EDGAR 10-K Filing

Company CIK: 1325878
Filing Year: 2021
Filename: 1325878_10-K_2021_0001325878-21-000008.json

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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 Federal Home Loan Bank Act of 1932, as amended (Bank Act). Our primary business is making collateralized loans, purchasing mortgages, and providing other banking services to member institutions (members) and certain qualifying non-members (housing associates). We are a cooperative owned by our members and are generally limited to providing products and services only to those members. Each FHLBank operates as a separate corporate entity with its own management, employees, and board of directors. 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. 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 Federal Housing Finance Agency (FHFA), an independent agency in the executive branch of the U.S. government. The FHFA’s mission is to ensure that the housing GSEs operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment.
Any federally insured depository institution, non-federally insured credit union, insurance company, or community development financial institution (CDFI) certified by the CDFI fund, whose principal place of business is located in Colorado, Kansas, Nebraska, or Oklahoma is eligible to become one of our members. (See Table 43 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 2020, this specified amount was $1.2 billion.
Our members are required to purchase and hold our capital stock as a condition of membership, and only members are permitted to purchase capital stock. All capital stock transactions are governed by our capital plan, which was developed under, is subject to, and operates within specific regulatory and statutory requirements.
Member institutions own nearly all of our outstanding capital stock and may receive dividends on that stock. Former members own capital stock as long as they have outstanding business transactions with us. A member must own an amount of capital stock in FHLBank based on the member’s total assets, and each member may be required to purchase activity-based capital stock as it engages in certain business activities with FHLBank, including advances, Acquired Member Assets (AMA) and, effective January 22, 2021, letters of credit (for additional discussion regarding this change to capital requirements, see "Liquidity and Capital Resources - Capital" under Item 7). As a result of these stock purchase requirements, we conduct business with related parties in the normal course of business. For disclosure purposes, we include in our definition of a related party any member institution (or successor) that is known to be the beneficial owner of more than five percent of any class of our voting stock and any person who is, or at any time since the beginning of our last fiscal year (January 1) was, one of our directors or executive officers, among others. Information on business activities with related parties is provided in Tables 81 and 82 under Item 12 - “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
Our business activities include providing collateralized loans, known as advances, to members and housing associates, and acquiring residential mortgage loans from members. By law, only certain general categories of collateral are eligible to secure FHLBank obligations. We also provide members and housing associates with letters of credit and certain correspondent services, such as safekeeping, wire transfers, and cash management.
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, 2020, our Primary Mission Asset ratio was 74 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. Although consolidated obligations are not obligations of, nor guaranteed by, the U.S. government, the capital markets have traditionally viewed the FHLBanks’ consolidated obligations as “Federal agency” debt. As a result, the FHLBanks have historically had ready access to funding at relatively favorable spreads to U.S. Treasuries. Additional funds are provided by deposits (received from both member and non-member financial institutions), other borrowings and the issuance of capital stock.
Standard & Poor’s (S&P) and Moody’s Investor Service (Moody’s) base their ratings of the FHLBanks and the debt issues of the FHLBank System in part on the FHLBanks’ relationship with the U.S. government and the implication of its support for the FHLBank System as GSEs. S&P currently rates the long-term credit ratings on the 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 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 stable for senior unsecured debt.
Advances
We make advances to members and housing associates based on the value of the security of their residential mortgages and other eligible collateral. Advances are required by FHFA regulation to be priced no lower than the cost of raising matching term and maturity funds in the marketplace plus the administrative and operating expenses associated with making such advances. A brief description of our standard advance product offerings is as follows:
▪Line of credit advances are draws under an established line of credit, which re-prices daily. A line of credit is established for a term of one year with outstanding amounts being available for the remaining term of the commitment. Line of credit advances are prepayable at any time without fee. Repayments, however, are not accepted if funds have been drawn on the same day;
▪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. Overnight line of credit advances were made available to members and housing associates beginning January 4, 2021;
▪Short-term fixed rate advances are non-amortizing, non-prepayable loans with terms to maturity from 3 to 93 days;
▪Regular fixed rate advances are non-amortizing loans, prepayable potentially with a fee, with terms to maturity from 94 days to 360 months;
▪Symmetrical fixed rate advances are non-amortizing loans with terms to maturity from 94 days to 360 months, prepayable with a fee, but the borrower also has the contractual ability to realize a gain from the market movement of interest rates upon prepayment;
▪Adjustable rate advances are non-amortizing loans with terms to maturity from 4 to 120 months (previously 180 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) or LIBOR;
▪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, that contain a set of predetermined principal payments to be made during the life of the advance;
•Convertible advances are non-amortizing, fixed rate loans with terms to maturity of 12 to 180 months that contain an option(s) that allows us to convert the fixed rate advance to a prepayable, adjustable rate advance that re-prices monthly based upon our one-month short-term, fixed rate advance product. Once we exercise our option to convert the advance, it can be prepaid without a fee in whole or in part on the initial conversion date or on any interest rate reset date thereafter. On October 30, 2020, we placed a moratorium on issuing convertible advances due to pricing complexity related to funding availability and optionality changes, including the transition from LIBOR to other indices with less optionality;
▪Forward settling advance commitments lock in the rate and term of future funding of regular and amortizing fixed rate advances up to 24 months in advance; and
▪Structured advances are other advance types (e.g., regular fixed rate, callable, amortizing or adjustable rate) with terms from 12 to 180 months with an embedded interest rate cap, floor, or collar.
Customized advances may be created on request, including advances with embedded interest rate floors and caps. All embedded derivatives in customized advances are evaluated to determine whether they are clearly and closely related to the advances. See Notes 1 and 7 in the Notes to Financial Statements under Item 8 for information on accounting for embedded derivatives. The types of derivatives used to hedge risks embedded in our advance products are indicated in Tables 61 and 62 under Item 7A - “Quantitative and Qualitative Disclosures About Market Risk.”
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.
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 Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) or Government National Mortgage Association (Ginnie Mae);
▪Cash or deposits in an FHLBank;
▪Other acceptable real estate-related collateral, provided such collateral has a readily ascertainable market value and we can perfect a security interest in such property (e.g., privately issued collateralized mortgage obligations (CMOs), mortgages on multifamily residential real property, second mortgages on 1-4 family residential property, mortgages on commercial real estate); or
▪In the case of any CFI, secured loans to small business, small farm and small agri-business or securities representing a whole interest in such secured loans.
As additional security for a member’s indebtedness, we have a statutory lien 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.
The Bank Act affords any security interest granted to us by any of our members, or any affiliate of any such member, priority over the claims and rights of any party, including any receiver, conservator, trustee, or similar party having rights of a lien creditor. The only exceptions are claims and rights held by actual bona fide purchasers for value or by parties that are secured by actual perfected security interests, and provided that such claims and rights would otherwise be entitled to priority under applicable law. In addition, our claims are given certain preferences pursuant to the receivership provisions in the Federal Deposit Insurance Act. Most members provide us a blanket lien covering substantially all of the member’s assets and 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.
Table 10 under Item 7 - "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" presents the amount of total interest income contributed by our advance products. Tables 26 and 27 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, 2020 and 2019 and the accrued interest income associated with the five borrowers providing the highest amount of interest income for the years ended December 31, 2020 and 2019.
Mortgage Loans
We purchase various residential mortgage loan products from participating financial institutions (PFIs) under the MPF Program, a secondary mortgage market structure created and maintained by FHLBank Chicago. Under the MPF Program, we invest in qualifying 5- to 30-year conventional conforming and government-guaranteed or -insured (by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), the Rural Housing Service of the Department of Agriculture (RHS) and the Department of Housing and Urban Development (HUD)) fixed rate mortgage loans on 1-4 family residential properties. These portfolio mortgage products, along with residential loans sold under the MPF Xtra and MPF Government MBS products, where the PFI sells a loan under the MPF Program structure to Fannie Mae or FHLBank Chicago, respectively, for securitization, collectively provide our members an opportunity to further their cooperative partnership with us. These products are intended to further assist our members and their mortgage product needs while enhancing our ability to manage mortgage volumes and receive a counterparty fee from FHLBank Chicago based on mortgage volumes sold by our PFIs. We have the authority to offer participation interests in risk sharing MPF loan pools to member institutions, which we believe may further enhance our ability to manage the size of our mortgage loan portfolio in the future.
The MPF Program helps fulfill our housing mission and provides an additional source of liquidity to FHLBank members that choose to sell mortgage loans into the secondary market rather than holding them in their own portfolios. MPF Program portfolio mortgage loans are considered AMAs, a core mission activity of the FHLBanks, as defined by FHFA regulations.
Allocation of Risk: The MPF Program is designed to allocate risks associated with residential mortgage loans between the PFIs and us. PFIs have direct knowledge of their mortgage markets and have developed expertise in underwriting and servicing residential mortgage loans. By allowing PFIs to originate residential mortgage loans, whether through retail or wholesale operations, and to retain or sell servicing rights of residential mortgage loans, the MPF Program gives control of those functions that mostly impact credit quality to PFIs. We are responsible for managing the interest rate, prepayment and liquidity risks associated with holding residential mortgage loans in portfolio.
Under the FHFA’s AMA regulation, the PFI must “bear the economic consequences” of certain losses with respect to a master commitment based upon the MPF product and other criteria. To comply with these regulations, MPF purchases and fundings are structured so the credit risk associated with MPF loans is shared with PFIs (excluding the MPF Xtra and government-guaranteed loan products). In order to share the credit risk with our PFIs, we use a third-party model 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. PFIs are required to have a CE obligation in an amount that provides FHLBank a high degree of confidence that the CE obligation will absorb losses in excess of the First Loss Account (FLA), even under reasonably likely adverse changes to expected economic conditions. The amount of the CE obligation is based on a documented analysis, including consideration of applicable insurance, credit enhancements, and other sources for repayment on the asset or pool. Effective January 1, 2020, all new and amended master commitments had a set minimum CE obligation, which was lower for products that offer performance-based credit enhancement fees (CE fees) (see Table 1).
The CE obligation methodology described above is applied to MPF portfolio products involving conventional mortgage loans. Subsequent to any private mortgage insurance (PMI), we share in the credit risk of the loans with the PFI. We assume the first layer of loss coverage as defined by the FLA. If losses beyond the FLA layer are incurred for a pool, the PFI assumes the loan losses up to the amount of the CE obligation, or supplemental mortgage insurance (SMI) policy purchased to replace a CE obligation or to reduce the amount of the CE obligation to some degree, as specified in a master commitment agreement for each pool of conventional mortgage loans purchased from the PFI. The CE obligation provided by the PFI ensures they retain a credit stake in the loans they sell and PFIs are compensated for managing this credit risk, either as a CE fee paid monthly or a one-time upfront fee paid at purchase (the option for a one-time upfront fee will be discontinued effective March 31, 2021). In some instances, depending on the MPF product type (see Table 1), all or a portion of the CE fee may be performance-based. Any losses in excess of our responsibility under the FLA and the member’s CE obligation or SMI policy for a pool of MPF loans are our responsibility. All loss allocations among us and our PFIs are based upon formulas specific to pools of loans covered by a specific MPF product and master commitment (see Table 2). PFIs’ CE obligations must be fully collateralized with assets considered eligible under our collateral policy. See Item 1 - “Business - Advances” for a discussion of eligible collateral.
There are three MPF portfolio products from which PFIs currently may choose (see Table 1). MPF Original, MPF 125, and MPF Government are closed loan products in which we purchase loans acquired or closed by the PFI. Under these MPF portfolio products, the PFI performs all traditional retail loan origination functions. As mentioned above, MPF Xtra essentially represents a loan sale from the PFI to an end buyer that is not FHLBank Topeka. The end buyer of the mortgages under the MPF Xtra product is Fannie Mae. MPF Government MBS is essentially a loan sale of government loans from the PFI to FHLBank Chicago for securitization into Ginnie Mae MBS. We receive a counterparty fee from our PFIs for facilitating their participation in the MPF Xtra and MPF Government MBS products.
The MPF portfolio products involving conventional mortgage loans are termed credit-enhanced products because we share in the credit risk of the loans (as described above) with the PFIs. The MPF Government, MPF Government MBS and MPF Xtra products do not have a first loss and/or credit enhancement structure. Effective January 1, 2022, the MPF Xtra product is subject to an annual limit of $1.5 billion program-wide for all participating FHLBanks combined.
Table 10 under Item 7 - "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" presents the amount of total interest income contributed by our mortgage loan products. Table 28 under Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition” presents the outstanding balances of mortgage loans sold to us, net of participations, from our top five PFIs and the percentage of those loans to total mortgage loans outstanding.
PFI Eligibility: Members and housing associates may apply to become PFIs. We review the general eligibility of the member, its servicing qualifications, and its ability to supply documents, data, and reports required to be delivered by PFIs under the MPF Program. A Participating Financial Institution Agreement provides the terms and conditions for the sale or funding of MPF mortgage loans by PFIs, including required CE obligations, and establishes the terms and conditions for servicing MPF loans. All of the PFI’s CE obligations under this agreement are secured in the same manner as the other obligations of the PFI under its regular advances agreement with us. We have the right under the advances agreement to request additional collateral to secure the PFI’s MPF CE obligations and cover repurchase risk.
MPF Provider: FHLBank Chicago serves as the MPF Provider 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. In addition, the MPF Provider manages the pricing and delivery mechanism for MPF loans and the back-office processing of MPF loans in its role as master servicer and program custodian. The MPF Provider has engaged Wells Fargo Bank N.A. as the vendor for master servicing and as the primary custodian for the MPF Program. We utilize the capability under the individual FHLBank pricing option to change the pricing offered to our PFIs for applicable MPF products, but any pricing changes made affect all delivery commitment terms and loan note rates in the same amount for all PFIs.
The MPF Provider publishes and maintains documentation (referred to as Guides) that details the requirements PFIs must follow in originating, underwriting or selling and servicing MPF loans. The MPF Provider maintains the infrastructure through which we can fund or purchase MPF loans through our PFIs. In exchange for providing these services, we pay the MPF Provider a quarterly fixed service cost and a transaction services fee, which is based upon the unpaid principal balances (UPB) before any charge-offs of MPF loans.
MPF Servicing: PFIs selling residential mortgage loans under the MPF Program may either retain the servicing function or transfer it and the servicing rights to an approved PFI servicer. If a PFI chooses to retain the servicing function, it receives a servicing fee. PFIs may utilize approved subservicers to perform the servicing duties. If the PFI chooses to transfer servicing rights to an approved third-party provider, the servicing is transferred concurrently with the sale of the residential mortgage loan with the PFI receiving a servicing-released premium. The servicing fee is paid to the third-party servicer. All servicing-retained and servicing-released PFIs are subject to the rules and requirements set forth in the MPF Servicing Guide. Throughout the servicing process, the master servicer monitors PFI compliance with MPF Program requirements and makes periodic reports to the MPF Provider.
Mortgage Standards: The MPF Program has adopted ability-to-repay and safe harbor qualified mortgage requirements for all mortgages with loan application dates on or after January 10, 2014. PFIs are required to deliver residential mortgage loans that meet the eligibility requirements in the MPF Guides. The eligibility guidelines in the MPF Guides applicable to the conventional mortgage loans in our portfolio are broadly summarized as follows:
▪Mortgage characteristics: MPF loans must be qualifying 5- to 30-year conforming conventional, fixed rate, fully amortizing mortgage loans, secured by first liens on owner-occupied 1- to 4-unit single-family residential properties and single-unit second homes.
▪Loan-to-value (LTV) ratio and PMI: The maximum LTV for conventional MPF loans is 95 percent, though Affordable Housing Program (AHP) MPF mortgage loans may have LTVs up to 100 percent. Conventional MPF mortgage loans with LTVs greater than 80 percent are insured by PMI from a mortgage guaranty insurance company that has successfully passed an internal credit review and is approved under the MPF Program.
▪Documentation and compliance: Mortgage documents and transactions are required to comply with all applicable laws. MPF mortgage loans are documented using standard Fannie Mae/Freddie Mac uniform instruments.
▪Government loans: Government mortgage loans sold under the MPF Program have substantially the same parameters as conventional MPF mortgage loans except that their LTVs may not exceed the LTV limits set by the applicable government agency and they must meet all requirements to be insured or guaranteed by the applicable government agency.
▪Ineligible mortgage loans: Loans not eligible for sale under the MPF Program include residential mortgage loans unable to be rated by S&P, loans not meeting eligibility requirements, loans classified as high cost, high rate, high risk, Home Ownership and Equity Protection Act loans or loans in similar categories defined under predatory or abusive lending laws, or subprime, non-traditional, or higher-priced mortgage loans.
Loss Calculations: Losses under the FLA for conventional mortgage loans are defined differently than losses for financial reporting purposes. The differences reside in the timing of the recognition of the loss and how the components of the loss are recognized. Under the FLA, a loss is the difference between the recorded loan value and the total proceeds received from the sale of a residential mortgage property after paying any associated expenses, not to exceed the amount of the FLA. The loss is recognized upon sale of the mortgaged property. For financial reporting purposes, when a mortgage loan is deemed a loss, the difference between the recorded loan value and the appraised value of the property securing the loan (fair market value) less the estimated costs to sell is recognized as a charge to the Allowance for Credit Losses on Mortgage Loans in the period the loss status is assigned to the loan. After foreclosure, any expenses associated with carrying the loan until sale are recognized as real estate owned (REO) expenses in the current period.
A majority of the states, and some municipalities, have enacted laws 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.
Table 1 presents a comparison of the different characteristics for each of the MPF products either held on our balance sheet as of December 31, 2020 or currently offered as a loan sale from the PFI to FHLBank Chicago:
Table 1
Product Name Size of
FHLBank’s FLA PFI CE Obligation Description CE Fee
Paid to PFI CE Fee Offset1
Servicing Fee
to PFI2
MPF Original 4 basis points (bps) per year against unpaid balance, accrued monthly Greater of aggregate sum of the loan level credit enhancements (LLCEs) or one percent of gross fundings 10 bps per year, paid monthly based on remaining UPB; guaranteed3
No 25 bps per year, paid monthly
MPF 1004
100 bps fixed based on gross fundings Aggregate sum of the LLCEs less FLA
7 to 10 bps per year, paid monthly based on remaining UPB; performance-based after 3 years Yes; after first 3 years, to the extent recoverable in future periods 25 bps per year, paid monthly
MPF 125 100 bps fixed based on gross fundings Greater of aggregate sum of the LLCEs less FLA or 25 bps 7 to 10 bps per year, paid monthly based on remaining UPB; performance-based Yes; to the extent recoverable in future periods 25 bps per year, paid monthly
MPF Plus5
Sized to equal expected losses 0 to 20 bps after FLA and SMI 7 bps per year plus 6 to 7 bps per year, performance-based (delayed for 1 year); all fees paid monthly based on remaining UPB Yes; to the extent recoverable in future periods 25 bps per year, paid monthly
MPF Xtra N/A N/A N/A N/A 25 bps per year, paid monthly
MPF Government N/A N/A (unreimbursed servicing expenses only) N/A6
N/A 44 bps per year, paid monthly
MPF Government MBS
N/A N/A (unreimbursed servicing expenses only) N/A
N/A Based on note rate
1 Future payouts of performance-based CE fees are reduced when losses are allocated to the FLA. The annual offset is limited to fees payable in a given year but could be reduced in subsequent years if losses exceed the annual CE fee. The overall reduction is limited to the FLA amount for the life of the pool of loans covered by a master commitment agreement.
2 The PFI has the option of retaining or selling the servicing on all MPF products. If the servicing is sold (servicing released), the PFI will receive an upfront servicing released premium as opposed to receiving servicing fees over time.
3 For this product, the PFI also has the option to receive the CE fee upfront when the mortgage loan is purchased based upon the present value of the monthly CE fee payments, with consideration for expected prepayments (the option for a one-time upfront fee will be discontinued effective March 31, 2021) .
4 The MPF 100 product is currently inactive due to regulatory requirements relating to loan originator compensation under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
5 Due to higher costs associated with the acquisition of supplemental insurance policies, the MPF Plus product is currently not active.
6 Two government master commitments have been grandfathered and paid 2 bps per year. All other government master commitments are not paid a CE fee.
Table 2 presents an illustration of the FLA and CE obligation calculation for each conventional MPF product type listed as of December 31, 2020:
Table 2
Product Name FLA CE Obligation Calculation
MPF Original 4 bps x unpaid principal, annually1
(LLCE2 x PSF3) x Gross Fundings
MPF 100 100 bps x loan funded amount ((LLCE x PSF) - FLA) x Gross Fundings
MPF 125 100 bps x loan funded amount ((LLCE x PSF) - FLA) x Gross Fundings
MPF Plus 5 x variable CE Fee (LLCE x PSF) - FLA - SMI4 = PCE5
1 Starts at zero and increases monthly over the life of the master commitment.
2 LLCE represents the sum of the loan level credit enhancement amounts of the loans sold into the pool of loans covered by the master commitment agreement.
3 The S&P Level’s Pool Size Factor (PSF) is applied at the MPF FHLBank level against the total of loans in portfolio.
4 SMI represents the coverage obtained from the supplemental mortgage insurer. The initial premium for the insurance was determined based on a sample $100 million loan pool. The final premium determination was made during the 13th month of the master commitment agreement, at which time any premium adjustment was determined based on actual characteristics of loans submitted. The SMI generally covers a portion of the PFI’s CE obligation, which typically ranges from 200 to 250 bps of the dollar amount of loans delivered into a mortgage pool, but the PFI may purchase an additional level of coverage to completely cover the PFI’s CE obligation. The CE fees paid to PFIs for this program are capped at a maximum of 14 bps, which is broken into two components, fixed and variable. The fixed portion of the CE fee is paid to the SMI insurer for the coverage discussed above and is a negotiated rate depending on the level of SMI coverage, ranging from 6 to 8 bps. The variable portion is paid to the PFI, and ranges from 6 to 8 bps, with payments commencing the 13th month following initial loan purchase under the master commitment agreement.
5 PCE represents the CE obligation that the PFI elects to retain rather than covering with SMI. Under this MPF product, the retained amount can range from 0 to 20 bps.
Investments
A portfolio of investments is maintained for liquidity and asset/liability management purposes. We maintain a portfolio of short-term investments in highly-rated institutions, including overnight Federal funds, term Federal funds, interest-bearing certificates of deposit and demand deposits, commercial paper, and securities purchased under agreements to resell (i.e., reverse repurchase agreements). A longer-term investment portfolio is also maintained, which includes securities issued or guaranteed by the U.S. government, U.S. government agencies and GSEs, as well as MBS that are issued by U.S. government agencies and housing GSEs (GSE securities are not explicitly guaranteed by the U.S. government).
Under FHFA regulations, we are prohibited from investing in certain types of securities including:
▪Instruments, such as common stock, that represent ownership in an entity, other than stock in small business investment companies or certain investments targeted to low-income persons or communities;
▪Instruments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks;
▪Non-investment-grade debt instruments other than certain investments targeted to low-income persons or communities, and instruments that were downgraded after purchase;
▪Whole mortgages or other whole loans other than: (1) those acquired under our MPF Program; (2) certain investments targeted to low-income persons or communities; (3) certain marketable direct obligations of state, local, or tribal government units or agencies, having at least the second highest credit rating from a Nationally Recognized Statistical Rating Organization (NRSRO); (4) MBS or asset-backed securities (ABS) backed by manufactured housing loans or home equity loans; and (5) certain foreign housing loans authorized under Section 12(b) of the Bank Act;
▪Non-U.S. dollar denominated securities;
▪Interest-only or principal-only stripped MBS, CMOs, real estate mortgage investment conduits (REMICs) and eligible ABS;
▪Residual-interest or interest-accrual classes of CMOs, REMICs and eligible ABS; and
▪Fixed rate MBS, CMOs, REMICs and eligible ABS, or floating rate MBS, CMOs, REMICs and eligible ABS that on the trade date are at rates equal to their contractual cap or that have average lives which vary by more than six years under an assumed instantaneous interest rate change of 300 bps.
In addition to the above limitations on allowable types of MBS investments, the FHFA limits our purchase of MBS by requiring that the aggregate value of MBS owned not exceed 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, 2020, the aggregate value of our MBS/CMO portfolio represented 256 percent of our regulatory capital.
Debt Financing - Consolidated Obligations
Consolidated obligations, consisting of bonds and discount notes, are our primary liabilities and represent the principal source of funding for advances, traditional mortgage products, and investments. Consolidated obligations are the joint and several obligations of the FHLBanks, backed only by the financial resources of the FHLBanks. Consolidated obligations are not obligations of the U.S. government, and the U.S. government does not guarantee them; however, the capital markets have traditionally viewed the FHLBanks’ obligations as “Federal agency” debt. As such, the FHLBanks historically have had reasonably stable access to funding at relatively favorable spreads to U.S. Treasuries. Our ability to access the capital markets through the sale of consolidated obligations, across the maturity spectrum and through a variety of debt structures, assists us in managing our balance sheet effectively and efficiently. Moody’s currently rates the FHLBanks’ consolidated obligations Aaa/P-1, and S&P currently rates them AA+/A-1+. These ratings measure the likelihood of timely payment of principal and interest on consolidated obligations and also reflect the FHLBanks’ status as GSEs, which generally implies the expectation of a high degree of support by the U.S. government even though their obligations are not guaranteed by the U.S. government.
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 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 3 presents the par value of our consolidated obligations and the combined consolidated obligations of all the FHLBanks as of December 31, 2020 and 2019 (in millions):
Table 3
12/31/2020 12/31/2019
Par value of consolidated obligations of FHLBank Topeka $ 48,476 $ 59,481
Par value of consolidated obligations of all FHLBanks $ 746,772 $ 1,025,895
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 4 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, 2020 and 2019 (dollar amounts in thousands):
Table 4
12/31/2020 12/31/2019
Total non-pledged assets $ 52,352,049 $ 63,017,801
Total carrying value of consolidated obligations $ 48,530,494 $ 59,461,225
Ratio of non-pledged assets to consolidated obligations 1.08 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 NRSROs with respect to ratings on consolidated obligations. In addition, the Office of Finance administers the Resolution Funding Corporation, a tax-exempt government corporation that was established as a result of the savings and loan crisis of the 1980s.
Consolidated Obligation Bonds: Consolidated obligation bonds are primarily used to satisfy our term funding needs. Typically, the maturities of these bonds range from less than one year to 30 years, but the maturities are not subject to any statutory or regulatory limit. Consolidated obligation bonds can be issued and distributed through negotiated or competitively bid transactions with approved underwriters or selling group members.
Consolidated obligation bonds generally are issued with either fixed or variable rate payment terms that use a variety of standardized indices for interest rate resets including, but not limited to, LIBOR, 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. Normally, when such a complex consolidated obligation bond is issued, we simultaneously enter into a derivative containing mirror or offsetting features to synthetically convert the terms of the complex bond to a simple variable rate callable bond tied to one of the standardized indices. We also simultaneously enter into derivatives containing offsetting features to synthetically convert the terms of some of our fixed rate callable and bullet bonds and floating rate bonds to a simple variable rate callable or bullet bond tied to one of the standardized indices.
Consolidated Obligation Discount Notes: The Office of Finance also sells consolidated obligation discount notes on behalf of the FHLBanks that generally are used to meet short-term funding needs. These securities have maturities up to one year and are offered daily through certain securities dealers in a discount note selling group. In addition to the daily offerings of discount notes, the FHLBanks auction discount notes with fixed maturity dates ranging from 4 to 26 weeks through competitive auctions held twice a week utilizing the discount note selling group. The amount of discount notes sold through the auctions varies based upon market conditions and/or on the funding needs of the FHLBanks. Discount notes are 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, futures, forward contracts, and other derivatives can be used as part of our interest rate risk management and funding strategies. This policy, 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, mortgage prepayment risk, unsecured credit risk, and foreign currency risk.
We use derivatives in our overall interest rate risk management to adjust the interest rate sensitivity of consolidated obligations to approximate more closely the interest rate sensitivity of assets, including advances, investments and mortgage loans, and/or to adjust the interest rate sensitivity of advances, investments, and mortgage loans to approximate more closely the interest rate sensitivity of liabilities. We also use derivatives to manage embedded options in assets and liabilities, to hedge the market value of existing assets, liabilities, and anticipated transactions, to hedge the duration risk of prepayable instruments, to mitigate adverse impacts to earnings from the contraction or extension of certain assets (e.g., advances or mortgage assets) and liabilities, and to reduce funding costs as discussed below. 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.
We often execute derivatives concurrently with the issuance of consolidated obligation bonds (collectively referred to as swapped consolidated obligation bond transactions) to reduce funding costs or to alter the characteristics of our liabilities to more closely match the characteristics of our assets. At times, we also execute derivatives concurrently with the issuance of consolidated obligation discount notes in order to create synthetic variable rate debt at a cost that is often lower than funding alternatives and comparable variable rate cash instruments issued directly by us. This strategy of issuing consolidated obligations while simultaneously entering into derivatives enables us to more effectively fund our variable rate and short-term fixed rate assets. It also allows us, in some instances, to offer a wider range of advances at more attractive 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.
