy regulatory liquidity requirements. We also purchase fixed rate securities for duration and interest rate risk management. A significant portion of our variable rate investment securities were indexed to LIBOR for the first half of 2023; however, LIBOR ceased publication on June 30, 2023. As such, all LIBOR-indexed investments converted to reference SOFR, either to start or fall back, beginning July 3, 2023 or at the beginning of the next reset period.
According to FHFA regulation, no additional MBS purchases may be made if the aggregate value of our MBS exceeds 300 percent of our regulatory capital. Further, quarterly increases in holdings of MBS are restricted to no more than 50 percent of regulatory capital. As of December 31, 2023, the aggregate value of our MBS portfolio represented 248 percent of our regulatory capital. We are below our regulatory threshold primarily due to an increase in regulatory capital despite increased MBS purchases in 2023. We expect to be below our regulatory limit in the near-term but continue to remain opportunistic about future MBS purchases.
We provide standby bond purchase agreements (SBPAs) to two state HFAs within the our district. For a predetermined fee, we accept an obligation to purchase the authorities’ bonds if the remarketing agent is unable to resell the bonds to suitable investors, and to hold the bonds until: (1) the designated remarketing agent can find a suitable investor; (2) we successfully exercise our right to sell the bonds; or (3) the HFA repurchases the bonds according to a schedule established by the SBPA. The standby bond purchase commitments executed and outstanding as of December 31, 2023 expire no later than 2028 though they are renewable upon request of the HFA and at our option. Total principal commitments for bond purchases under the SBPAs were $1.0 billion and $0.9 billion as of December 31, 2023 and 2022, respectively. We were not required to purchase any bonds under these agreements during 2022 or 2023. We plan to continue supporting the state HFAs in our district by executing SBPAs where appropriate and when allowed by our RMP. In the future, we may acquire participation interests in SBPAs with other FHLBanks and/or directly enter into SBPAs with out-of-district HFAs with the permission of the in-district FHLBank.
Major Security Types - Securities for which we have the ability and intent to hold to maturity are classified as held-to-maturity securities and recorded at carrying value, which is the net total of par, premiums, and discounts. We classify certain investments as trading or available-for-sale securities and carry them at fair value, generally for liquidity purposes, to provide a fair value offset to the gains (losses) on the interest rate swaps associated with swapped securities, and for asset/liability management purposes. Liquidity or other asset/liability management strategies may require periodic sale of these securities but they are not actively traded; most often, they are held until maturity or call date. Securities acquired as asset/liability management tools to manage duration risk, which may be sold when the duration exposure is within risk tolerances, are classified as trading or available-for-sale securities. Changes in the fair values of investments classified as trading are recorded through other income and the original premiums/discounts on these investments are not amortized.
See Note 3 of the Notes to Financial Statements under Item 8 of this annual report for additional information on our different investment classifications including the types of securities held under each classification. The carrying values by contractual maturities of our investments as of December 31, 2023 are summarized by security type in Table 31 (dollar amounts in thousands) with certain weighted average yield metrics along with carrying values as of December 31, 2022. 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 yield maintenance fees.
Table 31
12/31/2023 12/31/2022
Due in
one year
or less Due after
one year
through five years
Due after
five years
through 10 years
Due after
10 years Carrying
Value Carrying
Value
Trading securities:
U.S. Treasury obligations $ - $ - $ - $ - $ - $ 396,233
GSE debentures 270,837 17,601 - - 288,438 388,955
GSE MBS 81,108 528,031 6,537 4,494 620,170 636,265
Total trading securities 351,945 545,632 6,537 4,494 908,608 1,421,453
Available-for-sale securities:
U.S. Treasury obligations - 2,937,868 - - 2,937,868 3,315,356
U.S. obligation MBS - - - 107,535 107,535 40,039
GSE MBS 98,436 1,684,626 3,977,023 2,947,965 8,708,050 5,999,021
Total available-for-sale securities 98,436 4,622,494 3,977,023 3,055,500 11,753,453 9,354,416
Held-to-maturity securities:
State or local housing agency obligations - - 35,855 - 35,855 70,505
GSE MBS - 44,242 1,900 182,799 228,941 274,925
Total held-to-maturity securities - 44,242 37,755 182,799 264,796 345,430
Total securities 450,381 5,212,368 4,021,315 3,242,793 12,926,857 11,121,299
Interest-bearing deposits 1,604,989 - - - 1,604,989 2,039,852
Federal funds sold 2,080,000 - - - 2,080,000 3,750,000
Securities purchased under agreements to resell
3,875,000 - - - 3,875,000 2,350,000
TOTAL INVESTMENTS $ 8,010,370 $ 5,212,368 $ 4,021,315 $ 3,242,793 $ 20,486,846 $ 19,261,151
Weighted average yields1:
Available-for-sale securities 2.38 % 2.76 % 3.69 % 4.75 %
Held-to-maturity securities - % 2.83 % 2.58 % 1.71 %
1 The weighted average yields are calculated as the sum of each debt security using the period end balances multiplied by the coupon rate adjusted by the impact of amortization and accretion of premiums and discounts, divided by the total debt securities in the applicable portfolio. The result is then multiplied by 100 to express it as a percentage.
Securities Ratings - Tables 32 and 33 present the carrying value of our investments by rating as of December 31, 2023 and 2022 (in thousands). The ratings presented are the lowest ratings available for the security, issuer, or counterparty based on NRSROs, where available. Some counterparties for collateralized overnight borrowing are not rated by an NRSRO because they are not issuers of debt or are otherwise not required to be rated by an NRSRO. We also utilize other credit quality factors when analyzing potential investments including, but not limited to, collateral performance, marketability, asset class or sector considerations, local and regional economic conditions, and/or the financial health of the underlying issuer.
Table 32
12/31/2023
Carrying Value1
Investment Grade Unrated Total
Triple-A Double-A Single-A
Interest-bearing deposits2
$ 87 $ 566 $ 1,604,336 $ - $ 1,604,989
Federal funds sold2
- - 2,080,000 - 2,080,000
Securities purchased under agreements to resell3
- - 1,500,000 2,375,000 3,875,000
Investment securities:
Non-mortgage-backed securities:
U.S. Treasury obligations - 2,937,868 - - 2,937,868
GSE debentures - 288,438 - - 288,438
State or local housing agency obligations
35,855 - - - 35,855
Total non-mortgage-backed securities
35,855 3,226,306 - - 3,262,161
Mortgage-backed securities:
U.S. obligation MBS - 107,535 - - 107,535
GSE MBS - 9,557,161 - - 9,557,161
Total mortgage-backed securities - 9,664,696 - - 9,664,696
TOTAL INVESTMENTS $ 35,942 $ 12,891,568 $ 5,184,336 $ 2,375,000 $ 20,486,846
1 Investment amounts represent the carrying value and do not include related accrued interest receivable of $39.9 million at December 31, 2023.
2 Amounts include unsecured credit exposure with overnight maturities.
3 Amounts represent collateralized overnight borrowings.
Table 33
12/31/2022
Carrying Value1
Investment Grade Unrated Total
Triple-A Double-A Single-A
Interest-bearing deposits2
$ - $ 519 $ 2,039,333 $ - $ 2,039,852
Federal funds sold2
- 250,000 3,500,000 - 3,750,000
Securities purchased under agreements to resell3
- 150,000 - 2,200,000 2,350,000
Investment securities:
Non-mortgage-backed securities:
U.S. Treasury obligations - 3,711,589 - - 3,711,589
GSE debentures - 388,955 - - 388,955
State or local housing agency obligations
40,505 30,000 - - 70,505
Total non-mortgage-backed securities
40,505 4,130,544 - - 4,171,049
Mortgage-backed securities:
U.S. obligation MBS - 40,039 - - 40,039
GSE MBS - 6,910,211 - - 6,910,211
Total mortgage-backed securities - 6,950,250 - - 6,950,250
TOTAL INVESTMENTS $ 40,505 $ 11,481,313 $ 5,539,333 $ 2,200,000 $ 19,261,151
1 Investment amounts represent the carrying value and do not include related accrued interest receivable of $39.3 million at December 31, 2022.
2 Amounts include unsecured credit exposure with overnight maturities.
3 Amounts represent collateralized overnight borrowings.
Table 34 details interest rate payment terms for the carrying value of our investment securities as of December 31, 2023 and 2022 (in thousands). We generally manage the interest rate risk associated with our fixed rate trading and available-for-sale securities by entering into interest rate swaps that convert the investment's fixed rate to a variable rate index (see Tables 43 and 44 under Part I, Item 7A - “Quantitative and Qualitative Disclosures About Market Risk).”
Table 34
12/31/2023 12/31/2022
Trading securities:
Non-mortgage-backed securities:
Fixed rate $ 288,438 $ 785,188
Non-mortgage-backed securities 288,438 785,188
Mortgage-backed securities:
Fixed rate 609,139 622,984
Variable rate 11,031 13,281
Mortgage-backed securities 620,170 636,265
Total trading securities 908,608 1,421,453
Available-for-sale securities:
Non-mortgage-backed securities:
Fixed rate 2,937,868 3,315,356
Non-mortgage-backed securities 2,937,868 3,315,356
Mortgage-backed securities:
Fixed rate 3,727,446 3,193,215
Variable rate 5,088,139 2,845,845
Mortgage-backed securities 8,815,585 6,039,060
Total available-for-sale securities 11,753,453 9,354,416
Held-to-maturity securities:
Non-mortgage-backed securities:
Variable rate 35,855 70,505
Non-mortgage-backed securities 35,855 70,505
Mortgage-backed securities:
Fixed rate 23,650 33,741
Variable rate 205,291 241,184
Mortgage-backed securities 228,941 274,925
Total held-to-maturity securities 264,796 345,430
TOTAL $ 12,926,857 $ 11,121,299
Deposits: Total deposits increased 5.8 percent, from $0.7 billion at December 31, 2022 to $0.8 billion at December 31, 2023. Deposit programs are offered primarily to facilitate customer transactions with us, and all deposits are uninsured. Deposit products offered include demand and overnight deposits and short-term certificates of deposit. Deposits are typically in overnight or demand accounts that generally re-price daily based upon a market index such as the overnight Federal funds rate. The level of deposits is driven by member demand for deposit products, which in turn is a function of the liquidity position of members. Factors that influence deposit levels include turnover in member investment and loan portfolios, changes in members’ customer deposit balances, changes in members’ demand for liquidity, and our deposit pricing as compared to other short-term market rates. Declines in the level of deposits could occur during 2024 if the level of member liquidity should decrease due to loan demand outpacing deposit funding growth at members, or if depositor investment options improve as interest rates rise. Fluctuations in deposits have little impact on our ability to obtain liquidity. We historically have had stable and ready access to the capital markets through consolidated obligations and can replace any reduction in deposits with similarly or even lower priced borrowings.
Table 35 presents the average amount of and the annual rate paid on deposit types that exceed 10 percent of average deposits (dollar amounts in thousands). Deposit types are included only in the year(s) that the 10 percent threshold is met.
Table 35
2023 2022 2021
Amount Rate Amount Rate Amount Rate
Overnight deposits $ 332,442 4.94 % $ 429,345 1.29 % $ 619,793 0.05 %
Demand deposits 306,434 4.62 318,282 1.23 409,927 0.02
Non-interest bearing deposits 175,034 -
Consolidated Obligations: Consolidated obligations are the joint and several debt obligations of the FHLBanks and consist of bonds and discount notes. Consolidated obligations represent the primary source of liabilities we use to fund advances, mortgage loans and investments. As noted under Item 7A - “Quantitative and Qualitative Disclosures About Market Risk,” we use debt with a variety of maturities and option characteristics to manage our interest rate risk profile. We make extensive use of derivative transactions, executed in conjunction with specific consolidated obligation debt issues, to synthetically structure funding terms and costs.
Fixed rate bonds are generally used to fund fixed rate advances, mortgage loans and investments. To the extent that bonds are funding variable rate assets, we typically either issue bonds that have variable rates matching the variable rate asset index or utilize an interest rate swap to alter the fixed rate bonds' characteristics to match the assets' index. Additionally, we often use variable rate, fixed rate, or complex consolidated obligation bonds that are swapped or indexed to SOFR or OIS to fund short-term advances and money market investments and/or as a liquidity risk and interest-rate risk management tool.
Discount notes are primarily used to fund: (1) shorter-term advances or adjustable rate advances with indices and resets based on our short-term cost of funds; and (2) investments with maturities of three months or less. However, we sometimes use discount notes to fund longer-term assets, including fixed rate assets, variable rate assets, assets swapped to synthetically create variable rate assets and short-term anticipated cash flows generated by longer-term fixed rate assets.
Table 36 presents the carrying value of consolidated obligation bonds and discounts notes as of December 31, 2023 and 2022 (in thousands).
Table 36
12/31/2023 12/31/2022
Bonds:
Par value $ 49,409,390 $ 43,106,535
Premiums 12,874 18,950
Discounts (3,108) (3,789)
Concession fees (11,424) (11,262)
Hedging adjustments (360,243) (604,595)
Total bonds 49,047,489 42,505,839
Discount Notes:
Par value 20,903,145 24,997,018
Discounts (157,163) (190,034)
Concession fees (420) (714)
Hedging adjustments (2,313) (30,865)
Total discount notes 20,743,249 24,775,405
TOTAL $ 69,790,738 $ 67,281,244
Total consolidated obligations increased $2.5 billion, or 3.7 percent, from December 31, 2022 to December 31, 2023. The distribution between consolidated obligation bonds and discount notes shifted between periods, from 63.2 percent and 36.8 percent, respectively, at December 31, 2022 to 70.3 percent and 29.7 percent at December 31, 2023, respectively. The movement is primarily due to an increase in swapped callable bonds and swapped bullet bonds and a decrease in discount notes. Management increased issuance of swapped fixed rate debt due to favorable funding spreads and increased demand from investors driven by market volatility. Callable bonds are typically fixed or structured rate debt that pay higher coupons to investors because of the optionality held by the issuer. When a swap is called by the counterparty in a swapped callable bond transaction, we typically call the hedged bond. Unswapped callable bonds provide us with options to replace the bonds at lower costs if interest rates decline. Our funding mix generally is driven by asset composition, but we may also shift our debt composition as a result of market conditions that impact the cost of unswapped consolidated obligations and the cost of consolidated obligations swapped or indexed to SOFR or OIS. All floating rate bonds issued since 2021 have been indexed to SOFR as we transitioned away from LIBOR and maintain an allocation of floating rate bonds funding advances and investments. For a discussion on yields and spreads, see Table 8 under this Item 7 - “Results of Operations.” For further discussion of how our portfolio of unswapped callable bonds impacted interest rate risk, see Item 7A - “Quantitative and Qualitative Disclosures About Market Risk.”
We often execute derivatives concurrently with the issuance of consolidated obligations to create synthetic variable rate debt at a cost that is lower than funding alternatives and comparable variable rate cash instruments issued directly by us to alter the characteristics of our liabilities to more closely match the term and/or repricing characteristics of our assets. This strategy of issuing consolidated obligations while simultaneously entering into derivatives enables us to more effectively fund our variable rate and short-term fixed rate assets. It also allows us, in some instances, to offer a wider range of advances at more attractive terms than would otherwise be possible. Swapped consolidated obligation transactions depend on price relationships in both the FHLBank consolidated obligation market and the derivatives market, primarily the interest rate swap market. If conditions in these markets change, we may adjust the types or terms of the consolidated obligations issued and derivatives utilized to better match assets, meet customer needs, and/or improve our funding costs.
Several recent developments have the potential to impact the demand for FHLBank consolidated obligations in 2023 and perhaps beyond. For a discussion of the impact of these recent developments, U.S. government programs, governmental regulation of commercial banks, and the financial markets on the cost of FHLBank consolidated obligations, see “Financial Market Trends” under this Item 7.
Derivatives: We use derivatives to reduce the interest-rate sensitivity of our assets. We also use derivatives in our overall interest rate risk management to adjust the interest rate sensitivity of consolidated obligations to approximate more closely the interest rate sensitivity of assets, including advances, investments and mortgage loans. We also use derivatives to manage embedded options in assets and liabilities, to hedge the market value of existing assets, liabilities, and anticipated transactions, to hedge the duration risk of prepayable instruments, to mitigate adverse impacts to earnings from the contraction or extension of certain assets (e.g., advances or mortgage assets) and liabilities, and to reduce funding costs as discussed below. Generally, we designate derivatives as a fair value hedge of an underlying financial instrument or firm commitment. Economic hedges are defined as derivatives hedging specific or non-specific underlying assets, liabilities, or firm commitments that do not qualify for hedge accounting, but are acceptable hedging strategies under our RMP for asset/liability management.
All derivatives are marked to fair value with any associated accrued interest, and netted by clearing agent by Clearinghouse or by counterparty and offset by the fair value of any swap cash collateral received or delivered where the legal right of offset has been determined, and included on the Statements of Condition as an asset when there is a net fair value gain or as a liability when there is a net fair value loss. Fair values of our derivatives primarily fluctuate as the swap interest rate curves fluctuate. Other factors such as implied price/interest rate volatility, the shape of the above interest rate curves and time decay can also drive the market price for derivatives.
The notional amount of total derivatives outstanding increased by $2.0 billion, from $49.5 billion at December 31, 2022 to $51.5 billion at December 31, 2023, primarily due to increases in interest rate swaps hedging callable fixed rate bonds and non-callable and putable fixed rate advances, offset by declines in swaps hedging discount notes, which reflects the bond issuance shift, as discussed above, and the increase in regular and putable fixed rate advances. For additional information regarding the types of derivative instruments and risks hedged, see Tables 43 and 44 under Item 7A - “Quantitative and Qualitative Disclosures About Market Risk.”
Liquidity and Capital Resources
Liquidity: We maintain high levels of liquidity to achieve our mission of serving as a dependable and economical funding source for our members and housing associates. As part of fulfilling our mission, we also maintain minimum liquidity requirements in accordance with certain FHFA regulations and guidelines and in accordance with policies established by management and the board of directors. Our business model enables us to manage the levels of our assets, liabilities, and capital in response to changes in member credit demand, membership composition, and market conditions. As such, assets and liabilities utilized for liquidity purposes can vary significantly in the normal course of business due to the amount and timing of cash flows as a result of these factors.
Sources and Uses of Liquidity - A primary source of our liquidity is the issuance of consolidated obligations. The capital markets traditionally have treated FHLBank obligations as U.S. government agency debt. As a result, even though the U.S. government does not guarantee FHLBank debt, we generally have comparatively stable access to funding at relatively favorable spreads to U.S. Treasury rates. We are primarily and directly liable for our portion of consolidated obligations (i.e., those obligations issued on our behalf). In addition, we are jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all FHLBanks. Our uses of liquidity primarily include repaying called and maturing consolidated obligations for which we are the primary obligor, issuing advances, and purchasing investments and mortgage loans. We also use liquidity to repay member deposits, pledge collateral to derivative counterparties, and redeem or repurchase capital stock. Our other sources of liquidity include our short-term liquidity portfolio, deposit inflows, repayments of advances and mortgage loans, maturing investments, trading and available-for-sale investments, other secured and unsecured borrowings, interest income, or the sale of unencumbered assets.
During the year ended December 31, 2023, proceeds (net of premiums and discounts) from the issuance of bonds and discount notes were $52.2 billion and $481.2 billion, respectively, compared to $45.9 billion and $395.4 billion for the year ended December 31, 2022. The difference between the proceeds from bonds and discount notes reflects higher asset balances and the cumulative effect of using short-term discount notes to fund short-term advances and our short-term liquidity portfolio. High demand for Agency debt has kept the spread to U.S. Treasury obligations relatively narrow. Our ability to issue debt remains robust, but volatility in the capital markets can impact the demand for and cost of debt issued by the FHLBanks.
Our short-term liquidity portfolio consists of cash, short-term investments, and long-term investments with remaining maturities of one year or less. Short-term investments may include Federal funds sold, interest-bearing demand deposits, reverse repurchase agreements, and certificates of deposit. The short-term liquidity portfolio decreased between periods, from $10.0 billion as of December 31, 2022 to $8.0 billion as of December 31, 2023. The maturities of our short-term investments are structured to provide periodic cash flows to support our ongoing liquidity needs. To enhance our liquidity position, short-term investment securities (i.e., marketable certificates of deposit) are also classified as trading when held so that they can be readily sold should liquidity be needed immediately.
Investment securities on our balance sheet are also a source of potential liquidity. U.S. Treasury obligations, GSE debentures, and GSE MBS can be sold or pledged as collateral for financing in the securities repurchase agreement market. In addition to balance sheet sources of liquidity, we have established lines of credit with numerous counterparties in the Federal funds market as well as with the other FHLBanks. We expect to maintain a sufficient level of liquidity for the foreseeable future.
During the year ended December 31, 2023, advance disbursements totaled $907.0 billion compared to $630.2 billion for the prior year period which reflects increased member utilization of advances, especially short-term advances. Investment purchases (excluding overnight investments) totaled $4.0 billion in 2023 compared to $6.4 billion in 2022. Payments on maturing and retired consolidated obligation bonds and discount notes were $44.9 billion and $485.4 billion, respectively, for the year ended December 31, 2023 compared to $40.4 billion and $377.4 billion for the prior year period.
Capital: Total capital increased $214.1 million, or 5.8 percent, from December 31, 2022 to December 31, 2023 due to an increase in capital stock (see Table 38) and retained earnings. We strive to manage our average capital ratio above our minimum regulatory and RMP requirements in an effort to ensure that we have the ability to issue additional consolidated obligations should the need arise. Excess capital capacity ensures we are able to meet the liquidity needs of our members and/or repurchase excess stock either upon the submission of a redemption request by a member or at our discretion for balance sheet or capital management purposes.
Each member is required to hold capital stock to become and remain a member of FHLBank and enter into specified activities with FHLBank including, but not limited to, access to FHLBank’s credit products and selling AMA to FHLBank. The amount of Class A Common Stock a member must acquire and maintain is the Asset-based Stock Purchase Requirement, which is currently equal to 0.1 percent of a member’s total assets as of December 31 of the preceding calendar year, with a minimum requirement of $1,000, and a maximum requirement of $500,000. The amount of Class B Common Stock a member must acquire and maintain is the Activity-based Stock Purchase Requirement, which is currently equal to 4.5 percent of the principal amount of advances outstanding to the member plus 3 percent of the principal amount of AMA outstanding for members, limited to a maximum of 3.0 percent of the member's total assets at the end of the prior calendar year, plus 0.25 percent of letters of credit balances outstanding, less the member’s asset-based stock purchase requirement.