We purchase interest rate caps with various terms and strike rates to manage embedded interest rate cap risk associated with our variable rate MBS and CMO portfolios. Although these derivatives are valid economic hedges against the option risk of our portfolio of MBS and CMOs, they are not specifically linked to individual investment securities and therefore do not receive fair value hedge accounting. The derivatives are marked to fair value through earnings. We may also use interest rate caps and floors and callable swaps to manage and hedge prepayment and option risk on MBS, CMOs and mortgage loans.
See Item 7A - “Quantitative and Qualitative Disclosures About Market Risk” 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: The Gramm-Leach-Bliley Act (GLB Act) allows us to have two classes of stock, and each class may have sub-classes. Class A Common Stock is conditionally redeemable on six months’ written notice from the member, and Class B Common Stock is conditionally redeemable on five years’ written notice from the member, subject in each case to certain conditions and limitations that may restrict our ability to effectuate such redemptions. Membership is voluntary. However, other than non-member housing associates (see Item 1 - “Business - Advances”), membership is required in order to utilize our credit and mortgage finance products. Members that withdraw may not reapply for membership for five years.
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. Only permanent capital can satisfy our risk-based capital requirement. In addition, the GLB Act specifies a five percent minimum leverage capital requirement based on total FHLBank capital, which includes a 1.5 weighting factor applicable to permanent capital, and a four percent minimum total capital requirement that does not include the 1.5 weighting factor applicable to permanent capital. We may not redeem or repurchase any of our capital stock without 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 the three regulatory capital requirements: risk-based, leverage, and total capital.
Following are key components of our capital plan:
▪Two classes of authorized stock - Class A Common Stock and Class B Common Stock;
▪Both classes have $100 par value per share and both are defined as common stock;
▪Class A Common Stock is required for membership. The membership or asset-based stock requirement for each member is currently 0.1 percent of that member's total assets at the end of the prior calendar year, with a minimum requirement of 10 shares ($1,000) and a cap of 5,000 shares ($500,000);
▪To the extent a member’s asset-based requirement in Class A Common Stock is insufficient to support its calculated activity-based requirement, Class B Common Stock must be purchased in order to support that member’s activities with us. The activity-based stock requirement is the sum of the stock requirements for each activity less the asset-based stock requirement in Class A Common Stock and is calculated whenever a member enters into a transaction as follows:
◦Advances - 4.5 percent of outstanding principal balance (range = 4.0 to 6.0 percent);
◦AMA - 3.0 percent of outstanding principal balance (range = 0.0 to 6.0 percent), limited to a maximum of 3.0 percent of the member's total assets at the end of the prior calendar year (range = 1.0 to 3.0 percent), effective August 5, 2020. The previous requirement was 0.0 percent; and
◦Letters of credit - 0.25 percent of outstanding principal amount (range 0.0 = 1.0 percent), effective January 22, 2021. The previous requirement was 0.0 percent;
▪Excess stock is calculated daily. We may exchange excess Class B Common Stock for Class A Common Stock, but only if we continue to meet our regulatory capital requirements after the exchange;
▪A member may hold excess Class A Common Stock or Class B Common Stock, subject to our right to repurchase excess stock or to exchange excess Class B Common Stock for Class A Common Stock, or may ask to redeem all or part of its excess Class A Common Stock or Class B Common Stock. A member may also ask to exchange all or part of its excess Class A Common Stock or Class B Common Stock for Class B Common Stock or Class A Common Stock, respectively, but all such exchanges are completed at our discretion;
▪As a member increases its activities with us above the amount of activity supported by its asset-based requirement, excess Class A Common Stock is first exchanged for Class B Common Stock to meet the activity requirement prior to the purchase of additional Class B Common Stock;
▪Under the plan, the Board of Directors establishes a dividend parity threshold that is a rate per annum expressed as a positive or negative spread relative to a published reference interest rate index (e.g., Federal funds) or an internally calculated reference interest rate based upon any of our assets or liabilities (e.g., average yield on advances, average cost of consolidated obligations, etc.);
▪Class A Common Stock and Class B Common Stock share in dividends equally up to the dividend parity threshold, then the dividend rate for Class B Common Stock can exceed the rate for Class A Common Stock, but the Class A Common Stock dividend rate can never exceed the Class B Common Stock dividend rate;
▪A member may submit a redemption request to us for any or all of its excess Class A Common Stock and/or Class B Common Stock;
▪Within five business days of receipt of a redemption request for excess Class A Common Stock, we must notify the member if we decline to repurchase the excess Class A Common Stock, at which time the six-month waiting period will apply. Otherwise, we will repurchase any excess Class A Common Stock within five business days, though it is usually repurchased on the same date as the member’s redemption request;
▪Within five business days of receipt of a redemption request for excess Class B Common Stock, we must notify the member if we decline to repurchase the excess Class B Common Stock, at which time the five-year waiting period will apply. Otherwise, we will repurchase any excess Class B Common Stock within five business days, though it is usually repurchased on the same date as the member’s redemption request;
▪A member may cancel or revoke its written redemption request prior to the end of the redemption period (six months for Class A Common Stock and five years for Class B Common Stock) or its written notice of withdrawal from membership prior to the end of a six-month period starting on the date we received the member’s written notice of withdrawal from membership. Our capital plan provides that we will charge the member a cancellation fee in accordance with a schedule where the amount of the fee increases with the passage of time. There is no grace period after the submission of a redemption request during which the member may cancel its redemption request without being charged a cancellation fee; and
▪Each required share of Class A Common Stock and Class B Common Stock is entitled to one vote subject to the statutorily imposed voting caps.
See Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Capital” 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. Our minimum (threshold) level of retained earnings is calculated quarterly and re-evaluated by the Board of Directors as part of each quarterly dividend declaration. The retained earnings threshold includes detailed calculations of five components:
▪Market risk, which is calculated using a value-at-risk (VaR) methodology that implements historically-based stressed scenarios using the parsimonious factorization approach, which uses volatility shocks and option-adjusted spread shocks in addition to rate shocks and is the conditional tail expectation (the risk measure of a loss outside a given probability level) determined by the average of the worst five scenario outcomes. For periods prior to March 31, 2020, market risk was calculated using the percentage change method at a 99 percent confidence level for an 120-business day period (consistent with the market component of our regulatory risk-based capital VaR requirement);
▪Credit risk, which requires that retained earnings be sufficient to credit-enhance all of our assets from their actual rating levels to the equivalent of triple-A ratings (where advances are considered to be triple-A rated);
▪Pre-settlement risk, which is based upon the pre-settlement risk exposure associated with recently issued and unsettled debt issuance and is based on the current daily potential maximum price risk exposure, based on the 99th percentile of daily price risk calculated on the most recent 10 years of daily activity;
▪Operations risk, which is calculated using a combination of: (1) the Basel II basic indicator approach; and (2) the Basel II standardized approach. For periods prior to September 30, 2019, operations risk was calculated using a combination of: (1) the Basel II standardized approach; and (2) our operational risk event loss history, taking into consideration operational loss events reported by the FHLBank System that could impact us in the future; and
▪Net income volatility, which is calculated using: (1) the probability distribution of the net income volatility scenario-based outcomes using the statistical metrics mentioned above and a relative ratio setting of 75 percent; and (2) dividend payment risk, computed as four times the dollar amount of dividends paid at the average overnight Federal funds rate on average stock for the most recent calendar quarter. For periods prior to December 31, 2019, the dividend payment risk subcomponent was computed as four times the dollar amount of dividends paid on all stock (including mandatorily redeemable capital stock) for the most recently paid quarterly dividend.
The retained earnings threshold was considered by the Board of Directors when dividends were declared during the last two years, but the retained earnings threshold calculated in accordance with the RMP did not significantly affect the amount of dividends declared and paid. Tables 5 and 6 reflect the quarterly retained earnings threshold calculations utilized during 2020 and 2019 (in thousands), respectively, compared to the actual amount of retained earnings at the end of each quarter:
Table 5
Retained Earnings Component (based upon prior quarter end) 12/31/2020 09/30/2020 06/30/2020 03/31/2020
Market Risk $ 55,084 $ 159,000 $ 152,095 $ 178,361
Credit Risk 40,996 44,938 58,320 54,226
Pre-settlement Risk 30,000 30,000 30,000 30,000
Operations Risk 43,805 43,805 43,805 44,296
Net Income Volatility 7,393 6,505 40,899 37,285
Total Retained Earnings Threshold 177,278 284,248 325,119 344,168
Actual Retained Earnings as of End of Quarter 1,051,455 1,022,566 996,629 980,612
Overage $ 874,177 $ 738,318 $ 671,510 $ 636,444
Table 6
Retained Earnings Component (based upon prior quarter end) 12/31/2019 09/30/2019 06/30/2019 03/31/2019
Market Risk $ 108,053 $ 107,575 $ 155,131 $ 142,109
Credit Risk 50,732 64,756 50,933 55,035
Pre-settlement Risk 30,000 30,000 30,000 30,000
Operations Risk 44,296 44,296 34,003 31,230
Net Income Volatility 68,525 120,208 150,598 124,285
Total Retained Earnings Threshold 301,606 366,835 420,665 382,659
Actual Retained Earnings as of End of Quarter 999,809 972,948 950,276 942,840
Overage $ 698,203 $ 606,113 $ 529,611 $ 560,181
Under our retained earnings policy, any shortage of actual retained earnings with respect to the retained earnings threshold is to be met over a period generally not to exceed one year from the quarter-end calculation. The policy also provides that meeting the established retained earnings threshold 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. 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.
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.
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
In addition to supporting residential mortgage lending, one of our core missions is to support related housing and community development. We administer and fund a number of targeted programs specifically designed to fulfill that mission. These programs provide housing opportunities for thousands of very low-, low- and moderate-income households and strengthen communities primarily in Colorado, Kansas, Nebraska, and Oklahoma.
Affordable Housing Program: Amounts specified by the AHP requirements described in Item 1 - “Business - Assessments” are reserved for this program. AHP provides cash grants to members to finance the purchase, construction, or rehabilitation of very low-, low-, and moderate-income owner occupied or rental housing. In addition to the competitive AHP program funds, a customized homeownership set-aside program called the Homeownership Set-aside Program (HSP) is offered under the AHP. The HSP provides down payment, closing cost, and purchase-related repair assistance to first-time homebuyers in Colorado, Kansas, Nebraska, and Oklahoma.
Community Investment Cash Advance (CICA) Program: CICA loans to members specifically target underserved markets in both rural and urban areas. CICA loans represented 3.8 percent, 2.8 percent and 3.0 percent of total advances outstanding as of December 31, 2020, 2019, and 2018, respectively. Programs offered during 2020 under the CICA Program, which is not funded through the AHP, include:
▪Community Housing Program (CHP) - CHP makes loans available to members for financing the construction, acquisition, rehabilitation, and refinancing of owner-occupied housing for households whose incomes do not exceed 115 percent of the area’s median income and rental housing occupied by or affordable for households whose incomes do not exceed 115 percent of the area’s median income. For rental projects, at least 51 percent of the units must have tenants that meet the income guidelines, or at least 51 percent of the units must have rents affordable to tenants that meet the income guidelines. We provide advances for CHP-based loans to members at our estimated cost of funds for a comparable maturity plus a mark-up for administrative costs; and
▪Community Development Program (CDP) - CDP provides advances to members to finance CDP-qualified member financing including loans to small businesses, small farms, small agri-business or for community development purposes that meet one of the following criteria: (1) loans to firms that meet the Small Business Administration’s 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, agri-businesses, or projects located in a rural community, neighborhood, Census tract, or unincorporated area with a median income at or below 115 percent of the area median; (4) firms or projects located in a 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.
Competition
Advances: Demand for advances is affected by, among other things, the cost of alternative sources of liquidity available to our members, including deposits from members’ customers and other sources of liquidity that are available to members. Members mostly access alternative funding other than advances through the brokered deposit market and through repurchase agreements with commercial customers. Large members may have broader access to funding through repurchase agreements with investment banks and commercial banks as well as access to the national and global credit markets. While the availability of alternative funding sources to members can influence member demand for advances, the cost of the alternative funding relative to advances is a primary consideration when accessing alternative funding. Other considerations include product availability through FHLBank, 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. In 2020, we began offering advances indexed to SOFR in anticipation of the market-wide transition from LIBOR to SOFR. In 2021, we also began offering an overnight line of credit. 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 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 services offered.
Debt Issuance: We compete with the U.S. government (including debt programs explicitly guaranteed by the U.S. government), U.S. government agencies, Fannie Mae, Freddie Mac, and other GSEs, as well as corporate, sovereign, and supranational entities for funds raised through the issuance of unsecured debt in the national and global capital markets. Collectively, Fannie Mae, Freddie Mac, and the FHLBanks are generally referred to as the housing GSEs, and the cost of the debt of each can be positively or negatively affected by political, financial, or other news that reflects upon any of the three housing GSEs. If the supply of competing debt products increases without a corresponding increase in demand, our debt costs may increase, or less debt may be issued. We compete for the issuance of debt primarily on the basis of rate, term, structure 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: We are supervised and regulated by the FHFA, which is 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 promote their safety and soundness so they serve as a reliable source of liquidity and funding for housing finance and community investment. The FHFA is headed by a Director appointed by the President of the United States for a five-year term, with the advice and consent of the Senate. The Federal Housing Finance Oversight Board advises the Director with respect to overall strategies and policies in carrying out the duties of the Director. The Federal Housing Finance Oversight Board is comprised of the Secretary of the Treasury, Secretary of HUD, Chair of the Securities and Exchange Commission (SEC), and the Director, who serves as the Chairperson of the Federal Housing Finance Oversight Board. 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 annual, comprehensive examinations, as well as periodic reviews. Additionally, we are required to submit monthly information on 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 his or her discretion, to purchase consolidated obligations up to an aggregate principal amount of $4 billion. No borrowings under this authority have been outstanding since 1977. The U.S. Treasury receives the FHFA’s annual report to Congress, monthly reports reflecting securities transactions of the FHLBanks, and other reports reflecting the operations of the FHLBanks.
Audits and Examinations: We have an internal audit department and our Board of Directors has an audit committee. The Chief 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. We must submit annual management reports to Congress, the President of the United States, the Office of Management and Budget, and the Comptroller General. These reports include a statement of financial condition, a statement of operations, a statement of cash flows, a statement of internal accounting and administrative control systems, and the report of the independent public accounting firm on the financial statements.
The Comptroller General has authority under the Bank Act to audit or examine the 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, then he or she must report the results and provide his or her recommendations to Congress, the Office of Management and Budget, and the applicable FHLBank. The Comptroller General may also conduct his or her own audit of any financial statements of any individual FHLBank.
Human Capital Resources
Our workforce is a significant 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, 2020, we had 235 full-time and 4 part-time employees. As of December 31, 2020, approximately 51 percent of our workforce identifies as female and 49 percent identifies as male. As of December 31, 2020, 87 percent are non-minority and 13 percent are minority. Our workforce is leanly staffed, and historically has included 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 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 a diverse and inclusive workforce. As of December 31, 2020, the average tenure of our employees was 10.2 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 and increase shareholder value and provide members a reasonable return on their investment in FHLBank. To effect 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 that includes competitive 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 plans 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 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 educational and development programs; employee engagement opportunities to drive our Employer of Choice vision; and educational assistance programs;
•Work/Life balance - two-thirds paid salary continuation for short-term disability, 100 percent paid parental, military, bereavement, jury duty and court appearances leave. Flexible scheduling and teleworking options;
•Management succession planning - our board and leadership actively engage in management succession planning, with a defined plan for our Executive Team, which is reviewed and adjusted annually, to help ensure the smooth transition of operations in the event of an unplanned or planned absence of executives, designed to help assure the replacement executives are fully qualified to assume responsibility for ongoing operations;
•Our Performance Management framework includes planned quarterly, documented discussions coordinated between manager and employee. At the start of every quarter, managers and employees are asked to 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; and
•We are committed to the health, safety and wellness of our employees. In response to the COVID-19 pandemic, we implemented significant operating environment changes, safety protocols and procedures that we believe are in the best interest of our employees and members, and which are designed to comply with government regulations. This includes having a significant portion of our employees work remotely, while implementing additional safety measures for employees continuing critical on-site work.
Diversity, Equity and Inclusion: Diversity, Equity and Inclusion (DEI) is a strategic business priority for us. Our DEI officer is a member of the senior leadership team, reports to our sole Executive Vice President 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 in order to optimize success; and inclusion helps us to leverage the unique perspectives of all employees to help ensure optimal decision-making and strengthen our retention efforts. We operationalize our commitment through the development and execution of a three-year DEI strategic plan that includes quantifiable metrics to measure its 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 Inclusion, Diversity, and Equity Advisory council. We consider learning an important component of our DEI 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 DEI as a key component of our incentive plan framework to attempt to ensure 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 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
FHFA Final Rule on FHLBank Housing Goals Amendments. On June 25, 2020, the FHFA published a final rule, effective August 24, 2020, amending the FHLBank housing goals regulation. Enforcement of the final rule will phase in over three years. The final rule replaces the four existing retrospective housing goals with a single prospective mortgage purchase housing goal target in which 20 percent of AMA mortgages purchased in a year must be comprised of loans to low-income or very low-income families, or to families in low-income areas. The final rule also establishes a separate small member participation housing goal with a target level in which 50 percent of the members selling AMA loans in a calendar year must be small members. The final rule provides that an FHLBank may request FHFA approval of alternative target levels for either or both of the goals. The final rule also establishes that housing goals apply to each FHLBank that acquires any AMA mortgages during a year, eliminating the existing $2.5 billion volume threshold that previously triggered the application of housing goals for each FHLBank.
We do not believe these changes will have a material effect on our financial condition or results of operations.
FHFA Final Rule on Stress Testing. On March 24, 2020, the FHFA published a final rule, effective upon issuance, to amend its stress testing rule, consistent with section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (EGRRCPA). The final rule: (1) raises the minimum threshold for entities regulated by the FHFA to conduct periodic stress tests from $10 billion to $250 billion or more in total consolidated assets; (2) removes the requirements for FHLBanks to conduct stress testing; and (3) removes the adverse scenario from the list of required scenarios. FHLBanks are currently excluded from this regulation because no FHLBank has total consolidated assets over $250 billion, but the FHFA reserved its discretion to require an FHLBank with total consolidated assets below the $250 billion threshold to conduct stress testing. These amendments align the FHFA’s stress testing rule with rules adopted by other financial institution regulators that implement the Dodd-Frank Act stress testing requirements, as amended by EGRRCPA.
This rule eliminates these stress testing requirements for us, unless the FHFA exercises its discretion to require stress testing in the future. We do not expect this rule to have a material effect on our financial condition or results of operations.
Margin and Capital Requirements for Covered Swap Entities. On July 1, 2020, the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), the Farm Credit Administration, and the FHFA (collectively, Prudential Banking Regulators) jointly published a final rule, effective August 31, 2020, amending regulations that established minimum margin and capital requirements for uncleared swaps for covered swap entities under the jurisdiction of the Prudential Banking Regulators (Prudential Margin Rules). In addition to other changes, the final rule: (1) allows swaps entered into by a covered swap entity prior to an applicable compliance date to retain their legacy status and not become subject to the Prudential Margin Rules in the event that the legacy swaps are amended to replace an interbank offered rate (such as LIBOR) or other discontinued rate, or due to other technical amendments, notional reductions or portfolio compression exercises; (2) introduces a new Phase 6 compliance date for initial margin requirements for covered swap entities and their counterparties with an average daily aggregate notional amount (AANA) of uncleared swaps from $8 billion to $50 billion; and (3) clarifies that initial margin trading documentation does not need to be executed prior to the parties becoming obligated to exchange initial margin.
On the same date, the Prudential Banking Regulators published an interim final rule, effective September 1, 2020, extending the initial margin compliance date for Phase 6 counterparties to September 1, 2022. On November 9, 2020, the Commodity Futures Trading Commission (CFTC) published a final rule extending the initial margin compliance date for Phase 6 counterparties to September 1, 2022, thereby aligning with the Prudential Banking Regulators.
Further, on January 5, 2021, the CFTC published a final rule, effective February 4, 2021, that primarily amends the minimum margin and capital requirements for uncleared swaps under the jurisdiction of the CFTC (CFTC Margin Rules) by requiring covered entities to use a revised AANA calculation starting on September 1, 2022. The amendments, among other things, require entities subject to the CFTC’s jurisdiction to calculate the AANA for uncleared swaps during March, April and May of the current year, based on an average of month-end dates, as opposed to the previous requirement which required the calculation of AANA during June, July and August of the prior year, based on daily calculations. Parties would continue to be expected to exchange initial margin based on the AANA totals as of September 1 of the current year. These amendments align with the recommendation of the Basel Committee on Banking Supervision and Board of the International Organization of Securities Commissions. Separately, on January 25, 2021, the CFTC published a final rule, effective February 24, 2021, that amends the CFTC Margin Rules to permit, among other changes, covered swap entities to maintain separate minimum transfer amounts for initial and variation margin for each swap counterparty, provided the combined minimum transfer amount does not exceed $500,000.
We do not expect these rules to have a material effect on our financial condition or results of operations.
FDIC Brokered Deposits Restrictions. On January 22, 2021, the FDIC published a final rule, effective April 1, 2021, that amends its brokered deposits regulations that apply to less than well-capitalized insured depository institutions. The FDIC stated that the amendments are intended to modernize and clarify the FDIC’s brokered deposit regulations and they establish a new framework for analyzing the deposit broker definition, which determines whether deposits placed through deposit placement arrangements qualify as brokered deposits. These deposit placement arrangements include those between insured depository institutions and third parties, such as financial technology companies, for a variety of business purposes, including access to deposits. The amendments to the FDIC’s brokered deposit regulations, among other things, clarify what it means to be engaged in the business of facilitating the placement of deposits and expand the scope of the primary purpose exception. The rule amendments are expected to have the effect of narrowing the definition of deposit broker and excluding more deposits from treatment as brokered deposits. The amendments also establish an application and reporting process with respect to the primary purpose exception for businesses that do not meet one of several bright-line tests, and they affirm the FDIC’s position that the brokering of certificates of deposit constitutes deposit brokering.
This rule may have an effect on member demand for certain advances but we cannot predict the extent of the impact, although we do not expect this rule to materially affect our financial condition or results of operations.
FHFA Advisory Bulletin 2020-01 Federal Home Loan Bank Risk Management of AMA Risk Management. On January 31, 2020, the FHFA released guidance on risk management of AMA. The guidance communicates the FHFA’s expectations with respect to an FHLBank’s funding of its members through the purchase of eligible mortgage loans and includes expectations that an FHLBank will have board-established limits on AMA portfolios and management-established thresholds to serve as monitoring tools to manage AMA-related risk exposure. The guidance provides that the board of an FHLBank should ensure that it serves as a liquidity source for members, and an FHLBank should ensure that its portfolio limits do not result in that FHLBank’s acquisition of mortgages from smaller members being “crowded out” by the acquisition of mortgages from larger members. The advisory bulletin contains the expectation that the board of an FHLBank should set limits on the size and growth of portfolios and on acquisitions from a single PFI. In addition, the guidance provides that the board of an FHLBank should consider concentration risk in the areas of geographic area, high-balance loans, and in third-party loan originations.
We have revised policies to enhance monitoring and do not expect this advisory bulletin to have a material effect on our financial condition or results of operations.
United States Department of Treasury (Treasury) and Fannie Mae Preferred Stock Purchase Agreement Amendment. On January 14, 2021, Treasury and Fannie Mae entered into a letter agreement amending the terms of their Preferred Stock Purchase Agreement (PSPA), which could impact PFIs that participate in the MPF Program’s MPF Xtra product (where MPF loans acquired are concurrently sold to Fannie Mae). Under the PSPA, Treasury provides liquidity to Fannie Mae in exchange for senior preferred stock. Under the recent PSPA amendment, effective January 1, 2022, the FHFA (acting as conservator for Fannie Mae) and Treasury agreed to limit the dollar volume of loans Fannie Mae could purchase from a single seller through Fannie Mae’s cash window to $1.5 billion per year. As administrator of the MPF Program, the FHLBank of Chicago purchases MPF Xtra loans from PFIs and sells them to Fannie Mae via the cash window process. Based on volumes for the MPF Xtra product program-wide in 2020, the PSPA amendment would significantly curtail MPF Xtra cash window sales. Although this may negatively impact the volume of loans sold through the MPF Program unless a solution is developed, we do not currently expect it to have a material effect on our financial condition or results of operations.
LIBOR Transition
FHFA Supervisory Letter - Planning for LIBOR Phase-Out. On September 27, 2019, the FHFA issued a Supervisory Letter (LIBOR Supervisory Letter) to the FHLBanks that the FHFA stated is designed to ensure the FHLBanks will be able to identify and prudently manage the risks associated with the termination of LIBOR in a safe and sound manner. The LIBOR Supervisory Letter provided that the FHLBanks should, by March 31, 2020, cease entering into new LIBOR referenced financial assets, liabilities, and derivatives with maturities beyond December 31, 2021 for all product types except investments. With respect to investments, the FHLBanks were required, by December 31, 2019, to stop purchasing investments that reference LIBOR and mature after December 31, 2021. These phase-out dates do not apply to collateral accepted by the FHLBanks. The LIBOR Supervisory Letter also directed the FHLBanks to update their pledged collateral certification reporting requirements by March 31, 2020, in an effort to encourage members to distinguish LIBOR-linked collateral maturing after December 31, 2021. The FHLBanks were expected to cease entering into LIBOR-indexed financial instruments maturing after December 31, 2021 by the deadlines specified in the LIBOR Supervisory Letter, subject to limited exceptions granted by the FHFA for LIBOR-linked products serving compelling mission, risk mitigating, and/or hedging purposes that do not currently have readily available alternatives. We have already ceased purchasing investments that reference LIBOR and mature after December 31, 2021.
As a result of the market volatility experienced during 2020 due in part to the COVID-19 pandemic, the FHFA extended the FHLBanks’ authority to enter into LIBOR-based instruments that mature after December 31, 2021 from March 31, 2020 to June 30, 2020, except for investments and option embedded products. In addition, the FHFA extended the requirement to update pledged collateral certification reporting requirements from March 31, 2020 to September 30, 2020.
We continue to evaluate the potential impact of the LIBOR Supervisory Letter and the related subsequent guidance on our financial condition and results of operations, but we may experience lower overall demand or increased costs for our advances, which in turn may negatively impact the future composition of our balance sheet, capital stock levels, Primary Mission Asset ratio, net income and dividend.
LIBOR Transition - ISDA 2020 Interbank Offered Rate (IBOR) Fallbacks Protocol and Supplement to the 2006 ISDA Definitions. On October 23, 2020, the International Swaps and Derivatives Association, Inc. (ISDA), published a Supplement to the 2006 ISDA Definitions (Supplement) and the ISDA 2020 IBOR Fallbacks Protocol (Protocol). Both the Supplement and the Protocol took effect on January 25, 2021. On that date, to the extent we and our counterparty have adhered to the Protocol, then all legacy bilateral derivative transactions subject to Protocol-covered agreements (including ISDA agreements) that incorporate certain covered ISDA definitional booklets and reference a covered IBOR, including U.S. Dollar LIBOR, were effectively amended to apply the new ISDA-recommended IBOR fallbacks in the event of the relevant IBOR’s cessation. To the extent our counterparties do not adhere to the Protocol, then it will be necessary to bilaterally amend legacy covered agreements (including ISDA agreements) to address LIBOR fallbacks. The Protocol will remain open for adherence after the effective date. As of January 25, 2021, all new derivative contracts are subject to the relevant IBOR fallbacks set forth in the Supplement.
On October 21, 2020, the FHFA issued a Supervisory Letter to the FHLBanks that required each FHLBank to adhere to the Protocol by December 31, 2020, and to the extent necessary, to amend any bilateral agreements regarding the adoption of the Protocol by December 15, 2020. We adhered to the Protocol on October 22, 2020, and all of our counterparties have adhered to the Protocol. For a discussion of the potential impact of the LIBOR transition, refer to Item 7 - "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk Management” and Item 1A - "Risk Factors.”
FHLBank Membership Request for Input. On February 24, 2020, the FHFA issued a Request for Input on FHLBank membership (the Membership RFI). The Membership RFI, as part of a holistic review of FHLBank membership, seeks public input on whether the FHFA’s existing regulation on FHLBank membership, located at 12 CFR part 1263, remains adequate to ensure: (1) the FHLBank System remains safe and sound and able to provide liquidity to members in a variety of conditions; and (2) the advancement of the FHLBanks’ housing finance and community development mission. The FHFA sought input on several broad questions relating to FHLBank membership requirements, as well as on certain more specific questions related to the implementation of the current membership regulation. Responses were due on June 23, 2020.