Excess stock represents the amount of stock held by a member in excess of that institution’s minimum stock requirement. Upon reducing the Activity-based Stock Purchase Requirement, through a change to the capital plan, or through a reduction of advance, AMA or letters of credit balances, excess stock is created since the member is no longer required under our capital plan to hold the same amount of activity-based capital stock. If our excess stock exceeds one percent of our total assets before or after the payment of a dividend in the form of stock, we would be prohibited by FHFA regulation from paying dividends in the form of stock. To manage the amount of excess stock, we may repurchase excess Class A Common Stock over FHLBank-established limits held by any individual member. Our current practices include periodic mandatory repurchases of excess Class A Common Stock and exchanging all excess Class B Common Stock over $50,000 per member for Class A Common Stock on a daily basis.
Under our cooperatively structured capital plan, our capital stock balances should fluctuate along with any growth (increased capital stock balances) or reduction (decreased capital stock balances) in advance, AMA and letters of credit balances in future periods. Any repurchase of excess capital stock is at our discretion and subject to statutory and regulatory limitations, including remaining in compliance with all of our regulatory and internal capital requirements after any such discretionary repurchase.
The increase in retained earnings from December 31, 2022 to December 31, 2023 is attributed to the net income for the year of $370.5 million, exceeding the $221.6 million payment of dividends in 2023. Dividends increased $91.3 million for the year ended December 31, 2023 compared to the year ended December 31, 2022 as a result of increases in average capital stock outstanding and higher dividend rates paid on both Class A Common Stock and Class B Common Stock as discussed previously. The JCE Agreement provides that we allocate at least 20 percent of our net income to a separate RRE Account until the balance of that account equals at least one percent of our average balance of outstanding consolidated obligations calculated as of the last day of each calendar quarter. As of December 31, 2023, our level of restricted retained earnings represented approximately 0.58 percent of average outstanding consolidated obligations. These restricted retained earnings are not available to pay dividends (see the discussion of our JCE Agreement and the amendment to our capital plan under Item 1 - “Business - Capital, Capital Rules and Dividends”).
Our capital stock is not publicly traded. Members may request that we redeem any capital stock in excess of the minimum stock purchase requirements, but any repurchase of excess capital stock prior to the end of the redemption period is entirely at our discretion (see Item 1 - “Business - Capital, Capital Rules and Dividends”). All redemptions (at member request at the end of the redemption period) or repurchases (at our discretion, prior to the end of any applicable redemption period if made at a member’s request) are made at the par value of $100 per share. Stock redemption periods are six months for Class A Common Stock and five years for Class B Common Stock, although we can, at our discretion, repurchase amounts over a member’s minimum stock purchase requirements at any time prior to the end of the redemption periods as long as we will remain in compliance with our regulatory capital requirements after such repurchase. Ownership of our capital stock is concentrated within the financial services industry, and is stratified across various institutional entities as reflected in Table 37 as of December 31, 2023 and 2022 (dollar amounts in thousands):
Table 37
2023 2022
Count Amount Count Amount
Commercial banks 534 $ 1,340,879 530 $ 1,174,219
Savings institutions 21 645,656 21 672,893
Credit unions 90 272,855 88 335,733
Insurance companies 28 346,843 26 323,824
CDFIs 4 1,450 4 1,040
Total GAAP capital stock 677 2,607,683 669 2,507,709
Mandatorily redeemable capital stock 3 247 3 280
TOTAL REGULATORY CAPITAL STOCK 680 $ 2,607,930 672 $ 2,507,989
Our activity-based stock purchase requirements are consistent with our cooperative structure; members’ stock ownership requirements and the dollar amount of dividends paid to members generally increase as their activities with us increase. To the extent that a member’s asset-based stock purchase requirement is insufficient to cover the member’s activity-based stock purchase requirement, the member is required to purchase Class B Common Stock. We believe the value of our products and services is enhanced by dividend yields. Factors that affect members’ willingness to enter into activity with us and purchase additional required activity-based stock include, but are not limited to, our dividend rates, the risk-based capital weighting of our capital stock, and alternative investment or borrowing opportunities available to our members.
Table 38 provides a summary of member capital requirements under our current capital plan as of December 31, 2023 and 2022 (in thousands):
Table 38
Requirement 12/31/2023 12/31/2022
Asset-based (Class A Common Stock only) $ 184,901 $ 179,450
Activity-based (additional Class B Common Stock)1
2,182,176 2,125,885
Total Required Stock2
2,367,077 2,305,335
Excess Stock (Class A and B Common Stock) 240,853 202,654
Total Regulatory Capital Stock2
$ 2,607,930 $ 2,507,989
Activity-based Requirements:
Advances3
$ 2,050,911 $ 2,005,795
Letters of credit 18,122 16,190
AMA assets (mortgage loans)4
247,490 233,793
Total Activity-based Requirement 2,316,523 2,255,778
Asset-based Requirement (Class A Common Stock) not supporting member activity1
50,554 49,557
Total Required Stock2
$ 2,367,077 $ 2,305,335
1 Class A Common Stock, up to a member’s asset-based stock requirement, will be used to satisfy a member’s activity-based stock requirement before any Class B Common Stock is purchased by the member.
2 Includes mandatorily redeemable capital stock.
3 Advances to housing associates have no activity-based requirements because housing associates cannot own FHLBank stock.
4 Non-members previously required to purchase AMA activity-based stock are subject to the stock requirement in place at the time their membership ended as long as there are unpaid principal balances outstanding.
We are subject to various capital requirements under provisions of the GLB Act, the FHFA’s capital structure regulation and our RMP. See Item 1 - “Business - Capital, Capital Rules and Dividends” for details on the various capital requirements. We have been in compliance with each of the capital rules and requirements at all times, as applicable, since the implementation of our capital plan. See Note 11 of the Notes to Financial Statements under Item 8 for additional information and compliance as of December 31, 2023 and 2022.
Capital Distributions: Dividends may be paid in cash or capital stock as authorized by our board of directors. Quarterly dividends can be paid out of current and previous unrestricted retained earnings, subject to FHFA regulation and our capital plan.
Dividends paid to members totaled $221.6 million for the year ended December 31, 2023 compared to $130.3 million for the same period in the prior year. The weighted average dividend rate for the year ended December 31, 2023 was 8.47 percent which represented a dividend payout ratio of 59.8 percent compared to a weighted average dividend rate of 6.47 percent and a payout ratio of 54.1 percent for the year ended December 31, 2022. The dividend payout ratio represents dividends declared and paid during a period as a percentage of net income for the period, although FHFA regulation requires dividends be paid out of known income prior to the declaration date. For example, dividends declared and paid in December 2023 were based on income during the three months ended November 30, 2023. (See Part I, Item 1 - “Business - Capital, Capital Rules and Dividends” for other factors that contribute to the level of dividends paid.)
In accordance with our capital plan, we must pay holders of Class A Common Stock the dividend parity threshold (DPT) rate before paying a higher rate to holders of Class B Common Stock. The DPT is a dividend rate expressed as a percentage per annum up to which the dividends paid per share on Class A Common Stock and Class B Common Stock must be equal. The DPT effective for dividends paid during 2022 and the first quarter of 2023 was equal to the average overnight Federal funds effective rate minus 100 basis points. On March 24, 2023, the board of directors revised the DPT as the average effective overnight Federal funds rate for a dividend period minus 200 basis points. This DPT was effective beginning in the second quarter of 2023 and will continue to be effective until such time as it may be changed by the board of directors. When the overnight Federal funds effective rate is below 2.00 percent, the DPT is zero for that dividend period (DPT is floored at zero). Table 39 presents the dividend rates per annum paid on capital stock under our capital plan for the quarterly periods of 2023:
Table 39
Applicable Rate per Annum 12/31/2023 09/30/2023 06/30/2023 03/31/2023
Class A Common Stock 4.75 % 4.50 % 4.00 % 3.75 %
Class B Common Stock 9.50 9.25 9.00 8.75
Weighted Average1
8.84 8.62 8.31 8.12
Dividend Parity Threshold:
Average effective overnight Federal funds rate 5.33 % 5.26 % 4.99 % 4.52 %
Spread to index (2.00) (2.00) (2.00) (1.00)
TOTAL (floored at zero percent) 3.33 % 3.26 % 2.99 % 3.52 %
1 Weighted average dividend rates are dividends paid in cash and stock on both classes of stock divided by the average of capital stock eligible for dividends.
Table 40 presents the dividend rates per annum paid on capital stock under our capital plan for the quarterly periods of 2022:
Table 40
Applicable Rate per Annum 12/31/2022 09/30/2022 06/30/2022 03/31/2022
Class A Common Stock 3.00 % 2.25 % 1.00 % 0.25 %
Class B Common Stock
8.50 7.75 6.50 5.75
Weighted Average1
7.79 6.94 5.63 4.88
Dividend Parity Threshold:
Average effective overnight Federal funds rate 3.65 % 2.20 % 0.76 % 0.12 %
Spread to index (1.00) (1.00) (1.00) (1.00)
TOTAL (floored at zero percent) 2.65 % 1.20 % 0.00 % 0.00 %
1 Weighted average dividend rates are dividends paid in cash and stock on both classes of stock divided by the average of capital stock eligible for dividends.
We anticipate that our stock dividends on Class A Common Stock and Class B Common Stock will remain at or near current dividend rates into 2024. Historically, dividend rates have moved directionally with short-term interest rates. Market conditions and movements in short-term interest rates can be unpredictable, and adverse market conditions may result in lower dividend rates in future quarters. If there is a change to the DPT in the future, the capital plan requires that we provide members notice of that change 90 days prior to a dividend payment.
Under the capital plan, all dividends paid in the form of capital stock must be paid in the form of Class B Common Stock. We expect to continue paying dividends primarily in the form of capital stock, but future dividends may be paid in cash. The payment of cash dividends instead of stock dividends should not have a significant impact from a liquidity perspective, as the subsequent redemption of excess stock created by stock dividends would utilize liquidity resources in the same manner as a cash dividend. FHFA regulation prohibits any FHLBank from paying a stock dividend if excess stock outstanding will exceed one percent of its total assets after payment of the stock dividend.
Off-Balance Sheet Arrangements: In the ordinary course of business, we engage in financial transactions that, in accordance with GAAP, are not recorded on the Statements of Condition or may be recorded on the Statements of Condition in amounts that are different from the full contract or notional amount of the transactions. See Note 15 of the Notes to Financial Statements under Item 8 - “Financial Statements and Supplementary Data” for more information on our off-balance sheet arrangements.
Risk Management
Active risk management continues to be an essential part of our operations and a key determinant of our ability to: (1) provide liquidity to our members at reasonable costs to them; (2) maintain the par value of members’ capital stock; (3) repurchase or redeem members’ capital stock; and (4) maintain earnings to return an acceptable dividend to our members and meet retained earnings thresholds. Proper identification, assessment and management of risks, complemented by adequate internal controls, enable our stakeholders to have confidence in our ability to meet our housing finance mission, serve our stockholders, earn a profit, compete in the industry, and sustain and prosper over the long term. We maintain comprehensive risk management processes to facilitate, control and monitor risk taking. Periodic reviews by internal and external auditors, FHFA examiners and independent consultants subject our practices to additional scrutiny, further strengthening the process.
We maintain an ERM program in an effort to enable the identification of all inherent significant risks to the organization and institute the prompt and effective management of any major risk exposures. Under this program, we perform annual risk assessments designed to identify and evaluate all material risks that could adversely affect the achievement of our performance objectives and compliance requirements. ERM is a process, effected by our board of directors, management and other personnel, applied in strategy setting and across FHLBank. It is designed to: (1) identify and evaluate potential risks or events that may affect FHLBank; (2) manage these risks to desired residual risk levels consistent with our Risk Appetite Statement; and (3) provide reasonable assurance regarding the achievement of FHLBank's strategic, operations, reporting and compliance objectives. Our ERM program is a structured and disciplined approach that aligns strategy, processes, people, technology and knowledge with the purpose of identifying, evaluating and managing the uncertainties we face as we create value. It is a continuous process of identifying, prioritizing, assessing and managing inherent enterprise risks (i.e., business, compliance, credit, liquidity, market and operations) before they become realized risk events.
Our Risk Philosophy Statement, approved by our board of directors, establishes the broad parameters we consider in executing our business strategy and represents a set of shared attitudes and beliefs that characterize how we consider risk in everything we do. Our Risk Appetite Statement, also approved by our board of directors, defines the level of risk exposure we are willing to accept or retain in pursuit of stakeholder value. We accept a measured and managed amount of market risk while seeking to manage our risk exposure to business, compliance, credit, liquidity and operations risk to a low residual risk level. While we consider our risk appetite first in evaluating strategic alternatives, defining and managing to a specific risk appetite does not ensure we will not incur greater than expected losses or be faced with an unexpected, catastrophic loss. By defining and managing to a specific risk appetite, our board of directors and senior management strive to ensure that there is a common understanding of our desired risk profile, which enhances the ability of both to make improved strategic and tactical decisions. Our monthly Risk Dashboard provides a holistic view of our risk profile and the means for reporting our key risk metrics as defined within our Risk Appetite Metrics document, which is also approved by our board of directors. The Risk Dashboard is intended to demonstrate, at an entity level, whether our enterprise risks are well controlled and normal operations are expected with standard board of directors involvement.
As part of our ERM program, entity level risk assessment workshops are conducted with our management committees to identify and reach a general consensus on the primary risks that must be managed to help ensure achievement of our strategic objectives and allow for future success for the organization. By using this type of top-down assessment, we seek to: (1) gain an understanding of our current risk universe; (2) obtain management’s input on new and/or increasing areas of exposure; (3) determine the impact our primary risks might have on achieving our strategic business plan objectives; (4) discuss and validate our current risk management approach; (5) identify other risk management strategies that might be implemented to better ensure alignment with our desired residual risk profile; and (6) prioritize the allocation of resources to address those areas where current risk management strategies may be falling short relative to the overall level of perceived residual risk. The results of these activities, including any risk strategies and action plans for enhancing risk management practices, are summarized in an annual risk assessment report, which is reviewed by the SRMC and approved by the board of directors.
Business units also play key roles in our risk management program. We utilize a customized business unit risk assessment approach to ensure that: (1) risk assessments are completed annually for all of our business units; (2) effective internal controls and strategies are in place for managing the identified risks within the key processes throughout FHLBank; and (3) risk management or internal control weaknesses are properly identified with necessary corrective actions taken. The results of all risk assessments are reviewed by senior management and presented to the Risk Oversight Committee of the board of directors on a scheduled basis to keep our board of directors apprised of any weaknesses in the current risk management process of each business unit and the steps undertaken by management to address any identified weaknesses.
Effective risk management programs include not only conformance to risk management best practices by management but also incorporate board of director oversight. As previously noted, our board of directors plays an active role in the ERM process by regularly reviewing risk management policies and approving aggregate levels of risk. Involvement by the board of directors in establishing risk tolerance levels, including oversight of the development and maintenance of programs to manage it, is substantial and reflects a high level of director fiduciary responsibility and accountability. In addition to establishing the formal Risk Philosophy Statement, Risk Appetite Statement, Risk Appetite Metrics and reviewing the annual and business unit risk assessment results, our board of directors reviews both the RMP and Member Products Policy at least annually. Various management committees, including the Executive Team, the SRMC, the Asset/Liability Committee, the Credit Underwriting Committee, the Market Risk Analysis Committee, the ORC, the Disclosure Committee, the Technology Committee, and the Model Risk Management Committee, oversee our risk management process. The following discussion highlights our different strategies to diversify and manage risk. See Item 7A - “Quantitative and Qualitative Disclosures About Market Risk” for a separate discussion of market risk.
Interest Rate Risk Management: Interest rate risk is the risk that relative and absolute changes in interest rates may adversely affect an institution's financial condition and performance. The goal of an interest rate risk management strategy is not necessarily to eliminate interest rate risk, but to manage it by setting, and operating within, an appropriate framework and limits. We generally manage interest rate risk by acquiring and maintaining a portfolio of assets and liabilities and entering into related derivative transactions to limit the expected mismatches in duration and market value of equity (MVE) sensitivity. See Part I, Item 7A - “Quantitative and Qualitative Disclosures About Market Risk” for additional information on interest rate risk measurement.
Transition from LIBOR to an Alternative Reference Rate - Historically, many of our adjustable rate investments, derivatives, and collateral pledged were indexed to LIBOR with exposure extending past June 30, 2023. We assessed our LIBOR exposure, which included evaluating the fallback language of derivative and investment contracts indexed to LIBOR, and executed a transition plan for the replacement of LIBOR that included strategies to manage and reduce exposure, operating under the assumption that SOFR will become the dominant replacement in the capital markets. The publication of LIBOR on a representative basis ceased for one-week and two-month LIBOR as of January 1, 2022, and the remaining LIBOR tenors ceased immediately after June 30, 2023. During the first half of 2023, we had LIBOR exposure related to investment securities and derivatives with interest rates indexed to LIBOR. We transitioned all outstanding instruments referencing LIBOR to reference SOFR or these instruments reference SOFR as the fallback index. As such, we have no further variable LIBOR exposure.
Credit Risk Management: Credit risk is defined as the potential that a borrower or counterparty will fail to meet its financial obligations in accordance with agreed terms. We manage credit risk by following established policies, evaluating the creditworthiness of our counterparties, and utilizing collateral agreements and settlement netting for derivative transactions where enforceability of the legal right of offset has been determined. The most important step in the management of credit risk is the initial decision to extend credit. Continuous monitoring of counterparties is completed for all areas where we are exposed to credit risk, whether that is through lending, investing or derivative activities.
Lending and AMA Activities - Credit risk with members arises largely as a result of our lending and AMA activities (members’ CE obligations on conventional mortgage loans that we acquire through the MPF Program). We manage our exposure to credit risk on advances, letters of credit, and members’ CE obligations on conventional mortgage loans through a combined approach that provides ongoing review of the financial condition of our members coupled with credit enhancement sufficiency analysis, investment grade determination, and prudent collateralization.
At the time an advance is originated, we are required to obtain and then to maintain a security interest in sufficient collateral of the borrower, which is eligible in one or more of the following categories:
▪Fully disbursed, whole first mortgages on 1-4 family residential property or securities representing a whole interest in such mortgages;
▪Securities issued and guaranteed or insured by the U.S. government, U.S. government agencies and mortgage GSEs including, without limitation, MBS issued or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae;
▪Cash or deposits;
▪Other acceptable real estate-related collateral, which includes privately issued collateralized mortgage obligations (CMOs), mortgages on multifamily residential real property, second mortgages on 1-4 family residential property, and mortgages on commercial real estate; or
▪In the case of any CFI, secured loans to small business, small farm and small agri-business or securities representing a whole interest in such secured loans.
For collateral to be eligible for acceptance, we must be able to determine that the collateral has a readily ascertainable market value, can be reliably discounted to account for liquidation and other risks, and is able to be liquidated in due course.
The Bank Act affords any security interest granted to us by any of our members, or any affiliate of any such member, priority over the claims and rights of any party, including any receiver, conservator, trustee, or similar party that has rights of a lien creditor. The only exceptions are claims and rights held by actual bona fide purchasers for value or by parties that are secured by actual perfected security interests, and provided that such claims and rights would otherwise be entitled to priority under applicable law. In addition, our claims are given certain preferences pursuant to the receivership provisions in the Federal Deposit Insurance Act. Most members provide us a blanket lien covering substantially all of the member’s assets and their consent for us to file a financing statement evidencing the blanket lien. Based on the blanket lien, the financing statement and the statutory preferences, we normally do not take control of collateral, other than securities collateral, pledged by blanket lien borrowers. We take control of all securities collateral through delivery of the securities to us or to an approved third-party custodian. With respect to non-blanket lien borrowers (typically insurance companies, CDFIs, and housing associates), and given the interaction with certain state insurance laws with the Bank Act, we take control of all pledged collateral. If the financial condition of a blanket lien member warrants such action because of the deterioration of the member’s financial condition, regulatory concerns about the member or other factors, we will take control of sufficient collateral intended to fully collateralize the member’s indebtedness to us.
Since the FHLBank System was established in 1932, the U.S. has experienced a wide range of economic conditions, including periods of depression, recession, and expansion, but no degree of economic downturn has ever resulted in a credit loss on an advance. Even during the most recent financial crisis, which resulted in the failure of a number of member financial institutions, there were no credit losses on advances. In addition, the FHLBanks have never accepted collateral in satisfaction of an advance, but rather have been paid in full by an institution that assumes the advance, the FDIC, or some other receiver.
As also provided in the Bank Act, a member’s investment in our capital stock is held as additional collateral for the member’s advances and other credit obligations (letters of credit, CE obligations, etc.). In addition, we can call for additional collateral or substitute collateral during the life of an advance or other credit obligation to protect our security interest.
Credit risk arising from AMA activities under our MPF Program falls into three categories: (1) the risk of credit losses on the mortgage loans represented in our FLA and last loss positions; (2) the risk that a PFI will not perform as promised with respect to its loss position provided through its CE obligations on conventional mortgage loan pools, which are covered by the same collateral arrangements as those described for advances; and (3) the risk that a third-party insurer (obligated under PMI or SMI arrangements) will fail to perform as expected. Should a PMI third-party insurer fail to perform, it would increase our credit risk exposure because our FLA is the next layer to absorb credit losses on conventional mortgage loan pools. Likewise, if an SMI third-party insurer fails to perform, it would increase our credit risk exposure because it would reduce the participating member’s CE obligation loss layer since SMI is purchased by PFIs to cover all or a portion of their CE obligation exposure for mortgage pools under certain MPF Program products. Credit risk exposure to third-party insurers to which we have PMI and/or SMI exposure is monitored on an ongoing basis and regularly reported to the board of directors. In addition, we perform a credit analysis of third-party PMI and SMI insurers. On an ongoing basis, we review trends that could identify changing risks within our mortgage loan portfolio for macro- and micro-economic environment-related issues, including adverse changes in credit characteristics (loan purpose, low FICO scores, high debt-to-income ratios, high LTV ratios, etc.) and/or various types of concentrations (geographic, high-balance loans, third-party originated, etc.). Based on the credit underwriting standards under the MPF Program and this ongoing review, we have concluded that the mortgage loans we hold would not be considered subprime.
Investments - Our RMP restricts the acquisition of investments to high-quality, short-term money market instruments and highly rated long-term securities. The short-term investment portfolio represents unsecured credit and reverse repurchase agreements. Counterparty ratings are monitored daily while performance and capital adequacy are monitored on a monthly basis in an effort to mitigate unsecured credit risk on our short-term investments. Collateral eligibility and transaction margin requirements on our reverse repurchase agreements are monitored daily. U.S. Treasury obligations and MBS securitized by Fannie Mae or Freddie Mac represent the majority of our long-term investments. Other long-term investments include MBS issued by Ginnie Mae, unsecured GSE debentures and collateralized state and local HFA securities.