While it is uncertain what actions, if any, the FHFA will take as a result of the responses received from the Membership RFI, any rulemaking actions to update the current FHLBank membership regulation may impact FHLBank membership eligibility or requirements, and ultimately our business, business opportunities, and results of operations.
Legislative and Regulatory Developments Related to the COVID-19 Pandemic.
FHFA Supervisory Letter - Paycheck Protection Program (PPP) Loans as Collateral for FHLBank Advances. On April 23, 2020, the FHFA issued a Supervisory Letter (PPP Supervisory Letter) permitting the FHLBanks to accept PPP loans as collateral for advances as “Agency Securities,” given the Small Business Administration’s (SBA) 100 percent guarantee of the unpaid principal balance. On April 20, 2020, the SBA published its third interim final rule related to PPP loans, which explicitly waived certain regulatory requirements that must be satisfied before a member could pledge PPP loans to the FHLBanks as collateral. The PPP Supervisory Letter establishes a series of conditions under which the FHLBanks may accept PPP loans as collateral, which conditions focus on the financial condition of members, collateral discounts, and pledge dollar limits.
On December 27, 2020, the President signed into law an extension of the PPP until March 31, 2021. The April 23, 2020 Supervisory Letter from the FHFA allowing FHLBanks to accept PPP loans as collateral remains in effect.
CARES Act. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27, 2020. The $2.2 trillion package was the largest stimulus bill in U.S. history. The CARES Act is in addition to previous relief legislation passed by Congress in March 2020. The legislation provides the following:
•Assistance to businesses, states, and municipalities;
•Creates a loan program for small businesses, non-profits and physician practices that can be forgiven through employee retention incentives;
•Provides the Treasury Secretary authority to make loans or loan guarantees to states, municipalities, and eligible businesses and loosens some regulations imposed through the Dodd-Frank Act;
•Direct payments to eligible taxpayers and their families;
•Expands eligibility for unemployment insurance and payment amounts; and
•Includes mortgage forbearance provisions and a foreclosure moratorium.
Funding for the PPP, which was created by the CARES Act, was increased with the enactment of subsequent laws, most recently by the Consolidated Appropriations Act, 2021, on December 27, 2020. While some provisions of the CARES Act have expired, others have been extended by regulatory and legislative action. Additional phases of the CARES Act or other COVID-19 pandemic relief legislation may be enacted by Congress. We continue to evaluate the potential impact of such legislation on our business, including its continued impact to the U.S. economy; impacts to mortgages held or serviced by our members and that we accept as collateral; and the impacts on our MPF Program.
Additional COVID-19 Presidential, Legislative and Regulatory Developments. In light of the COVID-19 pandemic, former President Trump and President Biden, through executive orders; governmental agencies, including the SEC, OCC, Federal Reserve, FDIC, National Credit Union Administration, CFTC and the FHFA; and state governments and agencies, have taken, and may continue to take, actions to provide various forms of relief from, and guidance regarding, the financial, operational, credit, market, and other effects of the COVID-19 pandemic, some of which may have a direct or indirect impact on us or our members. Many of these actions are temporary in nature. We continue to monitor these actions and guidance as they evolve and to evaluate their potential impact on us.

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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 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, which could adversely affect our financial condition, results of operations, and ability to pay dividends. An economic recession over a prolonged period or other unfavorable economic conditions in our region (including on a state or local level) 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.
A natural disaster in the FHLBank’s region could adversely affect our profitability and financial condition. Portions of our region are subject to risks from tornadoes, floods, or other natural disasters. These natural disasters, including those resulting from significant climate changes, could damage or dislocate the facilities of our members, may damage or destroy collateral that members have pledged to secure advances or mortgages, or 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.
The impact of the COVID-19 pandemic on our members and our business has and is expected to continue to adversely affect our profitability and financial condition. As of the date of the filing of this report, the full effects of the COVID-19 pandemic are evolving and not fully known. The COVID-19 pandemic has to date caused significant economic and financial turmoil both in the U.S. and around the world. These conditions are expected to continue in the near term. Many businesses in our district and across the U.S. have been forced to suspend operations due to state and municipal restrictions imposed as a result of the COVID-19 pandemic. Ultimately, the significant slowdown in economic activity caused by the COVID-19 pandemic could continue to reduce loan demand at our member institutions, which could impact members’ demand for our products and services. It could also lead to a devaluation of our assets and/or the collateral pledged by our members to secure advances and other extensions of credit, all of which have had and could continue to have an adverse impact on our financial condition and results of operations, including as a result of reduced business volumes, reduced income or increased credit losses.
Our ability to obtain funds through the issuance of consolidated obligations depends in part on prevailing conditions in the capital markets (including investor demand), such as the effects of any reduced liquidity in financial markets, which are beyond our control. Volatility in the capital markets caused by the COVID-19 pandemic has impacted demand for FHLBank debt and the cost of the debt the FHLBanks issue, which could impact our liquidity and profitability. Our business and results of operations are affected by the fiscal and monetary policies of the U.S. government, foreign governments and their agencies. As stated previously, the Federal Reserve’s policies directly and indirectly influence the yield on our interest-earning assets and the cost of our interest-bearing liabilities. In response to COVID-19, the Federal Open Market Committee (FOMC) lowered the target range for Federal funds to a target range of zero to 0.25 percent. The outlook for 2021 is uncertain, and there is a possibility that the FOMC may keep interest rates low or use other policies if economic conditions warrant, each of which could further impact the efficiency of our asset and liability management activities and continue to negatively affect our financial condition and results of operations.
Most of our employees have been working remotely since March of 2020. Management began bringing employees back to work in our offices in August but returned to a predominantly remote workforce as infection rates began trending upward in November. With most of our employees working remotely, we could face operational difficulties or disruptions that could impair our ability to conduct and manage our business effectively. In addition, some of our employees, executive management team, or board of directors could become infected with the COVID-19 virus which, depending upon the number and the severity of their cases, could similarly affect our ability to conduct and manage our business effectively. Further, over time, remote operations may decrease the cohesiveness of our teams and our ability to maintain our culture, both of which are critical to our success. Counterparties, vendors and other third parties upon which we rely to conduct our business could be adversely impacted by the COVID-19 pandemic which could, in turn, lead to operational challenges for us. These potential difficulties, disruptions and challenges could increase the likelihood that our financial condition and results of operations could be impacted.
Significant borrower defaults on loans made by our members could occur as a result of reduced economic activity and these defaults could cause members to fail. We could be adversely impacted by the reduction in business volume that could arise from the failure of one or more of our members. Further, counterparty default, whether as a result of the operational or financial impacts of the COVID-19 pandemic, could adversely impact our financial condition and results of operations.
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 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 as a result of the Recovery Act, the Dodd-Frank Act and other significant legislation. 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. We cannot predict the effect of any new regulations or other regulatory guidance on our operations. Changes in regulatory requirements could result in, among other things, an increase in our cost of funding or overall cost of doing business, or a decrease in the size, scope or nature of our membership base, 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, 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.
We cannot predict whether new regulatory or other requirements will be promulgated by the FHFA or other regulatory agencies, or whether Congress will enact new legislation, and we cannot predict the effect of any new regulatory requirements or legislation on our operations. Changes in regulatory, statutory or other requirements could result in, among other things, an increase in our cost of funding and the cost of operating our business, a change in our permissible business activities, or a decrease in the size, scope or nature of our membership or our lending, investment or mortgage loan activities, which could negatively affect our financial condition and results of operations.
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, in order to compete more effectively with competitive funding sources, may decrease our profitability on advances. A decrease in the demand for our advances or a decrease in our profitability on advances, would negatively affect our financial condition and results of operations.
Likewise, our acquisition of mortgage loans is subject to competition. The most direct competition for purchases of mortgage loans comes from other buyers of conventional, conforming, fixed rate mortgage loans, such as Fannie Mae and Freddie Mac. Increased competition can result in the acquisition of a smaller market share of the mortgage loans available for purchase and, therefore, lower income from this business activity.
We also compete in the capital markets with Fannie Mae, Freddie Mac, and other GSEs, as well as corporate, sovereign, and supranational entities for funds raised through the issuance of consolidated obligations and other debt instruments. Our ability to obtain funds through the issuance of debt depends in part on prevailing market conditions in the capital markets (including investor demand), such as effects on the reduction in liquidity in financial markets, which are beyond our control. Accordingly, we may not be able to obtain funding on terms that are acceptable to us. Increases in the supply of competing debt products in the capital markets may, in the absence of increases in demand, result in higher debt costs to us or lesser amounts of debt issued at the same cost than otherwise would be the case. Although our supply of funds through issuance of consolidated obligations has always kept pace with our funding needs, we cannot guarantee that this will continue in the future, especially in the case of financial market disruptions when the demand for advances by our members typically increases.
Member mergers or consolidations, failures, 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 26) 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 28, 2021, we are rated Aaa with a stable outlook by Moody’s and AA+ with a stable outlook by S&P. Adverse revisions to or the withdrawal of our credit ratings could adversely affect us in a number of ways. It 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 28, 2021, the consolidated obligations of the FHLBanks are rated Aaa/P-1 by Moody’s and AA+/A-1+ by S&P. All of the FHLBanks are rated Aaa with a stable outlook by Moody’s and AA+ with a stable outlook by S&P. Changes in the credit standing or credit ratings of one or more of the other FHLBanks could result in a revision or withdrawal of the ratings of the consolidated obligations by the rating agencies at any time, which may negatively affect our cost of funds and our ability to issue consolidated obligations for our benefit.
We may become liable for all or a portion of the consolidated obligations of one or more of the other FHLBanks. We are jointly and severally liable with the other FHLBanks for all consolidated obligations issued on behalf of all FHLBanks through the Office of Finance. We cannot pay any dividends to members or redeem or repurchase any shares of our capital stock unless the principal and interest due on all our consolidated obligations have been paid in full. If another FHLBank were to default on its obligation to pay principal or interest on any consolidated obligation, the 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, the majority of which are located within the United States, Canada, Australia, and Europe. Our primary exposures to institutional counterparty risk are with: (1) obligations of mortgage servicers that service the loans we have as collateral on our credit obligations; (2) third-party providers of credit enhancements on the MBS that we hold in our investment portfolio, including mortgage insurers, bond insurers, and financial guarantors; (3) third-party providers of 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 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. 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 additional regulation following the financial crisis that began in 2008. These regulations could alter the balance sheet composition, market activities, and behavior of our counterparties in a way that could be detrimental to our access to the capital markets and overall financial market liquidity, which could have a negative impact on our funding costs and results of operations. Further, we rely on the Office of Finance for the issuance of consolidated obligations, and a failure or interruption of services provided by the Office of Finance could hinder our ability to access the capital markets. Accordingly, we cannot make any assurance that we will be able to obtain funding on terms acceptable to us in the future, if we are able to obtain funding at all in the case of future severe financial, economic, 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. Given the unpredictability of the financial markets, capturing all potential outcomes in these analyses is extremely difficult. 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 advances 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. 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.
Our business, results of operations and financial condition could be adversely impacted by the replacement of the LIBOR benchmark interest rate. We are evaluating the potential impact of the replacement of the LIBOR benchmark interest rate, including the likelihood of SOFR prevailing as the most widely adopted replacement reference rate. The market transition away from LIBOR is expected to be gradual and complicated, including the development of term and credit adjustments to accommodate differences between LIBOR, an unsecured rate, and SOFR, a secured rate. Introduction of an alternative reference rate also may introduce additional basis risk for market participants as an alternative index is utilized along with LIBOR. There can be no guarantee that SOFR will become widely used and that other alternative reference rates may or may not be developed with additional complications. We are not able to predict whether SOFR will become a widely accepted reference rate in place of LIBOR, or what the precise impact of a possible transition to SOFR or another alternate replacement reference rate will have on our business, financial condition, or results of operations. The Financial Conduct Authority (FCA) recently announced that the publication of LIBOR on a representative basis will cease for one-week and two-month LIBOR immediately after December 31, 2021, and the remaining LIBOR tenors immediately after June 30, 2023, but we are unable to predict if LIBOR will continue to be a viable index despite the extension of the LIBOR sunset date for certain tenors. The upcoming discontinuance of LIBOR and transition to SOFR or an alternative reference rate could adversely impact existing financial assets and liabilities indexed to LIBOR, including the effectiveness of existing hedging transactions, which could have an adverse impact on our business, financial condition, and results of operations.
For additional information on our LIBOR transition efforts and LIBOR exposure, see “Risk Management - Interest Rate Risk Management” under Item 7.
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. The cost of entering into derivative instruments has increased as a result of: (1) consolidations, mergers and bankruptcy or insolvency of financial institutions, which have led to fewer counterparties, resulting in less liquidity in the derivatives market; and (2) increased uncertainty related to the potential changes in legislation and regulations regarding over-the-counter derivatives including increased margin and capital requirements, and increased regulatory costs and transaction fees associated with clearing and custodial arrangements. If we are unable to manage our hedging positions properly, or are unable to enter into derivative hedging instruments on desirable terms or at all, we may incur higher funding costs, be required to limit certain advance product offerings, and be unable to effectively manage our interest rate risk and other risks, which could negatively affect our financial condition and results of operations.
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 disruptions in access to the FHLBank debt markets in response to a rise in capital market volatility. Our efforts to manage our liquidity position, including carrying out our contingency 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 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 cyber attacks, 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, 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 cyber attacks, 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. A failure to maintain current technology, systems, and facilities or an operational failure or interruption could significantly harm our customer relations, risk management, and profitability, which could negatively affect our financial condition and results of operations.
For additional information on information system and security threats, see “Risk Management - Operations Risk Management” under Item 7.
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 may be unable to retain key management or to attract other highly qualified 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.

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

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ITEM 2. PROPERTIES
Item 2: Properties
We own our primary facility located at 500 SW Wanamaker Road, Topeka, Kansas.

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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.

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

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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 28, 2021, we had 698 stockholders of record and 3,606,724 shares of Class A Common Stock and 11,925,008 shares of Class B Common Stock outstanding, including 9,644 shares of Class A Common Stock and 6,250 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 were able to manage our excess capital stock position in the past two years in order to pay stock dividends.
Due to the decline in short-term interest rates in recent periods, stock dividends on Class A Common Stock and Class B Common Stock will likely be lower in 2021 than what was paid in 2020. Historically, dividend levels have been influenced by several factors, including the following objectives: (1) moving dividend rates gradually over time; (2) having dividends reflective of the level of current short-term interest rates; and (3) managing the balance of retained earnings to appropriate levels as set forth in the retained earnings policy. See Item 1 - “Business - Capital, Capital Rules and Dividends” for more information regarding our retained earnings policy, and also see Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Capital” for a discussion of restrictions on dividend payments in the form of capital stock.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6: Selected Financial Data
Table 7 presents Selected Financial Data for the periods indicated (dollar amounts in thousands):
Table 7
12/31/2020 12/31/2019 12/31/2018 12/31/2017 12/31/2016
Statement of Condition (as of period end):
Total assets $ 52,591,712 $ 63,276,654 $ 47,715,256 $ 48,076,605 $ 45,216,749
Investments1
17,251,975 20,086,473 10,305,382 13,998,599 13,609,653
Advances 21,226,823 30,241,315 28,730,113 26,295,849 23,985,835
Mortgage loans, net2
9,205,207 10,633,009 8,410,462 7,286,397 6,640,725
Total liabilities 49,923,945 60,485,603 45,261,004 45,570,502 43,254,301
Deposits 1,229,361 790,640 473,820 461,769 598,931
Consolidated obligation discount notes, net3
10,882,417 27,447,911 20,608,332 20,420,651 21,775,341
Consolidated obligation bonds, net3
37,648,077 32,013,314 23,966,394 24,514,468 20,722,335
Total consolidated obligations, net3
48,530,494 59,461,225 44,574,726 44,935,119 42,497,676
Mandatorily redeemable capital stock 1,624 2,415 3,597 5,312 2,670
Total capital 2,667,767 2,791,051 2,454,252 2,506,103 1,962,448
Capital stock 1,574,004 1,766,456 1,524,537 1,640,039 1,226,675
Total retained earnings 1,051,455 999,809 914,022 840,406 735,196
Accumulated other comprehensive income (loss) (AOCI) 42,308 24,786 15,693 25,658 577
Statement of Income (for the year ended):
Net interest income 251,012 256,064 271,197 270,008 257,184
Provision (reversal) for credit losses on mortgage loans (716) 387 27 (186) (109)
Other income (loss) (40,148) 22,973 (12,847) 15,987 (13,830)
Other expenses 80,407 72,816 69,108 67,036 63,706
Income before assessments 131,173 205,834 189,215 219,145 179,757
AHP 13,123 20,597 18,944 21,934 17,984
Net income 118,050 185,237 170,271 197,211 161,773
Selected Financial Ratios and Other Financial Data (for the year ended):
Dividends paid in cash4
273 281 399 267 291
Dividends paid in stock4
70,551 99,169 96,256 91,734 78,068
Weighted average dividend rate5
4.38 % 6.46 % 6.13 % 5.77 % 5.29 %
Dividend payout ratio6
59.99 % 53.69 % 56.77 % 46.65 % 48.44 %
Return on average equity 4.50 % 7.32 % 6.82 % 8.18 % 7.45 %
Return on average assets 0.21 % 0.33 % 0.31 % 0.37 % 0.33 %
Average equity to average assets 4.59 % 4.45 % 4.62 % 4.55 % 4.47 %
Net interest margin7
0.44 % 0.45 % 0.50 % 0.51 % 0.53 %
Total capital ratio8
5.07 % 4.41 % 5.14 % 5.21 % 4.34 %
Regulatory capital ratio9
5.00 % 4.38 % 5.12 % 5.17 % 4.34 %
1 Includes trading securities, available-for-sale securities, held-to-maturity securities, interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold.
2 The allowance for credit losses on mortgage loans was $5,177,000, $985,000, $812,000, $1,208,000, and $1,674,000 as of December 31, 2020, 2019, 2018, 2017, and 2016, respectively. Effective January 1, 2020, new accounting guidance was adopted relating to the measurement of credit losses on financial instruments and resulted in a cumulative effect adjustment of $6,123,000.
3 Consolidated obligations are bonds and discount notes that we are primarily liable to repay. See Note 16 to the financial statements for a description of the total consolidated obligations of all FHLBanks for which we are jointly and severally liable.
4 Dividends reclassified as interest expense on mandatorily redeemable capital stock and not included as dividends recorded in accordance with GAAP were $59,000, $139,000, $229,000, $195,000, and $79,000 for the years ended December 31, 2020, 2019, 2018, 2017, and 2016, respectively.
5 Dividends paid in cash and stock on both classes of stock as a percentage of average capital stock eligible for dividends.
6 Ratio disclosed represents dividends declared and paid during the year as a percentage of net income for the period presented, although the FHFA regulation requires dividends be paid out of known income prior to declaration date.
7 Net interest income as a percentage of average earning assets.
8 GAAP capital stock, which excludes mandatorily redeemable capital stock, plus retained earnings and AOCI as a percentage of total assets.
9 Regulatory capital (i.e., permanent capital and Class A Common Stock) as a percentage of total assets.

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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 - 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 2019 Annual Report on Form 10-K for our MD&A for the fiscal year 2019 compared to fiscal year 2018.
Executive Level Overview
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. The FHLBanks, together with the Office of Finance, a joint office of the FHLBanks, make up the FHLBank System, which consists of 11 district FHLBanks. As independent, member-owned cooperatives, the FHLBanks seek to maintain a balance between their public purpose and their ability to provide adequate returns on the capital supplied by their members. The FHLBanks are supervised and regulated by the FHFA, an independent agency in the executive branch of the U.S. government. The FHFA’s mission is to ensure that the housing GSEs operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment.
Our primary funding source is consolidated obligations issued through the Office of Finance that facilitates the issuance and servicing of the consolidated obligations. The FHFA and the U.S. Secretary of the Treasury oversee the issuance of FHLBank debt. Consolidated obligations are debt instruments that constitute the joint and several obligations of all FHLBanks. Although consolidated obligations are not obligations of, nor guaranteed by, the U.S. government, the capital markets have traditionally viewed the FHLBanks’ consolidated obligations as “Federal agency” debt. As a result, the FHLBanks have historically had ready access to funding at relatively favorable spreads to U.S. Treasuries. Additional funds are provided by deposits (received from both member and non-member financial institutions), other borrowings, and the issuance of capital stock.
We serve eligible financial institutions in Colorado, Kansas, Nebraska, and Oklahoma (collectively, the Tenth District of the FHLBank System), who are also the member-owners of FHLBank. Initially, a member is required to purchase shares of Class A Common Stock based on the member’s total assets subject to a per member cap of $500,000. Each member may be required to purchase activity-based capital stock (Class B Common Stock) as it engages in certain business activities with FHLBank, including advances, AMA and letters of credit, at levels determined by management with the board of director’s approval and within the ranges stipulated in our Capital Plan. Our Advances activity-based stock requirement is 4.5 percent of the outstanding principal balance of advances. On July 23, 2020, FHLBank's board of directors changed the established AMA activity-based stock purchase requirement to three percent of the outstanding principal balance of AMA originated by or through that member and acquired by FHLBank from zero percent pursuant to its Capital Plan, effective as of August 5, 2020. The purchase requirement had been suspended for current members since July 2013. Former 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. The board of directors also established a Letters of Credit activity-based stock purchase requirement pursuant to its Capital Plan, effective as of January 22, 2021 at one quarter of one percent of the principal amount of letters of credit outstanding from the previous requirement of zero percent. Our capital increases when members are required to purchase additional capital stock in the form of Class B Common Stock to support an increase in their advance borrowings, AMA balances, or letters of credit activity. For additional discussion of these changes to capital requirements, see "Liquidity and Capital Resources - Capital" under this Item 2.
At our discretion, we may repurchase excess stock resulting from a decline in a member’s advances, AMA or letters of credit activities. We believe it is important to manage our business and the associated risks so that we strive to provide franchise value by maintaining a core mission asset focus and meeting the following objectives: (1) achieve our liquidity, housing finance and community development missions by meeting member credit needs by offering advances, supporting residential mortgage lending through the MPF Program and through other products; (2) periodically repurchase excess capital stock in order to appropriately manage the size of our balance sheet; and (3) pay acceptable dividends.
The COVID-19 pandemic continued to impact financial markets at the end of 2020, as interest rates remained at historically low levels and financial institutions continued to experience high levels of liquidity resulting from economic stimulus payments passed by Congress along with the Federal Reserve Bank’s easing of monetary policy, security purchase programs, and newly created lending facilities in response to the COVID-19 pandemic. The surge of COVID-19 infections, deaths, and associated restrictions at the end of 2020 generally slowed economic momentum that had been building during the second and third quarters of 2020, but we believe optimism surrounding vaccinations and the new administration's focus on pandemic response and relief has bolstered the stock market and other measures of consumer confidence in the first quarter of 2021. Pent-up consumer demand resulting from the pandemic is expected to accelerate economic recovery during the last half of 2021, as vaccination rates are anticipated to be high enough to lift COVID-related restrictions and give citizens the ability to resume pre-pandemic activities. Some businesses are projected to bring their workforce back onsite by early summer of 2021. Most of our employees have been working remotely since March of 2020. Management began bringing employees back to work in our offices in August 2020 but returned to a predominantly remote workforce as infection rates began trending upward in late November and early December 2020. We continue to conduct business without operational difficulties or disruptions despite the ongoing COVID-19 pandemic. We expect to continue the majority of our operations remotely until infection rates begin a significant downward trend, but began bringing employees back voluntarily and in phases beginning in March 2021.
During the second quarter of 2020, we provided $0.6 billion of zero-cost funding and $0.5 billion of low-cost funding to help members serve their customers affected by the COVID-19 pandemic. In March 2020, we also began accepting collateral modified by forbearance plans and loan modification agreements, including those with electronic signatures. We worked with the Federal Reserve to allow members to pledge their newly issued PPP loans to the Federal Reserve Bank of Kansas City. Additionally, we began accepting SBA PPP loans as collateral while limiting the reporting burden for members. For MPF PFIs, we waived delivery commitment extension fees through April 15, 2020 and eased certain underwriting, documentation and payment requirements for those impacted by the pandemic. For mortgage loans in the MPF Program, we are offering payment forbearance and temporary loan modification programs for borrowers impacted by the pandemic. Management continues to monitor the progress of the pandemic and is committed to assisting FHLBank members and their communities as impacts related to the pandemic continue to unfold.
Net income for the year ended December 31, 2020 was $118.1 million compared to $185.2 million for the year ended December 31, 2019. The $67.1 million decrease for the year was largely due to net losses on derivatives and hedging activities and trading securities, the majority of which occurred during the first quarter of 2020 due to the market disruption caused by the COVID-19 pandemic, although some stabilization was observed during the remainder of 2020 as the financial markets began a modest and uneven recovery. Detailed discussion relating to the fluctuations in net gains (losses) on derivatives and hedging activities and net gains (losses) on trading securities can be found in "Results of Operations" under this MD&A.
For the year ended December 31, 2020, net interest income was $251.0 million compared to $256.1 million for the same period in the prior year. Net interest income was reduced by a decline in the average balance and average rate of advances, the change in net interest settlements on fair value hedges, and increased premium amortization on mortgage-related assets due to faster prepayments, but the reduction was partially offset by a significant decrease in the cost of debt. The decrease in long-term market interest rates allowed us to replace approximately $13 billion of callable debt at a lower cost during 2020, which has reduced funding costs for current and future periods. The low interest rate environment has also allowed us to shift debt composition from discount notes to floating rate term debt, which more closely matches asset composition and reprices to the market more quickly than discount notes.
Total assets declined $10.7 billion, or 16.9 percent, from December 31, 2019 to December 31, 2020 driven mostly by a $9.0 billion decline in advances from $30.2 billion as of December 31, 2019 to $21.2 billion as of December 31, 2020. Advance demand by members has dropped significantly since the beginning of the second quarter of 2020 as many members have experienced significant deposit inflows and excess liquidity as a result of economic stimulus packages passed by Congress along with the Federal Reserve Bank’s easing of monetary policy, security purchase programs, and newly created lending facilities in response to the COVID-19 pandemic. The average balance of advances declined $3.4 billion, or 12.2 percent, for the year ended December 31, 2020 when compared to the prior year period.
Total liabilities decreased $10.6 billion, or 17.5 percent, from December 31, 2019 to December 31, 2020 which corresponded with the decline in assets, and the funding mix shifted to a lower percentage of discount notes between periods, as we issued more floating rate debt indexed to SOFR to more closely reflect the repricing characteristics of our assets. The decrease in long-term market interest rates also allowed us to reduce our funding costs for current and future periods as previously mentioned. For additional information on market trends impacting the cost of issuing debt, including discussion of the transition from LIBOR to an alternate reference rate, see "Financial Market Trends" and "Financial Condition" under this MD&A.
Total capital decreased $123.3 million, or 4.4 percent, between periods primarily due to a decrease in required capital stock related to the decline in advance utilization between periods that was subsequently repurchased, partially offset by the increase in required capital stock for AMA from the change to the AMA activity-based stock purchase requirement from zero to three percent effective August 5, 2020.
An increase in average assets partially funded by an increase in average equity combined with the decrease in net income resulted in a return on average equity (ROE) of 4.50 percent for the year ended December 31, 2020 compared to 7.32 percent for the prior year. Dividends paid to members totaled $70.8 million for the year ended December 31, 2020 compared to $99.5 million for the prior year. From December 31, 2019 to December 31, 2020, the dividend rate for Class A Common Stock decreased to 0.25 percent from 2.50 percent and the dividend rate for Class B Common Stock decreased to 5.25 percent from 7.50 percent. The weighted average dividend rate for the year ended December 31, 2020 was 4.38 percent, which represented a dividend payout ratio of 60.0 percent, compared to a weighted average dividend rate of 6.46 percent and a payout ratio of 53.7 percent for the same period in 2019. Differences in the weighted average dividend rates between periods are due to the difference in the mix of outstanding Class A Common Stock and Class B Common Stock between those periods and the decreases in the dividend rates. Other factors impacting the outstanding stock class mix during 2020 and, therefore, the average dividend rates, include regular exchanges of excess Class B Common Stock to Class A Common Stock and periodic repurchases of excess Class A Common Stock (see “Liquidity and Capital Resources - Capital” under this Item 7).
Our strategic business plan is structured in such a way that our business activities are intended to achieve our mission consistent with the FHFA’s core mission achievement guidance. The Primary Mission Asset ratio 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. Our Primary Mission Asset ratio was 74 percent for 2020. We intend to manage our balance sheet with the goal of maintaining a Primary Mission Asset ratio within a range of 70 to 80 percent. However, this ratio is dependent on several variables such as member demand for our advance and mortgage loan products, so it is possible that we will be unable to maintain this level indefinitely.
Financial Market Trends
The primary external factors that affect net interest income are market interest rates and the general state of the economy.
General discussion of the level of market interest rates:
Table 8 presents selected market interest rates as of the dates or for the periods shown.
Table 8
Market Instrument Average Rate Average Rate 12/31/2020 12/31/2019
2020 2019 Ending Rate Ending Rate
Secured Overnight Financing Rate1
0.36 % 2.21 % 0.07 % 1.55 %
Federal funds effective rate1
0.36 2.16 0.09 1.55
Federal Reserve interest rate on excess reserves1
0.38 2.13 0.10 1.55
3-month U.S. Treasury bill1
0.35 2.09 0.07 1.55
3-month LIBOR1
0.65 2.33 0.24 1.91
2-year U.S. Treasury note1
0.39 1.97 0.12 1.57
5-year U.S. Treasury note1
0.54 1.95 0.36 1.69
10-year U.S. Treasury note1
0.89 2.14 0.92 1.92
30-year residential mortgage note rate1,2
3.30 4.22 2.90 3.95
1 Source is Bloomberg.
2 Mortgage Bankers Association weekly 30-year fixed rate mortgage contract rate.
The COVID-19 pandemic continued to impact financial markets at the end of 2020, as interest rates remained at historically low levels and financial institutions continued to experience high levels of liquidity resulting from economic stimulus payments passed by Congress along with the Federal Reserve Bank’s easing of monetary policy, security purchase programs, and newly created lending facilities in response to the COVID-19 pandemic. The surge of COVID-19 infections, deaths, and associated restrictions at the end of 2020 slowed the economic momentum that began building during the second and third quarters of 2020, but we believe optimism surrounding vaccinations and the incoming administration's focus on pandemic response and relief bolstered the stock market and other measures of consumer confidence in January 2021. Pent-up consumer demand resulting from the pandemic is expected to accelerate economic recovery during the last half of 2021, as vaccination rates are anticipated to be high enough to lift COVID-related restrictions and give citizens the ability to resume pre-pandemic activities.
Spreads to comparative U.S. Treasury instruments for FHLBank consolidated obligations widened in March of 2020, increasing the cost to issue these instruments. However, during the remainder of 2020, these spreads narrowed considerably resulting in lower costs to issue consolidated obligations driven by robust market demand for the instruments and lower issuance needs by the FHLBanks due to ample liquidity available to FHLBank members. At the January 2021 meeting, the FOMC maintained the Federal funds rate at a range between 0 percent and 0.25 percent and said it would be appropriate to maintain its quantitative easing (QE), repo and overnight lending programs to keep credit available until it is confident that the economy has recovered from the downturn related to the COVID-19 pandemic and is on track to achieve its maximum employment, inflation, and price stability goals. The FOMC has also indicated it will not raise rates in anticipation of higher inflation but will wait until inflation exceeds two percent for some time. Based on FOMC projections in its Summary of Economic Projections released on December 16, 2020, this will likely not occur until the end of 2023 or beyond. The FOMC stated its intent to continue its purchases of U.S. Treasuries and agency MBS as part of its QE. Monetary and fiscal actions in response to the economic impact of the COVID-19 pandemic and dire economic outlooks for the next several years have driven Treasury and other benchmark rates to or near historic lows. 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 COVID-19 pandemic has caused significant economic and financial turmoil both in the U.S. and around the world. The global economy appears to be emerging from the economic downturn, but recovery remains hampered by the ongoing pandemic. Our ability to obtain funds through the issuance of consolidated obligations depends in part on prevailing conditions in the capital markets (including investor demand), such as the effects of any reduced liquidity in global financial markets. Volatility in the capital markets caused by the COVID-19 pandemic can impact demand for FHLBank debt and the cost of the debt the FHLBanks issue. The outlook for 2021 is uncertain, and it is likely that the FOMC will keep interest rates low or use other programs if economic conditions warrant, each of which could impact the efficiency of our asset and liability management activities. For further discussion, see this Item 7 - “Financial Condition - Consolidated Obligations.”
In July 2017, the FCA announced that it planned to phase out the regulatory oversight of LIBOR interest rate indices by 2021. However, the FCA recently announced that the publication of LIBOR on a representative basis will cease for one-week and two-month LIBOR immediately after December 31, 2021, and the remaining LIBOR tenors immediately after June 30, 2023. This extends transition for existing instruments, many of which have inadequate fallback language, but is not intended to prolong transition for new LIBOR issuance. As of December 31, 2020, all of our exposure to LIBOR was in the 1-month, 3-month, and 6-month tenors. The Alternative Reference Rates Committee (ARRC) in the United States has proposed SOFR as its recommended alternative to US Dollar (USD) LIBOR in the United States. SOFR is intended to be a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. The Federal Reserve Bank of New York began publishing SOFR rates in April 2018. As noted throughout this annual report, many of our assets and liabilities, including derivative assets and derivative liabilities, are indexed to USD LIBOR. A portion of these assets and liabilities and related collateral have maturity dates that extend beyond June 30, 2023. For additional information on our LIBOR transition efforts and LIBOR exposure, see “Risk Management - Interest Rate Risk Management” under this Item 7.
Other factors impacting FHLBank consolidated obligations:
We believe investors continue to view FHLBank consolidated obligations as carrying a relatively strong credit profile. Historically, our strong credit profile has resulted in steady investor demand for FHLBank consolidated obligations. We believe several market events continue to have the potential to impact the demand for our consolidated obligations including the economic impact of the COVID-19 pandemic, geopolitical events and/or disruptions; potential policy or regulatory changes under the new administration; changes in interest rates and the shape of the yield curve as the FOMC contemplates changes to monetary policy; and the replacement of LIBOR with another index as previously discussed.
Critical Accounting Policies and Estimates
The preparation of our financial statements in accordance with GAAP requires management to make a number of judgments and assumptions that affect our reported results and disclosures. Several of our accounting policies are inherently subject to valuation assumptions and other subjective assessments and are more critical than others in terms of their importance to results. These assumptions and assessments include: (1) the accounting related to derivatives and hedging activities; and (2) fair value determinations.
Changes in any of the estimates and assumptions underlying critical accounting policies could have a material effect on our financial statements.
The accounting policies that management believes are the most critical to an understanding of our financial condition and results of operations and require complex management judgment are described below.
Accounting for Derivatives and Hedging Activities: Derivative instruments are carried at fair value on the Statements of Condition. Any change in the fair value of a derivative is recorded each period in current period earnings or other comprehensive income (OCI), depending upon whether the derivative is designated as part of a hedging relationship and, if it is, the type of hedging relationship. A majority of our derivatives are structured to offset some or all of the risk exposure inherent in our lending, mortgage purchase, investment, and funding activities. We are required to recognize unrealized gains or losses on derivative positions, regardless of whether offsetting gains or losses on the hedged assets or liabilities are recognized simultaneously. Therefore, the accounting framework introduces the potential for considerable income variability from period to period. Specifically, a mismatch can exist between the timing of income and expense recognition from assets or liabilities and the income effects of derivative instruments positioned to mitigate market risk and cash flow variability. Therefore, during periods of significant changes in interest rates and other market factors, reported earnings may exhibit considerable variability. We seek to utilize hedging techniques that are effective under the hedge accounting requirements; however, in some cases, we have elected to enter into derivatives that are economically effective at reducing risk but do not meet hedge accounting requirements, either because it was more cost effective to use a derivative hedge compared to a non-derivative hedging alternative, or because a non-derivative hedging alternative was not available. As required by FHFA regulation and our RMP, derivative instruments that do not qualify as hedging instruments may be used only if we document a non-speculative purpose at the inception of the derivative transaction.
A hedging relationship is created from the designation of a derivative financial instrument as 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. If the hedge is not designated for shortcut hedge accounting, it is treated as a “long haul” fair value hedge, where the change in fair value of the hedged item must be measured separately from the derivative, and for which quantitative effectiveness testing must be performed regularly with results falling within established tolerances. If the hedge fails effectiveness testing, the hedge no longer qualifies for hedge accounting and the derivative is marked to estimated fair value through current period earnings without any offsetting change in estimated fair value related to the hedged item.
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. Specifically, each month we use a consistently applied statistical methodology that employs the most recent 30 historical interest rate environments and includes an R-squared test (commonly used statistic to measure correlation of the data), a slope test, and an F-statistic test (commonly used statistic to measure how well the regression model describes the collection of data). These tests measure the degree of correlation of movements in estimated fair values between the derivative and the related hedged item. For the hedging relationship to be considered effective, results must fall within established tolerances.
Given that a derivative qualifies for long haul fair value hedge accounting treatment, the most important element of effectiveness testing is the price sensitivity of the derivative and the hedged item in response to changes in interest rates and volatility as expressed by their effective durations. The effective duration will be influenced mostly by the final maturity and any option characteristics. In general, the shorter the effective duration, the more likely it is that effectiveness testing would fail because of the impact of the short-term index side of the interest rate swap. In this circumstance, the slope criterion is the more likely factor to cause the effectiveness test to fail.
The estimated fair values of the derivatives and hedged items do not have any cumulative economic effect if the derivative and the hedged item are held to maturity, or contain mutual optional termination provisions at par. Since these fair values fluctuate throughout the hedge period and eventually return to zero (derivative) or par value (hedged item) on the maturity or option exercise date, the earnings impact of fair value changes is only a timing issue for hedging relationships that remain outstanding to maturity or the call termination date.
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, changes in the market value of the derivative are reflected in income without any offset. As of December 31, 2020 and 2019, we held a portfolio of derivatives that are marked to market with no offsetting qualifying hedged item. This portfolio of economic derivatives consisted primarily of: (1) interest rate swaps hedging fixed rate MBS and non-MBS trading investments; (2) interest rate caps hedging adjustable rate MBS with embedded caps; and (3) interest rate swaps hedging variable rate consolidated obligation bonds. 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 being hedged by economic hedges is expected to partially offset that impact. The change in fair value of the derivatives classified as economic hedges is only partially offset by the change in the fair value of trading securities being hedged by economic hedges because the amount of economic hedges exceeds the amount of swapped trading securities and because of the relationship between mortgage rates relative to the interest rate swap curve for the swapped MBS trading securities. See Tables 61 and 62 under Item 7A - "Quantitative and Qualitative Disclosures About Market Risk," which present the notional amount and fair value amount for derivative instruments by hedged item, hedging instrument, hedging objective and accounting designation. The total par value of non-MBS and MBS classified as trading securities related to economic hedges was $1.6 billion and $0.8 billion, respectively, as of December 31, 2020, which matches the notional amount of interest rate swaps hedging the GSE debentures and MBS in trading securities on that date. For asset/liability management purposes, our fixed rate GSE debentures and MBS currently classified as trading are matched to interest rate swaps that effectively convert the securities from fixed rate investments to variable rate instruments. See Tables 15 through 18 under this Item 7, which show the relationship of gains/losses on economic hedges and gains/losses on the trading securities being hedged by economic derivatives. Our projections of changes in fair value of the derivatives have been consistent with actual results.
Fair Value: As of December 31, 2020 and 2019, certain assets and liabilities, including investments classified as trading or available-for-sale, and all derivatives, were presented in the Statements of Condition at fair value. Under GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair values play an important role in the valuation of certain assets, liabilities and derivative transactions. The fair values we generate directly impact the Statements of Condition, Statements of Income, Statements of Comprehensive Income, Statements of Capital, and Statements of Cash Flows as well as risk-based capital, duration of equity (DOE), and market value of equity (MVE) disclosures. Management also estimates the fair value of collateral that borrowers pledge against advance borrowings and other credit obligations to confirm that we have sufficient collateral to meet regulatory requirements and to protect ourselves from a credit loss.
Fair value measurement under GAAP uses a three-level fair value hierarchy to reflect the level of judgment involved in estimating fair value. Fair values are based on market prices when they are available (generally considered a Level 1 or Level 2 valuation under GAAP). If market quotes are not available, fair values are based on discounted cash flows using market estimates of interest rates and volatility, or on prices of similar instruments (generally considered a Level 3 valuation under GAAP). Pricing models and their underlying assumptions are based on our best estimates for discount rates, prepayment speeds, market volatility and other factors. We validate our financial models at least annually and the models are calibrated to values from outside sources on a monthly basis. We validate modeled values to outside valuation services routinely to determine if the values generated from discounted cash flows are reasonable. Additionally, due diligence procedures are completed for third-party pricing vendors. The assumptions used by third-party pricing vendors or within our models may have a significant effect on the reported fair values of assets and liabilities, including derivatives, and the related income and expense. See Note 15 of the Notes to Financial Statements under Item 8 - “Financial Statements and Supplementary Data” for a detailed discussion of the assumptions used to calculate fair values and the due diligence procedures completed. The use of different assumptions as well as changes in market conditions could result in materially different net income and retained earnings.
As of December 31, 2020, we had no fair values that were classified as Level 3 valuations for financial instruments that are measured on a recurring basis at fair value. However, we have impaired mortgage loans and REO, which were written down to their fair values and considered Level 3 valuations as of year-end. Based on the validation of our inputs and assumptions with other market participant data, we have concluded that the pricing for impaired mortgage loans and REO should be considered a Level 3 valuation.
Results of Operations
Earnings Analysis: Table 9 presents changes in the major components of our net income (dollar amounts in thousands):
Table 9
Increase (Decrease) in Earnings Components
2020 vs. 2019
Dollar Change Percentage Change
Total interest income $ (747,679) (50.2) %
Total interest expense (742,627) (60.2)
Net interest income (5,052) (2.0)
Provision (reversal) for credit losses on mortgage loans (1,103) (285.0)
Net interest income after mortgage loan loss provision (3,949) (1.5)
Net gains (losses) on trading securities 7,881 11.2
Net gains (losses) on derivatives and hedging activities (71,822) (124.6)
Other non-interest income 820 7.9
Total other income (loss) (63,121) (274.8)
Operating expenses 1,205 2.1
Other non-interest expenses 6,386 41.3
Total other expenses 7,591 10.4
AHP assessments (7,474) (36.3)
NET INCOME $ (67,187) (36.3) %
Table 10 presents the amounts contributed by our principal sources of interest income (dollar amounts in thousands):
Table 10
2020 2019 2018
Interest Income Percent of Total Interest Income Percent of Total Interest Income Percent of Total
Investments1
$ 191,103 25.8 % $ 466,531 31.3 % $ 361,563 28.8 %
Advances 268,051 36.2 716,199 48.1 637,203 50.7
Mortgage loans held for portfolio 280,708 37.9 304,582 20.5 256,698 20.4
Other 1,211 0.1 1,440 0.1 1,545 0.1
TOTAL INTEREST INCOME $ 741,073 100.0 % $ 1,488,752 100.0 % $ 1,257,009 100.0 %
1 Includes trading securities, available-for-sale securities, held-to-maturity securities, interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold.
Net income for the year ended December 31, 2020 was $118.1 million compared to $185.2 million for the year ended December 31, 2019. The $67.1 million decrease for the year was largely due to net losses on derivatives and hedging activities and trading securities, the majority of which occurred during the first quarter of 2020 due to the market disruption caused by the COVID-19 pandemic, although some stabilization was observed during the remainder of 2020 as the financial markets began a modest and uneven recovery. Spreads between investments and their associated swaps widened considerably during the first quarter of 2020 as a result of the COVID-19 market disruption, therefore impacting fair values at the end of the first quarter. These spreads normalized during the remainder of 2020, but the continued low interest rate environment kept the fair values of derivatives depressed and caused a decline in net interest settlements (from net interest received in 2019 to net interest paid in 2020, which decreased income) for 2020. This decline in derivative fair values was partially offset by gains on trading securities for the current year, as the coupons on the trading securities are higher than current market rates. While we generally consider fair value fluctuations to be temporary and expect to recover these losses in future periods, the outlook for 2021 is uncertain, so the fair values of our assets and derivatives could decline or fail to recover for a prolonged period of time. For detailed discussion relating to the fluctuations in net gains (losses) on derivatives and hedging activities and net gains (losses) on trading securities, see "Net Gains (Losses) on Derivatives and Hedging Activities" and "Net Gains (Losses) On Trading Securities" under this Item 7.
Other expenses increased by $7.6 million for the year ended December 31, 2020 compared to the prior year period, primarily due to the subsidy recorded for the below-market interest rates on COVID-19 Relief Advances. See "Financial Condition - Advances" under this Item 2 for additional information on the advances issued in response to the COVID-19 pandemic. Net interest income decreased by $5.1 million for the year ended December 31, 2020 compared to the same period in the prior year, discussed in greater detail below. An increase in average assets partially funded by an increase in average equity combined with the decrease in net income resulted in a decrease in ROE to 4.50 percent for the year ended December 31, 2020 compared to 7.32 percent for the prior year. Dividends paid to members totaled $70.8 million for the year ended December 31, 2020 compared to $99.5 million for the prior year.
Net Interest Income: Net interest income decreased $5.1 million for the comparative annual periods, from $256.1 million for the year ended December 31, 2019 to $251.0 million for the year ended December 31, 2020. Net interest income was reduced by a decline in the average balance and average rate of advances, the change in net interest settlements on fair value hedges, and increased premium amortization on mortgage-related assets due to faster prepayments, but these reductions were partially offset by a significant decrease in our cost of debt and an increase in advance prepayment fees. This decrease in the cost of debt and increase in prepayment fees also resulted in an improvement in net interest spread for 2020 compared to 2019.
The Federal Reserve’s rapid reduction in the Federal funds target rate and purchase of U.S. Treasury bonds in response to the COVID-19 pandemic-related market volatility resulted in declines across the interest rate curve during the first quarter of 2020 that persisted through 2020. During the first quarter, this volatility created margin compression on the short end of the curve, as overnight assets repriced downward faster than the liabilities funding them. Advance demand by members dropped significantly during 2020, as many members experienced significant deposit inflows and excess liquidity as a result of economic stimulus packages passed by Congress along with the Federal Reserve Bank’s easing of monetary policy, security purchase programs, and newly created lending facilities. This decline in advance demand, along with the impact of the decline in market interest rates on adjustable rate advances and new or modified advances, was the most significant factor in the decline in interest income in 2020. The decline in long-term interest rates has caused an increase in mortgage loan prepayments, which reduces net interest income in the form of accelerated amortization of premiums on mortgage-related assets and reinvestment at lower market rates. The decline in interest rates also impacted net interest income in the form of net interest settlement expense on advances and available-for-sale securities in 2020, compared to income from net interest settlements in 2019. However, management has actively managed our funding composition in response to market conditions, as the stability of the interest rate environment enabled us to shift debt composition from discount notes to floating rate term debt, which more closely matches asset composition and reprices to market interest rates more quickly than discount notes. Further, we were able to replace approximately $13 billion of callable debt at a lower cost in 2020. Replacing callable debt results in accelerated amortization of concessions (broker fees) in the month of the call, but the refinanced debt will continue to provide additional benefit in the form of lower rates for future periods. Our cost of debt also decreased due to a decline in the cost of discount notes, floating rate debt, and net interest settlements on swapped discount notes and bonds as market interest rates declined, partially offset by accelerated concession amortization on the called debt.
Average Balances: The average balance of interest-earning assets increased $91.1 million, or 0.2 percent, for the year ended December 31, 2020 compared to the same period in the prior year. Average advance balances decreased $3.4 billion, which reflects the reduced demand for advances resulting from deposit inflows from stimulus payments and other Federal relief available to our members, as mentioned previously. The decrease in advances was offset by increases in short- and long-term investments and mortgage loans for 2020 compared to 2019. The moderate increase in long-term investments between periods represents an increase in high-quality liquid asset (HQLA) investments partially offset by a slight decline in MBS. Investments are used to enhance income and provide liquidity within balance sheet and portfolio parameters. The increase in the average balance of mortgage loans despite the increase in prepayments reflects the consistent growth in our mortgage loan portfolio that has occurred for the past several years. We have implemented strategies to manage growth in the mortgage loan portfolio in order to remain within internal limits for AMA as a percent of total assets, as the decline in advance balances caused us to exceed our targeted risk tolerance at times during 2020. For further discussion of investments, advances and mortgage loans, see Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition.”
Yields: Market interest rates and trends affect yields and net interest margin on earning assets, including advances, mortgage loans, and investments. The average yield on total interest-earning assets for the year ended December 31, 2020 was 1.30 percent compared to 2.62 percent for the year ended December 31, 2019. The average cost of interest-bearing liabilities for the year ended December 31, 2020 was 0.91 percent, compared to 2.28 percent for the year ended December 31, 2019, which reflects an improvement in net interest spread of five basis points. Net interest margin declined by one basis point to 44 basis points for the year ended December 31, 2020 compared to 45 basis points in the prior year despite the increase in net interest spread due to the higher balances of lower yielding assets combined with an increase in average capital. Average advance balances declined by $3.4 billion, or 12.2 percent for the twelve months ended December 31, 2020 compared to the prior year period. The yield on advances also declined as adjustable rate advances and new or modified advances reflect current lower market interest rates, which contributed to lower net interest income and margin. This decrease in yield was marginally offset by an increase in prepayment fees. The average balance of mortgage loans increased $1.2 billion, or 13.1 percent, for 2020 compared to the prior year period, although accelerated premium amortization from prepayments and mortgage loan purchases at lower interest rates has decreased the yield on the portfolio. Mortgage loans, which are one of our highest net spread assets, increased as a percentage of total assets during 2020 as a result of the decline in advances, representing 17.5 percent of total assets as of December 31, 2020, compared to 16.8 percent as of December 31, 2019. However, the spread on mortgage loans has been compressed in recent periods as a result of accelerated premium amortization from prepayments, but this increase in premium amortization has been largely offset by the reduction in the cost of debt so this spread is expected to widen in future periods as the accelerated amortization of concessions on called debt rolls off and prepayments eventually subside. The decline in yields on earning assets was largely offset by the 137 basis point decrease in the cost of debt as a result of called debt reissued at lower rates combined with a decline in the cost of discount notes, floating rate debt, and net interest settlements as market interest rates declined, partially offset by accelerated concession amortization on the called debt (see Table 13). For further discussion of how we use bonds and discount notes, see Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Consolidated Obligations.
Our net interest spread is impacted by derivative and hedging activities, as the assets and liabilities hedged with derivative instruments designated under fair value hedging relationships are adjusted for changes in fair values, while other assets and liabilities are carried at historical cost. However, net interest payments or receipts on derivatives that do not qualify for hedge accounting (economic hedges) flow through net gains (losses) on derivatives and hedging activities (see Tables 15 and 16 under this Item 7) 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 a variable rate. Tables 11 and 12 present the impact of derivatives and hedging activities recorded in net interest income (in thousands):
Table 11
Advances Investments Mortgage Loans Consolidated Obligation Discount Notes Consolidated Obligation Bonds Total
Unrealized gains (losses) due to fair value changes
$ (1,687) $ (2,862) $ - $ (175) $ (313) $ (5,037)
Net amortization/accretion of hedging activities
(1,566) - (3,236) - - (4,802)
Net interest received (paid) (47,328) (104,230) - 18,402 36,206 (96,950)
TOTAL $ (50,581) $ (107,092) $ (3,236) $ 18,227 $ 35,893 $ (106,789)
Table 12
Advances Investments Mortgage Loans Consolidated Obligation Discount Notes Consolidated Obligation Bonds Total
Unrealized gains (losses) due to fair value changes
$ 47 $ (2,274) $ - $ 193 $ (363) $ (2,397)
Net amortization/accretion of hedging activities
(1,356) - (2,029) - - (3,385)
Net interest received (paid) 19,860 1,281 - 20 (5,312) 15,849
TOTAL $ 18,551 $ (993) $ (2,029) $ 213 $ (5,675) $ 10,067
Table 13 presents average balances and yields of major earning asset categories and the sources funding those earning assets (dollar amounts in thousands):
Table 13
2020 2019 2018
Average
Balance Interest
Income/Expense Yield Average
Balance Interest
Income/Expense Yield Average
Balance Interest
Income/Expense Yield
Interest-earning assets:
Interest-bearing deposits $ 1,405,969 $ 6,092 0.43 % $ 888,890 $ 19,801 2.23 % $ 762,346 $ 14,957 1.96 %
Securities purchased under agreements to resell
3,885,281 17,812 0.46 4,521,312 104,397 2.31 3,571,355 71,298 2.00
Federal funds sold 2,452,063 5,050 0.21 1,476,595 32,834 2.22 2,229,989 40,306 1.81
Investment securities1
13,580,306 162,149 1.19 12,121,452 309,499 2.55 9,401,909 235,002 2.50
Advances1,2
24,877,906 268,051 1.08 28,322,033 716,199 2.53 29,899,634 637,203 2.13
Mortgage loans3,4
10,549,506 280,708 2.66 9,326,732 304,582 3.27 7,816,191 256,698 3.28
Other interest-earning assets
44,875 1,211 2.70 47,752 1,440 3.02 46,113 1,545 3.35
Total earning assets 56,795,906 741,073 1.30 56,704,766 1,488,752 2.62 53,727,537 1,257,009 2.34
Other non-interest-earning assets
303,440 241,586 357,122
Total assets $ 57,099,346 $ 56,946,352 $ 54,084,659
Interest-bearing liabilities:
Deposits $ 819,270 1,802 0.22 $ 544,001 9,820 1.81 $ 560,819 8,912 1.59
Consolidated obligations1:
Discount Notes 17,325,512 123,124 0.71 23,972,736 532,155 2.22 24,713,789 451,380 1.83
Bonds 35,560,196 363,896 1.02 29,441,519 689,275 2.34 25,988,893 524,255 2.02
Other borrowings 50,726 1,239 2.44 51,854 1,438 2.78 44,565 1,265 2.84
Total interest-bearing liabilities
53,755,704 490,061 0.91 54,010,110 1,232,688 2.28 51,308,066 985,812 1.92
Capital and other non-interest-bearing funds
3,343,642 2,936,242 2,776,593
Total funding $ 57,099,346 $ 56,946,352 $ 54,084,659
Net interest income and net interest spread5
$ 251,012 0.39 % $ 256,064 0.34 % $ 271,197 0.42 %
Net interest margin6
0.44 % 0.45 % 0.50 %
1 Interest income/expense and average rates include the effect of associated derivatives that qualify for hedge accounting treatment. For 2019 and 2020, interest amounts reported for advances, investment securities, consolidated obligation discount notes, and consolidated obligation bonds include realized and unrealized gains (losses) on hedged items and derivatives in qualifying hedge relationships. Prior period interest amounts for 2018 do not conform to new hedge accounting guidance adopted January 1, 2019.
2 Advance income includes prepayment fees on terminated advances.
3 Credit enhancement fee payments are netted against interest earnings on the mortgage loans. The expense related to credit enhancement fee payments to PFIs was $7.7 million, $6.9 million and $6.1 million for the years ended December 31, 2020, 2019, and 2018, respectively.
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 14 summarizes changes in interest income and interest expense (in thousands):
Table 14
2020 vs. 2019 2019 vs. 2018
Increase (Decrease) Due to Increase (Decrease) Due to
Volume1,2
Rate1,2
Total Volume1,2
Rate1,2
Total
Interest Income3:
Interest-bearing deposits $ 7,628 $ (21,337) $ (13,709) $ 2,668 $ 2,176 $ 4,844
Securities purchased under agreements to resell
(12,928) (73,657) (86,585) 20,834 12,265 33,099
Federal funds sold 13,398 (41,182) (27,784) (15,481) 8,009 (7,472)
Investment securities 33,592 (180,942) (147,350) 69,338 5,159 74,497
Advances (78,355) (369,793) (448,148) (35,004) 114,000 78,996
Mortgage loans 36,867 (60,741) (23,874) 49,338 (1,454) 47,884
Other assets (83) (146) (229) 51 (156) (105)
Total earning assets 119 (747,798) (747,679) 91,744 139,999 231,743
Interest Expense3:
Deposits 3,374 (11,392) (8,018) (274) 1,182 908
Consolidated obligations:
Discount notes (118,496) (290,535) (409,031) (13,891) 94,666 80,775
Bonds 121,505 (446,884) (325,379) 74,711 90,309 165,020
Other borrowings (30) (169) (199) 202 (29) 173
Total interest-bearing liabilities 6,353 (748,980) (742,627) 60,748 186,128 246,876
Change in net interest income $ (6,234) $ 1,182 $ (5,052) $ 30,996 $ (46,129) $ (15,133)
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 hedge accounting treatment. For 2019 and 2020, interest amounts reported for advances, investment securities, consolidated obligation discount notes, and consolidated obligation bonds include realized and unrealized gains (losses) on hedged items and derivatives in qualifying hedge relationships. Prior period interest amounts for 2018 do not conform to new hedge accounting guidance adopted January 1, 2019.