Derivatives - We transact most of our derivatives with large banks and major broker-dealers. Over-the-counter derivative transactions may be either executed with a counterparty (uncleared derivatives) or with an executing broker and cleared through a Futures Commission Merchant (i.e., clearing agent) that acts on our behalf to clear and settle derivative transactions through a Clearinghouse (cleared derivatives).
We are subject to credit risk due to the risk of nonperformance by counterparties to our derivative transactions. The amount of credit risk on derivatives depends on the extent to which netting procedures and collateral requirements are used and are effective in mitigating the risk. We manage this risk through credit analysis and collateral management. We are also required to follow the requirements set forth by applicable regulation.
Uncleared Derivatives. We are subject to non-performance by the counterparties to our uncleared derivative transactions. All bilateral security agreements with our non-member counterparties include bilateral collateral exchange provisions that require all credit exposures be collateralized, subject to a minimum transfer amount. As a result of these risk mitigation practices, we do not anticipate any credit losses on our uncleared derivative transactions as of December 31, 2023.
Cleared Derivatives. We are subject to nonperformance by the Clearinghouse(s) and clearing agent(s). The requirement that we post initial and variation margin, through the clearing agent, to the Clearinghouse, exposes us to institutional credit risk if the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral and/or payments are posted daily for changes in the value of cleared derivatives through a clearing agent. We do not anticipate any credit losses on our cleared derivatives as of December 31, 2023.
We regularly monitor the exposures on our derivative transactions by determining the market value of positions using internal pricing models. The market values generated by the pricing model used to value derivatives are compared to dealer model results on a monthly basis to ensure that our derivative pricing model is reasonably calibrated to actual market pricing methodologies utilized by the dealers. In addition, we have our internal pricing model validated regularly by an independent consultant. As a result of these risk mitigation initiatives, management does not anticipate any credit losses on our derivative transactions. See Note 6 of the Notes to Financial Statements under Item 8 for additional information on managing credit risk on derivatives.
The contractual or notional amount of derivative transactions reflects our involvement in the various classes of financial instruments. The maximum credit risk with respect to derivative transactions is the estimated cost of replacing the derivative transactions if there are defaults, minus the value of any related collateral posted to satisfy the initial margin (if required). Our derivative transactions are subject to variation margin which is derived from the change in market value of the transaction and must be posted by the net debtor on demand. Cleared transactions are subject to initial margin as well as variation margin. The initial margin is intended to protect the Clearinghouse against default of a customer. Initial margin is calculated to cover the potential price volatility of the derivative transaction between the time of the default and the assignment of the transaction to another clearing agent or termination of the transaction. Although the initial margin requirement should decrease over time as the duration and market volatility decrease, it remains outstanding for the life of the transaction; thus, it is possible that we could either have: (1) net credit exposure with a Clearinghouse even if our net creditor position has been fully satisfied by the receipt of variation margin; or (2) net credit exposure with a Clearinghouse despite being the net debtor (i.e., being in a liability position). In determining maximum credit risk, we consider accrued interest receivables and payables as well as the netting requirements to net assets and liabilities.
Liquidity Risk Management: Maintaining the ability to meet our obligations as they come due and to meet the credit needs of our members and housing associates in a timely and cost-efficient manner is the primary objective of managing liquidity risk. We seek to be in a position to meet the credit needs of our members, as well as our debt service and liquidity needs, without maintaining excessive holdings of low-yielding liquid investments or being forced to incur unnecessarily high borrowing costs.
We maintain daily liquidity levels above certain thresholds and consider hypothetical adverse scenarios. These thresholds are outlined in our internal policies and comply with federal statutes, FHFA regulations and other FHFA guidance not issued in the form of regulations. We remained in compliance with liquidity regulatory requirements throughout 2023.
FHFA regulations require us to always have at least an amount equal to our current deposits received from our members invested in obligations of the United States, deposits in eligible banks or trust companies, or advances with remaining maturities not exceeding five years. We were in compliance with these regulations at all times during the year ended December 31, 2023.
We generally maintained stable access to the capital markets throughout 2023. A Contingency Funding Plan allows us to maintain sufficient liquidity in the event of operational disruptions at the FHLBank, the Office of Finance, or in the capital markets. For additional discussion of the market for our consolidated obligations and the overall market affecting liquidity see “Financial Market Trends” under this Item 7.
An entity’s liquidity position is vulnerable to any rating, event, performance or ratio trigger (collectively called triggers) that would lead to the termination of the entity’s credit availability or the acceleration of repayment of credit obligations owed by the entity. We have reviewed documents concerning our vulnerability to transactions that contain triggers to gain an understanding of the manner in which risks can arise from such triggers. Triggers adverse to us currently exist in agreements for uncleared derivative transactions and SBPAs. Our staff monitors triggers to properly manage any type of potential risks from triggers. For additional information regarding our credit exposure relating to derivative contracts, see Note 6 of the Notes to Financial Statements under Item 8 - “Financial Statements and Supplementary Data.”
With respect to advances, letters of credit, and SBPAs, credit practices are impacted by certain triggers based on the member’s or housing associate’s financial performance (or the ratings of bonds underlying SBPAs) as defined in detail in our policies and/or the appropriate agreements. See Notes 1, 4 and 15 in Item 8 - “Financial Statements and Supplementary Data - Notes to Financial Statements” for collateral requirements designed for our credit products.
We have executed SBPAs with multiple state housing finance authorities. All of the SBPAs contain rating triggers beneficial to us providing that if the housing finance authority bonds covered by the SBPA are rated below investment grade (triple-B), we would not be obligated to purchase the bonds even though we were otherwise required to do so under the terms of the SBPA contract. In addition, some transactions also contain a provision that allows us to terminate our obligation to purchase these bonds under the SBPA upon 30 days prior written notice if the long-term rating on the underlying bonds were to be withdrawn, suspended or reduced below single-A. As of December 31, 2023 and 2022, we were a party to, or participated in, 36 and 31 SBPAs, respectively, in which our principal commitments were $1.0 billion and $0.9 billion, respectively. We were not required to purchase any bonds under any agreements during the year ended December 31, 2023.
Business Risk Management: Business risk is the risk of an adverse impact on our profitability resulting from external factors that may occur in both the short and long run. We manage business risk, in part, through a commitment to strategic planning and by having a strategic business plan in effect at all times that describes how the business activities will achieve our mission and also details the operating goals and strategic objectives for each major business activity. The Strategic Business Plan is intended to make transparent our strategic plans as well as the strategic planning process that helps formulate that plan. The Strategic Business Plan is augmented from time-to-time, at least annually, with appropriate research and analysis. The Strategic Business Plan provides a mechanism for management and the board of directors to be fully engaged in fulfilling their responsibilities for establishing our long-term strategic direction. Directors’ knowledge of the external environment through their positions with member institutions in the financial services industry as well as a variety of other professions provides a strong experience base to complement the capabilities and competencies of management. Full development of the Strategic Business Plan, including tactical strategies and implementation, is delegated to management. We use planning scenarios to develop the Strategic Business Plan and we continue to refine and enhance the scenario planning process each year. We believe this process results in the development of robust and effective future scenarios, thereby enhancing the overall effectiveness of our strategic planning process and the development of risk strategies for each scenario. The board of directors plays a key role in the development of the Strategic Business Plan and regularly monitors progress in the achievement of business objectives. Two board of directors’ meetings are set aside each year for strategic planning purposes.
To manage business and strategic risk, earnings simulations are conducted annually with estimated base-, best- and worst-case scenarios. These earnings simulations are based upon a set of assumptions developed for each of the three scenarios that consider factors such as: (1) the effects of changes in interest rates and spreads; (2) the balances of advances, mortgage loans, and investments; (3) operating expenses; and (4) dividends. The worst-case scenario assumptions typically include a pessimistic interest rate assumption, an overall decline in advance balances of approximately 20 percent due to either a declining economy, the loss of a large borrowing member due to merger or acquisition, or changes in mortgage flow as a result of a declining economy. We monitor key indicators tied to the various scenario assumptions and provide a monthly report to the Executive Committee and the board of directors. This key indicator report includes advance balance monitoring for our largest eight members and our overall membership. See Table 21 under this Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Advances” for advance concentration to the top five borrowers.
Business risk also includes political, reputation, and regulatory risk. Congress occasionally considers legislation that could have an impact on the housing GSEs, including the FHLBanks. Legislation has the power to impact our cost of funds and our cost of doing business. It could also limit or expand existing authorities or change the competitive balance among the FHLBanks and other housing GSEs. Consequently, we seek to: (1) positively influence legislative outcomes; (2) support, oppose, or comment on regulatory proposals; and (3) continually educate all stakeholders about our positive impact on the communities we serve. To manage these types of business risks, we maintain a Director of Government and Industry Relations position and work with lobbying firms in Washington, D.C. Additionally, we, along with the other 10 FHLBanks, partner with our Washington, D.C.-based trade association, the Council of FHLBanks, to ensure that the FHLBank System's common legislative and regulatory interests are served. More specifically, we promote the enactment of laws and regulations that are beneficial to FHLBank Topeka and our members, and we oppose detrimental laws and regulations. We also work to enhance awareness and understanding of the FHLBanks among Washington leaders, including members of Congress and their staff, Executive departments, regulators, trade associations, and the financial media.
For additional discussions of general business risk, legislative and regulatory business risk and strategic business risk, see Item 1A - “Risk Factors.”
Joint and Several Liability - Although we are primarily liable for our portion of consolidated obligations (i.e., those issued on our behalf), we are also jointly and severally liable with the other FHLBanks for the payment of principal and interest on consolidated obligations of all the FHLBanks. See Item 1 - “Business - Debt Financing - Consolidated Obligations” and Note 8 of the Notes to Financial Statements under Item 8 for additional information regarding FHLBank’s joint and several liability.
Operations Risk Management: Operations risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, or systems, or from external events. This category of risk is inherent in our daily business activities and involves people, information technology (IT) systems, processes, and external events (including fraud, security incidents, and business disruptions). A number of strategies are used to manage and mitigate operations risk, including systems and procedures to monitor transactions and financial positions, segregation of duties, documentation of transactions, secondary reviews, comprehensive risk assessments conducted at the entity and business unit level, and periodic reviews by our Internal Audit department. The ORC serves as the primary venue for overseeing all of our operations risk management initiatives and activities.
Human Error and Circumvention or Failure of Internal Controls and Procedures - Employees play a vital role in implementing our risk management practices and strategies. We look to recruit, develop, promote, and retain high-quality employees by offering a fair and competitive compensation package and by providing a comfortable, secure and professional work environment in a cost-effective manner. To ensure our employees understand the importance of establishing and maintaining an effective internal control system, we maintain an Internal Control Policy which, in addition to defining internal control and describing the five interrelated components and underlying principles of FHLBank’s internal control framework, outlines the objectives for our internal controls, establishes and delineates management’s responsibilities for implementing and maintaining internal controls, and establishes the Internal Audit department as the business unit responsible for reviewing the adequacy of our internal controls. We have established and maintain an effective internal control system, guided by the Internal Control Policy, that addresses: (1) the establishment of strategies aligned with our mission and vision; (2) the efficiency and effectiveness of our activities; (3) the safeguarding of our assets: (4) the reliability, completeness and timely reporting of financial and management information (and the transparency of that information) to the board of directors and outside parties, including the Office of Finance, the SEC and the FHFA; and (5) compliance with applicable laws, regulations, policies, supervisory determinations and directives. The annual business unit risk assessment program serves to reinforce our focus on maintaining strong internal controls by identifying significant inherent risks and the internal controls and strategies used to mitigate those risks to acceptable residual risk levels. The business unit risk assessment program provides management and the board of directors with a thorough understanding of our risk management and internal control structure.
Systems Malfunctions and Security Threats - We rely heavily on IT systems and other technology to conduct our business. To manage operations risk as it relates to IT systems, we devote significant management attention and resources to technology. Our Technology Committee assists executive management in overseeing the development and implementation of significant technology strategies. The Technology Committee is also charged with providing strategic oversight of all technology-related activities, monitoring the strategic alignment and synchronization of IT services with our Strategic Business Plan (as well as our immediate and long-term goals and objectives), reviewing the operational health of IT systems, and reviewing new and/or anticipated projects related to our strategic initiatives. Protection of our information assets is also necessary to establish and maintain trust between us and our customers, maintain compliance with applicable laws and regulations, and protect our reputation. Consequently, we maintain an enterprise-wide security program. The goal of our enterprise security program is to maintain a security framework such that: (1) physical and information assets are protected from unauthorized access, modification, disclosure and destruction; (2) integrity and confidentiality of information is maintained; (3) physical and information assets and information systems are available when needed; and (4) cybersecurity threats and/or other information security risks are identified, monitored, and addressed through our enterprise information security program. For additional information on cybersecurity and cybersecurity threats, see Item 1C - “Cybersecurity.”
Man-made or Natural Disasters - We manage the risk of business disruption and systems failure due to man-made or natural disasters by having in place at all times a business resiliency plan, the purpose of which is to provide contingency plans for situations where operations cannot be carried out in their normal manner. We maintain an alternate data center that is geographically located far enough from our primary data center to prevent both data centers from being impacted by the same event. We also maintain an off-site business resumption center which includes computer equipment, office space, supplies, and other resources to allow our employees to resume operations if our headquarters is inaccessible. Our on-site power generators support both the alternate data center and business resumption center in case of total power failure. Business partners may also resume operations by working remotely in situations where our headquarters is inaccessible. Comprehensive business resiliency exercises utilizing the alternate data center and business resumption center are conducted routinely and vary in scope and duration to simulate various types of disruptions. The disaster recovery plans are reviewed and updated annually. We also have a reciprocal back-up agreement in place with FHLBank Boston to provide short-term advances to our members on our behalf in the event that our facilities are inoperable. In the event that FHLBank Boston’s facilities are inoperable, we have agreed to provide short-term liquidity advances to FHLBank Boston’s members. We complete an annual test of this agreement with FHLBank Boston to ensure the process and related systems are functioning properly. We also maintain a funds transfer contingency agreement with FHLBank Boston that is tested annually, which authorizes either FHLBank Topeka or FHLBank Boston to process wire transfers for the other during a contingency situation.
Internal or External Fraud - Our Anti-Fraud Policy, which includes our Whistleblower Procedures, along with our Anti-Money Laundering Policy, forms the foundation of our Fraud Awareness Program. Our Fraud Awareness Program establishes our methodology or framework for preventing, detecting, deterring, reporting, remediating, and punishing suspicious activities, money laundering activities, dishonest activities, violations of the Code of Ethics and other fraudulent activities that could create risks for us or undermine the public’s confidence in the integrity of our activities. Employees may submit good faith complaints or concerns regarding accounting or auditing matters, fraud concerns, potential wrongdoing or violations of applicable securities laws and regulations, or violations of the Commodity Exchange Act and relevant implementing regulations to management or our anonymous reporting service without fear of dismissal or retaliation of any kind. We are committed to achieving compliance with all applicable securities laws and regulations, the Commodity Exchange Act and relevant implementing regulations, accounting standards, accounting controls and audit practices. Decisions to prosecute or refer fraud investigation results to the appropriate law enforcement and/or regulatory agencies for independent investigation shall be made in conjunction with legal counsel and appropriate senior management, as will final decisions on disposition of the case.
Recently Issued Accounting Standards
See Note 2 of the Notes to Financial Statements under Item 8 - "Financial Statements and Supplementary Data" for a discussion of recently issued accounting standards.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk that changes in market value may adversely affect our financial condition and performance. Interest rate risk is a component of market risk and represents our most significant market risk exposure. Interest rate risk is the risk that the market value of our asset, liability, and derivative portfolios will be negatively impacted by interest rate volatility or that earnings will be affected significantly by interest rate changes. We manage interest rate risk through the characteristics of our portfolio of assets and liabilities and by using derivative transactions to limit duration mismatches and reduce MVE sensitivity. Matching the duration of assets with the duration of liabilities funding those assets is accomplished through the use of different debt maturities and embedded option characteristics, as well as the use of derivatives, primarily interest rate swaps, interest rate caps, and interest rate floors. Interest rate swaps increase the flexibility of our funding alternatives by providing cash flows or characteristics that might not be as readily available or cost-effective if obtained in the standard GSE debt market.
Duration of Equity: DOE aggregates the estimated sensitivity of market value for each of our financial assets and liabilities to changes in interest rates. A positive DOE results when the duration of assets and designated derivatives is greater than the duration of liabilities and designated derivatives, indicating a degree of interest rate risk exposure in a rising interest rate environment. A negative DOE results in the opposite scenario, indicating 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 in response to changing interest rates. A decline in market value does not necessarily translate directly into a decline in income, especially for entities that do not trade financial instruments. Changes in market value may indicate trends in income over longer periods, and knowing the sensitivity of our market value to changes in interest rates provides a measure of the interest rate risk we take.
Under the RMP, our base case DOE is generally limited to a range of ±5.0 assuming current interest rates. In addition, our DOE is generally limited to a range of ±7.0 assuming an instantaneous parallel increase or decrease in interest rates of 200 basis points. During periods of extremely low interest rates, the FHFA requires that the FHLBanks employ a constrained down shock analysis to limit the evolution of forward interest rates to positive non-zero values. Since our market risk model imposes a positive non-zero boundary on post-shock interest rates, no additional calculations are necessary to meet this FHFA requirement when applicable. When DOE exceeds the limits established by the RMP, corrective actions taken may include: (1) the purchase of interest rate caps, interest rate floors, or other derivatives; (2) the sale of assets; and/or (3) the addition to the balance sheet of assets or liabilities having characteristics that are such that they counterbalance the excessive duration observed.
Table 41 presents our DOE in the base and the up and down 200 basis point interest rate shock scenarios:
Table 41
Duration of Equity
Date Up 200 Basis Points Base Down 200 Basis Points
12/31/2023 3.3 2.1 1.2
09/30/2023 3.2 2.2 1.9
06/30/2023 2.3 1.6 2.0
03/31/2023 1.8 1.8 2.4
12/31/2022 1.7 1.7 2.1
The primary factors contributing to the net changes in duration from December 31, 2022 to December 31, 2023 were: (1) the relative change in interest rates and the relative level of mortgage rates during the period along with variable rate CMOs and their effective cap levels; (2) the increase in percent of total assets represented by the fixed rate mortgage loan portfolio during the period; and (3) asset/liability actions taken by management throughout the period, including the continued issuance of discount notes and short-term variable rate consolidated obligations to fund advance activity. The increase in shorter-term and relative change in longer-term interest rates during the period impacted the implied forward rates and the valuation of the variable rate CMO investments with lower effective interest rate caps. This impact resulted in a longer duration profile in the base and +200 interest rate shock scenarios. In addition, the relative changes in interest rates and mortgage rates during the period caused the mortgage loan portfolio contribution to duration to shorten less than the associated liabilities, contributing to the increase in the asset sensitive DOE profile in the base case. The mortgage loan portfolio generally has a longer duration profile in the interest rate shock scenarios contributing to the asset-sensitive DOE in the up and down 200 basis point shock scenarios, including the increasing asset-sensitive DOE in the up 200 basis point scenario. However, the prepayment sensitivity and market value changes in our mortgage portfolio currently align well with our non-swapped callable debt portfolio in these scenarios generating a relatively stable sensitivity profile in the interest rate shock scenarios.
The change in interest rates during the period generally shortened the duration profile for both the fixed rate mortgage loan portfolio and the associated unswapped callable consolidated obligation bonds funding these assets. With the increase in our mortgage loan portfolio balance, the net impact was a slight increase as a percentage of total assets during this period, as discussed in Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - MPF Program” so the duration profile changed as expected as prepayments increased slightly for both new production mortgage loans, as well as the outstanding fixed rate mortgage loan portfolio.
To effectively manage these changes in the mortgage loan portfolio (including new production and prepaid loans) and related sensitivity to changes in market conditions, unswapped callable consolidated obligation bonds that either matured or were called were generally replaced with reissuance of unswapped callable consolidated obligation bonds with relatively long maturities and short lock-out periods (generally three months to one year). Generally, changes in the profile of the liability portfolio corresponds with the expected duration profile of the new fixed rate mortgage loans, all else being equal, and positions the balance sheet for future changes in rates, including changes in interest rate increases where the mortgage loan portfolio will likely lengthen in duration as expected prepayments slow. For further discussion of the call and reissuance of consolidated obligation bonds, see Item 7 - “Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Consolidated Obligations.” The combination of these factors contributed to the net DOE changes in all scenarios during the period.
Duration gap is the difference between the duration of our assets and the duration of our liabilities. Our base duration gap was 1.3 months and 1.1 months for December 31, 2023 and 2022, respectively.
Market Value of Equity
MVE is the net value of our assets and liabilities. Estimating sensitivity of MVE to changes in interest rates is another measure of interest rate risk. The RMP measures our market value risk in terms of the MVE in relation to total regulatory capital stock outstanding (TRCS). TRCS includes all capital stock outstanding, including stock subject to mandatory redemption. As a cooperative, we believe using the TRCS results is an appropriate measure because it reflects our market value relative to the book value of our capital stock. Our RMP stipulates MVE shall not be less than: (1) 100 percent of TRCS under the base case scenario; or (2) 90 percent of TRCS under a ±200 basis point instantaneous parallel shock in interest rates. Table 42 presents MVE as a percent of TRCS. As of December 31, 2023, all scenarios are well above the specified limits and much of the relative level in the ratios during the periods covered by the table can be attributed to the relative level of the fixed rate mortgage loan and associated funding portfolio market values along with the relative level of outstanding capital.
The MVE to TRCS ratios can be impacted by the market value of equity sensitivity and level of capital outstanding based on our capital management approach. The relative level of advance, mortgage loan, and letters of credit balances, which trigger required stock, and excess stock as of December 31, 2023 (see Table 38 under Part I, Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Capital”) contributed to the MVE levels as of December 31, 2023. These relationships and associated risk sensitivity primarily generate the changes in the MVE/TRCS levels and produce the changes in the ratios in all interest rate scenarios in the table below.
Generally, a positive duration position accompanied by rising interest rates would negatively impact the base market value of equity (numerator). Likewise, as capital increases, the MVE/TRCS ratio declines since the capital level is the denominator in the ratio. While the change in interest rates contributed to the overall impact on base MVE during the period, the changes were limited with the ratio maintaining consistent levels in the base case and interest rate shock scenarios during the period.
Table 42
Market Value of Equity as a Percent of Total Regulatory Capital Stock
Date Up 200 Basis Points Base Down 200 Basis Points
12/31/2023 145 153 157
09/30/2023 136 144 150
06/30/2023 143 148 154
03/31/2023 143 148 154
12/31/2022 143 148 154
Detail of Derivative Instruments by Type of Instrument by Type of Risk
Various types of derivative instruments are utilized to mitigate the interest rate risks described in the preceding sections as well as to better match the terms of assets and liabilities. Tables 43 and 44 present the notional amount and fair value amount (fair value includes net accrued interest receivable or payable on the derivative) for derivative instruments by hedged item, hedging instrument, hedging objective and accounting designation (in thousands):
Table 43
12/31/2023
Hedged Item Hedging Instrument Hedging Objective Accounting Designation Notional Amount Fair Value Amount
Advances
Fixed rate non-callable advances Pay fixed, receive variable interest rate swap Convert the advance’s fixed rate to a variable rate index Fair Value Hedge $ 11,315,760 $ (2,205)
Fixed rate convertible advances Pay fixed, receive variable interest rate swap Convert the advance’s fixed rate to a variable rate index and offset option risk in the advance Fair Value Hedge 113,400 4,215
Fixed rate putable advances Pay fixed, receive variable interest rate swap Convert the advance’s fixed rate to a variable rate index and offset option risk in the advance Fair Value Hedge 2,071,800 (9,227)
Fixed rate non-callable advances Pay fixed, receive variable interest rate swap Convert the advance’s fixed rate to a variable rate index Economic Hedge 201,138 834
Firm commitment to issue a fixed rate advance Forward settling interest rate swap Protect against fair value risk Fair Value Hedge 52,141 7
Investments
Fixed rate non-MBS available-for-sale investments Pay fixed, receive variable interest rate swap Convert the investment’s fixed rate to a variable rate index Fair Value Hedge 3,050,000 (4,065)
Fixed rate MBS available-for-sale investments Pay fixed, receive variable interest rate swap Convert the investment’s fixed rate to a variable rate index Fair Value Hedge 3,766,473 48,363
Fixed rate non-MBS trading investments Pay fixed, receive variable interest rate swap Convert the investment’s fixed rate to a variable rate index Economic Hedge 293,000 (26)
Fixed rate MBS trading investments Pay fixed, receive variable interest rate swap Convert the investment’s fixed rate to a variable rate index Economic Hedge 628,027 20,659
Adjustable rate MBS with embedded caps Interest rate cap Offset the interest rate cap embedded in a variable rate investment Economic Hedge 304,000 698
Mortgage Loans Held for Portfolio
Fixed rate mortgage purchase commitments Mortgage purchase commitment Protect against fair value risk Economic Hedge 41,641 128
Consolidated Obligation Discount Notes
Fixed rate non-callable consolidated obligation discount notes with tenors less than 6 months Receive fixed, pay variable interest rate swap Convert the discount note's fixed rate to a variable rate Economic Hedge 5,261,131 453
Fixed rate non-callable consolidated obligation discount notes with tenors of 6 to 12 months Receive fixed, pay variable interest rate swap Convert the discount note's fixed rate to a variable rate Fair Value Hedge 3,727,296 911
Consolidated Obligation Bonds
Fixed rate non-callable consolidated obligation bonds Receive fixed, pay variable interest rate swap Convert the bond’s fixed rate to a variable rate index Fair Value Hedge 4,599,000 (18,313)
Fixed rate callable consolidated obligation bonds Receive fixed, pay variable interest rate swap Convert the bond’s fixed rate to a variable rate index and offset option risk in the bond Fair Value Hedge 14,797,000 (241,011)
Callable step-up/step-down consolidated obligation bonds Receive variable interest rate with embedded features, pay variable interest rate swap Reduce interest rate sensitivity and repricing gaps by converting the bond’s variable rate to a different variable rate index and/or to offset embedded options risk in the bond Fair Value Hedge 1,312,000 (72,918)
TOTAL $ 51,533,807 $ (271,497)
Table 44
12/31/2022
Hedged Item Hedging Instrument Hedging Objective Accounting Designation Notional Amount Fair Value Amount
Advances
Fixed rate non-callable advances Pay fixed, receive variable interest rate swap Convert the advance’s fixed rate to a variable rate index Fair Value Hedge $ 8,219,720 $ 39,770
Fixed rate convertible advances Pay fixed, receive variable interest rate swap Convert the advance’s fixed rate to a variable rate index and offset option risk in the advance Fair Value Hedge 309,650 9,795
Firm commitment to issue a fixed rate advance Forward settling interest rate swap Protect against fair value risk Fair Value Hedge 176,464 234
Fixed rate non-callable advances Pay fixed, receive variable interest rate swap Convert the advance’s fixed rate to a variable rate index Economic Hedge 34,257 1,107
Investments
Fixed rate MBS available-for-sale investments Pay fixed, receive variable interest rate swap Convert the investment’s fixed rate to a variable rate index Fair Value Hedge 3,243,924 74,972
Fixed rate non-MBS available-for-sale investments Pay fixed, receive variable interest rate swap Convert the investment’s fixed rate to a variable rate index Fair Value Hedge 3,250,000 770
Fixed rate non-MBS trading investments Pay fixed, receive variable interest rate swap Convert the investment’s fixed rate to a variable rate index Economic Hedge 798,500 43
Fixed rate MBS trading investments Pay fixed, receive variable interest rate swap Convert the investment’s fixed rate to a variable rate index Economic Hedge 652,700 32,883
Adjustable rate MBS with embedded caps Interest rate cap Offset the interest rate cap embedded in a variable rate investment Economic Hedge 304,000 1,727
Mortgage Loans Held for Portfolio
Fixed rate mortgage purchase commitments Mortgage purchase commitment Protect against fair value risk Economic Hedge 33,882 (149)
Consolidated Obligation Discount Notes
Fixed rate non-callable consolidated obligation discount notes with tenors of 6 to 12 months Receive fixed, pay floating interest rate swap Convert the discount note's fixed rate to a variable rate Fair Value Hedge 7,508,162 1,003
Fixed rate non-callable consolidated obligation discount notes with tenors of 6 to 12 months Receive fixed, pay floating interest rate swap Convert the discount note's fixed rate to a variable rate Economic Hedge 12,564,086 (1,095)
Consolidated Obligation Bonds
Fixed rate non-callable consolidated obligation bonds Receive fixed, pay variable interest rate swap Convert the bond’s fixed rate to a variable rate index Fair Value Hedge 2,304,500 (18,280)
Fixed rate callable consolidated obligation bonds Receive fixed, pay variable interest rate swap Convert the bond’s fixed rate to a variable rate index and offset option risk in the bond Fair Value Hedge 8,053,000 (458,805)
Callable step-up/step-down consolidated obligation bonds Receive variable interest rate with embedded features, pay variable interest rate swap Reduce interest rate sensitivity and repricing gaps by converting the bond’s variable rate to a different variable rate index and/or to offset embedded options risk in the bond Fair Value Hedge 1,902,000 (124,715)
Variable rate non-callable consolidated obligation bonds Receive variable interest rate, pay variable interest rate swap Reduce basis risk by converting an undesirable variable rate index in the bond to a more desirable variable rate index Economic Hedge 100,000 (8)
TOTAL $ 49,454,845 $ (440,748)

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8: Financial Statements and Supplementary Data
The following financial statements and accompanying notes, including the Report of Independent Registered Public Accounting Firm, are set forth on pages to of this Form 10-K.
Audited Financial Statements
Description Page Number
Management's Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP (PCAOB ID 238)
Statements of Condition as of December 31, 2023 and 2022
Statements of Income for the Years Ended December 31, 2023, 2022, and 2021
Statements of Comprehensive Income for the Years Ended December 31, 2023, 2022, and 2021
Statements of Capital for the Years Ended December 31, 2023, 2022, and 2021
Statements of Cash Flows for the Years Ended December 31, 2023, 2022, and 2021
Notes to Financial Statements

---

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

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A: Controls and Procedures
Disclosure Controls and Procedures
Senior management is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide a reasonable level of assurance in achieving their desired objectives; however, in designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Management, with the participation of the President and CEO, our principal executive officer, and the Chief Accounting Officer, our principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2023. Based upon that evaluation, the CEO and Chief Accounting Officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2023.
Management’s Report on Internal Control Over Financial Reporting
Management’s Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm with respect to FHLBank’s internal control over financial reporting are included under Item 8 - “Financial Statements and Supplementary Data.”
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the fourth quarter of the year for which this annual report on Form 10-K is filed that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
Item 9B: Other Information
None.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10: Directors, Executive Officers and Corporate Governance
Information About Our Executive Officers
Table 45 sets forth certain information about each of our executive officers as of the filing date of this annual report on Form 10-K.
Table 45
Executive Officer Age Position Held
Jeffrey B. Kuzbel 57 President and Chief Executive Officer
Sonia R. Betsworth 62 EVP/Chief Administrative Officer
Carl M. Koupal, III 40 EVP/Chief Legal and Ethics Officer, Corporate Secretary
Brian J. Dreher 53 SVP/Chief Information Officer
Dan J. Hess 58 SVP/Chief Business Officer
Amanda J. Kiefer 48 SVP/Chief Human Resources and Inclusion Officer
Thomas E. Millburn1
53 SVP/Chief Audit Executive
Martin L. Schlossman, Jr. 55 SVP/Chief Risk Officer
Amy J. Crouch 48 FVP/Chief Accounting Officer, Principal Financial Officer
__________
1 Although Mr. Millburn is a non-voting member of FHLBank's executive team, he is not considered an "executive officer" as defined in Rule 3b-7 of the Exchange Act because he is not in charge of a principal business unit, division or function, nor does he perform a policy making function.
No executive officer has any family relationship with any other executive officer or director. All executive officers, other than the Chief Audit Executive and the CRO, may be removed from office or discharged by the board of directors or the President and CEO with or without cause. The Chief Audit Executive may be removed from office, with or without cause, only with the approval of the Audit Committee. The CRO may be removed from office, with or without cause, only with the approval of the Risk Oversight Committee.
There are no arrangements or understandings between any executive officer and any other person pursuant to which the executive officer was or is to be selected as an officer of FHLBank, including no employment agreement between any executive officer and FHLBank.
Except as otherwise indicated below, each officer has been engaged in the principal occupation listed above for at least five years:
Jeffrey B. Kuzbel became President and CEO in January 2024, after serving as Executive Vice President and CFO starting in January 2022, and Senior Vice President and CFO starting in April 2021. Prior to joining FHLBank in 2021, Mr. Kuzbel served as LIBOR Transition Executive at Capital One Financial from 2019 to March 2021; Treasury & Balance Sheet Management CFO at Capital One Financial from 2016 through 2018; Managing Vice President, Balance Sheet Management, at Capital One Financial from 2013 through 2015; Vice President, Balance Sheet Strategy from 2010 through 2012; and Senior Director, Treasury Finance & Analytics during 2009. Prior to his tenure at Capital One Financial, Mr. Kuzbel served as Lead Director - Market Risk Management for Freddie Mac, as Vice President - Fixed Income Portfolio Management and Trading at Advanced Investment Management, Inc., and as Head of Investments at the Federal Home Loan Bank of Pittsburgh.
Sonia R. Betsworth became Executive Vice President and Chief Administrative Officer (CAO) in January 2022, after serving as Senior Vice President and CAO since March 2017, and as Interim CAO starting in January 2017. Ms. Betsworth is responsible for overseeing FHLBank’s Information Technology, Building Services and Security, Corporate Portfolio Management, and Corporate Strategies activities. From March 2013 through December 2016, she was Senior Vice President and Chief Credit Officer. She served as Senior Vice President, Director of Credit from July 2009 to March 2013; Senior Vice President, Director of Member Products from April 2006 through June 2009; Director of Sales, Lending and Collateral from 2002 to April 2006; and Director of Credit and Collateral from 1999 to 2002. She joined FHLBank in 1983. Ms. Betsworth was named Assistant Vice President in 1994 and Vice President in 1998.
Carl M. Koupal, III, became Executive Vice President and Chief Legal and Ethics Officer (CLEO), Corporate Secretary in January 2024, after serving as Senior Vice President and CLEO, Corporate Secretary starting in October 2022. Mr. Koupal is responsible for overseeing FHLBank’s Legal Services, Housing and Community Development, Government and Industry Relations, Corporate Communications, and Corporate Governance activities. Mr. Koupal previously served as Chief Compliance and Ethics Officer & General Counsel, Corporate Secretary starting in October 2021; First Vice President, Associate General Counsel, Director of Legal Services and Compliance, Corporate Secretary from April 2018 to October 2021; and as Vice President, Assistant General Counsel, Director of Compliance and Corporate Secretary from March 2016 through March 2018. Mr. Koupal joined FHLBank in 2008 as a Law Clerk and was promoted to Staff Attorney in 2009; Legal and Compliance Officer in 2011; Assistant Vice President, Assistant General Counsel, Director of Compliance and Assistant Corporate Secretary in 2014; and Vice President, Assistant General Counsel, Director of Compliance and Corporate Secretary in 2016.
Brian Dreher became Senior Vice President and Chief Information Officer (CIO) in January 2022, after serving as Vice President and Director of IT Infrastructure & Operations starting in 2014. Mr. Dreher is responsible for FHLBank’s Information Technology activities, including IT governance, application solutions delivery, information security, infrastructure, and operations. He served as Vice President, Assistant Director of Information Technology from 2010 to 2014, and Vice President and Software Development Manager from 2004 to 2010. He joined FHLBank in 1998.
Dan J. Hess became Senior Vice President and Chief Business Officer in March 2013. Mr. Hess is responsible for overseeing FHLBank’s Product Administration and Lending, Product Development and Research, Sales, Member Solutions, and Wire Services activities. Mr. Hess previously served as Senior Vice President, Director of Member Products from July 2009 to March 2013; First Vice President, Director of Sales from April 2002 to May 2009; and Senior Vice President, Director of Sales from May 2009 to July 2009. Mr. Hess joined FHLBank in 1995 as a Correspondent Banking Account Manager for Kansas. He was promoted to Lending Officer in 1997, to Assistant Vice President and Lending Manager in 1999, and to Vice President in 2000. Mr. Hess has announced his plans to retire on April 1, 2024.
Amanda J. Kiefer became Senior Vice President and Chief Human Resources and Inclusion Officer in October 2021. Ms. Kiefer is responsible for overseeing FHLBank’s Human Resources and DEIB activities. Ms. Kiefer previously served as First Vice President, Director of Human Resources and Inclusion since January 2016, and as Interim Director of Human Resources from October 2015 to January 2016. Ms. Kiefer joined FHLBank in 2011 as Officer and Corporate Counsel, and was subsequently promoted to Assistant Vice President, Assistant General Counsel and Office of Minority and Women Inclusion (OMWI) Officer.
Thomas E. Millburn became Senior Vice President, Chief Audit Executive in March 2016. Mr. Millburn is responsible for overseeing FHLBank’s Internal Audit activities. Mr. Millburn previously served as Senior Vice President, Chief Internal Audit Officer from March 2011 to March 2016 and Senior Vice President, Director of Internal Audit from December 2010 to March 2011. Mr. Millburn joined FHLBank in 1994 as a staff internal auditor and was promoted to Assistant Vice President, Director of Internal Audit in 1999, Vice President in 2000 and First Vice President in March 2004.
Martin L. Schlossman, Jr., became Senior Vice President, CRO in March 2017, after serving as Interim CRO starting in January 2017. Mr. Schlossman is responsible for overseeing FHLBank’s Credit, Market Risk Analysis, and Operations Risk and Compliance activities. Mr. Schlossman previously served as Senior Vice President, Associate CRO from March 2012 through December 2016. He joined FHLBank in November 2000 as an Enterprise Risk Analyst and was promoted to Planning Officer in December 2001, Assistant Vice President in March 2004, Vice President in June 2005, and First Vice President in March 2009. He was named Associate CRO in June 2010 and was promoted to Senior Vice President in March 2012.
Amy J. Crouch became First Vice President and Chief Accounting Officer and FHLBank’s Principal Accounting Officer in January 2023. She was named Interim Principal Financial Officer in January 2024. Ms. Crouch is responsible for FHLBank’s Accounting activities, including financial reporting. Ms. Crouch previously served as Vice President, Director of Financial Reporting since September 2011, and as SEC Reporting and Compliance Manager from April 2008 to September 2011. She joined FHLBank in 2005 as SEC Reporting and Compliance Accountant.
Directors
The Bank Act (as amended by the Recovery Act) and FHFA regulations mandate that our board of directors consist of 13 directors or such other number as may be provided by the FHFA, a majority of whom are to be member directors and at least two-fifths of whom are to be independent directors. Due to the interplay of the “method of equal proportions,” which the FHFA uses to allocate member directorships to each state in our four-state district, the requirement that at least two-fifths of the directorate must be comprised of independent directors, and the requirement that the number of member directorships allocated to each of those four states must be at least equal to the number allocated to each state on December 31, 1960, the FHFA may require from time to time the allocation of additional member director seats. Our board of directors currently consists of 17 directors, 10 of whom are member directors and 7 of whom are independent directors. Under the FHFA regulations, new and re-elected directors serve four-year terms, subject to adjustment by the FHFA to establish staggering of the board. Directors cannot be elected to serve more than three consecutive full terms. A director who was term-limited may be re-elected to a directorship for a term that commences no earlier than two years after the expiration of the third full term. Each director must be: (1) a citizen of the United States; and (2) either a bona fide resident in our district or serve as an officer or director of a member located in our district. Additionally, at least two of the independent directors must qualify as public interest directors. To qualify as a public interest director, an individual must have more than four years of experience in representing consumer or community interests in banking services, credit needs, housing, or consumer financial protections.
Member directorships are designated to each of the four states in our district and each of our members is entitled to nominate and vote for candidates representing the state in which the member’s principal place of business is located. To qualify as a nominee for a member directorship, a nominee must be an officer or director of a member located in the state to which the director of the FHFA has allocated the directorship, and such member must meet all minimum capital requirements established by its appropriate Federal banking agency or appropriate state regulator. Member directors are nominated by members located in the state to which the member directorship is assigned, based on a determination by the nominating institution that the nominee possesses the applicable experience, qualifications, attributes and skills to qualify the nominee to serve as an FHLBank director, without any participation from our board of directors. Following the nomination process, a member is entitled to cast, for each applicable member directorship, one vote for each share of capital stock that the member is required to hold, subject to a statutory limitation. Under this limitation, the total number of votes that each member may cast is limited to the average number of shares of capital stock that were required to be held by all members in that state as of the record date for voting.
Each of our member directors meets the required qualifications and, as such, each is an officer or director of a member in the respective state from which they were nominated and elected.
Independent directors are elected by ballot from among those eligible persons nominated by the board of directors after consultation with the Affordable Housing Advisory Council and after the nominee has been submitted to the FHFA for review. In nominating independent directors, our board of directors may consider an individual’s current and prior experience on the board of directors, the qualifications of the nominee, and the skills and experience most likely to add strength to the board of directors, among other skills, qualifications and attributes. FHFA regulations require us to encourage the consideration of diversity in nominating or soliciting nominees for positions on our board of directors. Pursuant to our Procedures for Identifying and Evaluating Candidates for Independent Directorships and Filling Vacant Directorships, our board of directors will consider diversity in nominating independent directors and in electing member directors when the board of directors is permitted to elect or appoint member directors in the event of a vacancy, and in evaluating potential director candidates, the board of directors may also identify appropriate criteria that will promote appropriate diversity on the board of directors and help meet our strategic needs, including desired skill sets, experience, residence, ability to devote sufficient time to service on the board of directors, ethnicity and/or gender. If our board of directors nominates only one individual for each independent directorship, then each nominee must receive at least 20 percent of the number of votes eligible to be cast in the election to be elected. If our board of directors nominates more persons for the type of independent directorship to be filled than there are directorships of that type to be filled in the election, then the nominee receiving the highest number of votes will be elected. Each member voting in the independent director election is entitled to cast one vote for each share of capital stock that the member is required to hold, subject to the statutory limitation discussed above. Our board of directors has adopted procedures for the nomination and election of independent directors, consistent with the requirements of the Bank Act and FHFA regulations.
There are no arrangements or understandings between any director and any other person pursuant to which the director was or is to be selected as a director or nominee. No director has any family relationship with any other director or executive officer. No director or executive officer of FHLBank has been involved in any legal proceeding during the past ten years that would affect the integrity or ability of such director or nominee to serve in such capacity, including any proceedings identified in Item 401(f) of Regulation S-K.
On November 7, 2023, Steven G. Bradshaw from the State of Oklahoma, Craig A. Meader from the state of Kansas, and Gregg Vandaveer from the state of Oklahoma were each declared elected as member directors, and Holly M. Johnson was declared elected as an independent director of FHLBank’s board of directors. Each of the directors elected in 2023 will serve four-year terms expiring December 31, 2027.
Table 46 sets forth certain information regarding each of our directors as of the filing date of this annual report on Form 10-K.
Table 46
Director Age Type of
Directorship Director Since Current Term
Expiration Board Committee
Membership1
Milroy A. Alexander 74 Independent January 2015 December 2024 (a), (b), (c), (e) Chair
Steven G. Bradshaw
64 Member
January 2024 December 2027
(d), (f)
Thomas E. Henning 71 Independent January 2023 December 2026 (a), (b), (d)
Michael B. Jacobson 70 Member January 2022 December 2025 (d), (f)
Holly Johnson 60 Independent January 2016
December 2027
(a) Chair, (c), (d)
Lynn Jenkins Katzfey 60 Independent July 2019 December 2024 (e), (f)
Barry Lockard 58 Member January 2019 December 2026 (b), (c) Chair
Craig A. Meader 66 Member January 2020
December 2027
(e), (f)
L. Kent Needham 70 Member January 2013 December 2024 (a), (c), (d) Chair
Jeffrey R. Noordhoek 58 Independent July 2020 December 2025 (b), (f)
Mark J. O’Connor 59 Member May 2011 December 2025 (c), (e), (f) Chair
Thomas H. Olson, Jr. 58 Member January 2013 December 2024 (a), (b) Chair, (c), (e)
Carla D. Pratt 55 Independent January 2023 December 2026 (b), (e)
Douglas E. Tippens 69 Member January 2015 December 2026 (a), (b), (d)
Gregg Vandaveer
71 Member
January 2024
December 2027
(e), (f)
Paul E. Washington 54 Independent July 2021 December 2025 (a), (e)
Lance L. White 50 Member January 2023 December 2026 (d), (f)
1 Board of Director committees are as follows: (a) Audit; (b) Compensation, Human Resources and Inclusion; (c) Executive; (d) Risk Oversight; (e) Housing and Governance; and (f) Operations.