Net Gains (Losses) on Derivatives and Hedging Activities: The volatility in other income (loss) is driven predominantly by net gains (losses) on derivatives that do not qualify for hedge accounting treatment under GAAP (economic derivatives), which generally include interest rate swaps, caps and floors. Net gains (losses) from derivatives and hedging activities 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 15 and 16, 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 and hedging activities instead of net interest income, which does not reflect the full economic impact of the swaps on yields, especially for trading investments that are swapped to variable rates. 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 periods. 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. Tables 15 and 16 present the earnings impact of derivatives and hedging activities by financial instrument as recorded in other non-interest income (in thousands):
Table 15
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
$ (2,997) $ (75,965) $ - $ - $ 352 $ (78,610)
Mortgage delivery commitments - - (4,205) - - (4,205)
Economic hedges - net interest received (paid)
(223) (46,389) - (148) 130 (46,630)
Net gains (losses) on derivatives and hedging activities
(3,220) (122,354) (4,205) (148) 482 (129,445)
Net gains (losses) on trading securities hedged on an economic basis with derivatives
- 77,652 - - - 77,652
TOTAL $ (3,220) $ (44,702) $ (4,205) $ (148) $ 482 $ (51,793)
Table 16
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
$ (1,379) $ (71,468) $ - $ (1) $ 14,960 $ (57,888)
Mortgage delivery commitments - - 4,309 - - 4,309
Discount note commitments - - - (70) - (70)
Economic hedges - net interest received (paid) (21) (2,263) - (3) (1,687) (3,974)
Net gains (losses) on derivatives and hedging activities
(1,400) (73,731) 4,309 (74) 13,273 (57,623)
Net gains (losses) on trading securities hedged on an economic basis with derivatives
- 70,950 - - - 70,950
TOTAL $ (1,400) $ (2,781) $ 4,309 $ (74) $ 13,273 $ 13,327
For the years ended December 31, 2020 and 2019, net gains and losses on derivatives and hedging activities resulted in a decrease in net income of $129.4 million and $57.6 million, respectively. The $71.8 million decrease for 2020 was a result of temporary changes in the fair values of derivatives resulting from market volatility related to the COVID-19 pandemic. Although interest rates remained low, some recovery occurred during the remainder of 2020, as spreads between investments and their associated swaps normalized from the widening that negatively impacted fair values during the first quarter of 2020. Further, the decrease in the level of swap index rates from December 31, 2019 to December 31, 2020 had a negative impact on the net interest settlements of interest rate swaps, which decreased net income by $46.6 million for the year ended December 31, 2020, compared to a decrease in net income of $4.0 million for the year ended December 31, 2019. The fair value 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 more than offset by the fair value gains attributable to the swapped securities for the year ended December 31, 2020, which are recorded in net gains (losses) on trading securities (see Table 17). The unrealized gains on trading securities were generally driven by the decreases in interest rates between periods and are discussed in greater detail below.
For 2019, the majority of the losses were economic interest rate swaps associated with trading securities, and declines in LIBOR and the overnight index swap rate (OIS) (i.e., the index rates on these swaps) between 2018 and 2019 resulted in fair value losses that were largely offset by fair value gains on the trading securities (see Table 17). We experienced unrealized fair value gains on basis swaps economically hedging consolidated obligations primarily caused by the decline in one-month LIBOR. We experienced unrealized fair value losses on interest rate swaps indexed to OIS and hedging U.S. Treasury obligations held in our trading portfolio as OIS declined towards the end of the year relative to the rates at inception. These fluctuations were offset by unrealized gains for the year ended December 31, 2019 attributable to the swapped U.S. Treasury obligations, which are recorded in net gains (losses) on trading securities. Unrealized losses on our interest rate swaps matched to GSE debentures for the year ended December 31, 2019 were a result of the passage of time, as several derivatives approached maturity (reducing the overall loss position of the derivatives), changes in interest rates for their respective maturities (pay fixed rate swap), and decreases in three-month LIBOR (receive variable rate swap). These fluctuations were offset by unrealized gains for the years ended December 31, 2019 attributable to the swapped GSE debentures, which are recorded in net gains (losses) on trading securities.
Table 17 presents the relationship between the swapped trading securities and the associated interest rate swaps that do not qualify for hedge accounting treatment, by investment type (in thousands):
Table 17
2020 2019
Gains (Losses) on Derivatives Gains (Losses) on Trading Securities Net Gains (Losses) on Derivatives Gains (Losses) on Trading Securities Net
U.S. Treasury obligations $ (19,052) $ 18,001 $ (1,051) $ (18,745) $ 18,766 $ 21
GSE debentures (16,505) 15,849 (656) (14,951) 16,026 1,075
GSE MBS (40,663) 43,802 3,139 (37,421) 36,158 (1,263)
TOTAL $ (76,220) $ 77,652 $ 1,432 $ (71,117) $ 70,950 $ (167)
For additional detail regarding gains and losses on trading securities, see Table 18 and related discussion under this Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations.”
See Tables 61 and 62 under Item 7A - “Quantitative and Qualitative Disclosures About Market Risk” for additional detail regarding notional and fair value amounts of derivative instruments.
Net Gains (Losses) on Trading Securities: 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 Tables 15 and 16. Unrealized gains (losses) fluctuate as the fair value of our trading portfolio fluctuates. There are a number of factors that can impact the fair value of a trading security including the movement in interest rates, changes in credit spreads, the passage of time, and changes in price volatility. Table 18 presents the major components of the net gains (losses) on trading securities (in thousands):
Table 18
2020 2019
Trading securities not hedged:
GSE debentures $ - $ (496)
U.S. obligation MBS and GSE MBS 304 (193)
Short-term securities 186 -
Total trading securities not hedged 490 (689)
Trading securities hedged on an economic basis with derivatives:
U.S. Treasury obligations 18,001 18,766
GSE debentures 15,849 16,026
GSE MBS 43,802 36,158
Total trading securities hedged on an economic basis with derivatives
77,652 70,950
TOTAL $ 78,142 $ 70,261
Our trading portfolio is comprised primarily of fixed rate U.S. Treasury obligations, GSE debentures, and multifamily GSE MBS, with a small percentage of variable rate GSE MBS. Periodically, we also invest in short-term securities classified as trading for liquidity purposes. In general, the fixed rate securities are related to economic hedges in the form of interest rate swaps that convert fixed rates to variable rates (see Table 17 for the association between the gains (losses) 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 interest rates and credit spreads, and are swapped on an economic basis to three-month LIBOR. The fair values of the fixed rate multifamily GSE MBS are affected by changes in mortgage rates and credit spreads, and these securities are swapped on an economic basis to one-month LIBOR. The fair values of the U.S. Treasury obligations are affected by changes in intermediate Treasury rates and swapped on an economic basis to OIS or SOFR. The unrealized gains for the current year reflect the broad decline in market interest rates across all tenors and indices between periods.
Other Expenses: Other expenses, which include compensation and benefits and other operating expenses, increased $7.6 million for the year ended December 31, 2020, compared to the prior year period primarily due to the subsidy recorded for the below-market interest rates on COVID-19 Relief Advances. See "Financial Condition - Advances" under this Item 2 for additional information on the advances issued in response to COVID-19. We expect modest increases in compensation and benefits expense for 2021 in anticipation of hiring for new positions. We also expect an increase in operating expense in 2021 due to planned software implementations. We do not expect a material increase in operating expenses related to the ongoing COVID-19 pandemic, as certain budgeted expenses were reallocated for pandemic-related operating expenses.
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. In order to effectively accomplish our mission, we must obtain adequate funding amounts at acceptable interest rate levels. We use derivatives as tools to reduce our funding costs and manage interest rate risk and prepayment risk. We also acquire and classify certain investments as trading securities for liquidity and asset-liability management purposes. Although we strive to manage interest rate risk and prepayment risk utilizing these transactions for asset-liability tools, we do not manage the fluctuations in the fair value of our derivatives or trading securities. We are essentially a “hold-to-maturity” investor and transact derivatives only for hedging purposes, even though some derivative hedging relationships do not qualify for hedge accounting under GAAP (referred to as economic hedges) and therefore can add significant volatility to our GAAP net income.
We believe that certain non-GAAP financial measures are helpful in understanding our operating results and provide meaningful period-to-period comparison of our long-term economic value in contrast to GAAP results, which can be impacted by fair value changes driven by market volatility, gains/losses on instrument sales, or transactions that are considered unpredictable. However, we may engage in periodic instrument sales for liquidity purposes or to reduce our exposure to LIBOR-indexed instruments. 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, and (4) adjusted ROE. Reconciliations of these non-GAAP financial measures to the most comparable GAAP measure are included below. Although we calculate our non-GAAP financial measures consistently from period to period using appropriate GAAP components, non-GAAP financial measures are not required to be uniformly applied and are not audited. Another material limitation associated with the use of non-GAAP financial measures is that they have no standardized measurement prescribed by GAAP and may not be comparable to similar non-GAAP financial measures used by other companies. While we believe the non-GAAP measures contained in this annual report are frequently used by 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.
As part of evaluating our financial performance, we adjust net income reported in accordance with GAAP for the impact of: (1) AHP assessments (equivalent to an effective minimum income tax rate of 10 percent); (2) fair value changes on derivatives and hedging activities (excludes net interest settlements); and (3) unpredictable items, such as prepayment fees, gains/losses on retirement of debt, gains/losses on mortgage loans held for sale, and gains/losses on securities. The result is referred to as “adjusted income,” which is a non-GAAP measure of income. Adjusted income is used to compute an adjusted ROE that is then compared to the average overnight Federal funds effective rate, with the difference referred to as adjusted ROE spread. Components of adjusted income and adjusted ROE spread are used: (1) to measure performance under our incentive compensation plans; (2) as a measure in determining the level of quarterly dividends; and (3) in strategic planning. While we utilize adjusted income as a key measure in determining the level of dividends, we consider GAAP net income volatility caused by gains (losses) on derivatives and hedging activities and trading securities in determining the adequacy of our retained earnings as determined under GAAP. Because the adequacy of GAAP retained earnings is considered in setting the level of our quarterly dividends, gains (losses) on derivatives and hedging activities and trading securities can come into consideration when setting the level of our quarterly dividends. Because we are primarily a “hold-to-maturity” investor and do not trade derivatives, we believe that adjusted income, adjusted ROE and adjusted ROE spread are helpful in understanding our operating results and provide a meaningful period-to-period comparison. In contrast, GAAP net income, ROE based on GAAP net income and ROE spread based on GAAP net income can vary significantly from period to period because of fair value changes on derivatives and certain other items that management excludes when evaluating operational performance. Management believes such volatility hinders a consistent measurement analysis.
Derivative and hedge accounting affects the timing of income or expense from derivatives. However, when the derivatives are held to maturity or call dates, there is no economic income or expense impact from these derivatives. For example, interest rate caps are purchased with an upfront fixed cost to provide protection against the risk of rising interest rates. Under derivative accounting guidance, these instruments are then marked to fair value each month, which can result in having to recognize significant 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 from derivatives, derivative accounting also impacts the presentation of net interest settlements on derivatives and hedging activities. This presentation differs under GAAP for economic hedges when compared to hedges that qualify for hedge accounting. Net interest settlements on economic hedges are included with the economic derivative fair value changes and are recorded in net gains (losses) on derivatives and hedging activities while the net interest settlements on qualifying fair value hedges are included in net interest margin. Therefore, only the economic derivative fair value changes and the ineffectiveness for qualifying hedges are removed to arrive at adjusted income (i.e., net interest settlements, which represent actual cash inflows or outflows and do not create fair value volatility, are not removed).
Adjusted income was $133.1 million for the year ended December 31, 2020 compared to $190.9 million for the year ended December 31, 2019. The decrease in adjusted income for the current year compared to net income as reported under GAAP was a result of the decline in adjusted net interest income due to the impact of lower market interest rates on net interest settlements (see Table 20). Management uses adjusted net interest income to effectively evaluate drivers of net interest income by consistently presenting the impact of derivatives on net interest margin. Fair value gains and losses required by GAAP to be presented in net interest margin are removed while interest settlements on economic derivatives are added or subtracted from GAAP net interest income so that only the derivative interest settlements are recorded in net interest margin for adjusted net interest income presentation purposes. Reconciliations of adjusted income and adjusted net interest income are presented below.
Table 19 presents a reconciliation of GAAP net income to adjusted income (in thousands):
Table 19
2020 2019
Net income, as reported under GAAP $ 118,050 $ 185,237
AHP assessments 13,123 20,597
Income before AHP assessments 131,173 205,834
Derivative (gains) losses1
87,852 56,046
Trading (gains) losses (78,142) (70,261)
Prepayment fees on terminated advances (6,278) (763)
Net (gains) losses on sale of held-to-maturity securities - 46
Net (gains) losses on sale of available-for-sale securities (1,523) -
Total excluded items 1,909 (14,932)
Adjusted income (a non-GAAP measure) $ 133,082 $ 190,902
1 Consists of fair value changes on all derivatives and hedging activities excluding net interest settlements on economic hedges.
Table 20 presents a reconciliation of GAAP net interest income to adjusted net interest income (in thousands):
Table 20
2020 2019
Net interest income, as reported under GAAP $ 251,012 $ 256,064
(Gains) losses on derivatives qualifying for hedge accounting recorded in net interest income
5,037 2,397
Net interest settlements on derivatives not qualifying for hedge accounting
(46,630) (3,974)
Prepayment fees on terminated advances (6,278) (763)
Adjusted net interest income (a non-GAAP measure) $ 203,141 $ 253,724
Net interest margin, as calculated under GAAP 0.44 % 0.45 %
Adjusted net interest margin (a non-GAAP measure) 0.36 % 0.45 %
Table 21 presents a comparison of adjusted ROE (a non-GAAP financial measure) to the average overnight Federal funds rate, which we use as a key measure of effective utilization and management of members’ capital. The decrease in adjusted ROE for the year ended December 31, 2020 compared to the prior year period reflects the decrease in adjusted net income. Adjusted ROE spread is calculated as follows (dollar amounts in thousands):
Table 21
2020 2019
Average GAAP total capital $ 2,622,776 $ 2,531,504
ROE, based upon GAAP net income 4.50 % 7.32 %
Adjusted ROE, based upon adjusted income 5.07 % 7.54 %
Average overnight Federal funds effective rate 0.36 % 2.16 %
Adjusted ROE as a spread to average overnight Federal funds effective rate
4.71 % 5.38 %
Financial Condition
Overall: Total assets declined between periods, from $63.3 billion at December 31, 2019 to $52.6 billion at December 31, 2020, driven mostly by the $9.0 billion, or 29.8 percent, decline in advances between periods as many members experienced significant deposit inflows and excess liquidity as a result of economic stimulus packages passed by Congress along with the Federal Reserve Bank’s easing of monetary policy, security purchase programs, and lending facilities. Mortgage loans decreased by $1.4 billion during the year, representing 17.5 percent of total assets as of December 31, 2020, compared to 16.8 percent as of December 31, 2019. Mortgage loans are one of the highest net spread assets on our balance sheet and as they increase as a percent of total assets, all things being equal, they have the potential to increase our net interest margin, although accelerated premium amortization from mortgage loan prepayments has resulted in spread compression in recent periods. Total liabilities decreased $10.6 billion from December 31, 2019 to December 31, 2020 which corresponded with the decline in assets, and the funding mix shifted to a lower percentage of discount notes between periods, as we issued more floating rate debt indexed to SOFR to better reflect the repricing characteristics of our assets. Our funding mix generally is driven by asset composition, but we may also shift our debt composition as a result of market conditions that impact the cost of consolidated obligations swapped or indexed to SOFR, Treasury bills, or OIS. For additional information on market trends impacting the cost of issuing debt, including discussion of the transition from LIBOR to an alternate reference rate, see "Financial Market Trends" and "Financial Condition" under this Item 7.
Total capital decreased $123.3 million, or 4.4 percent, from December 31, 2019 to December 31, 2020 primarily due to a decrease in required capital stock related to the decline in advance utilization between periods, resulting in excess stock that was subsequently repurchased, partially offset by the increase in required capital stock for AMA from the change to the AMA activity-based stock purchase requirement from zero to three percent effective August 5, 2020.
Dividends paid to members totaled $70.8 million for the year ended December 31, 2020 compared to $99.5 million for the same period in the prior year. From December 31, 2019 to December 31, 2020, the dividend rate for Class A Common Stock decreased from 2.50 percent to 0.25 percent and the dividend rate for Class B Common Stock decreased from 7.50 percent to 5.25 percent. The weighted average dividend rate for the year ended December 31, 2020 was 4.38 percent, which represented a dividend payout ratio of 60.0 percent, compared to a weighted average dividend rate of 6.46 percent and a payout ratio of 53.7 percent for the same period in 2019. The increase in payout ratios between periods was a result of the decline in income as a result of the aforementioned COVID-19 market volatility that began near the end of the first quarter of 2020. The dividend payout ratio represents dividends declared and paid during a quarter as a percentage of net income for the quarter, although FHFA regulation requires dividends be paid out of known income prior to the declaration date. For example, dividends declared and paid in December 2020 were based on income during the three months ended November 2020. Our dividend rates have historically moved in tandem with short-term market rates, so the decrease reflects the decline in market interest rates resulting from FOMC rate cuts in March 2020 to stimulate the U.S. economy. (See Item 1 - “Business - Capital, Capital Rules and Dividends” of our Form 10-K for other factors that contribute to the level of dividends paid). We anticipate stock dividends on Class A Common Stock and Class B Common Stock will remain at these lower levels during 2021, consistent with the lower level of short-term interest rates and our retained earnings policy.
The majority of our short-term advances and overnight investments are funded with floating rate bonds to achieve certain liquidity targets, which is reflected in Table 22, as the allocation of discount notes decreased and bonds increased. Table 22 presents the percentage concentration of the major components of our Statements of Condition:
Table 22
Component Concentration
12/31/2020 12/31/2019
Assets:
Cash and due from banks 8.7 % 3.0 %
Interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold 9.8 10.3
Investment securities 23.0 21.4
Advances 40.4 47.8
Mortgage loans, net 17.5 16.8
Other assets 0.6 0.7
Total assets 100.0 % 100.0 %
Liabilities:
Deposits 2.3 % 1.2 %
Consolidated obligation discount notes, net 20.7 43.4
Consolidated obligation bonds, net 71.6 50.6
Other liabilities 0.3 0.4
Total liabilities 94.9 95.6
Capital:
Capital stock outstanding 3.0 2.8
Retained earnings 2.0 1.6
Accumulated other comprehensive income (loss) 0.1 -
Total capital 5.1 4.4
Total liabilities and capital 100.0 % 100.0 %
Table 23 presents changes in the major components of our Statements of Condition (dollar amounts in thousands):
Table 23
Increase (Decrease)
in Components
12/31/2020 vs. 12/31/2019
Dollar
Change Percent
Change
Assets:
Cash and due from banks $ 2,653,249 138.4 %
Interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold (1,381,156) (21.2)
Investment securities (1,453,342) (10.7)
Advances (9,014,492) (29.8)
Mortgage loans, net (1,427,802) (13.4)
Other assets (61,399) (15.4)
Total assets $ (10,684,942) (16.9) %
Liabilities:
Deposits $ 438,721 55.5 %
Consolidated obligation discount notes, net (16,565,494) (60.4)
Consolidated obligation bonds, net 5,634,763 17.6
Other liabilities (69,648) (29.8)
Total liabilities (10,561,658) (17.5)
Capital:
Capital stock outstanding (192,452) (10.9)
Retained earnings 51,646 5.2
Accumulated other comprehensive income (loss) 17,522 70.7
Total capital (123,284) (4.4)
Total liabilities and capital $ (10,684,942) (16.9) %
Advances: Our advance products are developed, as authorized in the Bank Act and regulations established by the FHFA, to meet the specific liquidity and term funding needs of our members. As a wholesale provider of funds, we compete with brokered certificates of deposit and security repurchase agreements. The Federal Reserve Bank’s PPP Liquidity Facility was a direct competitor for FHLBank advances during the majority of 2020, although any quantification of that impact on advance balances is difficult to determine. We strive to price our advances relative to our marginal cost of funds while trying to remain competitive with the wholesale funding markets. While there is typically less competition in the long-term maturities, member demand for advances in these maturities has historically been lower than the demand for advances with short- and medium-term maturities. Nonetheless, long-term advances are also priced at relatively low spreads to our cost of funds. We continuously evaluate our product offerings in an effort to anticipate and meet member demand and stay competitive, especially as funding availability changes, including the transition from LIBOR to other indices with less optionality. As such, in October 2020, we placed a moratorium on the issuance of convertible advances and we no longer offer the Member Option Advance, which was a form of callable advance where the cost of the call option is paid upfront.
Advances decreased $9.0 billion from December 31, 2019 to December 31, 2020 as a result of a decrease in member demand for advances, as many members experienced significant deposit inflows and excess liquidity as a result of economic stimulus packages passed by Congress along with the Federal Reserve Bank’s easing of monetary policy, security purchase programs, and lending facilities. Though the majority of the decrease in advances is attributable to our largest borrowers, the decline in advance demand was widespread among FHLBank membership. Advance composition shifted from adjustable rate to fixed rate, as members called adjustable rate callable advances in favor of regular and short-term fixed rate advances as interest rates declined. Members also modified advances to lower rates and extended fixed rate advance terms as a result of the decline in interest rates. We anticipate volatility in advance balances in 2021 based on several factors related to the COVID-19 pandemic, including large members with relatively strong deposit growth and access to other funding sources, which could cause an additional decline in advance balances. Advances could decline if additional economic stimulus increases market liquidity as it flows to members in the form of deposits. We also anticipate an increase in advance modifications, which will lower the yield on the portfolio to current market rates, but the advance is retained and the member pays a prepayment fee for the modification.
During the three months ended June 30, 2020, we issued subsidized COVID-19 Relief Advances to help members serve their customers affected by the COVID-19 pandemic. The zero-cost advances had a term of six months and the low-cost advances have terms between 6 and 24 months. As of December 31, 2020, $0.5 billion of low-cost advances were outstanding. All zero-cost advances had matured as of December 31, 2020. Advances are no longer being issued under this program, but management continues to monitor the progress of the pandemic and is committed to assisting our members and their communities as the pandemic continues to have an adverse impact on households and businesses.
Table 24 summarizes advances outstanding by product (dollar amounts in thousands):
Table 24
12/31/2020 12/31/2019
Dollar Percent Dollar Percent
Adjustable rate:
Standard advance products:
Line of credit $ 979,591 4.6 % $ 9,421,491 31.2 %
Regular adjustable rate advances 1,132,700 5.4 665,000 2.2
Adjustable rate callable advances 2,322,600 11.1 11,444,700 38.0
Standard housing and community development advances:
Adjustable rate callable advances 35,712 0.2 37,212 0.1
Total adjustable rate advances 4,470,603 21.3 21,568,403 71.5
Fixed rate:
Standard advance products:
Short-term fixed rate advances 8,672,584 41.4 1,111,007 3.7
Regular fixed rate advances 5,055,179 24.1 4,717,025 15.6
Fixed rate callable advances 20,146 0.1 17,241 0.1
Standard housing and community development advances:
Regular fixed rate advances 461,178 2.2 470,925 1.6
Fixed rate callable advances 831 - 2,831 -
Total fixed rate advances 14,209,918 67.8 6,319,029 21.0
Convertible:
Standard advance products:
Fixed rate convertible advances 1,656,550 7.9 1,607,500 5.3
Amortizing:
Standard advance products:
Fixed rate amortizing advances 323,928 1.5 331,551 1.1
Fixed rate callable amortizing advances 10,702 0.1 10,807 -
Standard housing and community development advances:
Fixed rate amortizing advances 292,448 1.4 324,477 1.1
Fixed rate callable amortizing advances 8,292 - 10,288 -
Total amortizing advances 635,370 3.0 677,123 2.2
TOTAL PAR VALUE $ 20,972,441 100.0 % $ 30,172,055 100.0 %
An individual advance may be reclassified to a different product type between periods due to the occurrence of a triggering event such as the passing of a call date (i.e., from fixed rate callable advance to regular fixed rate advance) or conversion of an advance (i.e., from fixed rate convertible advance to adjustable rate callable advance).
Advances are one of the primary ways we fulfill our mission of providing liquidity to our members and constituted the largest asset on our balance sheet at December 31, 2020 and 2019. Advance par value decreased by 30.5 percent from December 31, 2019 to December 31, 2020 (see Table 24) and the majority of the decrease was in line-of-credit and adjustable rate callable advances partially offset by an increase in short-term fixed rate advances. The composition of the advance portfolio remains concentrated in advances that either reprice or mature on a relatively short-term basis as members continue to benefit from pricing efficiency in a declining interest rate environment. Members are beginning to transition away from adjustable rate callable advances as pricing on other products has become more attractive and we expect this trend to continue.
As of December 31, 2020 and 2019, 56.3 percent and 57.6 percent, respectively, of our members carried outstanding advance balances. The overall demand for our advances is typically influenced by our members’ ability to profitably invest the funds in loans and investments as well as their need for liquidity, which is influenced by changes in loan demand and their ability to efficiently grow deposits proportionately. As previously mentioned, most members are flush with liquidity as a result of economic stimulus payments and other funding options such as the Federal Reserve Bank's PPP Liquidity Facility. Advance demand could decline further if additional economic stimulus increases market liquidity as it flows to members in the form of deposits. The attractiveness of our advances is also influenced by the impact our dividends have on the effective cost of advances. Following the recent steep decline in rates, our short-term advances should continue to become more attractive relative to other funding options even when taking the reduction in dividend rates into consideration. We experienced advance growth from our smaller members in the short term as they took advantage of the subsidized COVID-19 Relief Advances to help serve their customers affected by the COVID-19 pandemic, but this increase did not offset decreases from larger members as previously discussed. When, and if, member advance demand changes, a few larger members could have a significant impact on the amount of total outstanding advances. If our members reduce the volume of their advances, we expect to continue our past practice of repurchasing excess capital stock.
Rather than match-funding long-term, fixed rate, large dollar advances, we elect to swap a significant portion of large dollar advances with longer maturities to short-term indices (e.g., OIS beginning in late 2018 and SOFR beginning in 2019) 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 89.3 percent and 91.0 percent of our total advance portfolio as of December 31, 2020 and 2019, respectively. We anticipate continuing the practice of swapping large dollar advances with longer maturities to short-term indices. In the first quarter of 2019, we began swapping fixed rate non-callable advances to SOFR as part of our plan to transition away from LIBOR as a reference rate. Furthermore, we began offering adjustable rate advances indexed to SOFR in late 2020. For additional information on our LIBOR transition efforts and LIBOR exposure, see “Risk Management - Interest Rate Risk Management” under this Item 7.
Our potential credit risk from advances is concentrated in commercial banks and savings institutions in our four-state district, but also includes potential credit risk exposure to insurance companies, credit unions, housing associates and a small number of non-members. Table 25 presents advances outstanding by borrower type (in thousands):
Table 25
12/31/2020 12/31/2019
Member advances:
Commercial banks $ 6,358,653 $ 12,524,921
Savings institutions 9,272,904 11,376,368
Insurance companies 3,800,672 3,817,982
Credit unions 1,351,697 2,284,657
CDFI 10,624 8,751
Total member advances 20,794,550 30,012,679
Non-member advances:
Housing associates 152,891 120,800
Non-member borrowers1
25,000 38,576
Total non-member advances 177,891 159,376
TOTAL PAR VALUE $ 20,972,441 $ 30,172,055
1 Includes former members that have merged into or were acquired by non-members.
Table 26 presents information on our five largest borrowers (dollar amounts in thousands). If the borrower was not one of our top five borrowers for one of the periods presented, the applicable columns are left blank. Based on no historical loss experience on advances since the inception of FHLBank, along with our rights to collateral with an estimated fair value in excess of the book value of these advances, we do not expect to incur any credit losses on these advances.
Table 26
12/31/2020 12/31/2019
Borrower Name Advance
Par Value Percent of Total
Advance Par
Advance
Par Value Percent of Total
Advance Par
MidFirst Bank $ 7,460,000 35.6 % $ 8,585,000 28.5 %
Capitol Federal Savings Bank 1,740,000 8.3 2,090,000 6.9
United of Omaha Life Insurance Co. 1,420,604 6.8 1,205,761 4.0
Security Life of Denver Insurance Co. 1,010,000 4.8 925,000 3.1
Gateway First Bank 547,468 2.6
BOKF, N.A. 4,500,000 14.9
TOTAL $ 12,178,072 58.1 % $ 17,305,761 57.4 %
Table 27 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 27
2020 2019
Borrower Name Advance Income Percent of Total
Advance Income1
Advance Income Percent of Total
Advance Income1
MidFirst Bank $ 49,220 15.8 % $ 157,654 22.7 %
BOKF, N.A. 34,049 11.0 174,240 25.1
Capitol Federal Savings Bank 31,713 10.2 52,267 7.5
American Fidelity Assurance Co. 12,033 3.9
United of Omaha Life Insurance Co. 10,356 3.3 24,411 3.5
Security Life of Denver Insurance Co. 17,076 2.5
TOTAL $ 137,371 44.2 % $ 425,648 61.3 %
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.