The following describes the principal occupation, business experience, qualifications and skills, among other matters, of the 17 directors who currently serve on the board of directors. Except as otherwise indicated, each director has been engaged in the principal occupation described below for at least five years:
Milroy A. Alexander has been a housing, financial and business consultant since 2010, serving non-profit housing organizations and a residential and commercial redevelopment authority. A former board member of the Municipal Securities Rulemaking Board, he was also a member of the board of trustees of Rose Community Foundation for 10 years ending in December 2017, and is currently board Chair of the Lowry Redevelopment Authority and Northeast Denver Housing Center. Mr. Alexander previously served as Executive Director and CEO of the Colorado Housing and Finance Authority in Denver, Colorado. The board of directors considered Mr. Alexander’s qualifications, skills and attributes, including his more than 21 years of service at a state HFA, including nine years as Executive Director and CEO and 12 years as CFO; his certification as a certified public accountant (CPA); his more than 11 years as an auditor with Touche Ross & Co. (now Deloitte); his past service on the audit committees of many organizations, his experience in and knowledge of auditing and accounting, financial management, organizational management, project development, and risk management practices; and his ability to enhance the diversity of viewpoints among the directors serving on the board of directors by providing the board of directors with racial diversity, when making his nomination.
Steven G. Bradshaw has served as President Emeritus of BOKF, N.A., and BOK Financial, Tulsa, Oklahoma, since July 2022. He has also served as President and CEO of both BOKF, N.A., and BOK Financial, both of Tulsa, Oklahoma, from January 2014 to December 2021. Before joining BOKF, N.A., and BOKF Financial in 1991, he operated his wholly owned retail brokerage service. Although the board of directors did not participate in Mr. Bradshaw’s nomination since he is a member director, Mr. Bradshaw possesses a B.S. in Business Finance from the University of Central Oklahoma, graduated with distinction from the Southwestern Graduate School of Banking, and has over 30 years of banking experience that assists in his service as a director.
Thomas E. Henning has been Manager of Henning LLC Companies since January 2023. Prior to his current role, Mr. Henning was Chairman, President and CEO of the Assurity Group, Inc. (AGI), a mutual holding company of life insurance companies in Lincoln, Nebraska, from 2005 through 2022 and was employed by Security Financial Life Insurance Co., a predecessor to AGI, from 1990 to 2005. Mr. Henning has served on the board of Nelnet, Inc., a public company and provider of education finance and services, headquartered in Lincoln, Nebraska, since 2003. He has also served on the board of First Interstate Bank, a public company and provider of financial services headquartered in Billings, Montana, since 2022, and previously served on the board of Great Western Bank prior to its acquisition by First Interstate Bank from 2015 to 2022. The board of directors considered Mr. Henning’s qualifications, skills, and attributes, including his past experience as Chairman, President, and CEO of a life and health insurance company; his past experience as President and CEO of a community bank and President and Chief Operating Officer of a regional banking group; his prior and current service on the board of publicly traded companies; his more than 40 years of financial services experience; his prior service as an FHLBank director; and his experience in and knowledge of auditing and accounting, financial management, organizational management, project development, risk management practices, and the law, when making his nomination. Prior to his current term, Mr. Henning served as an independent director of FHLBank from April 2007 through December 2015.
Michael B. Jacobson has served as Chairman, President and CEO of NebraskaLand Bank, North Platte, Nebraska, since 1998. He has also served as Chairman, President and CEO of NebraskaLand Financial Services, Inc. since 2000. Mr. Jacobson also serves on the Government Relations committee of the Nebraska Bankers Association, Chairman of North Platte Redevelopment Authority, Chair of the North Platte Airport Authority, on the Great Plans Health board of directors, as a University of Nebraska Foundation Trustee, and on Governor Pete Ricketts' Agricultural committee. Although the board of directors did not participate in Mr. Jacobson's nomination since he is a member director, Mr. Jacobson possesses a B.S. in agricultural economics, is a graduate of the Colorado Graduate School of Banking and possesses over 40 years of banking experience, including over 25 years as the CEO of a bank, that assists in his service as a director. Prior to his current term, Mr. Jacobson served as a member director of FHLBank from January 2012 through December 2019.
Holly Johnson, a Chickasaw citizen and CPA, owns a tribal consulting company providing services to the Chickasaw Nation in the area of administrative support and policy development. She served as Secretary of the Department of Treasury for the Chickasaw Nation from October 2012 to December 2019, where she was responsible for all finance and accounting functions. From October 2010 to September 2012, she served as the Administrator of Planning and Organizational Development for the Chickasaw Nation. From August 2003 to October 2010, she served as an Elected Tribal Legislator for the Pontotoc District. Ms. Johnson serves as a trustee of the Chickasaw Foundation and is a past trustee of the Ada City Schools Foundation and the Chickasaw Nation's 401(k) plans, a past board member of the Ada Chamber of Commerce, a member of the Oklahoma State University School of Accounting Executive Advisory Board, and a former appointed commissioner of the Oklahoma Ethics Commission. She represented Indian Tribal Governments on the Advisory Committee of the Internal Revenue Service. The board of directors considered Ms. Johnson's qualifications, skills and attributes, including her role as Secretary for the Department of Treasury for the Chickasaw Nation; her experience as a CPA and at public accounting firms; her experience in and knowledge of auditing and accounting, financial management, organizational management, project development and risk management practices; and her ability to enhance the diversity of viewpoints among the directors serving on the board of directors by providing the board of directors with gender and racial diversity, when making her nomination.
Lynn Jenkins Katzfey has been a partner at LJ Strategies since January 2019. Ms. Katzfey worked as a CPA for 16 years before launching a career in public service. Ms. Katzfey served as Treasurer of the State of Kansas and was subsequently elected to serve five terms in the U.S. House of Representatives. She currently serves on the boards of directors for American Century Investments Mutual Funds and previously served on the board of directors of MGP Ingredients, Inc. The board of directors considered Ms. Katzfey's qualifications, skills and attributes, including her role as a member of the U.S. House of Representatives, including service in leadership roles and on the House Financial Services Committee and the House Ways and Means Committee; her role as the Treasurer of the State of Kansas; her experience as a CPA and at public accounting firms; her experience in and knowledge of auditing and accounting, financial management, organizational management, project development, and the law; and her ability to enhance the diversity of viewpoints among the directors serving on the board of directors by providing the board of directors with gender diversity, when making her nomination.
Barry J. Lockard is Chair of our board of directors. Mr. Lockard has served as President and CEO of Cornhusker Bank, Lincoln, Nebraska, since 2007. Mr. Lockard previously held senior leadership roles at Black and Decker, Cincinnati Bell, and First National Bank of Omaha. He also served eight years in the Nebraska Army National Guard. He has served on the boards of directors of the Nebraska Bankers Association, the American Bankers Association (ABA) Community Bankers Council, and is a trustee for the Graduate School of Banking at Colorado, where he has also served as a member of the faculty. Although the board of directors did not participate in Mr. Lockard’s nomination since he is a member director, Mr. Lockard possesses a bachelor’s degree in business administration, is a graduate of the Colorado Graduate School of Banking, and has more than 15 years as a bank CEO, that assists in his service as a director.
Craig A. Meader has served as Chairman and CEO of First National Bank of Kansas since 1988. Mr. Meader has served as Chairman of the Kansas Bankers Association and the Bankers Bank of Kansas. Mr. Meader is a former member of the ABA Community Bankers Council, Government Relations Council and the ABA board of directors. Although the board of directors did not participate in Mr. Meader’s nomination since he is a member director, Mr. Meader possesses a bachelor’s degree in business administration and finance, is a graduate of the Madison Wisconsin Graduate School of Banking, served on the board of directors of Bankers’ Bank of Kansas, N.A. for seven years, including one year as Chairman, and has more than 40 years as a bank CEO, that assists in his service as a director.
L. Kent Needham has served as Chairman and CEO of The First Security Bank, Overbrook, Kansas, since July 2022. He served as Chairman, President and CEO of The First Security Bank, Overbrook, Kansas from 2007 to 2022. Prior to that he served as President/CEO and Director of First State Bank & Trust in Tonganoxie, Kansas from 1993 to 2007; Executive Vice President and Director of Farmers Bank & Trust, N.A. in Great Bend, Kansas, from 1981 to 1992; and Assistance Vice President of Western National Bank in Amarillo, Texas from 1977 to 1980. Mr. Needham began his banking career at Coffeyville State Bank in Coffeyville, Kansas, where he served as a loan officer from 1975 to 1976. Mr. Needham is a graduate of the Graduate School of Banking at Colorado. Mr. Needham previously served as a member of the Board of Trustees and as Chairman of the Graduate School of Banking at Colorado, served as a member of the Board of Directors and as Chairman of the Kansas Bankers’ Association, and previously served on a number of committees of the ABA. Although the board of directors did not participate in Mr. Needham's nomination since he is a member director, Mr. Needham possesses an MBA, is a graduate of the Colorado Graduate School of Banking, and has over 40 years of banking experience, including more than 20 years as CEO, that assists in his service as a director.
Jeffrey R. Noordhoek has served as CEO of Nelnet, Inc., a publicly traded company, since January 2014, and previously served as President of Nelnet, Inc., from January 2006 through December 2013. The board of directors considered Mr. Noordhoek's qualifications, skills and attributes, including his position as CEO of Nelnet, Inc., which is a publicly traded company listed on the New York Stock Exchange and is the largest education payment plan provider in the United States; his lending, financial services, capital markets and derivatives experience; his experience overseeing a large team of information technology and IT security professionals; and his experience in and knowledge of auditing and accounting, financial management, organizational management, project development, and risk management practices, when making his nomination.
Mark J. O’Connor serves as the president of the Board of The Impact Development Fund, a nonprofit CDFI headquartered in Loveland, Colorado. Mr. O’Connor recently retired as President of Investments of FirstBank Holding Company, Lakewood, Colorado, where he held many leadership positions since 1989. Although the board of directors did not participate in Mr. O’Connor’s most recent nomination since he is a member director, Mr. O’Connor has more than 30 years of banking experience. He is a graduate of the Pacific Coast Banking School and has over 18 years of investment portfolio management experience, which includes serving as the President of Investments and Chair of the ALCO Committee of a large bank holding company. His experience on the board of a state housing finance authority, including service as Chairman, and his prior experience as an FHLBank director assist in his service as a director.
Thomas H. Olson, Jr. has been CEO of Points West Community Bank, Windsor, Colorado, from 1998 through 2019. Mr. Olson is currently the Chairman of Points West Community Bank, Windsor, Colorado, Chairman of First Nebraska Bancs, Inc., Chairman of Bank of Estes Park, Chairman of First National Financial, Director of Nebraska State Bank, Director of O&F Cattle Co., and Director of Rush Creek Land and Livestock. Although the board of directors did not participate in Mr. Olson's nomination since he is a member director, Mr. Olson has a B.S. in Finance and Accounting, is a graduate of the Colorado Graduate School of Banking, and has over 36 years of banking experience, including more than 21 years as CEO, that assists in his service as a director.
Carla D. Pratt has served as the Ada Lois Sipuel Fisher Chair in Civil Rights, Race, and Justice in Law at the University of Oklahoma College of Law since May 2022. Prior to her current position she served as Dean and Professor of Law at Washburn University School of Law in Topeka, Kansas, from July 2018 to May 2022. Prior to joining Washburn University School of Law, she served various faculty and administrative roles at Penn State’s Dickinson School of Law beginning in July 2000. Prior to joining academia, she practiced insurance law and commercial litigation. The board of directors considered Ms. Pratt’s qualifications, skills and attributes, including her position as former Dean and Professor of Law at Washburn University School of Law; her service as an Associate Justice of the Standing Rock Sioux Supreme Court; her service on the accrediting body that is authorized by the U.S. Department of Education to accredit American law schools; her experience and deep understanding of diversity and inclusion issues and initiatives; her experience in and knowledge of auditing and accounting, financial management, organizational management, project development, risk management practices, and the law; and her ability to enhance the diversity of viewpoints among the directors serving on the board of directors by providing the board of directors with racial and gender diversity, when making her nomination.
Douglas E. Tippens has served as Executive Vice President of BancFirst, Oklahoma City, Oklahoma, since December 2017. He served as Market President of BancFirst from November 2015 to December 2017. Before his service at BancFirst, Mr. Tippens served as President and CEO of Bank of Commerce, Yukon, Oklahoma, since 2006, and served on the board of directors of Bank of Commerce, Chelsea, Oklahoma, since 2013. Although the board of directors did not participate in Mr. Tippens’ nomination since he is a member director, Mr. Tippens possesses a B.S. in agriculture economics and an MBA, is a graduate of the Graduate School of Banking at the University of Wisconsin, has more than 40 years of banking experience, including 10 years as president and CEO, and served on the board of directors of the Federal Reserve Bank of Kansas City, Oklahoma City Branch, that assists in his service as a director.
Gregg Vandaveer has served as Sooner State Bank's Chairman of the Board since 2022 where he previously served as President and CEO from 2001 to 2021. Prior to joining Sooner State Bank, he served as President and CEO of Oklahoma State Bank from 1998 to 2001; Executive Vice President and Chief Lending Officer of First Enterprise Bank from 1995 to 1998; Executive Vice President and Member of the Board of Directors at American Bancorp of Oklahoma from 1987 to 1994; Vice President: Correspondent Banking for United Oklahoma Bank from 1983 to 1987; and Vice President of Johnco, Inc. Although the board of directors did not participate in Mr. Vandaveer’s nomination since he is a member director, Mr. Vandaveer possesses a B.S. in journalism, is a graduate of the Southwestern Graduate School of Banking, the ABA Commercial Lending School, and the Oklahoma Bankers Association Intermediate School of Banking, and has more than 30 years of banking experience, including more than 20 years as president and CEO, that assists in his service as a director.
Paul E. Washington has served as Executive Vice President for IMA Financial Group, Denver, Colorado, since May 2021, where he is responsible for mergers & acquisitions, commercial real estate strategy, communications, governance, administration, and investments. Mr. Washington served as market director (a regional president-equivalent position) for JLL, a Fortune 500, SEC registered commercial real estate services company from April 2017 to May 2021. He currently serves on the boards of directors for Independent Bank Group, Inc.; Colorado Concern; Downtown Denver Partnership; and Denver Museum of Nature & Science. Mr. Washington holds bar licenses in Colorado and California and previously served on the Colorado Housing and Finance Authority board of directors from 2013 to 2021 where he served as both board Chair and Chair of the Finance committee. The board of directors considered Mr. Washington's qualifications, skills, and attributes, including his degree in business and his J.D. and L.L.M. in taxation; his prior experience in leading a large real estate services company; his prior service on the board of directors of the Colorado Housing and Finance Authority; his experience in and knowledge of auditing and accounting, financial management, organizational management, project development, risk management practices, and the law; and his ability to enhance the diversity of viewpoints among the directors serving on the board of directors by providing the board of directors with racial diversity, when making his nomination.
Lance L. White has served as President and CEO of Bank of the Flint Hills, Wamego, Kansas, since 2007. Although the board of directors did not participate in Mr. White’s nomination since he is a member director, Mr. White has a B.S. in Accounting, is a graduate of the Colorado Graduate School of Banking, has served on the Community Depository Institutions Advisory Council of the Federal Reserve Bank of Kansas City, and has over 25 years of banking experience, including more than 15 as CEO, that assists in his service as a director.
Code of Ethics
We have adopted a Code of Ethics that applies to our directors, officers (including our principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions) and employees. Our Code of Ethics is filed as an exhibit to reports we file with the SEC and has been posted on our website at www.fhlbtopeka.com in the “Board Governance” page. We will also post on our website any amendments to, or waivers from, a provision of our Code of Ethics that applies to the principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions as required by applicable rules and regulations. Except for the documents specifically incorporated by reference into this annual report on Form 10-K, information contained on our website or that can be accessed through our website is not incorporated by reference into this annual report on Form 10-K. Reference to our website is made as an inactive textual reference. The Code of Ethics is available, in print, free of charge, upon request. Written requests may be made to the CLEO of FHLBank at 500 SW Wanamaker, Topeka, Kansas, 66606.
Audit Committee Financial Expert
We have a separately-designated, standing audit committee, which consists of Holly Johnson (Chair), Milroy A. Alexander, Thomas E. Henning, L. Kent Needham, Thomas H. Olson, Jr., Douglas E. Tippens, and Paul E Washington.
The board of directors has determined that Holly Johnson is an “audit committee financial expert” as that term is defined under SEC regulations. Ms. Johnson is “independent” in accordance with the Nasdaq Independence Standards (defined under Item 13 below) for audit committee members, as those standards were applied by our board of directors.
The Compensation, Human Resources and Inclusion Committee Report is included following the Compensation Discussion and Analysis in Item 11 - “Executive Compensation.”

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
Compensation Discussion and Analysis
Overview of Previous Year Performance and Compensation: Our overall executive compensation philosophy is to attract, retain, and motivate highly-qualified executive officers who will advance: (1) our business objectives to promote our long-term growth and profitability in accordance with achievement of our long-term strategic objectives; and (2) our mission of supporting our members’ efforts to build strong communities.
The named executive officers in 2023 were: (1) the President and CEO; (2) the Executive Vice President and CFO; (3) the Executive Vice President and CAO; (4) the Senior Vice President and CRO; (5) the Senior Vice President and CLEO (collectively, the Named Executive Officers).
In determining the appropriate total compensation package for our Named Executive Officers for 2023, we considered the principal objectives of our compensation program as: (1) attracting and retaining highly-qualified and talented individuals; and (2) motivating these individuals to achieve short- and long-term FHLBank-wide performance goals through incentive compensation.
In 2023, we provided competitive compensation opportunities for our Named Executive Officers based in part on adjustments to base salary in line with our Executive Pay Philosophy and on incentive compensation achievable through our Executive Incentive Compensation Plan (EICP). The EICP provides cash-based annual incentives and deferred incentive awards, which promote the achievement of short- and long-term objectives. The achievement of both short- and long-term goals translated to above target incentive awards earned by our Named Executive Officers in recognition of their contribution to our overall performance and success.
Framework for Compensation Decisions: The Compensation, Human Resources and Inclusion Committee of the board of directors (Compensation Committee) oversees the compensation of the Named Executive Officers. The Compensation Committee’s responsibilities in 2023 included:
▪Advising the board of directors on the establishment of appropriate compensation, incentive and benefits programs, including the recommendation of performance goals for the EICP;
▪Approving the base salaries for the CFO, CAO, CRO and CLEO, as recommended by the CEO;
▪Approving the annual and deferred cash incentive awards of the CEO, CFO, CAO, CRO and CLEO; and
▪Recommending to the board of directors the base salary, including any salary adjustments, of the CEO.
Elements of Executive Compensation in 2023: To implement our compensation objectives, the elements of our 2023 compensation program for the Named Executive Officers included: (1) annual base salary; (2) annual and deferred cash incentive award opportunities under our EICP; (3) retirement and other benefits; (4) limited perquisites; and (5) potential payments upon termination or change in control.
Use of Benchmarks - We believe a key to attracting and retaining highly qualified executive officers is the identification of the appropriate peer groups within which we compete for executive talent. We have historically recruited nationally, both within and outside of the FHLBank System, in our efforts to attract highly qualified candidates for the Named Executive Officer positions. To ensure that we are offering and paying competitive compensation to retain our Named Executive Officers, the board of directors (and/or Compensation Committee) periodically retains compensation consultants to assist with comparative analyses of the Named Executive Officers’ total compensation through a review of survey data reflecting potential comparator benchmarks for total compensation. Our Compensation Committee has used the survey data as guideposts in considering and determining competitive levels of base salary and total compensation for our Named Executive Officers among other factors as described above.
For 2023 compensation, the Compensation Committee considered the competitiveness of the total compensation paid to our Named Executive Officers by reviewing comparative survey data obtained from the compensation consultant, McLagan Partners, Inc. (McLagan).
The Compensation Committee generally considers a market composite benchmark when making pay decisions regarding the Named Executive Officers. The market composite benchmark created by McLagan is calculated by considering publicly available proxy data for regional and community banks with assets between $10 billion and $20 billion and other FHLBanks. Additionally, in calculating the market composite benchmark, for the commercial banks' peer group, Divisional Heads are used as the relevant comparison at the median. For the other FHLBanks' peer group, overall Functional Heads are used at the median.
The following is a list of regional and community banks with $10 billion to $20 billion in assets, which is the market peer group used for the 2023 compensation benchmarks:
Apple Financial Holdings Independent Bank
Axos Financial, Inc. Independent Bank Corp.
BancFirst Corporation International Bancshares Corporation
Bank of North Dakota Lakeland Bancorp, Inc.
Banner Bank Mechanics Bank
Berkshire Bank Merchants Bank of Indiana
Bremer Financial Corporation Mutual of Omaha
Central Bancompany, Inc NBT Bancorp Inc.
Columbia Bank - NJ Northwest Bank - PA
Community Bank System, Inc. OceanFirst Bank
CVB Financial Corp. PlainsCapital Bank
Dime Community Bancshares, Inc. Provident Financial Services
Eagle Bancorp Inc. Renasant Corporation
Enterprise Financial Services Corp. Sandy Spring Bank
FB Financial Corporation Seacoast Banking Corporation of Florida
First BanCorp - PR ServisFirst Bancshares, Inc.
First Bancorp NC State Bank & Trust
First Busey Corporation Stellar Bancorp, Inc.
First Financial Bancorp TowneBank
First Financial Bankshares, Inc. TriState Capital Bank
First Foundation Inc. Trustmark Corporation
First Merchants Bank Veritex Holdings, Inc.
First United Bank Washington Trust Bank
Hilltop Holdings Inc. WesBanco, Inc.
Hope Bancorp, Inc. WSFS Financial Corporation
The intent to remain competitive primarily with the other FHLBanks and to also consider the broader labor market of a limited group of financial services institutions reflects our belief that the knowledge and skills necessary to effectively perform our Named Executive Officers’ duties may be developed as a result of experience not only at other FHLBanks, but also at a variety of other financial services institutions. We recognize that Topeka’s geographic location may be a disadvantage in attracting executives, but generally is a positive factor in retaining executives.
The FHLBank-based survey data is considered a primary peer group. For each of the FHLBank-based and market-based peer groups (the survey data), the Compensation Committee considered the 25th percentile, 50th percentile (median) and 75th percentile compensation ranges for analyzing executive positions similar to those of our Named Executive Officers in assessing the competitiveness of our total compensation for the Named Executive Officers. The Compensation Committee generally strives to establish annual base salary and incentive compensation opportunities for our Named Executive Officers in the median range of the survey data reviewed assuming target level performance would be achieved. The ultimate compensation determined appropriate in any given year, however, will depend on the scope of a Named Executive Officer’s responsibilities as compared to similar positions within our identified peer group(s), the experience and performance of the individual Named Executive Officer, and our overall performance. While survey information is one factor in setting compensation for our Named Executive Officers, surveys are not the sole governing factor and independent decisions by the Compensation Committee are necessary to make compensation consistent with our financial condition and future prospects.
Annual Base Salary - A significant element of each Named Executive Officer’s total compensation is annual base salary, which is designed to reward our Named Executive Officers for past performance and their commitment to future performance and to serve as the foundation for competitive total compensation. Adjustments to annual base salaries for the Named Executive Officers are considered annually and made effective January 1st, following an analysis of our total compensation practices, the survey data, and FHLBank’s performance.
For 2023, the Compensation Committee determined that appropriate annual base salaries for each Named Executive Officer should be competitive with the salaries of comparable executive positions within financial institutions that are regarded as peers for purposes of providing guideposts for a competitive compensation analysis, as discussed in more detail previously under “Use of Benchmarks.” Adjustments to annual base salaries of the Named Executive Officers for 2023 were based on: (1) each Named Executive Officer’s scope of responsibility and accountability; (2) analysis of our comparator peer groups; (3) performance of FHLBank based on achievement levels of FHLBank-wide goals in the prior year; (4) the perceived performance of each Named Executive Officer, as a subjective matter; and (5) other factors such as experience, time in position, general economic conditions, and labor supply and demand conditions.
A final factor that the Compensation Committee generally considers in determining base salary increases in its effort to retain our Named Executive Officers is the relative difference in compensation between the executive officers as well as the pay relationship between executive officers and other employees at FHLBank. The Compensation Committee believes that internal pay equity provides an additional perspective to that of the survey data and helps ensure our executive compensation practices are internally consistent and equitable.
The Compensation Committee also considered guidance and communications from our regulator, the FHFA, in determining total compensation for the Named Executive Officers as more specifically addressed below under “FHFA Oversight.”
In 2023, the Compensation Committee and the CEO determined that, with respect to competitive pay positioning for purposes of retaining our Named Executive Officers, it was appropriate to increase the base salaries of the Named Executive Officers to maintain competitive base and total compensation. Consideration was also given to each Named Executive Officer’s scope of responsibility, market comparators, individual and FHLBank performance, and other factors as described above. The CEO salary increase was recommended by the Compensation Committee and approved by the board of directors. Table 47 presents the total base salary and the percentage of salary increase for the Named Executive Officers, effective January 1, 2023:
Table 47
Named Executive Officer Percentage Increase Salary
Mark E. Yardley, President & CEO1
12.5 % $ 900,000
Jeffrey B. Kuzbel, EVP & CFO
6.3 470,000
Sonia R. Betsworth, EVP & CAO 7.2 370,000
Martin L. Schlossman, Jr., SVP & CRO 8.3 365,000
Carl M. Koupal, III, SVP & CLEO
7.5 360,000
1 Mark E. Yardley served as President & CEO through December 31, 2023 and as a non-executive Senior Advisor until February 1, 2024.
Annual and Deferred Cash Incentive Awards - Our EICP is a cash-based annual incentive plan with a long-term deferral component that establishes individual incentive compensation award opportunities related to achievement of performance objectives during the performance periods. The EICP establishes two performance periods: (1) a Base Performance Period aligned with the calendar year; and (2) a Deferral Performance Period (or the long-term performance period), which is a three-year period commencing the calendar year following the Base Performance Period. Named Executive Officers may earn an annual cash incentive during a Base Performance Period and a deferred cash incentive during a Deferral Performance Period. For each Base Performance Period, the board of directors will establish a Total Base Opportunity for Named Executive Officers. The Total Base Opportunity is equal to a percentage of each Named Executive Officer’s annual base salary at the beginning of the Base Performance Period and is composed of the Cash Incentive and the Deferred Incentive.
We believe that well-designed incentive compensation plans provide important opportunities to motivate our Named Executive Officers to accomplish financial, risk, and operational goals that promote our mission. Thus, motivating our Named Executive Officers to accomplish business and financial short- and long-term goals that promote a high level of performance for our members is a key objective of our total compensation program. Consequently, our compensation and benefits programs are designed to motivate our Named Executive Officers to engage in the behaviors and performance necessary to deliver our desired results.
To effectively motivate the Named Executive Officers to accomplish both short- and long-term goals that promote our performance, we believe that incentive awards must represent pay at risk. In other words, the administration of our incentive compensation plans must be such that awards are distributed only in exchange for accomplishing pre-established goals, recommended by the Compensation Committee and approved by the board of directors, and are distributed only in accordance with such achievement. In 2023, we achieved at or above target attainment for each of the pre-established goals.
In the fourth quarter of 2022, goal metrics, metric performance ranges and metric weights for cash incentive award opportunities under the 2023 EICP were developed. The proposed performance objectives reflected the drivers of our business and mission and were based upon the Compensation Committee’s and management’s discussions with respect to our primary mission and stockholder perceptions of success. The Compensation Committee and management took steps intended to align the performance objectives to the Strategic Business Plan. The Compensation Committee reviewed and analyzed the proposed 2023 performance objectives, as appropriate, before submitting the objectives to the board of directors for approval.
For the Base Performance Period of January 1, 2023 to December 31, 2023, the board of directors approved a Total Base Opportunity equal to a percentage of each Named Executive Officer’s annual base salary at the beginning of the Base Performance Period. Certain Named Executive Officers have a greater and more direct impact than others on the success of FHLBank; therefore, these differences are recognized by varying the Total Base Opportunity for each Named Executive Officer. The Total Base Opportunity is the amount that may be earned for achieving performance levels under established Performance Measures and is comprised of the Cash Incentive and the Deferred Incentive. In the event FHLBank’s performance during the Base Performance Period results in the achievement of a Total Base Opportunity that exceeds 100 percent of a Participant’s base salary at the start of the Base Performance Period, the Target Document provides that the Total Base Opportunity shall be capped at 100 percent of the Participant’s base salary in accordance with regulatory restrictions. The Deferred Incentive is 50 percent of the Total Base Opportunity, which shall be deferred for the Deferral Performance Period, which is the three-year period from January 1, 2024 to December 31, 2026, over which FHLBank applies an interest rate credit compounding annually, as further described below, and becomes payable after the end of the Deferral Performance Period, subject to review by the Director of the FHFA. The Cash Incentive is the portion of the Total Base Opportunity that is not the Deferred Incentive and becomes payable after the end of the Base Performance Period upon achievement of established Performance Measures, subject to review by the Director of the FHFA.
Awards under the EICP may be granted for achievement of Performance Measures corresponding to achievement levels, from threshold, to target, to optimum performance for each goal metric. Threshold represents the minimum achievement level; target represents the expected achievement level; and optimum represents the achievement level that substantially exceeds the target level. Awards may be earned for performance attainment within these achievement levels as a percentage of base salary that corresponds to actual performance. For performance that falls between any two levels of achievement, linear interpolation is used to ensure that the award is consistent with the level of performance achieved. Named Executive Officers may earn annual awards expressed as a percent of their base salary at the beginning of the Performance Period. Total Base Opportunity is capped at 100 percent of the Participant’s Earned Base Salary. Table 48 presents the Total Base Opportunity for each Named Executive Officer for each achievement level for the Base Performance Period:
Table 48
Position Total Base Opportunity
Threshold Target Optimum
President & CEO 37.5 % 75.0 % 112.5 %
EVP
30.0 60.0 90.0
SVP
25.0 50.0 75.0
The Total Base Opportunity Goal Metrics for 2023 are described in Table 49:
Table 49
Total Base Opportunity Goal Metric Definition
Return on Equity Spread to SOFR1
The spread between (a) adjusted net income (before assessment of the Affordable Housing Program (AHP) commitment) divided by the daily average total regulatory capital and (b) the daily average of overnight SOFR.
Advance Penetration Spread
Advance penetration spread is defined as a four-quarter average of the total advances outstanding to members divided by the total assets of members less the same measurement of total advances to total assets for members of other FHLBanks.
Diversity, Equity and Inclusion Education and Culture
FHLBank’s Diversity, Equity and Inclusion (DEI) initiative is defined as the advancement of DEI, to the maximum extent possible in balance with financially safe and sound business practices, through inclusion and utilization of diverse-owned businesses as vendors and the inclusion of diverse individuals within its workforce, as defined in the DEI Policy, in all business activities of FHLBank.
Diversity, Equity and Inclusion Business Practice Outcome Measures Points are awarded by achievement of the following (one point awarded for each): (1) Workforce: Attain a workforce ratio of at least 12% business partners of color as of 12/31/2023. (2) Workforce: Participate in four outreach opportunities to support diversifying our workforce or members of the board of directors. (3) Marketplace: Participate in four outreach opportunities with diverse-owned vendors. (4) Marketplace: Participate in four outreach opportunities with diverse broker dealers. (5) Marketplace: Increase the number of viable and certified diverse suppliers in Supplier GATEWAY by 12. (6) Culture: Celebrate cultural diversity of business partners at four FHLBank-sponsored events.
Risk Management - Market, Credit and Liquidity Risks
Management of FHLBank risks as determined by the weighted average rating by the board of directors in an annual evaluation of the Risk Appetite metrics in this area using a 1 (lowest) to 5 (highest) point scale. General risk categories are market, credit and liquidity risks.
Risk Management - Compliance, Business and Operations Risks
Management of FHLBank risks as determined by the weighted average rating by the board of directors in an annual evaluation of the Risk Appetite metrics in this area using a 1 (lowest) to 5 (highest) point scale. General risk categories are compliance, business and operations risks.
1 As part of evaluating our financial performance and measuring EICP performance, we begin with the components of “adjusted income”, a non-GAAP financial measures defined in Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations.” We adjust net income reported in accordance with GAAP for the impact of: (1) AHP assessments (equivalent to an effective minimum income tax rate of 10 percent); (2) fair value changes on trading securities and derivatives and hedging activities (excluding net interest settlements); (3) prepayment and yield maintenance fees; (4) non-routine and/or unpredictable items, such as gains/losses on securities; and (5) non-recurring items, such as gains/losses on retirement of debt and gains/losses on mortgage loans held for sale. For measuring our EICP performance, we further adjust for other items excluded because they are not considered a part of our routine operations or ongoing business model, such as interest expense on mandatorily redeemable capital stock, amortization of derivative option costs and amortization/accretion of premium/discount on unswapped MBS classified as trading.
The profit- and mission-oriented objectives “Return on Equity Spread to SOFR” and “Advance Penetration Spread” were based on the belief that profitability and mission focus are critical to the long-term viability of the organization. The “Diversity, Equity and Inclusion Education and Culture” and “Diversity, Equity and Inclusion Business Practice Outcome Measures” reflect our commitment to diversity across all levels of our business, from recruiting and growing our business partners to selecting our suppliers. We recognize that by harnessing the power of our collective similarities and differences FHLBank is better able to deliver on our mission. We believe this makes FHLBank a better place to work and a better partner for our cooperative members. Finally, the “Risk Management - Market, Credit and Liquidity Risks” and the “Risk Management - Compliance, Business and Operations Risks” objectives were included in recognition of the impact that the Named Executive Officers have on management of business, compliance, credit, liquidity, market and operations risks, to incent strong risk management practices and to reward positive risk management performance as determined by the board of directors. We divided the risk management objectives to provide balance and focus in the amount of risk exposure we are willing to accept/retain in pursuit of stakeholder value.
The Total Base Opportunity available to Participants for the Financial Performance Goals shall be adjusted as reflected in Table 50 below if the daily average Total Regulatory Capital is below 4.75 percent for 2023. The Financial Performance Goals include the Return on Equity Spread to SOFR and Advance Penetration Spread, which represent 50 percent of the Base Opportunity Metric Weights at Table 52.
Table 50
Daily Average Total Regulatory Capital Financial Performance Goals Adjustment
≥4.75% 0%
≥4.70% and <4.75% (25)%
≥4.65% and <4.70% (50)%
≥4.60% and <4.65% (75)%
<4.60% (100)%
Award levels were set at Threshold, Target and Optimum percentages of annual base salary. Table 51 sets forth the specific annual goal performance ranges, the actual achievement levels, and the incentive payout for each of our Total Base Opportunity Goal Metrics in 2023:
Table 51
Total Base Opportunity Goal Metrics Annual Performance Range Actual Achievement Incentive Payout1
Threshold Target Optimum
Return on Equity Spread to SOFR
2.43 % 3.43 % 4.03 % 4.75 % 150.00 %
Advance Penetration Spread
1.20 % 1.70 % 2.20 % 2.09 % 139.00 %
Diversity, Equity and Inclusion Education and Culture 80.00 % 85.00 % 90.00 % 91.73 % 150.00 %
Diversity, Equity and Inclusion Business Practice Outcome Measures (6.0 point scoring scale)
2.00 4.00 6.00 6.00 150.00 %
Risk Management - Market, Credit and Liquidity Risks (5.0 point scoring scale)
3.00 4.00 5.00 4.30 115.00 %
Risk Management - Compliance, Business and Operations Risks (5.0 point scoring scale)
4.00 4.50 5.00 4.68 118.00 %
TOTAL WEIGHTED AVERAGE INCENTIVE PAYOUT
135.50 %
1 If the actual achievement is Optimum or higher, the incentive payout is capped at 150.00 percent.
We believe the goals incorporated into the EICP are indicative of our balanced approach to profitability, mission and member-focus, and risk management. As reflected in Table 51, we achieved in excess of Optimum for the Return on Equity Spread to SOFR and above target for the Advance Penetration Spread. We achieved Optimum for Education and Culture and Optimum for the Business Practice Outcome Measures of the DEI goals. We exceeded Target performance for Market, Credit and Liquidity and Compliance, Business and Operations of the Risk Management goals.
Table 52 provides the metric weight for each Total Base Opportunity Goal Metric as a percent of the Total Base Opportunity for each Named Executive Officer in 2023:
Table 52
Performance Objective Metric Weight
Return on Equity Spread to Secured Overnight Financing Rate 40 %
Advance Penetration Spread 10
Diversity, Equity and Inclusion Education and Culture 5
Diversity, Equity and Inclusion Business Practice Outcome Measures 5
Risk Management - Market, Credit, and Liquidity 20
Risk Management - Compliance, Business, and Operations 20
TOTAL 100 %
Table 53 presents the base salary, aggregate goal achievement, Total Base Opportunity, Cash Incentive and Deferred Incentive for each Named Executive Officer as calculated under the EICP for the Base Performance Period of January 1, 2023 to December 31, 2023 and the Deferral Performance Period, which is the three-year period from January 1, 2024 to December 31, 2026:
Table 53
Named Executive Officer Base Salary Incentive
Percent of Base Salary Total Base Opportunity Cash
Incentive1
Deferred Incentive
Mark E. Yardley, President & CEO
$ 900,000 100.00 % $ 900,000 $ 450,000 $ 450,000
Jeffrey B. Kuzbel, EVP & CFO
470,000 81.30 382,111 191,056 191,055
Sonia R. Betsworth, EVP & CAO 370,000 81.30 300,811 150,406 150,405
Martin L. Schlossman, Jr., SVP & CRO 365,000 67.75 247,288 123,644 123,644
Carl M. Koupal, III, SVP & CLEO
360,000 67.75 243,900 121,950 121,950
1 Cash Incentive is included as non-equity incentive plan compensation in Table 57 for all Named Executive Officers.
The final value of the Deferred Incentive portion of the Total Base Opportunity for the calendar year 2024 to calendar year 2026 is measured by applying a six percent interest credit, compounded annually, to the Deferred Incentive presented in Table 53, as long as FHLBank has an MVE of not less than 100 percent of TRCS outstanding, as of the last day of the Deferral Performance Period.
For any Performance Period, an award will not be payable if we fail to achieve performance at or above the Performance Measure(s) set by the Compensation Committee. The Compensation Committee may, in its discretion, reduce or eliminate an award payable under the EICP under any of the following circumstances: (1) we receive a composite “4” or “5” rating in our FHFA examination in any single year in any single Base Performance Period or Deferral Performance Period; (2) the board of directors finds a serious, material safety or soundness problem or a serious, material risk management deficiency exists, or if: (a) operational errors or omissions result in material revisions to the financial results, information submitted to the FHFA, or to data used to determine incentive payouts; (b) submission of material information to the SEC, Office of Finance, and/or FHFA is significantly past due; or (c) we fail to make sufficient progress, as determined by the board of directors, in the timely remediation of significant examination, monitoring or other supervisory findings; (3) during the most recent FHFA examination, the FHFA identified an unsafe or unsound practice or condition that is material to the financial operation of FHLBank within a Named Executive Officer’s area(s) of responsibility and such unsafe or unsound practice or condition is not subsequently resolved in favor of FHLBank by the last day of the Base Performance Period or Deferral Performance Period; or (4) a given participant does not achieve satisfactory individual achievement levels (as determined in the sole discretion of the Compensation Committee) during the Deferral Performance Period. Additionally, Deferred Incentive awards shall be reduced by one-third for each year during the Deferral Performance Period in which we have negative net income, as defined and in accordance with GAAP. The Compensation Committee did not reduce or eliminate an award.
The EICP for the 2021-2023 Deferral Performance Period is subject to the following performance goal: (1) FHLBank must have an MVE of not less than 100 percent of TRCS outstanding as of the last day of the Deferral Performance Period; and (2) the calculation of the Final Deferred Incentive Award shall be calculated by applying an interest rate credit of six percent, compounded annually, to the Deferred Incentive.
Based on the performance results, Table 54 presents the Final Deferred Incentive Award for the 2021-2023 Deferral Performance Period for each Named Executive Officer:
Table 54
Named Executive Officer Deferred Incentive Final Deferred Incentive Award1
Mark E. Yardley, President & CEO
$ 233,705 $ 278,347
Jeffrey B. Kuzbel, EVP & CFO
- -
Sonia R. Betsworth, EVP & CAO 79,191 94,318
Martin L. Schlossman, Jr., SVP & CRO 70,595 84,080
Carl M. Koupal, III, SVP & CLEO
- -
1 The amount is included as non-equity incentive plan compensation in Table 57 for all Named Executive Officers.
2 The amount reflected is based on the Non-NEO EICP for which the goal achievement percentage is the same as the NEO EICP for the 2021-2023 Deferral Performance Period.
A Named Executive Officer, in the discretion of the Compensation Committee, shall be required to forfeit an award earned under the EICP if the Named Executive Officer is: (1) terminated from employment with FHLBank for Cause as defined under the EICP; (2) engages in competition with FHLBank or interferes with the business relationships of FHLBank during their employment or for a period of one year following their termination; or (3) discloses confidential information of FHLBank.
Bonuses - On occasion, the Compensation Committee may elect to award a Named Executive Officer additional compensation in the form of a bonus in recognition of that Named Executive Officer's performance. In April 2021, Mr. Kuzbel, joined FHLBank as SVP and CFO and received a hiring bonus in the amount of $150,000 with the first $100,000 paid on April 15, 2021 in accordance with his offer letter, and the remaining $50,000 bonus paid on the first payroll date following completion of his first year of employment with FHLBank. In 2021, Mr. Kuzbel also received an upfront relocation stipend of $25,000.
Retirement and Other Benefits - In 2023, certain of the Named Executive Officers were participants in the Pentegra Defined Benefit Plan for Financial Institutions, a tax-qualified multiple-employer defined-benefit plan (DB Plan), which was hard frozen December 31, 2019. All of the Named Executive Officers participate in the Federal Home Loan Bank of Topeka 401(k) Plan, a defined contribution retirement savings plan qualified under the Internal Revenue Code (IRC) for employees of FHLBank (DC Plan). In response to federal legislation, which imposed restrictions on the retirement benefits payable to our executives, we subsequently established a third retirement plan, the Benefit Equalization Plan (BEP) to maintain the competitive level of our total compensation for executive officers, including the Named Executive Officers. Generally, the BEP is characterized as a non-qualified “excess benefit” plan, which restores those retirement benefits that exceed the IRC limits applicable to the qualified DB Plan and DC Plan. In this respect, the BEP is an extension of our retirement commitment to our Named Executive Officers and other eligible highly compensated employees that preserves and restores the full pension and thrift benefits that, due to IRC limitations, are not payable from the qualified pension plans.
DB Plan - The board of directors resolved, effective December 31, 2019, to: (1) freeze the DB Plan to discontinue the future accrual of new benefits under the DB Plan; and (2) revise the BEP to cease any further accrual of pension benefit under the BEP (as described further below).
Our DB Plan covered all full-time employees of FHLBank as of January 1, 2009 who met the eligibility requirements of: (1) attainment of age 21; (2) completion of twelve months of employment; and (3) employed by FHLBank as of December 31, 2008, including certain of the Named Executive Officers. Employees were not fully vested until they completed five years of employment. The regular form of retirement benefits provides a single life annuity; a lump-sum payment or other additional payment options are also available to a limited degree for those Named Executive Officers who were employed prior to a plan change in 2003. The benefits are not subject to offset for social security or any other retirement benefits received. In 2023, four of the Named Executive Officers (the CEO, CAO, CRO, and CLEO) participated in the DB Plan, which required no contribution from those four Named Executive Officers.
The DB Plan made available a normal retirement benefit, at or after age 65 where a Named Executive Officer participant has met the vesting requirement, equal to 2.0 percent of their highest three-year average salary multiplied by their years of benefit service, up to 30 years. Three Named Executive Officer participants (Messrs. Yardley and Schlossman and Ms. Betsworth) are eligible to receive benefits in excess of 2.0 percent because of a plan change in 2003. The amount in excess of 2.0 percent is a calculated “frozen add-on” determined at the time of the plan change. The formula for this “frozen add-on” is the prior benefit formula as of August 31, 2003 minus the new benefit formula as of September 1, 2003. Benefits are payable in the event of retirement, death, disability, or termination of employment if vested. Only the portion of the benefit accrued before September 1, 2003 is payable as a lump sum to employees who have attained age 50; otherwise, benefits are paid in installments.
Early retirement benefits are payable at a reduced rate. Upon termination of employment prior to age 65, Named Executive Officer participants meeting the five-year vesting and age 45 early retirement eligibility criteria are entitled to an early retirement benefit. Each of the Named Executive Officers participating in the DB Plan is eligible for early retirement. The early retirement benefit amount is calculated by taking the normal retirement benefit amount and reducing it by 3.0 percent times the difference between the age of the early retiree and age 65. If the Named Executive Officer was employed prior to September 1, 2003 and their age and benefit service added together totaled 70 (Rule of 70), the normal retirement benefit amount would be reduced by 1.5 percent for each year between the age of the early retiree and age 65 for the portion of the normal retirement benefit accrued prior to September 1, 2003.