See Table 10 for information on the amount of interest income on advances as a percentage of total interest income for the years ended December 31, 2020, 2019, and 2018.
Prepayment Fees - Advances are priced based on our marginal cost of issuing matched-maturity funding while considering our related administrative and operating costs, pricing on other funding alternatives available to members, and desired profitability targets. Advances with a maturity or repricing period greater than three months that do not include call features that can be exercised at the option of the member generally incorporate a fee sufficient to make us financially indifferent should the borrower decide to prepay the advance.
Letters of Credit - We also issue letters of credit for members. Members must collateralize letters of credit in accordance with the same requirements as for advances. Letters of credit are generally issued or confirmed on behalf of a member to: (1) 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 $5.4 billion and $4.8 billion as of December 31, 2020 and 2019, 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, 2020 and 2019, which are noted in Table 25, 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, especially 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 single-family residential mortgage loans.
The principal amount of new mortgage loans acquired and held on our balance sheet from our PFIs during the year ended December 31, 2020 was $2.7 billion. The low interest rate environment has increased mortgage loan prepayments, which has resulted in a decrease of 13.4 percent in the outstanding net balance of our mortgage loan portfolio from December 31, 2019 to December 31, 2020. Net mortgage loans as a percentage of total assets increased, from 16.8 percent as of December 31, 2019 to 17.5 percent as of December 31, 2020. Table 10 presents the amount of interest income on mortgage loans held for portfolio as a percentage of total interest income for the years ended December 31, 2020, 2019, and 2018.
As a result of the recent decline in advances, we are monitoring our targeted AMA risk tolerance as a percent of our balance sheet and are implementing strategies to manage growth in the mortgage loan portfolio. Future growth in the MPF portfolio is a function of asset size and composition, most notably the balance of advances, and a multiple of capital, as growth in advances impacts our capital level and allows the balance of mortgage loans to increase without exceeding our targeted AMA risk tolerance. The other factors that may influence future growth in our mortgage loans held for portfolio include: (1) the number of new and delivering PFIs; (2) the mortgage loan origination volume of current PFIs; (3) refinancing activity; (4) the level of interest rates and the shape of the yield curve; (5) the relative competitiveness of MPF pricing to the prices offered by other buyers of residential mortgage loans; and (6) a PFI's level of excess risk-based capital relative to the required risk-based capital charge associated with the PFI's CE obligations on MPF mortgage loans. In an effort to manage the level of mortgage loans on our books, management has researched and continues to review options including participating loan volume (as described below) to members or other investors if needed. 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, 2020. The MPF Program is evaluating additional liquidity options that may help participating FHLBanks manage the size of their mortgage loan portfolios in the future.
The MPF Xtra product is a structure where our PFIs sell mortgage loans to FHLBank Chicago and simultaneously to Fannie Mae. During 2020 and 2019, we had MPF Xtra loan volume of $1.6 billion and $0.1 billion, respectively. The large increase in MPF Xtra volume from 2019 to 2020 reflects efforts in 2020 to manage growth in consideration of our AMA risk tolerance, as discussed above. The MPF Government MBS product is a structure where our PFIs sell government loans to FHLBank Chicago that are aggregated and pooled into securities guaranteed by Ginnie Mae. We had volume of $237.2 million and $106.8 million in the MPF Government MBS product during 2020 and 2019, respectively. During 2018, we began offering the MPF Direct product, which provides the PFI the opportunity to sell to Redwood Trust (an entity that is not affiliated with us) for securitization mortgage loans exceeding the FHFA conforming loan limit under the MPF Program structure. We had volume of $0.6 million and $13.7 million in MPF Direct during 2020 and 2019, respectively. This product was discontinued during 2020, hence the decline from 2019 to 2020. Effective January 1, 2022, the MPF Xtra product is subject to an annual limit of $1.5 billion program-wide for all participating FHLBanks combined which is expected to reduce volumes and, therefore, fee income as well. We receive a counterparty fee from our PFIs for facilitating their participation in these products.
Table 28 presents the outstanding balances of mortgage loans sold to us, net of participations, from our top five PFIs and the percentage of those loans to total mortgage loans outstanding (dollar amounts in thousands). If the member was not one of our top five PFIs for one of the periods presented, the applicable columns are left blank.
Table 28
12/31/2020 12/31/2019
Mortgage
Loan Balance Percent of Total
Mortgage Loans
Mortgage
Loan Balance Percent of Total
Mortgage Loans
NBKC Bank $ 481,224 5.3 % $ 925,748 8.8 %
Tulsa Teachers Credit Union 338,935 3.7
Fidelity Bank 333,086 3.7 393,205 3.8
FirstBank of Colorado 318,220 3.5 424,437 4.1
West Gate Bank 270,985 3.0
Mutual of Omaha Bank 396,389 3.8
Sunflower Bank 383,226 3.7
TOTAL $ 1,742,450 19.2 % $ 2,523,005 24.2 %
Table 29 presents information regarding the asset quality of our mortgage loan portfolio (in thousands):
Table 29
2020 2019 2018 2017 2016
Nonaccrual, past due and restructured loans:
Nonaccrual loans, UPB1
$ 115,353 $ 14,905 $ 11,198 $ 16,456 $ 14,897
Loans past due 90 days or more and still accruing interest, UPB 22,428 8,505 7,631 6,031 4,962
Allowance for credit losses on mortgage loans:
Beginning balance $ 985 $ 812 $ 1,208 $ 1,674 $ 1,972
Adjustment for cumulative effect of accounting change2
6,123 - - - -
Charge-offs/recoveries3
(1,215) (214) (423) (280) (189)
Provision (reversal) for mortgage loan losses (716) 387 27 (186) (109)
Ending balance $ 5,177 $ 985 $ 812 $ 1,208 $ 1,674
Interest income shortfall for nonaccrual loans:
Gross amount of interest income that would have been recorded based on original terms $ 4,679 $ 723 $ 636 $ 894 $ 859
Interest recognized in income during the period (2,710) (566) (493) (661) (687)
Shortfall $ 1,969 $ 157 $ 143 $ 233 $ 172
1 Conventional residential mortgage loans are classified as nonaccrual when they are contractually past due 90 days or more at which time interest is no longer accrued. Interest continues to accrue on government-insured residential mortgage loans (e.g., FHA, VA, HUD and RHS loans) that are contractually past due 90 days or more. Nonaccrual loans include troubled debt restructurings of $1.3 million, $1.4 million, $1.3 million, $1.5 million, and $1.4 million as of December 31, 2020, 2019, 2018, 2017, and 2016, respectively. Troubled debt restructurings are restructurings in which we, for economic or legal reasons related to the debtor’s financial difficulties, grant a concession to the debtor that we would not otherwise consider.
2 Effective January 1, 2020, new accounting guidance was adopted relating to the measurement of credit losses on financial instruments and resulted in a cumulative effect adjustment.
3 The ratio of net charge-offs/recoveries to average loans outstanding was approximately one basis point or less for the periods ending December 31, 2020, 2019, 2018, 2017, and 2016.
The serious delinquency rate of the mortgage loan portfolio increased from December 31, 2019 to December 31, 2020 (see Table 30) primarily due to loans in a forbearance plan as a result of the COVID-19 pandemic, which is discussed in greater detail below. Table 30 presents delinquency information for the unpaid principal of conventional mortgage loans in our traditional MPF products (dollar amounts in thousands):
Table 30
12/31/2020 12/31/2019
30 to 59 days delinquent and not in foreclosure $ 49,619 $ 57,758
60 to 89 days delinquent and not in foreclosure 19,263 7,249
90 days or more delinquent and not in foreclosure1
104,845 9,836
In process of foreclosure2
1,763 3,300
Total conventional mortgage loans delinquent or in process of foreclosure $ 175,490 $ 78,143
Real estate owned (carrying value) $ 991 $ 874
Serious delinquency rate3
1.2 % 0.1 %
1 Includes all troubled debt restructurings regardless of delinquency status not classified as in process of foreclosure. Troubled debt restructurings are restructurings in which we, for economic or legal reasons related to the debtor's financial difficulties, grant a concession to the debtor that we would not otherwise consider.
2 Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported.
3 Conventional loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total conventional loan portfolio principal balance. Only fixed rate prime conventional mortgage loans are held in the MPF portfolio.
Two indications of credit quality are Fair Isaac Corporation (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 31 provides the percentage distribution of FICO scores at origination for conventional mortgage loans outstanding in our traditional MPF products:
Table 31
FICO Score1
12/31/2020 12/31/2019
< 620 0.5 % 0.5 %
620 to < 660 4.2 4.0
660 to < 700 12.0 11.6
700 to < 740 19.6 19.9
>= 740 63.7 64.0
100.0 % 100.0 %
Weighted average 750 750
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 32 provides LTV ratios at origination for conventional mortgage loans outstanding in our traditional MPF products:
Table 32
LTV 12/31/2020 12/31/2019
<= 60% 16.0 % 14.5 %
> 60% to 70% 14.8 14.6
> 70% to 80% 50.4 51.9
> 80% to 90% 10.2 10.1
> 90% to < 100% 8.6 8.9
100.0 % 100.0 %
Weighted average 74.0 % 74.6 %
Our mortgage loans held in portfolio were dispersed across all 50 states and the District of Columbia as of December 31, 2020 and 2019. Table 33 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.
Table 33
12/31/2020 12/31/2019
Kansas 33.0 % 30.2 %
Nebraska 24.0 22.0
Colorado 14.6 16.1
Oklahoma 11.8 10.9
California 2.6 4.0
All other 14.0 16.8
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 increased $4.2 million from December 31, 2019 to December 31, 2020 primarily as a result of the adoption of new accounting guidance pertaining to measurement of credit losses on financial instruments that resulted in an adjustment to retained earnings of $6.1 million. The small reversal in the provision for the year ended December 31, 2020 was due to a decrease in the size of the portfolio, strong performance among those borrowers not directly impacted by the COVID-19 pandemic and a more favorable outlook on the recovery in the labor markets. As anticipated, there was an increase in charge-offs related to serious delinquencies largely attributable to the negative impact of the COVID-19 pandemic on some borrowers. When a loan is charged off, it reduces the allowance and removes the charged-off loan from the pool of loans that are collectively evaluated. This effectively boosts the performance statistics of the collectively evaluated pool, which also explains the reversal of the provision recorded for the year ended December 31, 2020. As of December 31, 2020, there was $82.2 million, or 1.0 percent, of unpaid principal balances of conventional loans in a forbearance plan as a result of COVID-19, representing $1.7 million, $5.7 million, $7.2 million, and $67.7 million with payment status of current, 30 to 59 days past due, 60 to 89 days past due, and greater than 90 days past due, respectively. Delinquencies of conventional loans, including loans in a COVID-19 forbearance plan, remained at low levels relative to the portfolio, at 2.1 percent and 0.8 percent of the amortized cost of total conventional loans at December 31, 2020 and December 31, 2019, respectively. We believe that policies and procedures are in place to effectively manage the credit risk on mortgage loans held in portfolio. See Note 6 of the Notes to Financial Statements under Item 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.
The CARES Act allows financial institutions to provide payment forbearance to assist borrowers who have experienced a hardship resulting from COVID-19. Our mortgage loan servicers may grant a forbearance period to borrowers who have requested forbearance based on COVID-19 related difficulties regardless of the status of the loan at the time of the request, which could impact our mortgage loan portfolio and allowance in future periods. For additional information on loans under forbearance, see Note 6 of the Notes to Financial Statements under Item 8.
Investments: Investments are used to enhance income and provide liquidity and primary and secondary market support for the U.S. housing securities market. Total investments declined $2.8 billion from December 31, 2019 to December 31, 2020 as maturities and principal paydowns exceeded purchases due to unfavorable market conditions and limited MBS investment opportunities during the year, and the desire at year-end to hold higher levels of cash in anticipation of potential year-end financial disruptions.
Short-term Investments - Short-term investments, which are used to provide funds to meet the credit needs of 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. The Bank Act and FHFA regulations and guidelines set liquidity requirements for us, and our board of directors has adopted additional liquidity policies. In addition, we maintain a contingency liquidity plan in the event of financial market disruptions. See “Risk Management - Liquidity Risk Management” under this Item 7 for a discussion of our liquidity management.
Within our portfolio of short-term investments, we face credit risk from unsecured exposures. Our short-term unsecured credit investments have maturities generally ranging between overnight and three months and 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 34 presents the carrying value of our unsecured credit exposure with private counterparties by investment type (in thousands). The unsecured investment credit exposure presented may not reflect the average or maximum exposure during the period as the balances presented reflect the balances at period end.
Table 34
12/31/2020 12/31/2019
Interest-bearing deposits $ 756,250 $ 919,693
Federal funds sold 1,780,000 850,000
TOTAL UNSECURED INVESTMENT CREDIT EXPOSURE1
$ 2,536,250 $ 1,769,693
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, however, generally limit our unsecured exposure to any private counterparty to no more than the balance of our retained earnings, even if the counterparty limit under the previously discussed calculation would be higher. As of December 31, 2020, 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 2020, 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 on-going surveillance described previously and generally investing in unsecured investments of highly-rated counterparties. From time to time, we extend unsecured credit to qualified members by investing in overnight Federal funds issued by them. As of December 31, 2020, all unsecured investments were rated as investment grade based on NRSROs (see Table 38).
Table 35 presents the amount of our unsecured investment credit exposure by remaining contractual maturity and by the domicile of the counterparty or the domicile of the counterparty’s parent for U.S. branches and agency offices of foreign commercial banks as of December 31, 2020 (in thousands). We also mitigate the credit risk on investments by generally investing in investments that have short-term maturities.
Table 35
Domicile of Counterparty Overnight
Domestic $ 756,250
U.S. Branches and agency offices of foreign commercial banks:
Canada 900,000
Germany 480,000
Netherlands 250,000
Finland 150,000
Total U.S. Branches and agency offices of foreign commercial banks
1,780,000
TOTAL UNSECURED INVESTMENT CREDIT EXPOSURE1
$ 2,536,250
1 Excludes unsecured investment credit exposure to U.S. government, U.S. government agencies, instrumentalities, GSEs and supranational entities, and does not include related accrued interest.
Unsecured credit exposure continues to be cautiously placed. In addition, we anticipate continued future investment in reverse repurchase agreements, which are secured investments, and limiting unsecured exposure, especially to foreign financial institutions, as long as the interest rates are comparable. To enhance our liquidity position, we classify our unsecured short-term investment securities in our trading portfolio, which allows us to sell these securities if necessary.
Long-term investments - Our long-term investment portfolio consists primarily of GSE MBS and U.S. Treasury obligations. Our RMP restricts the acquisition of investments to highly rated long-term securities. During the last half of 2018, we began acquiring fixed rate U.S. Treasury obligations and swapping these securities from fixed to variable rates, as either trading securities that are economically swapped or, beginning in 2019, available-for-sale securities that are swapped in qualifying fair value hedging relationships. In addition to serving as excellent collateral, U.S. Treasuries also satisfy recent changes to regulatory liquidity requirements. Currently, the vast majority of our variable rate investment securities are indexed to LIBOR. For additional information on our LIBOR transition efforts and LIBOR exposure, see “Risk Management - Interest Rate Risk Management” under this Item 7.
According to FHFA regulation, no additional MBS purchases can 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, 2020, the aggregate value of our MBS portfolio represented 256 percent of our regulatory capital. At times we may exceed the required threshold due to decreases in regulatory capital; however, we were in compliance with the regulatory limit at the time of each purchase during the year ended December 31, 2020. We were below our threshold at December 31, 2020 due to limited MBS investment opportunities not indexed to LIBOR, as we are no longer purchasing investments that reference LIBOR and mature after December 31, 2021.
As of December 31, 2020, we held $2.7 billion, $2.9 billion, and $0.8 billion of par value in MBS in our held-to-maturity, available-for-sale, and trading portfolios, respectively. The majority of the MBS in the held-to-maturity portfolio are variable rate GSE securities. The majority of the MBS in the trading and available-for-sale portfolios are fixed rate GSE securities, which are swapped from fixed to variable rates.
We provide SBPAs to two state HFAs within the Tenth 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, 2020 expire no later than 2023 though they are renewable upon request of the HFA and at our option. Total principal commitments for bond purchases under the SBPAs were $0.7 billion as of both December 31, 2020 and 2019, respectively. We were required to purchase $122.4 million in bonds under these agreements during the three months ended March 31, 2020. These bonds were classified as available-for-sale securities, and were acquired at par and sold at par prior to March 31, 2020. We were not required to purchase any bonds under these agreements during 2019. We plan to continue to support the state HFAs in our district by continuing to execute SBPAs where appropriate and when allowed by our RMP. In the future, we may 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 tied to swapped securities, and for asset/liability management purposes. Liquidity or other asset/liability management strategies, such as reducing our LIBOR exposure, 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 are likely to be sold when the duration risk is no longer present, are classified as trading or available-for-sale securities. Changes in the fair values of investments classified as trading are recorded through other income and original premiums/discounts on these investments are not amortized.
See Note 4 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 value of our investments is summarized by security type in Table 36 (in thousands).
Table 36
12/31/2020 12/31/2019 12/31/2018
Trading securities:
U.S. Treasury obligations $ 1,298,518 $ 1,530,518 $ 252,377
GSE debentures 431,875 416,025 1,000,495
Mortgage-backed securities:
U.S. obligation MBS - - 467
GSE MBS 892,983 866,019 897,774
Total trading securities 2,623,376 2,812,562 2,151,113
Available-for-sale securities:
U.S. Treasury obligations 3,546,325 4,261,791 -
GSE MBS 3,194,985 2,920,709 1,725,640
Total available-for-sale securities 6,741,310 7,182,500 1,725,640
Held-to-maturity securities:
State or local housing agency obligations 78,960 82,805 86,430
Mortgage-backed securities:
U.S. obligation MBS 70,814 93,375 109,866
GSE MBS 2,597,218 3,393,778 4,260,577
Total held-to-maturity securities 2,746,992 3,569,958 4,456,873
Total securities 12,111,678 13,565,020 8,333,626
Interest-bearing deposits 760,297 921,453 670,660
Federal funds sold 1,780,000 850,000 50,000
Securities purchased under agreements to resell 2,600,000 4,750,000 1,251,096
TOTAL INVESTMENTS $ 17,251,975 $ 20,086,473 $ 10,305,382
The carrying values by contractual maturities of our investments are summarized by security type in Table 37 (dollar amounts in thousands). Expected maturities of certain securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
Table 37
12/31/2020
Due in
one year
or less Due after
one year
through five years
Due after
five years
through 10 years
Due after
10 years Carrying
Value
Trading securities:
U.S. Treasury obligations $ 357,770 $ 940,748 $ - $ - $ 1,298,518
GSE debentures - 431,875 - - 431,875
Mortgage-backed securities:
GSE MBS - 624,797 229,245 38,941 892,983
Total trading securities 357,770 1,997,420 229,245 38,941 2,623,376
Yield on trading securities 2.84 % 2.62 % 2.97 % 0.65 %
Available-for-sale securities:
U.S. Treasury obligations 1,768,588 1,777,737 - - 3,546,325
GSE MBS - 444,356 2,750,629 - 3,194,985
Total available-for-sale securities 1,768,588 2,222,093 2,750,629 - 6,741,310
Yield on available-for-sale securities 1.76 % 2.19 % 2.69 % - %
Held-to-maturity securities:
State or local housing agency obligations - - 48,960 30,000 78,960
Mortgage-backed securities:
U.S. obligation MBS - - - 70,814 70,814
GSE MBS - 794,396 246,433 1,556,389 2,597,218
Total held-to-maturity securities - 794,396 295,393 1,657,203 2,746,992
Yield on held-to-maturity securities - % 1.14 % 1.23 % 1.44 %
Total securities 2,126,358 5,013,909 3,275,267 1,696,144 12,111,678
Yield on total securities 1.94 % 2.18 % 2.57 % 1.43 %
Interest-bearing deposits 760,297 - - - 760,297
Federal funds sold 1,780,000 - - - 1,780,000
Securities purchased under agreements to resell 2,600,000 - - - 2,600,000
TOTAL INVESTMENTS $ 7,266,655 $ 5,013,909 $ 3,275,267 $ 1,696,144 $ 17,251,975
Securities Ratings - Tables 38 and 39 present the carrying value of our investments by rating as of December 31, 2020 and 2019 (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 38
12/31/2020
Carrying Value1
Investment Grade Unrated Total
Triple-A Double-A Single-A
Interest-bearing deposits2
$ - $ 4,047 $ 756,250 $ - $ 760,297
Federal funds sold2
- 150,000 1,630,000 - 1,780,000
Securities purchased under agreements to resell3
- - - 2,600,000 2,600,000
Investment securities:
Non-mortgage-backed securities:
U.S. Treasury obligations - 4,844,843 - - 4,844,843
GSE debentures - 431,875 - - 431,875
State or local housing agency obligations
48,960 30,000 - - 78,960
Total non-mortgage-backed securities
48,960 5,306,718 - - 5,355,678
Mortgage-backed securities:
U.S. obligation MBS - 70,814 - - 70,814
GSE MBS - 6,685,186 - - 6,685,186
Total mortgage-backed securities - 6,756,000 - - 6,756,000
TOTAL INVESTMENTS $ 48,960 $ 12,216,765 $ 2,386,250 $ 2,600,000 $ 17,251,975
1 Investment amounts represent the carrying value and do not include related accrued interest receivable of $37.9 million at December 31, 2020.
2 Amounts include unsecured credit exposure with overnight maturities.
3 Amounts represent collateralized overnight borrowings.
Table 39
12/31/2019
Carrying Value1
Investment Grade Unrated Total
Triple-A Double-A Single-A
Interest-bearing deposits2
$ 255 $ 1,761 $ 919,437 $ - $ 921,453
Federal funds sold2
- - 850,000 - 850,000
Securities purchased under agreements to resell3
- - - 4,750,000 4,750,000
Investment securities:
Non-mortgage-backed securities:
U.S. Treasury obligations - 5,792,309 - - 5,792,309
GSE debentures - 416,025 - - 416,025
State or local housing agency obligations
52,805 30,000 - - 82,805
Total non-mortgage-backed securities
52,805 6,238,334 - - 6,291,139
Mortgage-backed securities:
U.S. obligation MBS - 93,375 - - 93,375
GSE MBS - 7,180,506 - - 7,180,506
Total mortgage-backed securities - 7,273,881 - - 7,273,881
TOTAL INVESTMENTS $ 53,060 $ 13,513,976 $ 1,769,437 $ 4,750,000 $ 20,086,473
1 Investment amounts represent the carrying value and do not include related accrued interest receivable of $45.7 million at December 31, 2019.
2 Amounts include unsecured credit exposure with overnight maturities.
3 Amounts represent collateralized overnight borrowings.
Table 40 details interest rate payment terms for the carrying value of our investment securities as of December 31, 2020 and 2019 (in thousands). We 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 61 and 62 under Item 7A - “Quantitative and Qualitative Disclosures About Market Risk)."
Table 40
12/31/2020 12/31/2019
Trading securities:
Non-mortgage-backed securities:
Fixed rate $ 1,730,393 $ 1,946,543
Non-mortgage-backed securities 1,730,393 1,946,543
Mortgage-backed securities:
Fixed rate 853,027 817,568
Variable rate 39,956 48,451
Mortgage-backed securities 892,983 866,019
Total trading securities 2,623,376 2,812,562
Available-for-sale securities:
Non-mortgage-backed securities:
Fixed rate 3,546,325 4,261,791
Non-mortgage-backed securities 3,546,325 4,261,791
Mortgage-backed securities:
Fixed rate 3,194,985 2,920,709
Mortgage-backed securities 3,194,985 2,920,709
Total available-for-sale securities 6,741,310 7,182,500
Held-to-maturity securities:
Non-mortgage-backed securities:
Variable rate 78,960 82,805
Non-mortgage-backed securities 78,960 82,805
Mortgage-backed securities:
Fixed rate 73,595 104,359
Variable rate 2,594,437 3,382,794
Mortgage-backed securities 2,668,032 3,487,153
Total held-to-maturity securities 2,746,992 3,569,958
TOTAL $ 12,111,678 $ 13,565,020
Securities Concentrations - We did not hold securities from any issuers, excluding securities issued or guaranteed by U.S. government agencies or GSEs, with aggregate book values greater than ten percent of our capital as of December 31, 2020.
Deposits: Total deposits increased 55.5 percent from December 31, 2019 to December 31, 2020. Deposit programs are offered primarily to facilitate customer transactions with us. 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. Due to the low rate environment, demand deposits are currently floored at two basis points and overnight deposits are floored at five basis points. 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 2021 if the level of member liquidity should decrease due to loan demand outpacing deposit funding growth at member institutions, 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 41 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 41
2020 2019 2018
Amount Rate Amount Rate Amount Rate
Overnight deposits $ 463,984 0.25 % $ 233,467 1.97 % $ 202,147 1.65 %
Demand deposits 354,173 0.18 290,913 1.64 239,314 1.39
Derivative counterparty collateral deposits
119,358 1.90
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 primarily used to fund longer-term (one year or greater) 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 change the fixed rate bonds' characteristics in order to match the assets' index. Additionally, we use variable rate, fixed rate, or complex consolidated obligation bonds that are swapped or indexed to SOFR, LIBOR, OIS, or U.S. Treasury bills to fund short-term advances and money market investments and/or as a liquidity risk management tool.
In late 2018, we began swapping fixed rate bonds to OIS rates rather than swapping fixed rate callable bonds to LIBOR. We did so in part to reduce our exposure to LIBOR as the market prepares to transition away from LIBOR as a reference rate. We also began participating in SOFR-indexed debt issuances in November 2018 and swapping certain financial instruments to SOFR in the first quarter of 2019 in an effort to manage our exposure to LIBOR assets and liabilities with maturities beyond 2021. No outstanding LIBOR debt has a maturity date beyond December 31, 2021. For additional information on our LIBOR transition efforts and LIBOR exposure, see “Risk Management - Interest Rate Risk Management” under this Item 7.
Discount notes are primarily used to fund: (1) shorter-term advances or adjustable rate advances with indices and resets based on our short-term cost of funds; and (2) investments with maturities of three months or less. However, we sometimes use discount notes to fund longer-term assets, including fixed rate assets, variable rate assets, assets swapped to synthetically create variable rate assets and short-term anticipated cash flows generated by longer-term fixed rate assets.
Total consolidated obligations decreased 18.4 percent from December 31, 2019 to December 31, 2020. The distribution between discount notes and bonds shifted from 46.2 percent and 53.8 percent, respectively, of total outstanding consolidated obligations as of December 31, 2019 to 22.4 percent and 77.6 percent, respectively, as of December 31, 2020. Consolidated obligation bonds increased as we issued more floating rate debt indexed to SOFR to better reflect the repricing characteristics of our assets. The decrease in discount notes reflects the decline in short-term advances and the shift to term funding indexed to SOFR. We issued $28.0 billion of floating rate bonds indexed to SOFR during 2020 as we continue to transition away from LIBOR and increase our allocation of floating rate bonds funding short-term advances and short-term investments. Approximately $13 billion of bonds were called during 2020 and replaced at a lower cost with either callable or non-callable fixed rate bonds or discount notes. While we currently have stable access to funding markets, future developments could impact the cost of replacing outstanding debt. Some of these include, but are not limited to, a large increase in call volume, significant increases in advance demand, legislative and regulatory changes, geopolitical events, proposals addressing GSEs, derivative and financial market reform, market transition from LIBOR to alternative reference rates, a decline in investor demand for consolidated obligations, further rating agency downgrades of U.S. Treasury obligations that will in turn impact the rating on FHLBank consolidated obligations, and changes in Federal Reserve policies, outlooks, and programs. Volatility in the capital markets caused by the COVID-19 pandemic have and could continue to impact demand for FHLBank debt and the cost of the debt the FHLBanks issue. For a discussion on yields and spreads, see Table 13 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.”
Several recent developments have the potential to impact the demand for FHLBank consolidated obligations in 2021 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.