DC Plan - The DC Plan is a tax-qualified, defined contribution plan. Substantially all officers and employees of FHLBank are covered by the plan. FHLBank contributes a matching amount equal to a percentage of voluntary employee contributions, subject to certain limitations (see “BEP” below).
All employees who have met the eligibility requirements can choose to participate in the DC Plan. We match employee contributions based on the length of service and the amount of an employee’s contribution. These employer contributions are immediately 100 percent vested. During 2023, matching ratios for all employees, including the Named Executive Officers (with the exception of Mr. Kuzbel), under the DC Plan were as follows:
Year 1 No match
Years 2 through 3 100 percent match up to 4 percent of employee’s eligible compensation
Years 4 through 5 150 percent match up to 4 percent of employee’s eligible compensation
After 5 years 200 percent match up to 4 percent of employee’s eligible compensation
We also make a monthly basic contribution in an amount equal to two percent of all employees’, including the Named Executive Officers’, monthly eligible compensation after one year of service.
BEP - The BEP is an unfunded, nonqualified supplemental executive retirement plan that permits Named Executive Officers and certain other executives to defer compensation and to receive matching contributions that would otherwise have been made or accrued under FHLBank’s DC Plan, as appropriate, but for the limitations imposed by the IRC. Each of the Named Executive Officers are participants in the BEP. As part of Mr. Kuzbel's offer letter, he is eligible to receive an employer contribution of 10 percent as though he were a five-year, tenured employee of FHLBank.
The BEP allows the Named Executive Officers to receive a rate of return based on our return on equity calculated for EICP purposes for the previous year. For 2023, the rate of return earned on the defined contribution portion of the BEP was 6.83 percent, which was our 2022 return on equity.
Named Executive Officers are at all times 100 percent vested in their defined contribution account balances of the BEP. In the event of unforeseen emergencies, they may request withdrawals equal to the lesser of the amounts necessary to meet their financial hardships or the amount of their account balances. As of December 31, 2023, each of the Named Executive Officers would be entitled to receive their respective balance of compensation deferred through participation under the BEP within ninety days of any such Named Executive Officer’s termination of employment due to death, disability or retirement and upon a change in control as defined in the BEP and in accordance with IRC Section 409A and applicable regulations. For each Named Executive Officer, these amounts are listed in Table 61 under the column titled “Aggregate Balance at Last FYE.”
As indicated above, the pension accrual benefit of the BEP ceased further accruals as of December 31, 2019.
Other benefits - We are also committed to providing competitive benefits designed to promote health and welfare for all employees (including their families), including the Named Executive Officers. We offer all employees a variety of benefits including insurance (medical, dental, vision, prescription drug, life, long-term disability and travel accident), short-term disability salary continuation, flexible spending accounts, health savings account, an employee assistance program and education benefits. The Named Executive Officers participate in these benefit programs on the same basis as all other eligible employees.
Perquisites - The board of directors views limited perquisites afforded to the Named Executive Officers as an element of the total compensation program. Any perquisites provided, however, are not intended to materially add to any Named Executive Officer’s compensation package and, as such, are provided to them primarily as a convenience associated with their respective duties and responsibilities. Examples of ongoing perquisites that were provided to the Named Executive Officers in 2023 include cell phone reimbursement, limited spousal travel and limited club dues. Total perquisites to each Named Executive Officer are presented in Table 58.
Potential payments upon termination or change in control
Severance Benefits - We provide severance benefits to the Named Executive Officers pursuant to our Executive Officer Severance Policy. The policy’s primary objective is to provide a level of protection to officers from loss of income during a period of unemployment. These officers are eligible to receive severance pay under the policy if we terminate the officer’s employment with or without cause, subject to certain limitations. These limitations include: (1) the officer voluntarily terminates employment, including as a result of disability or death; or (2) the officer’s employment is terminated by us for misconduct.
Provided the requirements of the policy are met and the Named Executive Officer provides us an enforceable release, Table 55 presents the term and amounts that would have been payable to the Named Executive Officer under the Executive Officer Severance Policy as of December 31, 2023, or other effective policy, absent a qualifying event that would result in payments under the Change in Control Plan (see “Change in Control Plan” below):
Table 55
Officer Months Severance Amount1
COBRA2
Severance Total
Mark E. Yardley3
12 $ 900,000 $ 23,506 $ 923,506
Jeffrey B. Kuzbel4
9 352,500 25,768 378,268
Sonia R. Betsworth 9 277,500 17,629 295,129
Martin L. Schlossman, Jr. 6 182,500 13,408 195,908
Carl M. Koupal, III5
6 180,000 17,179 197,179
1 Severance Amount equals the number of months of base salary as described under the Executive Officer Severance Policy.
2 COBRA equals the number of months of medical, dental and vision coverage cost as described under the Executive Officer Severance Policy.
3 In December 2023, Mr. Yardley ceased to serve as President and CEO effective December 31, 2023; consequently, the Severance Policy was no longer applicable to Mr. Yardley as of January 1, 2024.
4 Effective January 1, 2024, Mr. Kuzbel became President and CEO making him eligible for 12 months of severance benefits as of that date.
5 Effective January 1, 2024, Mr. Koupal became Executive Vice President making him eligible for 9 months of severance benefits as of that date.
The amounts above do not include accrued incentive plan payments as presented in the Summary Compensation Table; the aggregate balance of the DC Plan as presented in the Nonqualified Deferred Compensation Table; or the present value of accumulated benefits of the BEP as presented in the Pension Benefits Table.
Change in Control Plan - The Change in Control Plan provides that, upon both a change in control and the termination of a participant that qualifies as a Change in Control Termination, a participant will be entitled to a cash lump sum payment. A Change in Control means the occurrence of any of the following events, provided it shall not include any reorganization that is mandated by any Federal statute, rule, regulations or directive: (1) the merger, reorganization, or consolidation of FHLBank Topeka with or into another FHLBank or other entity; (2) the sale or transfer of all or substantially all of the business or assets of FHLBank Topeka to another FHLBank or other entity; (3) the purchase by FHLBank Topeka or transfer to FHLBank Topeka of substantially all of the business or assets of another FHLBank; (4) a change in the composition of the board of directors, as a result of one or a series of related transactions, that causes the combined number of member directors from the states of Colorado, Kansas, Nebraska and Oklahoma to cease to constitute a majority of the directors of FHLBank Topeka; or (5) the liquidation or dissolution of FHLBank Topeka. We provide for payments under a Change in Control to: (1) promote key employee loyalty and to assure continued dedication to FHLBank Topeka, notwithstanding the possibility, threat or occurrence of a Change in Control; and (2) to reduce the personal uncertainties to key employees who are vital to FHLBank Topeka's future success associated with a pending or possible Change in Control, and to encourage those key employees' continued dedication to FHLBank Topeka.
A Participant in the Change in Control Plan will receive in a cash lump sum, an amount that, when combined with any amount payable under an FHLBank severance policy, equals a compensation multiplier times the sum of: (1) the Participant’s then annualized base salary; and (2) an amount equal to the target Total Base Opportunity as reflected in FHLBank’s EICP Targets document for the year in which the change in control occurs. Participants at Tier 1 are subject to a compensation multiplier of 2.99, participants at Tier 2 are subject to a compensation multiplier of 2.0, and participants at Tier 3 are subject to a compensation multiplier of 1.0. A Participant is also eligible to receive the continuation of certain group health care benefits for a period of years equal to their compensation multiplier. The Compensation Committee approved the following Participants in the Change in Control Plan and their effective Tiers: CEO at Tier 1; CFO and CAO at Tier 2; and CRO and CLEO at Tier 3.
Table 56 represents the elements of potential payments upon a Change in Control and the total amount that would be payable to the participating Named Executive Officers as of December 31, 2023 subject to FHLBank’s Change in Control Plan, as currently in effect:
Table 56
Officer Severance Amount1
Incentive2
COBRA3
Change in Control Total
Mark E. Yardley4
$ 2,691,000 $ 2,018,250 $ 70,518 $ 4,779,768
Jeffrey B. Kuzbel5
940,000 564,000 68,715 1,572,715
Sonia R. Betsworth 740,000 444,000 47,012 1,231,012
Martin L. Schlossman, Jr. 365,000 182,500 26,816 574,316
Carl M. Koupal, III 360,000 180,000 34,357 574,357
1 Compensation multiplier times the annual base salary at year end as described under the Change in Control Plan.
2 Compensation multiplier times target Total Base Opportunity reflected in the 2023 EICP Targets as described in under the Change in Control Plan.
3 COBRA equals the number of months of medical, dental and vision coverage cost as described under the Change in Control Plan.
4 In December 2023, Mr. Yardley ceased to serve as President and CEO effective December 31, 2023; consequently, the Change in Control Plan was no longer applicable to Mr. Yardley as of January 1, 2024.
5 Effective January 1, 2024, Mr. Kuzbel became President and CEO making him eligible for the Tier 1 compensation multiplier as of that date.
The amounts above do not include accrued incentive plan payments as presented in the Summary Compensation Table; the aggregate balance of the DC Plan as presented in the Nonqualified Deferred Compensation Table; or the present value of accumulated benefits of the BEP as presented in the Pension Benefits Table.
Why We Choose to Pay These Elements: We believe the Compensation Committee’s analyses described above provided an appropriate process to determine 2023 compensation levels for each Named Executive Officer that reasonably positions us to competitively manage our operations for success and to accomplish our mission.
The mix of compensation elements that comprised the total compensation of our Named Executive Officers in 2023 particularly allowed us to provide total compensation that we believe appropriately balanced reasonable guaranteed pay through carefully considered base salary determinations with additional at-risk cash compensation opportunities for the Named Executive Officers. This means that while we strived to match an appropriate level of compensation comparable to that reflected by our perceived peer groups and internal pay analysis through annual base salary and retirement benefits components, we also strived to provide a component of compensation that is at-risk in both the shorter- and longer-term. These at-risk awards represent an opportunity to reward our Named Executive Officers based on the achievement of both our annual and long-term performance goals and the discretion vested in our Compensation Committee.
FHFA Oversight: Section 1113 of the Recovery Act requires that the Director of the FHFA prevent an FHLBank from paying compensation to its executive officers that is not reasonable and comparable to that paid for employment in similar businesses involving similar duties and responsibilities. In 2009, the FHFA issued an advisory bulletin establishing certain principles for executive compensation at the FHLBanks and the Office of Finance that include: (1) such compensation must be reasonable and comparable to that offered to executives in similar positions at comparable financial institutions; (2) such compensation should be consistent with sound risk management and preservation of the par value of FHLBank capital stock; (3) a significant percentage of an executive’s incentive based compensation should be tied to longer-term performance and outcome-indicators and be deferred and made contingent upon performance over several years; and (4) the board of directors should promote accountability and transparency in the process of setting compensation. On January 28, 2014, the FHFA issued a final rule on executive compensation, which defines “reasonable” and “comparable” compensation and establishes the review and approval process for certain compensation payments and agreements. The FHLBank is subject to additional supervisory guidance and oversight from the FHFA, from time to time.
The FHLBanks have been directed to provide all compensation actions affecting their Named Executive Officers to the FHFA for review.
Compensation, Human Resources and Inclusion Committee Report: The Compensation, Human Resources and Inclusion Committee of our board of directors has reviewed and discussed the Compensation Discussion and Analysis with management. Based on its review and discussions with management, the Compensation, Human Resources and Inclusion Committee has recommended to the board of directors that the Compensation Discussion and Analysis be included in our annual report on Form 10-K.
The Compensation, Human Resources and Inclusion Committee
of the board of directors
Thomas H. Olson, Jr., Chair
Milroy A. Alexander
Thomas E. Henning, Chair Designate
Barry J. Lockard
Jeffrey R. Noordhoek
Carla D. Pratt
Douglas E. Tippens
Table 57 presents the Summary Compensation Table for the Named Executive Officers for the years for which they represented Named Executive Officers of FHLBank.
Table 57
Name and Principal Position
Year Salary Bonus Non-Equity Incentive Plan Compensation1
Change in Pension Value and Nonqualified Deferred Compensation Earnings2
All Other Compensation3
Total
Mark E. Yardley4
2023 $ 900,000 $ - $ 820,046 $ 700,625 $ 132,871 $ 2,553,542
President & CEO
2022 800,000 - 721,642 69,058 114,339 1,705,039
2021 725,000 - 481,944 407,337 105,952 1,720,233
Jeffrey B. Kuzbel5
2023 470,000 - 191,056 3,993 70,544 735,593
EVP & CFO
2022 442,000 50,000 175,101 3,533 60,614 731,248
2021 322,500 125,000 132,942 619 161,543 742,604
Sonia R. Betsworth6
2023 370,000 - 279,660 236,248 51,895 937,803
EVP & CAO
2022 345,000 - 250,056 22,762 45,376 663,194
2021 335,000 - 176,948 17,490 44,207 573,645
Martin L. Schlossman, Jr.7
2023 365,000 - 237,831 107,417 49,431 759,679
SVP & CRO
2022 337,000 - 211,707 8,606 43,477 600,790
2021 328,500 - 162,659 4,211 42,668 538,038
Carl M. Koupal, III8
2023 360,000 - 121,950 24,868 48,014 554,832
SVP & CLEO
2022 335,000 - 110,594 448 43,672 489,714
1 All compensation reported under “non-equity incentive plan compensation” represents performance awards earned pursuant to achievement of performance objectives under FHLBank’s EICP, subject to the approval of the Compensation Committee and not disapproved by the FHFA. The deferred compensation earned and the accrued component of the EICP for 2020 was reduced when paid in 2021. In 2023, the amount of these reductions, which was $91,699, $34,936, and $30,107 for Mr. Yardley, Ms. Betsworth, and Mr. Schlossman, respectively, was paid at the discretion of the Board of Directors. The amounts in the table reflect the actual amounts paid in the respective years.
2 The change in pension value will fluctuate with changes in discount rates used to calculate the present value of accumulated benefits and can result in decreases. However, per SEC rules, any net actuarial decreases in pension plan values have been excluded from this column. Nonqualified deferred compensation earnings include above market earnings attributable to the BEP, which are calculated by multiplying the nonqualified deferred compensation average balance of the applicable year by the average rate of return in excess of the long-term applicable Federal rate (120 percent compounded quarterly) published by the IRS.
3 The 2023 components of All Other Compensation are provided in Table 58.
4 Above market earnings attributable to the BEP were $49,625, $69,058, and $56,337 for 2023, 2022, and 2021, respectively. The aggregate change in the value of the accumulated benefit under FHLBank’s DB Plan was $221,000, $(444,000), and $111,000 for 2023, 2022, and 2021, respectively. The aggregate change in the value of the accumulated benefit under the defined benefit portion of the BEP was $430,000, $(1,077,000), and $240,000 for 2023, 2022, and 2021, respectively.
5 Above market earnings attributable to the BEP were $3,993, $3,533, and $619 for 2023, 2022 and 2021, respectively.
6 Above market earnings attributable to the BEP were $17,248, $22,762, and $17,490 for 2023, 2022, and 2021, respectively. The aggregate change in the value of the accumulated benefit under FHLBank’s DB Plan was $151,000, $(651,000) and $(62,000) for 2023, 2022, and 2021, respectively. The aggregate change in the value of the accumulated benefit under the defined benefit portion of the BEP was $68,000, $(321,000) and $(18,000) for 2023, 2022, and 2021, respectively.
7 Above market earnings attributable to the BEP were $8,417, $8,606, and $4,211 for 2023, 2022, and 2021, respectively. The aggregate change in the value of the accumulated benefit under FHLBank’s DB Plan was $69,000, $(406,000) and $(51,000) for 2023, 2022 and 2021, respectively. The aggregate change in the value of the accumulated benefit under the defined benefit portion of the BEP was $30,000, $(184,000), and $(16,000) for 2023, 2022, and 2021, respectively.
8 Above market earnings attributable to the BEP were $868 and $448 for 2023 and 2022, respectively. The aggregate change in the value of the accumulated benefit under FHLBank’s DB Plan was $24,000 and $(223,000) for 2023 and 2022, respectively.
Table 58 presents the components of “All Other Compensation” for 2023 as summarized in Table 57. There were no perquisites or personal benefits of more than $10,000 in aggregate for any Named Executive Officer for 2023.
Table 58
Named Executive Officer
Life Insurance Premiums
Long Term and Individual Disability Premiums
FHLBank Contribution to DC Plan
FHLBank Contribution to Defined Contribution Portion of BEP
Other Miscellaneous Total All Other Compensation
Mark E. Yardley
$ 855 $ 4,132 $ 33,000 $ 94,885 $ - $ 132,871
Jeffrey B. Kuzbel 804 5,411 19,027 45,302 - 70,544
Sonia R. Betsworth 634 770 21,210 28,746 536 51,895
Martin L. Schlossman, Jr. 625 759 19,689 28,358 - 49,431
Carl M. Koupal, III 616 749 26,152 20,215 282 48,014
Table 59 presents the Grants of Plan Based Awards Table for the Named Executive Officers.
Table 59
Name Plan Estimated Future Payouts Under Non-Equity Incentive Plan Awards1
Threshold Target Optimum
Mark E. Yardley
EICP-Cash Incentive $ 168,750 $ 337,500 $ 506,250
President & CEO EICP-Deferred Incentive Opportunity 168,750 337,500 506,250
Jeffrey B. Kuzbel
EICP-Cash Incentive 70,500 141,000 211,500
EVP & CFO EICP-Deferred Incentive Opportunity 70,500 141,000 211,500
Sonia R. Betsworth EICP-Cash Incentive 55,500 111,000 166,500
EVP & CAO EICP-Deferred Incentive Opportunity 55,500 111,000 166,500
Martin L. Schlossman, Jr. EICP-Cash Incentive 45,625 91,250 136,875
SVP & CRO EICP-Deferred Incentive Opportunity 45,625 91,250 136,875
Carl M. Koupal, III
EICP-Cash Incentive 45,000 90,000 135,000
SVP & CLEO EICP-Deferred Incentive Opportunity 45,000 90,000 135,000
1 Amounts reflected for the EICP represent the applicable range of estimated future payouts and do not represent amounts actually earned or awarded for the fiscal year ended December 31, 2023. Award amounts are calculated using the base salaries in effect on January 1 at the beginning of the performance period. The EICP-Cash Incentive, if any, are earned and vested at year end. Awards, if any, under the EICP-Deferred Incentive Opportunity are payable in the year following the end of the three-year performance period. See discussion under Annual and Deferred Cash Incentive Awards under this Item 11 for a description of the terms of the EICP and potential future payouts.
Pension Benefits: Table 60 presents the 2023 Pension Benefits Table for the participating Named Executive Officers.
Table 60
Name Plan Name Number of Years of Credited Services
Present Value of Accumulated Benefit Payments During Last Fiscal Year
Mark E. Yardley
Pentegra Defined Benefit Plan for Financial Institutions 30.000 $ 3,078,000 $ -
President & CEO FHLBank Benefit Equalization Plan 30.000 5,996,000 -
Sonia R. Betsworth Pentegra Defined Benefit Plan for Financial Institutions 30.000 2,137,000 -
EVP & CAO FHLBank Benefit Equalization Plan 30.000 881,000 -
Martin L. Schlossman, Jr. Pentegra Defined Benefit Plan for Financial Institutions 18.083 856,000 -
SVP & CRO FHLBank Benefit Equalization Plan 18.100 324,000 -
Carl M. Koupal, III
Pentegra Defined Benefit Plan for Financial Institutions 10.500 226,000 -
SVP & CLEO FHLBank Benefit Equalization Plan N/A - -
Deferred Compensation: Table 61 presents the 2023 Nonqualified Deferred Compensation Table for the participating Named Executive Officers. Our fiscal year (FY) is 2023, with a fiscal year end (FYE) of December 31, 2023.
Table 61
Name Executive Contributions in Last FY1
Registrant Contributions in Last FY
Aggregate Earnings in Last FY
Aggregate Withdrawals / Distributions
Aggregate Balance at Last FYE2
Mark E. Yardley, President & CEO
$ 97,885 $ 94,885 $ 152,675 $ - $ 2,527,807
Jeffrey B. Kuzbel, EVP & CFO
33,606 45,302 12,284 - 241,727
Sonia R. Betsworth, EVP & CAO 45,794 28,746 53,065 - 879,268
Martin L. Schlossman, Jr., SVP & CRO 97,223 28,358 25,896 - 470,386
Carl M. Koupal, III, SVP & CLEO
11,077 20,215 2,670 - 65,111
1 All amounts are also included in the salary column of Table 57.
2 The total amount reported as preferential (above market) earnings in the aggregate balance at last FYE reported as compensation to each Named Executive Officer in the Executive Group in our Summary Compensation Tables for previous years (2006-2022) was $455,039 for Mr. Yardley, $4,152 for Mr. Kuzbel, $89,904 for Ms. Betsworth, $12,817 for Mr. Schlossman, Jr. , and $448 for Mr. Koupal. The amounts reported as preferential (above market) earnings for the current year are presented in Table 57.
CEO Pay Ratio: As required by Section 953(b) of the Dodd-Frank Act and Item 402(u) of Regulation S-K, we are providing the following information about the relationship of the median of the annual Total Compensation of all our employees except our CEO (the "Median Employee"), and the annual total compensation of Mr. Yardley, our CEO, who is our principal executive officer. We identified the Median Employee in 2023 (see methodology below).
Methodology used to determine the Median Employee
We identified the Median Employee by comparing the 2023 compensation (i.e., base salary on December 31, 2023 combined with actual incentive compensation earned in 2023 but paid in 2024) for each of the employees who were employed by FHLBank on December 31, 2023, and ranking all 252 employees by that consistently applied compensation measure from lowest to highest, excluding the CEO. Because there was an even amount of employees in the total count, we identified the two middle employees and selected the one with lower compensation to represent the initial median employee. Next, we identified the five employees with 2023 compensation higher than that initial median employee and the five employees with 2023 compensation lower than that initial median employee, constituting a total pool of 11 employees (the “Identified Pool”). We then calculated the 2023 Total Compensation for each employee in the Identified Pool for 2023 in the same manner as “Total Compensation” as shown for our CEO in the Summary Compensation Table, Table 57, which includes among other things, amounts attributable to the change in pension value, which will vary among employees based upon their tenure at FHLBank. We ranked the 2023 Total Compensation for each employee in the Identified Pool from lowest to highest, and the employee from the Identified Pool in the middle is our Median Employee. The employees in the calculation included only full-time employees as all part-time employees and interns were excluded.
Methodology used to determine the CEO Pay Ratio for 2023
For the year ended December 31, 2023, the ratio of our CEO’s Total Compensation to the Total Compensation of our Median Employee was approximately 20:1. For the year ended December 31, 2023, the Total Compensation of the CEO, as reported in the Summary Compensation Table, Table 57, was $2,553,542, and the Total Compensation of the Median Employee for the same year ended December 31, 2023 was $125,286. As a result of our methodology for determining the pay ratio, the estimated pay ratio reported above may not be comparable to the pay ratio of other companies in our industry or in other industries because other companies may rely on different methodologies or assumptions to determine an estimate of their pay ratio, or may make adjustments that we do not make. In addition, no two companies have identical employee populations or compensation programs. As such, our pay ratio should not be used as a basis for comparison between companies.
Director Compensation: Table 62 presents the Director Compensation Table for the persons who served on our board of directors during 2023.
Table 62
Name Fees Earned or Paid in Cash
Nonqualified Deferred Compensation Earnings1
Total
Donald R. Abernathy, Jr. $ 120,000 $ 532 $ 120,532
Milroy A. Alexander 130,000 2,952 132,952
G. Bridger Cox 155,000 9,295 164,295
Thomas E. Henning 120,000 120,000
Michael B. Jacobson 120,000 120,000
Holly Johnson 130,000 130,000
Lynn Katzfey 120,000 120,000
Barry J. Lockard 134,500 134,500
Craig A. Meader 120,000 120,000
L. Kent Needham 130,000 2,182 132,182
Jeffrey R. Noordhoek 120,000 120,000
Mark J. O’Connor 130,000 130,000
Thomas H. Olson, Jr. 130,000 130,000
Carla D. Pratt 120,000 120,000
Douglas E. Tippens 120,000 14,580 134,580
Paul E. Washington 120,000 120,000
Lance L. White 120,000 545 120,545
1 Nonqualified deferred compensation earnings represents above market earnings attributable to the BEP, which are calculated by multiplying the nonqualified deferred compensation average balance of the applicable year by the average rate of return in excess of the long-term applicable Federal rate (120 percent compounded quarterly) published by the IRS.
Director Fees - The board of directors establishes on an annual basis a Board of Directors Compensation Policy governing compensation for board of director meeting attendance. Our 2023 Board of Directors Compensation Policy (2023 Policy) was adopted January 26, 2023 and became effective January 1, 2023. This policy was established in accordance with the Bank Act and FHFA regulations that were amended in 2008 to remove the statutory cap on director compensation. The applicable statutes and regulations allow each FHLBank to pay its directors reasonable compensation and expenses, subject to the authority of the Director of the FHFA to object to, and to prohibit prospectively, compensation and/or expenses that the Director of the FHFA determines are not reasonable. To compensate them for their time while serving as directors, our 2023 Policy provided that each director shall be paid one-fourth of their maximum annual compensation provided for in the policy following the end of each calendar quarter. The quarterly payment can be reduced for reasons specified in the policy.
The Maximum Annual Compensation amounts are based on an evaluation of McLagan market research data, including the appropriate peer group and peer positioning, a fee comparison among the FHLBanks and the board’s assessment of appropriate and comparable pay that will allow the FHLBank to recruit and retain highly qualified directors. The 2023 Policy established annual compensation limits of $155,000 for the Chair, $134,500 for the Vice Chair, $130,000 for Committee Chairs and $120,000 for all other directors. Additionally, an individual serving as a Vice Chair of the Board was also entitled to an increase of $5,000 in their maximum annual compensation in the event the individual served as both Vice Chair of the Board and a Committee Chair.
The board of directors adopted a 2024 Board of Directors Compensation Policy (2024 Policy) governing compensation for board of director meeting attendance on December 15, 2023. The 2024 Policy is similar to the 2023 Policy, except that the 2024 policy reflects increases in the established annual compensation limits to $160,000 for the Chair, $140,000 for the Vice Chair, $130,000 for Committee Chairs, and $123,000 for all other directors. In addition to the Maximum Annual Compensation reflected in the policy, a director may also realize the benefit of reasonable spousal or guest travel expenses that qualify as perquisites as set forth in the Directors and Executive Officers Travel Policy, for one meeting per calendar year, as designated by the Chair of the board of directors. Directors are also entitled to participate in FHLBank’s BEP, discussed above, which allows Directors the opportunity to defer Director compensation, up to 100 percent.
Director Expenses - Directors are also reimbursed for all necessary and reasonable travel, subsistence and other related expenses incurred in connection with the performance of their duties. For expense reimbursement purposes, directors’ official duties can include:
▪Meetings of the Board and Board Committees;
▪Meetings requested by the FHFA;
▪Meetings of FHLBank System committees;
▪FHLBank System director meetings;
▪Meetings of the Council of Federal Home Loan Banks and Council committees; and
▪Attendance at other events on behalf of FHLBank.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
We are a cooperative. Our members or former members own all of our outstanding capital stock. A majority of our directors are elected from our membership. One of the voting rights of members is for the election of member and independent directors. Each member is eligible to vote for those open member director seats in the state in which its principal place of business is located and for all open independent director seats, which are elected by members of the entire FHLBank district. Membership is voluntary; however, members must give notice of their intent to withdraw from membership. A member that withdraws from membership may not be readmitted to membership for five years after the date upon which its required membership stock (Class A Common Stock) is redeemed by us.
Management cannot legally and, therefore, does not, own our capital stock. We do not offer any compensation plan to our employees under which equity securities of FHLBank are authorized for issuance.
Table 63 presents information on members holding five percent or more of the total outstanding capital stock, which includes mandatorily redeemable capital stock, of FHLBank as of February 29, 2024. No affiliated officer or director of these stockholders currently serves on our board of directors.
Table 63
Member Institutions Holding 5 Percent or More Capital Stock
Borrower Name Address City State Number of Shares Percent of Total
MidFirst Bank 501 NW Grand Blvd Oklahoma City OK 4,789,901 20.0 %
BOKF, N.A. 1 Williams Center-BOK Tower 16 SW Tulsa OK 2,707,397 11.3
TOTAL 7,497,298 31.3 %
Additionally, because of the fact that a majority of our board of directors is nominated and elected from our membership (“member directors”), these member directors are officers or directors of members that own our capital stock. Table 64 presents total outstanding capital stock, which includes mandatorily redeemable capital stock, held as of February 29, 2024, for members whose affiliated officers or directors currently serve on our board of directors:
Table 64
Total Capital Stock Outstanding to Member Institutions whose Officers or Directors Serve as a Director
Borrower Name Address City State Number of Shares Percent of Total
BOKF, N.A. 1 Williams Center-BOK Tower 16 SW Tulsa OK 2,707,397 11.3 %
NebraskaLand Bank 1400 S Dewey Street North Platte NE 52,053 0.2
Cornhusker Bank 8310 O Street Lincoln NE 46,664 0.2
Bank of the Flint Hills 806 5th Street Wamego KS 35,957 0.2
Points West Community Bank 1291 Main Street Windsor CO 8,629 -
BancFirst 100 N Broadway Ave Oklahoma City OK 6,500 -
First National Bank of Kansas 600 N 4th Street Burlington KS 5,852 -
Sooner State Bank 2 SE 4th Street Tuttle OK 3,474 -
First Security Bank 312 Maple Street Overbrook KS 2,927 -
Bank of Estes Park 255 Park Lane Estes Park CO 1,805 -
Nebraska State Bank 218 Main Street Oshkosh NE 1,207 -
Impact Development Fund 200 E. 7th Street, Suite 412 Loveland CO 1,200 -
TOTAL 2,873,665 11.9 %

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13: Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
Since we are a cooperative, ownership of our capital stock is a prerequisite for our members to transact business with us. In recognition of this organizational structure, the SEC granted us an accommodation pursuant to a “no action letter,” dated May 23, 2006, which relieves us from the requirement to make disclosures under Item 404(a) of Regulation S-K for transactions with related persons, such as our members and directors, which occur in the ordinary course of business. Further, the Recovery Act codified this accommodation.
Members with beneficial ownership of more than five percent of our total outstanding capital stock and all our directors are classified as related persons under SEC regulations. Transactions with members deemed related persons of FHLBank occur in the ordinary course of our business since we conduct our advance and mortgage loan business almost exclusively with our members. Our member directors are officers or directors of members that own our capital stock and conduct business with us.
Information with respect to the directors who are officers or directors of our members is set forth under Item 10 - “Directors, Executive Officers and Corporate Governance - Directors.” Additional information regarding members that are beneficial owners of more than five percent of our total outstanding capital stock is provided in Item 12 - “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
See Item 11 - “Executive Compensation” for a discussion of the compensation of our Named Executive Officers and directors.
We have a written “Related Person Transactions Policy” (Policy) that provides for the review and approval or ratification by our Audit Committee of any transaction with a related person that is outside the ordinary course of business. Under the Policy, transactions with related persons that are in the ordinary course of business are deemed pre-approved.
A “Related Person” under the Policy is:
▪Any person who is, or at any time since the beginning of our last fiscal year was, a director or an executive officer of FHLBank;
▪Any immediate family member of any of the foregoing persons and any person (other than a tenant or employee) sharing the household of such director or executive officer;
▪Any firm, corporation, or other entity in which any of the foregoing persons is an executive officer, a general partner or principal or in a similar position; or
▪Any member institution (or successor) of FHLBank that is known to be the beneficial owner of more than five percent of our voting securities.
“Ordinary course of business” is defined in the Policy as activities conducted with members, including but not limited to providing our products and services to the extent such product and service transactions are conducted on terms no more favorable than the terms of comparable transactions with similarly situated members or housing associates, as applicable, or transactions between FHLBank and a Related Person where the rates and charges involved in the transactions are subject to competitive bidding. Our products and services include: (1) credit products (i.e., line of credit, advances, forward settling advance commitments, letters of credit, standby credit facility and derivative transactions); (2) MPF Program mortgage loan products; (3) housing and CDP products; and (4) other services (i.e., deposit accounts, wire transfer services, safekeeping services and unsecured credit transactions permissible under the RMP).
Transactions outside the ordinary course of business, with Related Persons that have a direct or indirect material interest, and exceed $120,000 are subject to Audit Committee review and approval under the Policy and include situations in which: (1) we obtain products or services from a Related Person of a nature, quantity or quality, or on terms that are not readily available from alternative sources; (2) we provide products or services to a Related Person on terms not comparable to those provided to unrelated parties; or (3) the rates or charges involved in the transactions are not subject to competitive bidding.
Director Independence
Board Operating Guidelines and Nasdaq Standards: The Board Operating Guidelines of FHLBank (Guidelines), available at www.fhlbtopeka.com, require that the board of directors make an annual affirmative determination as to the independence of each director, as that term is defined by Rule 5605(a)(2) of the Nasdaq Marketplace Rules (the “Nasdaq Independence Standards”).
The board of directors has affirmatively determined that each one of its directors, both independent and member directors (each of whom is listed in Item 10 of this Form 10-K), is independent in accordance with the Nasdaq Independence Standards.
To assist the board of directors in making an affirmative determination of each director’s independence under the Nasdaq Independence Standards, the board of directors: (1) applied categorical standards for independence contained in the Guidelines and under the Nasdaq Independence Standards; (2) determined subjectively the independence of each director; and (3) considered the recommendation of the Audit Committee following its assessment of the independence of each director. The board of directors’ determination of independence under the Nasdaq Independence Standards rested upon a finding that each director has no relationship which, in the opinion of the board of directors, would interfere with that director’s exercise of independent judgment in carrying out the responsibilities of the director. Since under FHFA regulations, each independent director must be a bona fide resident of our district, and each member director must be an officer or director of one of our members, the board of directors included in its consideration whether any of these relationships would interfere with the exercise of independent judgment of a particular director.
Committee Independence
Audit Committee: In addition to the Nasdaq Independence Standards for committee members, our Audit Committee members are subject to the independence standards of the FHFA. FHFA regulations state that a director will be considered sufficiently independent to serve as an Audit Committee member if that director does not have a disqualifying relationship with FHLBank or its management that would interfere with the exercise of that director’s independent judgment. Disqualifying relationships include but are not limited to:
▪Being employed by FHLBank in the current year or any of the past five years;
▪Accepting compensation from FHLBank other than compensation for service as a director;
▪Serving or having served in any of the past five years as a consultant, advisor, promoter, underwriter, or legal counsel of FHLBank; or
▪Being an immediate family member of an individual who is, or has been in any of the past five years, employed by FHLBank as an executive officer.
In addition to the independence standards for Audit Committee members required under the FHFA regulations, Section 10A(m) of the Exchange Act sets forth the independence requirements of directors serving on the Audit Committee of a listed company under the Exchange Act. Under Section 10A(m), to be considered independent, a member of the Audit Committee may not, other than in their capacity as a member of the board of directors or any other board committee: (1) accept any consulting, advisory, or other compensation from FHLBank; or (2) be an affiliated person of FHLBank.
All members of our Audit Committee were independent under the FHFA’s audit committee independence criteria and under the independence criteria of Section 10A(m) of the Exchange Act throughout the period covered by this annual report.
The FHFA’s criteria for audit committee independence are posted on the corporate governance page of our website at www.fhlbtopeka.com. Except for the documents specifically incorporated by reference into this Annual Report on Form 10-K, information contained on our website or that can be accessed through our website is not incorporated by reference into this Annual Report on Form 10-K. Reference to our website is made as an inactive textual reference.
Compensation, Human Resources and Inclusion Committee: FHLBank’s board of directors has established a Compensation Committee. Under Nasdaq rules, to be considered an independent compensation committee member, the board of directors must affirmatively determine the independence of each director on the Compensation Committee and must consider all factors specifically relevant to determine whether a director has a relationship to FHLBank which is material to that director’s ability to be independent from management in connection with the duties of a Compensation Committee member, including the source of the compensation of the director and whether the director is affiliated with FHLBank. The board of directors has affirmatively determined that each member of the Compensation Committee is independent in accordance with the Nasdaq Independence Standards for compensation committee members.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14: Principal Accountant Fees and Services
Prior to approving PricewaterhouseCoopers LLP as our independent accountants for 2023, the Audit Committee considered whether PricewaterhouseCoopers LLP’s provision of services other than audit services is compatible with maintaining the accountants’ independence. The Audit Committee’s policy is to pre-approve all audit, audit-related, and permissible non-audit services provided by our independent accountants. The Audit Committee pre-approved all such services provided by the independent accountants during 2023 and 2022. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent accountants and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent accountants in accordance with its pre-approval and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.
Table 65 sets forth the aggregate fees we were billed for the years ended December 31, 2023 and 2022 by our external accounting firm, PricewaterhouseCoopers LLP (in thousands):
Table 65
2023 2022
Audit fees $ 1,044 $ 892
Audit-related fees 70 65
Tax fees - -
All other fees 81 1
TOTAL $ 1,195 $ 958
Audit fees during the years ended December 31, 2023 and 2022 were for professional services rendered for the audits of our annual financial statements and review of financial statements included in our annual reports on Form 10-K and quarterly reports on Form 10-Q.
Audit-related and all other fees during the years ended December 31, 2023 and 2022 were for discussions regarding miscellaneous accounting-related matters and a license fee for an electronic disclosure checklist application. For the year ended December 31, 2023, all other fees also included $80 thousand for a pre-implementation software review.
We are assessed our proportionate share of the costs of operating the Office of Finance, which includes the expenses associated with the annual audits of the combined financial statements of the 11 FHLBanks. The audit fees for the combined financial statements are billed directly by PricewaterhouseCoopers LLP to the Office of Finance and we are assessed our proportionate share of these expenses. In 2023 and 2022, we were assessed $42,000 each year for the costs associated with PricewaterhouseCoopers LLP’s audits of the combined financial statements for those years. These assessments are not included in the table above.
Section 1433 of the Bank Act provides that we and the other FHLBanks are exempt from all federal, state and local taxation, with the exception of real property tax. Therefore, no tax consultation fees were paid to our external accounting firm during the years ended December 31, 2023 and 2022.
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15: Exhibit and Financial Statement Schedules
a) The financial statements included as part of this Form 10-K are identified in the index to Audited Financial Statements appearing in Item 8 of this Form 10-K and which index is incorporated in this Item 15 by reference.
b) Exhibits.
We have incorporated by reference certain exhibits as specified below pursuant to Rule 12b-32 under the Exchange Act.
Exhibit No. Description
3.1
Exhibit 3.1 to the FHLBank’s registration statement on Form 10, filed May 15, 2006, and made effective on July 14, 2006 (File No. 000-52004) (the “Form 10 Registration Statement”), Federal Home Loan Bank of Topeka Articles and Organization Certificate, is incorporated herein by reference as Exhibit 3.1.
3.2
Exhibit 3.1 to the Current Report on Form 8-K, filed October 26, 2022, Federal Home Loan Bank of Topeka Amended and Restated Bylaws, is incorporated herein by reference as Exhibit 3.2.
4.1
Exhibit 4.1 to the 2019 Annual Report on Form 10-K, filed March 20, 2020, Federal Home Loan Bank of Topeka Capital Plan, is incorporated herein by reference as Exhibit 4.1.
4.2
Exhibit 4.2 to the 2019 Annual Report on Form 10-K, filed March 20, 2020, Description of Securities - Supplement to the Federal Home Loan Bank of Topeka Capital Plan, is incorporated herein by reference as Exhibit 4.2.
10.1*
Exhibit 10.1 to the Current Report on Form 8-K, filed December 18, 2020, Federal Home Loan Bank of Topeka Benefit Equalization Plan, is incorporated herein by reference as Exhibit 10.1.
10.2
Exhibit 10.3 to the 2016 Annual Report on Form 10-K, filed March 9, 2017, Federal Home Loan Bank of Topeka Form of Advance, Pledge and Security Agreement (Specific Pledge), is incorporated herein by reference as Exhibit 10.2.
10.3
Exhibit 10.4 to the 2016 Annual Report on Form 10-K, filed March 9, 2017, Federal Home Loan Bank of Topeka Form of Advance, Pledge and Security Agreement (Blanket Pledge), is incorporated herein by reference as Exhibit 10.3.
10.4
Exhibit 10.6 to the 2013 Annual Report on Form 10-K, filed March 14, 2014, Federal Home Loan Bank of Topeka Form of Confirmation of Advance, is incorporated herein by reference as Exhibit 10.4.
10.5
Exhibit 10.1 to the Current Report on Form 8-K, filed June 23, 2017, Bond Trust Indenture dated as of June 1, 2017, between Shawnee County, Kansas and BOKF, N.A., is incorporated herein by reference as Exhibit 10.5.
10.6
Exhibit 10.2 to the Current Report on Form 8-K, filed June 23, 2017, Lease Agreement dated as of June 1, 2017, between Shawnee County, Kansas and Federal Home Loan Bank of Topeka, is incorporated herein by reference as Exhibit 10.6.
10.7
Exhibit 10.3 to the Current Report on Form 8-K, filed June 23, 2017, Base Lease Agreement dated as of June 1, 2017, between Shawnee County, Kansas and Federal Home Loan Bank of Topeka, is incorporated herein by reference as Exhibit 10.7.
10.8
Exhibit 10.26 to the 2016 Annual Report on Form 10-K, filed March 9, 2017, Amended and Restated Federal Home Loan Banks P&I Funding and Contingency Plan Agreement, is incorporated herein by reference as Exhibit 10.8.
10.9*
Exhibit 10.1 to the Current Report on Form 8-K, filed February 16, 2022, Executive Incentive Compensation Plan, is incorporated herein by reference as Exhibit 10.9.
10.10*
Exhibit 10.2 to the Current Report on Form 8-K, filed January 8, 2019, Federal Home Loan Bank of Topeka 2019 Executive Incentive Compensation Plan Targets, is incorporated herein by reference as Exhibit 10.10.
10.11*
Exhibit 10.1 to the Current Report on Form 8-K, filed February 6, 2020, Federal Home Loan Bank of Topeka 2020 Executive Incentive Compensation Plan Targets, is incorporated herein by reference as Exhibit 10.11
10.12*
Exhibit 10.1 to the Current Report on Form 8-K, filed February 2, 2021, Federal Home Loan Bank of Topeka 2021 Executive Incentive Compensation Plan Targets, is incorporated herein by reference as Exhibit 10.12.
10.13*
Exhibit 10.2 to the Current Report on Form 8-K, filed February 16, 2022, Federal Home Loan Bank of Topeka 2022 Executive Incentive Compensation Plan Targets, is incorporated herein by reference as Exhibit 10.13.
10.14*
Exhibit 10.1 to the Current Report on Form 8-K, filed March 7, 2023, Federal Home Loan Bank of Topeka 2023 Executive Incentive Compensation Plan Targets, is incorporated herein by reference as Exhibit 10.14.
10.15*
Exhibit 10.1 to the Current Report on Form 8-K, filed July 20, 2015, Federal Home Loan Bank of Topeka Change in Control Plan, is incorporated herein by reference as Exhibit 10.15.
10.16*
Exhibit 10.1 to the Current Report on Form 8-K, filed August 1, 2018, Federal Home Loan Bank of Topeka Executive Officer Severance Policy, is incorporated herein by reference as Exhibit 10.16.
10.17*
Exhibit 10.1 to the Current Report on Form 8-K, filed February 16, 2023, Federal Home Loan Bank of Topeka 2023 Board of Directors Compensation Policy, is incorporated herein by reference as Exhibit 10.17.
10.18
Exhibit 10.1 to the Current Report on Form 8-K, filed January 5, 2024, Federal Home Loan Bank of Topeka 2024 Board of Directors Compensation Policy, is incorporated herein by reference as Exhibit 10.18.
Exhibit No. Description
10.19*
Exhibit 10.1 to the Current Report on Form 8-K, filed June 30, 2016, Form of Director Indemnification Agreement, is incorporated herein by reference as Exhibit 10.19.
10.20*
Exhibit 10.2 to the Current Report on Form 8-K, filed June 30, 2016, Form of Officer Indemnification Agreement, is incorporated herein by reference as Exhibit 10.20.
14.1
Federal Home Loan Bank of Topeka Code of Ethics
24.1
Power of Attorney.
31.1
Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of First Vice President and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of President and Principal Executive Officer and First Vice President and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1
Federal Home Loan Bank of Topeka Audit Committee Charter.
99.2
Federal Home Loan Bank of Topeka Audit Committee Report.
101.INS**
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH**
XBRL Taxonomy Extension Schema Document
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**
XBRL Taxonomy Extension Label Linkbase Document
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF**
XBRL Taxonomy Extension Definition Linkbase Document
104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
* Represents a management contract or a compensatory plan or arrangement.
** The financial information contained in these XBRL documents is unaudited.