Borrowings with original maturities of one year or less are considered short-term. Table 42 summarizes short-term borrowings (dollar amounts in thousands):
Table 42
Consolidated Obligation Discount Notes Consolidated Obligation Bonds with Original Maturities of One Year or Less
2020 2019 2018 2020 2019 2018
Outstanding at end of the period1
$ 10,883,608 $ 27,510,042 $ 20,649,098 $ 20,628,300 $ 4,976,050 $ 1,265,000
Weighted average rate at end of the period2
0.08 % 1.54 % 2.35 % 0.12 % 1.66 % 2.39 %
Daily average outstanding for the period1
$ 17,341,197 $ 24,020,763 $ 24,746,689 $ 12,816,886 $ 4,344,953 $ 1,532,082
Weighted average rate for the period2
0.81 % 2.21 % 1.81 % 0.34 % 2.15 % 1.68 %
Highest outstanding at any month-end1
$ 26,560,957 $ 27,510,042 $ 26,952,174 $ 20,628,300 $ 6,484,500 $ 2,450,000
1 Par Value
2 Computed based on par value and coupon/interest rate
Derivatives: All derivatives are marked to fair value with any associated accrued interest, and netted by clearing agent by 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 SOFR, OIS and LIBOR swap interest rate curves fluctuate. Other factors such as implied price/interest rate volatility, the shape of the above interest rate curves and time decay can also drive the market price for derivatives.
The notional amount of total derivatives outstanding decreased by $1.8 billion, from $20.9 billion at December 31, 2019 to $19.1 billion at December 31, 2020, due to decreases in interest rate swaps hedging investments due primarily to maturities and a decrease in interest rate swaps hedging fixed rate consolidated obligation discount notes, which reflects the shift from discount notes to term funding indexed to SOFR. These decreases were partially offset by an increase in interest rate swaps hedging fixed rate advances, which reflects the increase in mid-term and long-term non-callable fixed rate advances, and fixed rate consolidated obligation bonds. For additional information regarding the types of derivative instruments and risks hedged, see Tables 61 and 62 under Item 7A - “Quantitative and Qualitative Disclosures About Market Risk.”
Liquidity and Capital Resources
Capital: Total capital decreased $123.3 million, or 4.4 percent, from December 31, 2019 to December 31, 2020 primarily due to a decrease in required capital stock related to the decline in advance utilization between periods, resulting in excess stock that was subsequently repurchased. This decline was partially offset by the increase in required capital stock for AMA from the change to the AMA activity-based stock purchase requirement from zero to three percent effective August 5, 2020 (see Table 44).
Each member is required to hold capital stock to become and remain a member of the FHLBank and enter into specified activities with the FHLBank including, but not limited to, access to the FHLBank’s credit products and selling AMA to the 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 less the member’s Asset-based Stock Purchase Requirement. As of December 31, 2020, there was no Activity-based Stock Purchase Requirement for letters of credit. However, effective January 22, 2021, the Letter of Credit Activity-based Stock Purchase Requirement increased to one quarter of one percent from the previous requirement of zero percent. The change in the Activity-based Stock Purchase Requirements will not change for former members with outstanding business transactions.
Excess stock represents the amount of stock held by a member in excess of that institution’s minimum stock requirement. Upon reducing the activity-based stock purchase requirement, through a mandated change or through a reduction of advance or AMA 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 balances and AMA 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, 2019 to December 31, 2020 is attributed to the net income for the year of $118.1 million, exceeding the $70.8 million payment of dividends in 2020. Dividends decreased $28.7 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 as a result of decreases in capital stock outstanding and 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, 2020, our level of restricted retained earnings represented approximately 0.52 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 43 as of December 31, 2020 and 2019 (dollar amounts in thousands):
Table 43
2020 2019
Count Amount Count Amount
Commercial banks 556 $ 780,192 572 $ 915,378
Savings institutions 21 445,785 23 530,623
Credit unions 90 162,346 88 136,589
Insurance companies 24 184,863 23 183,307
CDFIs 4 818 4 559
Total GAAP capital stock 695 1,574,004 710 1,766,456
Mandatorily redeemable capital stock 5 1,624 7 2,415
TOTAL REGULATORY CAPITAL STOCK 700 $ 1,575,628 717 $ 1,768,871
Our activity-based stock purchase requirements are consistent with our cooperative structure; members’ stock ownership requirements and the dollar amount of dividends paid to members generally increases as their activities with us increase. To the extent that a member’s asset-based stock purchase requirement is insufficient to cover the member’s activity-based stock purchase requirement, the member is required to purchase Class B Common Stock. We believe the value of our products and services is enhanced by dividend yields that exceed the return available from other investments with similar terms and credit quality. Factors that affect members’ willingness to enter into activity with us and purchase additional required activity-based stock include, but are not limited to, our dividend rates, the risk-based capital weighting of our capital stock, and alternative investment or borrowing opportunities available to our members.
Table 44 provides a summary of member capital requirements under our current capital plan as of December 31, 2020 and 2019 (in thousands):
Table 44
Requirement 12/31/2020 12/31/2019
Asset-based (Class A Common Stock only) $ 161,766 $ 158,758
Activity-based (additional Class B Common Stock)1
1,100,684 1,264,160
Total Required Stock2
1,262,450 1,422,918
Excess Stock (Class A and B Common Stock) 313,178 345,953
Total Regulatory Capital Stock2
$ 1,575,628 $ 1,768,871
Activity-based Requirements:
Advances3
$ 936,880 $ 1,352,339
AMA assets (mortgage loans)4
268,915 621
Total Activity-based Requirement 1,205,795 1,352,960
Asset-based Requirement (Class A Common Stock) not supporting member activity1
56,655 69,958
Total Required Stock2
$ 1,262,450 $ 1,422,918
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 UPBs outstanding.
We are subject to three capital requirements under provisions of the GLB Act, the FHFA’s capital structure regulation and our current capital plan, which includes risk-based capital requirement, total capital requirement and leverage capital requirement. We have been in compliance with each of the aforementioned capital rules and requirements at all times since the implementation of our capital plan. See Note 12 of the Notes to Financial Statements under Item 8 for additional information and compliance as of December 31, 2020 and 2019.
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 (see the discussion of our JCE Agreement and the amendment to our capital plan under Item 1 - “Business - Capital, Capital Rules and Dividends”). The dividend payout ratio represents the percentage of net income paid out as dividends. The fluctuations in the dividend payout ratios for recent year-ends (see Table 7 under Item 6 - “Selected Financial Data”) are primarily attributable to the changes in net income due to the volatility of net gains (losses) on derivatives and hedging activities and net gains (losses) on trading securities (see this Item 7 - “Results of Operations” for additional discussion).
Within our capital plan, we have the ability to pay different dividend rates to the holders of Class A Common Stock and Class B Common Stock. This differential is implemented through a methodology referred to as the dividend parity threshold. Holders of Class A Common Stock and Class B Common Stock share in dividends equally up to the dividend parity threshold for a dividend period, then the dividend rate for holders of Class B Common Stock can exceed the rate for holders of Class A Common Stock, but the dividend rate on Class A Common Stock can never exceed the dividend rate on Class B Common Stock. In essence, the dividend parity threshold: (1) serves as a soft floor to holders of Class A Common Stock since we must pay holders of Class A Common Stock the dividend parity threshold rate before paying a higher rate to holders of Class B Common Stock; (2) indicates a potential dividend rate to holders of Class A Common Stock so that they can make decisions as to whether or not to hold excess Class A Common Stock; and (3) provides us with a tool to manage the amount of excess stock through higher or lower dividend rates by varying the desirability of holding excess shares of Class A Common Stock (i.e., the lower the dividend rate on Class A Common Stock, the less desirable it is to hold excess Class A Common Stock).
The current dividend parity threshold is equal to the average effective overnight Federal funds rate for a dividend period minus 100 basis points and was effective for all dividends paid in 2019 and 2020. The dividend parity threshold is floored at zero percent when the current overnight Federal funds target rate is less than one percent. Under the capital plan, all dividends paid in the form of capital stock must be paid in the form of Class B Common Stock. Table 45 presents the dividend rates per annum paid on capital stock under our capital plan for the quarterly periods of 2020:
Table 45
Applicable Rate per Annum 12/31/2020 09/30/2020 06/30/2020 03/31/2020
Class A Common Stock 0.25 % 0.25 % 0.50 % 2.25 %
Class B Common Stock 5.25 5.25 5.50 7.25
Weighted Average1
4.09 3.69 3.69 5.94
Dividend Parity Threshold:
Average effective overnight Federal funds rate 0.09 % 0.09 % 0.06 % 1.23 %
Spread to index (1.00) (1.00) (1.00) (1.00)
TOTAL (floored at zero percent) 0.00 % 0.00 % 0.00 % 0.23 %
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 46 presents the dividend rates per annum paid on capital stock under our capital plan for the quarterly periods of 2019:
Table 46
Applicable Rate per Annum 12/31/2019 09/30/2019 06/30/2019 03/31/2019
Class A Common Stock 2.50 % 2.50 % 2.50 % 2.25 %
Class B Common Stock 7.50 7.50 7.50 7.50
Weighted Average1
6.14 6.61 6.56 6.56
Dividend Parity Threshold:
Average effective overnight Federal funds rate 1.65 % 2.20 % 2.40 % 2.40 %
Spread to index (1.00) (1.00) (1.00) (1.00)
TOTAL (floored at zero percent) 0.65 % 1.20 % 1.40 % 1.40 %
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 paid dividend rates of 0.25 percent on Class A Common Stock and 5.25 percent on Class B Common Stock for the fourth quarter of 2020. We anticipate stock dividends on Class A Common Stock and Class B Common Stock will remain at these lower levels during 2021, consistent with the lower level of short-term interest rates and our retained earnings policy. Continued adverse market conditions may result in lower dividend rates in future quarters. While there is no assurance that our board of directors will not change the dividend parity threshold in the future, the capital plan requires that we provide members with 90 days' notice prior to the end of a dividend period in which a different dividend parity threshold is utilized in the payment of a dividend.
We expect to continue paying dividends primarily in the form of capital stock, but future dividends may be paid in cash. The payment of cash dividends instead of stock dividends should not have a significant impact from a liquidity perspective, as the subsequent redemption of excess stock created by stock dividends would utilize liquidity resources in the same manner as a cash dividend.
As of December 31, 2020, 59.0 percent of our capital was capital stock, and 41.0 percent was retained earnings and AOCI. As of December 31, 2019, 63.3 percent of our capital was capital stock, and 36.7 percent was retained earnings and AOCI. As mentioned previously, we were in compliance with our minimum regulatory capital requirements as of December 31, 2020. Additionally, within our RMP we have an internal minimum total capital-to-asset ratio requirement of 4.6 percent, which is in excess of the 4.00 percent regulatory requirement. All regulatory and internal capital ratios include mandatorily redeemable capital stock as capital, which we treat as a liability under GAAP. We expect to maintain a regulatory capital-to-asset percentage greater than the regulatory minimum of 4.0 percent and greater than our RMP minimum of 4.6 percent. However, our GAAP total capital percentage could drop below these levels because mandatorily redeemable capital stock is considered a liability under GAAP. See Table 7 under Item 6 - “Selected Financial Data” for reported percentages for total capital ratio and regulatory capital ratio.
Liquidity: We maintain high levels of liquidity to achieve our mission of serving as an economical funding source for our members and housing associates. As part of fulfilling our mission, we also maintain minimum liquidity requirements in accordance with certain 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 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. While we increased liquidity and coordination of debt issuance among the FHLBanks in response to market volatility created by the COVID-19 pandemic, at no time during 2020 did the COVID-19 pandemic affect our balance sheet liquidity or access to the debt markets in a manner that caused us to be unable to meet the liquidity needs of our business or our members.
Sources and Uses of Liquidity - A primary source of our liquidity is the issuance of consolidated obligations. The capital markets traditionally have treated FHLBank obligations as U.S. government agency debt. As a result, even though the U.S. government does not guarantee FHLBank debt, we generally have comparatively stable access to funding at relatively favorable spreads to U.S. Treasury rates. We are primarily and directly liable for our portion of consolidated obligations (i.e., those obligations issued on our behalf). In addition, we are jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all FHLBanks.
During the year ended December 31, 2020, proceeds (net of premiums and discounts) from the issuance of bonds and discount notes were $48.0 billion and $631.0 billion, respectively, compared to $24.7 billion and $818.1 billion for the year ended December 31, 2019. The large difference between the proceeds from bonds and discount notes reflects the cumulative effect of using short-term discount notes to fund short-term advances and our short-term liquidity portfolio. The change in these issuances year over year reflects the decrease in advances balances and also reflects our composition shift from discount notes to the use of term funding indexed to SOFR. Our other sources of liquidity include our short-term liquidity portfolio, deposit inflows, repayments of advances and mortgage loans, maturing investments, interest income, maturing Federal funds sold, and proceeds from maturing reverse repurchase agreements or the sale of unencumbered assets.
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, certificates of deposit, and reverse repurchase agreements. The short-term liquidity portfolio increased between periods, from $9.4 billion as of December 31, 2019 to $11.8 billion as of December 31, 2020. The amounts were slightly elevated at the end of both periods in anticipation of potential member needs at the end of 2020 and 2019 and U.S. Treasuries within one year of maturity as of December 31, 2020. 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.
We also maintain a portfolio of GSE debentures, U.S. Treasury obligations, and GSE MBS that can be pledged as collateral for financing in the securities repurchase agreement market and are classified as trading to enhance our liquidity position. The par value of these debentures and U.S. Treasury obligations was $1.6 billion and $1.9 billion as of December 31, 2020 and December 31, 2019, respectively. The par value of these MBS was $0.8 billion as of both December 31, 2020 and December 31, 2019, respectively. We also hold $3.5 billion in par value of U.S. Treasury obligations classified as available-for-sale to satisfy regulatory liquidity requirements that went into effect March 31, 2019. In addition to the balance sheet sources of liquidity discussed previously, we have established lines of credit with numerous counterparties in the Federal funds market as well as with the other FHLBanks. Accordingly, we expect to maintain a sufficient level of liquidity for the foreseeable future.
We strive to manage our average capital ratio to remain above our minimum regulatory and RMP requirements 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.
Our uses of liquidity primarily include issuing advances, purchasing investments and mortgage loans, and repaying called and maturing consolidated obligations for which we are the primary obligor. We also use liquidity to repay member deposits, pledge collateral to derivative counterparties, redeem or repurchase capital stock, and pay dividends to members.
During the year ended December 31, 2020, advance disbursements totaled $383.7 billion compared to $323.5 billion for the prior year period. During the year ended December 31, 2020, investment purchases (excluding overnight investments) totaled $1.3 billion compared to $9.2 billion for the same period in the prior year. The higher amount of investment purchases in the prior year was primarily U.S. Treasury obligations purchased in response to new regulatory liquidity requirements. During the year ended December 31, 2020, payments on consolidated obligation bonds and discount notes were $42.3 billion and $647.5 billion, respectively, compared to $16.7 billion and $811.3 billion for the prior year period.
Liquidity Requirements - We are subject to funding gap and cash balance guidelines for measuring required liquidity. Funding gaps are defined as the difference between our assets and liabilities scheduled to mature during a specific period stated as a percentage of total assets. FHFA liquidity guidelines require that we manage our funding gap to a minimum ratio for the three-month and one-year horizons calculated with data as of the calendar month-end using the average ratio for the three most recent month-ends. FHFA guidelines require us to maintain a minimum number of days of positive cash balances without access to the capital markets for the issuance of consolidated obligations.
FHFA guidelines allow HQLA to be included in liquidity metrics. The FHFA defines HQLA as uncommitted and unencumbered U.S. Treasury securities that have a remaining maturity of no greater than 10 years designated as trading or available-for-sale. We are also allowed to include some legacy GSE debentures as HQLA. We calculate our liquidity under the funding gap guidelines monthly and are required to submit applicable data in a report to the FHFA monthly. Liquidity is calculated under the cash balance guidelines daily and applicable data is generally required to be submitted to the FHFA daily. Statutory liquidity requires us to have an amount equal to current deposits received from members invested in obligations of the United States, deposits in eligible banks or trust companies, and advances with a remaining maturity not exceeding five years. Statutory liquidity is calculated daily. See “Risk Management - Liquidity Risk Management” under this Item 7 for additional discussion on our liquidity requirements. We remained in compliance with liquidity regulatory requirements in effect during 2020, except for our three-month funding gap requirement during a portion of the first quarter of 2020.
Contingency plans are in place at FHLBank and the Office of Finance that prioritize the allocation of liquidity resources in the event of financial market disruptions, as well as systemic Federal Reserve wire transfer system disruptions. Further, under the Bank Act, the Secretary of Treasury has the authority, at his discretion, to purchase consolidated obligations up to an aggregate amount of $4.0 billion. No borrowings under this authority have been outstanding since 1977.
Generally, our overnight liquid assets are funded with discount notes or floating rate bonds of a longer tenor. In order to help ensure sufficient liquidity, we generally maintain a longer weighted-average maturity on our consolidated obligation discount notes and floating rate bonds than the weighted average maturity of short-term liquid investments and short-term advance balances. Over time, especially when the short end of the yield curve steepens, maintaining the differential between the weighted average original maturity of discount notes and short-term liquid investments and short-term advances will increase our cost of funds and reduce our net interest income. The increase in floating rate debt indexed to SOFR relative to our overall funding is to manage this risk, so that our funding will reprice relative to overnight rates rather than term rates.
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 16 of the Notes to Financial Statements under Item 8 - “Financial Statements and Supplementary Data” for more information on our off-balance sheet arrangements.
Contractual Obligations: Table 47 represents the payment due dates or expiration terms under the specified contractual obligation type, excluding derivatives, by period as of December 31, 2020 (in thousands). Consolidated obligations listed exclude discount notes, which have maturities of one year or less, and are based on contractual maturities. Actual distributions could be influenced by factors affecting potential early redemptions.
Table 47
Contractual Obligations Total Payments due by period
1 Year or Less
After 1 Through 3 Years
After 3 Through 5 Years
After 5 Years
Consolidated obligation bonds $ 37,592,650 $ 27,921,650 $ 2,484,400 $ 1,667,800 $ 5,518,800
Operating leases 232 81 143 8 -
Financing obligation 35,000 - - - 35,000
Commitments to fund mortgage loans 133,456 133,456 - - -
Advance commitments 40,694 19,693 21,001 - -
Expected future pension benefit payments 13,411 1,289 2,587 990 8,545
Mandatorily redeemable capital stock 1,624 990 634 - -
TOTAL $ 37,817,067 $ 28,077,159 $ 2,508,765 $ 1,668,798 $ 5,562,345
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 enterprise risk management (ERM) program in an effort to enable the identification of all inherent significant risks to the organization and institute the prompt and effective management of any major risk exposures. Under this program, we perform annual risk assessments designed to identify and evaluate all material risks that could adversely affect the achievement of our performance objectives and compliance requirements. ERM is a process, effected by our Board of Directors, management and other personnel, applied in strategy setting and across 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 Strategic Risk Management Committee and approved by the Risk Oversight Committee of the Board of Directors.
Business units also play key roles in our risk management program. We utilize a customized business unit risk assessment approach 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. As a result of our efforts, 23 business unit risk assessments were completed in 2020 addressing 137 key processes throughout FHLBank. The number of business unit risk assessments and key processes will necessarily fluctuate over time as organizational changes occur, responsibilities shift and new products and services are developed. 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 in order to keep our Board of Directors apprised of any weaknesses in the current risk management process of each business unit and the steps undertaken by management to address any identified weaknesses. Each process level risk is associated with one or more entity level risks to establish a relationship or connection between the top down or entity level risks and the risks managed at the business unit level.
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 Strategic Risk Management Committee, the Asset/Liability Committee, the Credit Underwriting Committee, the Market Risk Analysis Committee, the Operations Risk Committee, the Disclosure Committee, and the Technology 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 sensitivity. See 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 - Many of our assets and liabilities are indexed to LIBOR, so we continue to evaluate the potential impact of the replacement of the LIBOR benchmark interest rate, including the likelihood of SOFR prevailing as the most widely adopted replacement reference rate. We have assessed our current LIBOR exposure, which included evaluating the fallback language of derivative and investment contracts indexed to LIBOR, and have developed a transition plan that includes strategies to manage and reduce exposure in addition to operational readiness. Our swap agreements are governed by ISDA. On October 9, 2020, ISDA announced the launch of the ISDA Protocol. The Protocol had an effective date of January 25, 2021 and modified legacy and new trades to include robust fallback language for adherents. We adhered to the Protocol on October 22, 2020. For additional information on the Protocol, see "Legislative and Regulatory Developments" under Item 1. The market transition away from LIBOR is expected to be gradual and complex, including the development of term and credit adjustments to accommodate differences between LIBOR, an unsecured rate, and SOFR, a secured rate. SOFR is based on a broad segment of the overnight U.S. Treasuries repurchase market and is intended to be a measure of the average cost of borrowing cash overnight collateralized by U.S. Treasury securities. We started participating in SOFR-indexed debt issuances in November 2018 and swapping certain financial instruments to SOFR in January 2019 in an effort to manage our exposure to LIBOR assets and liabilities with maturities beyond 2021. We sold $162.9 million of available-for-sale securities indexed to LIBOR during the first quarter of 2020. We continue to consider the sale of securities as part of our strategy to reduce LIBOR exposure, but market pricing and reinvestment opportunities are limiting factors. The FCA recently announced that the publication of LIBOR on a representative basis will cease for one-week and two-month LIBOR immediately after December 31, 2021, and the remaining LIBOR tenors immediately after June 30, 2023. This extends transition for existing instruments, many of which have inadequate fallback language, but is not intended to prolong transition for new LIBOR issuance. As of December 31, 2020, all of our exposure to LIBOR was in the 1-month, 3-month, and 6-month tenors.
During the fourth quarter of 2020, the derivative clearinghouses, CME Clearing and LCH Limited, began using SOFR to calculate price alignment interest and discount future cash flows for cleared interest rate derivatives in an effort to promote liquidity in SOFR and support the swap market's transition from LIBOR to SOFR. The impact of the transition on FHLBank was immaterial.
In September 2019, the FHFA issued a supervisory letter to the FHLBanks providing LIBOR transition guidance. The supervisory letter states that by March 31, 2020, the FHLBanks should no longer enter into new financial assets, liabilities, and derivatives that reference LIBOR and mature after December 31, 2021, for all product types except investments. On March 16, 2020, in light of market volatility, the FHFA extended from March 31, 2020 to June 30, 2020 the FHLBanks’ ability to enter into instruments referencing LIBOR that mature after December 31, 2021, except for investments and option embedded products. With respect to investments, the FHLBanks were required, by December 31, 2019, to stop purchasing investments that reference LIBOR and mature after December 31, 2021.
The principal balance of variable rate advances indexed to LIBOR as of December 31, 2020 was $1.1 billion, which represents 24.3 percent of total variable rate advances. The contractual maturities of these LIBOR-indexed advances are all due by the end of 2021; thus, we have no LIBOR exposure after 2021. We have $47.7 million in advances indexed to SOFR as of December 31, 2020.
Table 48 presents the par value of variable rate investment securities by the related interest rate index as of December 31, 2020 (dollar amounts in thousands):
Table 48
12/31/2020
Index Amount Percent
Non-mortgage-backed securities:
LIBOR $ 78,960 2.9 %
Non-mortgage-backed securities 78,960 2.9
Mortgage-backed securities:
LIBOR 2,634,262 97.1
Other 21 -
Mortgage-backed securities 2,634,283 97.1
TOTAL $ 2,713,243 100.0 %
Table 49 presents the par value of investment securities indexed to LIBOR outstanding by year of contractual maturity as of December 31, 2020 (in thousands):
Table 49
12/31/2020
Year of Contractual Maturity Amount
Non-mortgage-backed securities:
After June 30, 2023 $ 78,960
Non-mortgage-backed securities 78,960
Mortgage-backed securities:
2022 86,380
Through June 30, 2023 92,364
Thereafter 2,455,518
Mortgage-backed securities 2,634,262
TOTAL $ 2,713,222
Table 50 presents the notional amount of interest rate swaps (excludes interest rate caps and mortgage delivery commitments) by related interest rate index as of December 31, 2020 (amounts in thousands):
Table 50
12/31/2020
Index Pay Side Receive Side
Fixed rate $ 14,410,753 $ 3,928,113
LIBOR 1,065,000 5,668,436
SOFR 774,613 6,372,529
OIS 2,088,500 2,369,788
TOTAL $ 18,338,866 $ 18,338,866
Table 51 presents the notional amount of interest rate swaps (excludes interest rate caps and mortgage delivery commitments) indexed to LIBOR outstanding by termination date as of December 31, 2020 (in thousands). Actual terminations of certain derivatives will differ from contractual termination dates because derivative counterparties may have call options within the derivative contracts. Likewise, if the financial instrument being hedged by the derivative (either as a qualifying fair value hedge or as an economic hedge) is called or paid off prior to contractual maturity, we could potentially call or terminate the corresponding derivative prior to the termination date.
Table 51
12/31/2020
Year Pay Side Receive Side
Cleared Bilateral Cleared Bilateral
2021 $ 500,000 $ 540,000 $ 348,960 $ 10,000
2022 - - 196,630 54,932
Prior to June 30, 2023 - - 305,274 -
Thereafter - 25,000 935,183 3,817,457
TOTAL $ 500,000 $ 565,000 $ 1,786,047 $ 3,882,389
Table 52 presents the par value of variable rate consolidated obligation bonds by the related interest rate index as of December 31, 2020 (dollar amounts in thousands). The contractual maturities of the LIBOR-indexed consolidated obligation bonds are all due by the end of 2021; thus, we have no LIBOR exposure after 2021.
Table 52
12/31/2020
Index Amount Percent
SOFR $ 17,652,000 74.3 %
LIBOR 6,050,000 25.5
U.S. Treasury 50,000 0.2
TOTAL $ 23,752,000 100.0 %
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’ credit enhancement 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’ credit enhancement 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.
As provided in the Bank Act, a member’s investment in our capital stock is held as additional collateral for the member’s advances and other credit obligations (letters of credit, CE obligations, etc.). In addition, we can call for additional collateral or substitute collateral during the life of an advance or other credit obligation to protect our security interest.
Credit risk arising from AMA activities under our MPF Program falls into three categories: (1) the risk of credit losses on the mortgage loans represented in our FLA and last loss positions; (2) the risk that a PFI will not perform as promised with respect to its loss position provided through its CE obligations on conventional mortgage loan pools, which are covered by the same collateral arrangements as those described for advances; and (3) the risk that a third-party insurer (obligated under PMI or SMI arrangements) will fail to perform as expected. Should a PMI third-party insurer fail to perform, it would increase our credit risk exposure because our FLA is the next layer to absorb credit losses on conventional mortgage loan pools. Likewise, if a 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 housing finance agency 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, 2020.
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, 2020.
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 7 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.
Tables 53 and 54 present derivative notional amounts and counterparty credit exposure by whole-letter rating (in the event of a split rating, we use the lowest rating published by Moody's or S&P) for derivative positions with counterparties to which we had credit exposure (in thousands):
Table 53
12/31/2020
Credit Rating Notional Amount Net Derivatives Fair Value Before Collateral Cash Collateral Pledged From (To) Counterparty Net Credit Exposure to Counterparties
Liability positions with credit exposure:
Uncleared derivatives1:
Single-A $ 249,500 $ (2,748) $ (2,882) $ 134
Cleared derivatives2
13,649,736 (4,644) (152,724) 148,080
TOTAL DERIVATIVE POSITIONS WITH CREDIT EXPOSURE $ 13,899,236 $ (7,392) $ (155,606) $ 148,214
1 Exposure can change on a daily basis; thus, there is often a short lag time between the date the exposure is identified, collateral is requested and collateral is returned.
2 Represents derivative transactions cleared with LCH Limited and CME Clearing. LCH Limited was rated AA- by S&P; LCH Limited's parent company, LCH Group Holdings Limited, was not rated; and London Stock Exchange Group, LCH Group Holdings Limited's ultimate parent, was rated A3 by Moody's and A by S&P as of December 31, 2020. CME Clearing is not rated; however, CME Clearing's parent company, CME Group, Inc., was rated Aa3 by Moody's and AA- by S&P as of December 31, 2020.
Table 54
12/31/2019
Credit Rating Notional Amount Net Derivatives Fair Value Before Collateral Cash Collateral Pledged From (To) Counterparty Net Credit Exposure to Counterparties
Asset positions with credit exposure:
Uncleared derivatives:
Single-A $ 63,500 $ 257 $ - $ 257
Cleared derivatives1
14,150,148 1,821 (145,658) 147,479
Liability positions with credit exposure:
Uncleared derivatives2:
Single-A 6,123,478 (78,575) (84,633) 6,058
Triple-B 286,008 (5,894) (6,409) 515
TOTAL DERIVATIVE POSITIONS WITH CREDIT EXPOSURE $ 20,623,134 $ (82,391) $ (236,700) $ 154,309
1 Represents derivative transactions cleared with LCH Limited and CME Clearing. LCH Limited was rated AA- by S&P; LCH Limited's parent company, LCH Group Holdings Limited, was not rated; and London Stock Exchange Group, LCH Group Holdings Limited's ultimate parent, was rated A3 by Moody's and A by S&P as of December 31, 2019. CME Clearing is not rated; however, CME Clearing's parent company, CME Group, Inc., was rated Aa3 by Moody's and AA- by S&P as of December 31, 2019.
2 Exposure can change on a daily basis; thus, there is often a short lag time between the date the exposure is identified, collateral is requested and collateral is returned.
Foreign Counterparty Risk - Loans, acceptances, interest-bearing deposits with other banks, other interest-bearing investments and any other monetary assets payable to us by entities of foreign countries, regardless of the currency in which the claim is denominated are referred to as "cross-border outstandings." Our cross-border outstandings consist primarily of short-term trading securities and Federal funds sold issued by banks and other financial institutions, which are non-sovereign entities, and derivative asset exposure with counterparties that are also non-sovereign entities. Secured reverse repurchase agreements outstanding are excluded from cross-border outstandings because they are fully collateralized.
In addition to credit risk, cross-border outstandings have the risk that, as a result of political or economic conditions in a country, borrowers may be unable to meet their contractual repayment obligations of principal and/or interest when due because of the unavailability of, or restrictions on, foreign exchange needed by borrowers to repay their obligations. We continue to cautiously place unsecured cross-border outstandings.
Table 55 presents the fair value of cross-border outstandings as of December 31, 2020 (dollar amounts in thousands):
Table 55
Canada Other1
Total1
Amount Percent of Total Assets Amount Percent of Total Assets Amount Percent of Total Assets
Federal funds sold2
$ 900,000 1.7 % $ 880,000 1.7 % $ 1,780,000 3.4 %
Derivative assets:
Net exposure at fair value - (2,748) (2,748)
Cash collateral held - 2,882 2,882
Net exposure after cash collateral - - 134 - 134 -
TOTAL $ 900,000 1.7 % $ 880,134 1.7 % $ 1,780,134 3.4 %
1 Represents foreign countries where individual exposure is less than one percent of total assets. Total cross-border outstandings to countries that individually represented between 0.75 and 1.0 percent of our total assets as of December 31, 2020 were $0.9 billion (Germany).
2 Consists solely of overnight Federal funds sold.
Table 56 presents the fair value of cross-border outstandings to countries in which we do business as of December 31, 2019 (dollar amounts in thousands).
Table 56
Total1
Amount Percent of Total Assets
Federal funds sold2
$ 450,000 0.7 %
Derivative assets:
Net exposure at fair value (12,235)
Cash collateral held 12,869
Net exposure after cash collateral 634 -
TOTAL $ 450,634 0.7 %
__________
1 Represents foreign countries where individual exposure is less than one percent of total assets.
2 Consists solely of overnight Federal funds sold.
Table 57 presents the fair value of cross-border outstandings to countries in which we do business as of December 31, 2018 (dollar amounts in thousands).
Table 57
Total1
Amount Percent of Total Assets
Federal funds sold2
$ 50,000 0.1 %
Derivative assets:
Net exposure at fair value (18,961)
Cash collateral held 22,261
Net exposure after cash collateral 3,300 -
TOTAL $ 53,300 0.1 %
__________
1 Represents other foreign countries where individual exposure is less than one percent of total assets.
2 Consists solely of overnight Federal funds sold.
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.
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. Table 58 summarizes our compliance with the Bank Act liquidity requirements as of December 31, 2020 and 2019 (in thousands):
Table 58
12/31/2020 12/31/2019
Liquid assets1
$ 7,110,712 $ 3,688,874
Total qualifying deposits 1,229,361 790,640
Excess liquid assets over requirement $ 5,881,351 $ 2,898,234
1 Although we have other assets that qualify as eligible investments under the liquidity requirements, only interest-earning deposits, Federal funds sold, and deposits with the Federal Reserve are listed because these exceed the liquidity requirements without the consideration of any other eligible investments.
We generally maintained stable access to the capital markets throughout 2020. 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 in order to properly manage any type of potential risks from triggers. For additional information regarding our credit exposure relating to derivative contracts, see Note 7 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, 5 and 16 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, 2020 and 2019, we were a party to, or participated in, 24 and 23 SBPAs, respectively, in which our principal commitments were $0.7 billion for both periods. We were required to purchase $122.4 million in bonds under these agreements during the year ended December 31, 2020. These bonds were classified as available-for-sale securities, and were acquired at par and sold at par within the same month. We were not required to purchase any bonds under any agreements during the year ended December 31, 2019.
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 and facilitated by the Strategic Planning and Member Solutions department. We use planning scenarios to develop the Strategic Business Plan and we continue to refine and enhance the scenario planning process each year. We believe this process results in the development of robust and effective future scenarios, thereby enhancing the overall effectiveness of our strategic planning process and the development of risk strategies for each scenario. The Board of Directors plays a key role in the development of the Strategic Business Plan and regularly monitors progress in the achievement of business objectives. Two Board of Directors’ meetings are set aside each year for strategic planning purposes.
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 the declining economy. The Strategic Planning and Member Solutions department monitors key indicators tied to the various scenario assumptions and provides 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 26 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 Government Relations Officer 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 9 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, information 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 Operations Risk Committee 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 Information Security Threats - We rely heavily on IT systems and other technology to conduct our business. To manage operations risk as it relates to IT systems, we devote significant management attention and resources to technology. 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 information security program. The goal of our enterprise information security program is to maintain an information security framework such that: (1) information assets are protected from unauthorized access, modification, disclosure and destruction; (2) integrity and confidentiality of information is maintained; (3) information assets and information systems are available when needed; and (4) cyber security threats and/or other information security risks are identified, monitored, assessed, and appropriately managed or mitigated through our enterprise information security program.
Man-made or Natural Disasters - Business disruption and systems failure due to man-made or natural disasters are managed by having in place at all times a disaster recovery plan, the purpose of which is to provide contingency plans for situations where operations cannot be carried out in their normal manner. We maintain contingency plans which deal with business interruptions lasting for a prolonged period of time. An off-site recovery operations center is also maintained which is an important component of our overall disaster recovery planning effort. The recovery center is maintained on a different power grid and is serviced by another telephone central office than our main headquarters. An on-site power generator supports the site in case of total power failure. The off-site recovery center is also used to store computer equipment, information, supplies, and other resources specifically acquired for business continuity purposes. Comprehensive testing is conducted utilizing the off-site recovery location at least once each year with additional limited tests conducted on a quarterly basis. The disaster recovery plans are reviewed and updated semi-annually with employee emergency contact information updated weekly through our human resource information system. We also have a reciprocal back-up agreement in place with FHLBank 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 maintained a funds transfer contingency agreement with the 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.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
We measure interest rate risk exposure by various methods, including the calculation of DOE and MVE in different interest rate scenarios.
Duration of Equity: DOE aggregates the estimated sensitivity of market value for each of our financial assets and liabilities to changes in interest rates. In essence, DOE indicates the sensitivity of theoretical MVE to changes in interest rates. However, MVE should not be considered indicative of our market value as a going concern or our value in a liquidation scenario. A positive DOE results when the duration of assets and designated derivatives is greater than the duration of liabilities and designated derivatives. A positive DOE generally indicates a degree of interest rate risk exposure in a rising interest rate environment. A negative DOE indicates a degree of interest rate risk exposure in a declining interest rate environment. Higher DOE numbers, whether positive or negative, indicate greater volatility of MVE in response to changing interest rates. That is, if we have a DOE of 3.0, a 100 basis point (one percent) increase in interest rates would cause our MVE to decline by approximately three percent whereas a 100 basis point decrease in interest rates would cause our MVE to increase by approximately three percent. It should be noted that a decline in MVE does not necessarily translate directly into a decline in near-term income, especially for entities that do not trade financial instruments. Changes in market value may indicate trends in income over longer periods, and knowing the sensitivity of our market value to changes in interest rates provides a measure of the interest rate risk we take.
Under the RMP approved by our Board of Directors, our DOE is generally limited to a range of ±5.0 assuming current interest rates. In addition, our DOE is generally limited to a range of ±7.0 assuming an instantaneous parallel increase or decrease in interest rates of 200 basis points. During periods of extremely low interest rates, 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 in order to meet this FHFA requirement when applicable.
The DOE parameters established by our Board of Directors represent one way to establish general limits on the amount of interest rate risk that we find acceptable. If our DOE exceeds the policy limits established by the Board of Directors, we either: (1) take asset/liability actions to bring the DOE back within the ranges established in our RMP; or (2) review and discuss potential asset/liability management actions with the Board of Directors at the next regularly scheduled meeting that could bring the DOE back within the ranges established in the RMP and ascertain a course of action, which can include a determination that no asset/liability management actions are necessary. A determination that no asset/liability management actions are necessary can be made only if the Board of Directors agrees with management’s recommendations. All of our DOE measurements were inside Board of Director established policy limits (discussed in previous paragraph) and operating ranges (discussed in next paragraph) as of December 31, 2020. On an ongoing basis, we actively monitor portfolio relationships and overall DOE dynamics as a part of our evaluation processes for determining acceptable future asset/liability management actions.
We typically maintain DOE within the above ranges through management of the durations of our assets, liabilities and derivatives. Significant resources in terms of staffing, software and equipment are continuously devoted to assuring that the level of interest rate risk existing in our balance sheet is properly measured and limited to prudent and reasonable levels. The DOE that management and the Board of Directors consider prudent and reasonable is somewhat lower than the RMP limits mentioned above and can change depending upon market conditions and other factors. As set forth in our Risk Appetite Metrics approved by the Board of Directors, we typically manage our DOE in the current base scenario to remain in the range of ±2.5 and in the ±200 basis point interest rate shock scenarios to remain in the range of ±4.0. When DOE exceeds either the limits established by the RMP or the more narrowly-defined ranges to which we manage DOE, corrective actions taken may include: (1) the purchase of interest rate caps, interest rate floors, or other derivatives; (2) the sale of assets; and/or (3) the addition to the balance sheet of assets or liabilities having characteristics that are such that they counterbalance the excessive duration observed. For example, if an increase in our DOE were due to the extension of mortgage loans, MBS or new advances to members, an appropriate action would be to add new long-term liabilities, whether callable or non-callable, to the balance sheet to offset the lengthening asset position.
Table 59 presents our DOE in the base and the up and down 200 basis point interest rate shock scenarios:
Table 59
Duration of Equity
Date Up 200 Basis Points Base Down 200 Basis Points
12/31/2020 -1.3 -1.2 0.5
09/30/2020 -0.9 1.1 0.4
06/30/2020 -1.5 -3.9 0.4
03/31/2020 -0.5 -2.3 0.7
12/31/2019 0.8 -0.9 2.4
09/30/2019 1.0 -0.7 2.0
06/30/2019 1.4 -0.4 2.6
03/31/2019 1.6 0.0 3.8
As of December 31, 2020, all DOE results continue to remain inside our operating range of ±2.5 in the base scenario and ±4.0 in the ±200 basis point interest rate shock scenarios. Our DOE as of December 31, 2020 increased in the base and up 200 basis point shock scenarios and decreased in the down 200 basis point shock scenario from December 31, 2019. The primary factors contributing to these net changes in duration during the period were: (1) the decrease in interest rates and the relative level of mortgage rates during the period; (2) the decrease in the fixed rate mortgage loan portfolio during the period; and (3) asset/liability actions taken by management throughout the period, including replacing either called or matured long-term unswapped callable consolidated obligation bonds with newly issued bonds with relatively short lock-out periods as conditions permitted and the continued issuance of discount notes funding balances in short-term advances.
The overall decrease in interest rates from December 31, 2019 generally shortens the duration profile for both the fixed rate mortgage loan portfolio and the associated unswapped callable consolidated obligation bonds funding these assets. With the decrease in our mortgage loan portfolio during this period, as discussed in Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - MPF Program,” the duration profile changed as expected since a general decrease in interest rates typically generates faster prepayments for both new production mortgage loans, as well as the outstanding fixed rate mortgage loan portfolio. Generally, lower interest rates indicate a relative increase in refinancing incentive for borrowers.
The fixed rate mortgage loan portfolio decreased in net outstanding balance, but increased as an overall percentage of total assets with the decrease in total assets during the period, increasing from 16.8 percent of total assets as of December 31, 2019 to 17.5 percent as of December 31, 2020. Similar to past periods, the mortgage loan portfolio remains a sizable portion of our balance sheet and changes occurring with this portfolio tend to be magnified in terms of DOE. Since the DOE calculation is a market value based measurement and as portfolio market values increase or decrease, they become larger or smaller contributors to the overall market value of total assets. With the mortgage loan portfolio continuing to comprise a significant percentage of overall assets, its behavior is quite visible in the duration risk profile and changes in this portfolio are typically magnified as interest rates change. For the quarter ended June 30, 2020, the base DOE result of -3.9 exceeded the operating range of ±2.5 primarily as a result of the increased weighting of the mortgage loan portfolio resulting from the decline in the advance portfolio and the decline in interest rates as well as mortgage rates. The increase in the weighting caused the mortgage asset portfolio to comprise a larger percentage of total assets, and with the decline in interest rates shortening the duration of the mortgage asset portfolio, the impact to the base DOE was an overall increase in liability sensitivity, or a more negative DOE.
This magnification occurs when a portfolio market value weighting as a percent of the overall net market value of the balance sheet changes, causing the remaining portfolios to be a smaller or larger component of the total balance sheet composition. For example, when our advance balances increase, our mortgage loan portfolio effectively decreases as a proportion of our total assets, assuming all other asset portfolios and interest rates remain constant. This relationship then causes the duration of the mortgage loan portfolio to have a somewhat smaller contribution impact to the overall DOE since DOE is a market value weighted measurement. As stated previously, even with the decline in the mortgage loan portfolio during the period, the mortgage loan portfolio increased as a percentage of the market value of the net balance sheet, causing the DOE profile to have a marginally larger impact from the mortgage loan duration profile. With these balance sheet dynamics, we continue to actively manage and monitor the contributing factors of our market risk profile, including DOE. As the relationship of the fixed rate mortgage loan assets and the associated callable liabilities vary based on market conditions, we evaluate and manage these market driven sensitivities as both portfolios change in balance level and overall proportion.
With respect to the mortgage loan portfolio, new mortgage loans were added to the mortgage loan portfolio to a lesser degree to replace the significant level of mortgage loans that were prepaid during the period due to the historically low interest rate environment and we continue to actively manage the changes in the portfolio to position the balance sheet sensitivity to perform within our established risk tolerances. To effectively manage these changes in the mortgage loan portfolio (including new production and prepaid loans) and related sensitivity to changes in market conditions, unswapped callable consolidated obligation bonds that either matured or were called were replaced with reissuance of unswapped callable consolidated obligation bonds with relatively long maturities and short lock-out periods (generally three months to one year). The reissuance of new callable bonds to replace matured or called bonds at lower interest rates as rates declined and remained at historically low levels during the period, generally extending the duration profile of this portfolio. This liability extension corresponds with the expected longer duration profile of the new fixed rate mortgage loans, all else being equal, and positions the balance sheet for future changes in rates, including rate increases where the mortgage loan portfolio will likely lengthen in duration as expected prepayments slow. This liability lengthening includes the inherent convexity (discussed below) profile of these portfolios and demonstrates the specific duration sensitivity to changes in interest rates at certain shock scenarios where the unswapped callable bonds are more or less sensitive to certain levels of interest rates, causing the overall DOE to increase or decrease, similar to the factors causing the changes in DOE for all interest rate shock scenarios during the period. 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.
In addition, the relative level of mortgage rates and prices generally contribute significantly to the sensitivity of the fixed rate mortgage loan portfolio causing the duration profile to lengthen or shorten based on the relationship between interest rates, mortgage rates, mortgage prices and associated mortgage spreads. While mortgage rates and spreads contributed to the changes in DOE sensitivity during the period, associated mortgage prices were a significant contributing factor. As expected, all model-related assumptions are regularly evaluated with reasonable enhancements applied periodically. The associated mortgage pricing mechanism includes an extended market-based approach and contributed to the changes during the period. Further, issuance of discount notes continued, as well as increased issuance of variable rate consolidated obligations, in order to provide adequate liquidity sources to appropriately address changes in borrowers' short-term advance balances and associated capital stock activity during the period. The combination of all these factors contributed to the net DOE changes in all interest rate shock scenarios, where the DOE increased in the base and up 200 basis point scenarios and decreased in the down 200 basis point shock scenario. The down shock scenario continues to provide limited information since interest rates remain at historically low levels. This low interest rate environment essentially generates at or near zero interest rates for the majority of interest rates along the down 200 shocked term structure of interest rates, which causes valuation changes to be limited and generates DOE results with marginal information.
We purchased $0.3 billion of fixed rate multi-family GSE MBS during the period. These fixed rate securities were effectively swapped to appropriate indices and impact DOE only slightly since they are reflected as variable rate instruments and are further described in Item 7 - "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Net Gains (Losses) on Trading Securities." As mentioned previously, the addition of mortgage securities, whether fixed or variable rate, typically lengthens the duration profile of the respective portfolios and generally lengthens our DOE. The relationship of the variable rate GSE MBS/CMOs and the purchased interest rate cap portfolio provides a measured impact on the positively shocked duration results as well. We did not purchase additional interest rate caps during 2020.
We have historically purchased interest rate caps to offset the impact of embedded caps in variable rate GSE MBS/CMOs in rising interest rate scenarios. As expected, these interest rate caps are a satisfactory interest rate risk hedge to rising interest rates and provide an offsetting risk response to the risk profile changes in variable rate GSE CMOs with embedded caps. We periodically assess derivative strategies to ensure that overall balance sheet risk is appropriately hedged within our established risk appetite and make adjustments to the derivative portfolio as needed. This evaluation is completed considering not only the par value of the variable rate MBS/CMO investments with embedded caps being hedged with purchased interest rate caps, but also the composition of the purchased cap portfolio and expected prepayments of the variable rate MBS/CMO investments with embedded caps. This evaluation of the relative relationship between the variable rate investment portfolio and the purchased cap portfolio continues to indicate a sufficient hedging relationship, including a convexity profile that continues to perform well within our expectations. Our purchases of interest rate caps tend to partially offset the negative convexity of our mortgage assets and the effects of any interest rate caps embedded in the variable rate MBS/CMOs.
Convexity is the measure of the exponential change in prices for a given change in interest rates; or more simply stated, it measures the rate of change in duration as interest rates change. When an instrument is negatively convex, price generally increases at a slower pace as interest rates decline. When an instrument’s convexity profile approaches zero, it simply demonstrates that the duration profile is flattening or that the duration is changing at an increasingly slower rate. When an instrument’s convexity profile moves further from zero, the duration profile is steepening and is changing in price at an increasingly faster rate. Duration is a measure of the relative risk of a financial instrument, and the more rapidly duration changes as interest rates change, the riskier the instrument. The variable rate MBS/CMOs have negative convexity as a result of the embedded caps and prepayment options. Additionally, all of our mortgage loans are fixed rate, so they have negative convexity as a result of the prepayment options. We seek to mitigate this negative convexity with purchased options that have positive convexity (interest rate caps) and callable liabilities that have negative convexity (unswapped callable bonds), which offset some or all of the negative convexity risk in our assets. With the changes in current capital market conditions, the relatively low level of interest rates and the general shape of the yield curve, all of which make it challenging to manage our market risk position, we continue to take measured asset/liability actions to stay within established policy limits.
With respect to the down instantaneous shock scenarios, the sensitivities of both the assets and liabilities are impacted to a large extent by the absolute level of rates and the positive non-zero boundary methodology as discussed previously. Since the term structure of interest rates is at or near historically low levels, an instantaneous parallel shock of down 100 basis points or 200 basis points will effectively produce a flattened term structure of interest rates near zero for much of the interest rate term structure. As mentioned previously, this flattened term structure will produce slight, if any, variations in valuations, which generate near zero duration results since the duration measurement captures the sensitivity of valuations to changes in rates. These near zero duration results should be viewed in the context of the broader risk profile of the base and positive interest rate shock scenarios to establish a sufficient vantage point for helping discern the overall sensitivity of our balance sheet and of DOE. The net DOE decrease in the down 200 basis point interest rate shock scenario during the period is generally a function of related factors noted previously, including the impact of the changing term structure of interest rates. As with all scenario changes that occurred during the period, the impact from various sensitivities was expected and discussed during our regular interest-rate risk profile review process.
As noted previously, if at any point a risk measurement nears or exceeds an operating range or policy limit established by the Board of Directors, certain actions may be implemented both by management and the Board of Directors. We typically manage a DOE measurement that exceeds the established limits with various asset/liability management actions. Whenever an established limit is exceeded, the Board of Directors is advised by management and the issue is discussed at the next regularly scheduled Board of Directors’ meeting. If after discussion, the Board of Directors determines that asset/liability management action is required, management implements the Board-approved approach to address the situation. Even though all of our DOE measurements are inside management’s operating range as of December 31, 2020, active monitoring of portfolio relationships and overall DOE dynamics continues as do evaluation processes for acceptable future asset/liability management actions.
In calculating DOE, we also calculate our duration gap, which is the difference between the duration of our assets and the duration of our liabilities. Our base duration gap was -0.8 months and -0.5 months for December 31, 2020 and 2019, respectively. Again, as discussed previously, the relative performance of the duration gap was primarily the result of the changes in the fixed rate mortgage loan portfolio and the associated funding decisions made by management in response to the interest rate environment. All FHLBanks are required to submit this base duration gap number to the Office of Finance as part of the quarterly reporting process created by the FHFA.
Matching the duration of assets with the duration of liabilities funding those assets is accomplished through the use of different debt maturities and embedded option characteristics, as well as the use of derivatives, primarily interest rate swaps, caps and floors as discussed previously. Interest rate swaps increase the flexibility of our funding alternatives by providing desirable cash flows or characteristics that might not be as readily available or cost-effective if obtained in the standard GSE debt market. FHFA regulation prohibits the speculative use of derivatives, and we do not engage in derivatives trading for short-term profit. Because we do not engage in the speculative use of derivatives through trading or other activities, the primary risk posed by derivative transactions is credit risk in that a counterparty may fail to meet its contractual obligations on a transaction and thereby force us to replace the derivative at market price (see Item 7 - “Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Credit Risk Management” for additional information).
As discussed earlier, the funding of mortgage loans and prepayable assets with liabilities that have similar duration or average cash flow patterns over time is our primary strategy for and means of managing the interest rate risk for these assets. To achieve the desired liability durations, we issue debt across a broad spectrum of final maturities. Because the durations of mortgage loans and other prepayable assets change as interest rates change, callable consolidated obligation bonds with similar duration characteristics, on average, are frequently issued. The duration of callable bonds shortens when interest rates decrease and lengthens when interest rates increase, allowing the duration of the debt to better match the typical duration of mortgage loans and other prepayable assets as interest rates change. In addition to actively monitoring this relationship, the funding and hedging profile and process are continually measured and reevaluated. We may also use purchased interest rate caps and floors to manage the duration of our assets and liabilities. For example, in order to manage our interest-rate risk in rising interest rate environments, we may purchase out-of-the-money interest rate caps to help manage the duration extension of mortgage assets, especially variable rate MBS/CMOs with periodic and lifetime embedded interest rate caps. During times of falling interest rates, when mortgage assets are prepaying quickly and shortening in duration, we may also synthetically convert fixed rate debt to variable rate using interest rate swaps in order to shorten the duration of our liabilities to more closely match the shortening duration of mortgage assets. As we need to lengthen the liability duration, we terminate selected interest rate swaps to effectively extend the duration of the previously swapped debt.
Market Value of Equity
MVE is the net value of our assets and liabilities. Estimating sensitivity of MVE to changes in interest rates is another measure of interest rate risk. We generally maintain an MVE within limits specified by the board of directors in the RMP. The RMP measures our market value risk in terms of the MVE in relation to total regulatory capital stock outstanding (TRCS). TRCS includes all capital stock outstanding, including stock subject to mandatory redemption. As a cooperative, we believe using the TRCS results 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 60 presents MVE as a percent of TRCS. As of December 31, 2020, all scenarios are well above the specified limits and much of the relative level in the ratios during the periods covered by the table can be attributed to the relative level of the fixed rate mortgage loan market values as rates have continued to remain historically low along with the relative level of outstanding capital.
The MVE to TRCS ratios can be greatly impacted by the level of capital outstanding based on our capital management approach. Typically, as advances increase and the associated capital level increases, the ratio will generally decline since the new advances are primarily short-term with market values at or near par. Conversely, as advance balances decrease and the capital level decreases as capital stock is repurchased, the ratio will generally increase. However, if excess capital stock is not repurchased, the capital level remains higher thereby causing a decrease in the ratio. The relative level of advance balances, required stock (including the new activity-based capital stock requirement for mortgage loan balances) and excess stock as of December 31, 2020 (see Table 44 under Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Capital”) as well as the extended market-based mortgage loan portfolio derived market values contributed to the MVE levels as of December 31, 2020. These relationships primarily generate the changes in the MVE/TRCS levels and produce the changes in the ratios in all interest rate scenarios in the table below.
Table 60
Market Value of Equity as a Percent of Total Regulatory Capital Stock
Date Up 200 Basis Points Base Down 200 Basis Points
12/31/2020 201 183 189
09/30/2020 186 177 182
06/30/2020 231 210 209
03/31/2020 184 173 177
12/31/2019 175 174 176
09/30/2019 174 174 179
06/30/2019 171 174 176
03/31/2019 172 176 176
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. Generally, we designate derivative instruments as either: (1) a fair value hedge of an underlying financial instrument; or (2) an economic hedge used in asset/liability management. An economic hedge is defined as a derivative hedging specific or non-specific underlying assets, liabilities or firm commitments that either does not qualify for hedge accounting, or for which we have not elected hedge accounting, but is an acceptable hedging strategy under our RMP. For hedging relationships that are not designated for shortcut hedge accounting, we formally assess (both at the hedge’s inception and monthly on an ongoing basis) whether the derivatives used have been highly effective in offsetting changes in the fair values of hedged items and whether those derivatives may be expected to remain highly effective in future periods. We typically use regression analyses or similar statistical analyses to assess the quantitative effectiveness of our long haul hedges. We determine the hedge accounting to be applied when the hedge is entered into by completing detailed documentation, which includes a checklist setting forth criteria that must be met to qualify for hedge accounting.
Tables 61 and 62 present the notional amount and fair value amount (fair value includes net accrued interest receivable or payable on the derivative) for derivative instruments by hedged item, hedging instrument, hedging objective and accounting designation (in thousands):
Table 61
12/31/2020
Hedged Item Hedging Instrument Hedging Objective Accounting Designation Notional Amount Fair Value Amount
Advances
Fixed rate non-callable advances Pay fixed, receive variable interest rate swap Convert the advance’s fixed rate to a variable rate index Fair Value Hedge $ 3,922,227 $ (10,550)
Fixed rate convertible advances Pay fixed, receive variable interest rate swap Convert the advance’s fixed rate to a variable rate index and offset option risk in the advance Fair Value Hedge 1,656,550 (108,780)
Firm commitment to issue a fixed rate advance Forward settling interest rate swap Protect against fair value risk Economic Hedge 9,285 (403)
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 37,171 (1,866)
Firm commitment to issue a fixed rate advance Forward settling interest rate swap Protect against fair value risk Fair Value Hedge 19,915 57
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 3,450,000 (321)
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 2,885,402 (141,371)
Fixed rate non-MBS trading investments Pay fixed, receive variable interest rate swap Convert the investment’s fixed rate to a variable rate index Economic Hedge 1,648,500 (63)
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 781,703 (65,771)
Adjustable rate MBS with embedded caps Interest rate cap Offset the interest rate cap embedded in a variable rate investment Economic Hedge 602,500 141
Mortgage Loans Held for Portfolio
Fixed rate mortgage purchase commitments Mortgage purchase commitment Protect against fair value risk Economic Hedge 133,456 650
Consolidated Obligation Discount Notes
Fixed rate non-callable consolidated obligation discount notes with tenors of 6 to 12 months Receive fixed, pay variable interest rate swap Convert the discount note's fixed rate to a variable rate Fair Value Hedge 174,613 1
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 3,253,500 17,952
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 500,000 8
TOTAL $ 19,074,822 $ (310,316)
Table 62
12/31/2019
Hedged Item Hedging Instrument Hedging Objective Accounting Designation Notional Amount Fair Value Amount
Advances
Fixed rate non-callable advances Pay fixed, receive variable interest rate swap Convert the advance’s fixed rate to a variable rate index Fair Value Hedge $ 3,160,580 $ 953
Fixed rate convertible advances Pay fixed, receive variable interest rate swap Convert the advance’s fixed rate to a variable rate index and offset option risk in the advance Fair Value Hedge 1,607,500 (24,784)
Firm commitment to issue a fixed rate advance Forward settling interest rate swap Protect against fair value risk Fair Value Hedge 35,504 28
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 6,000 (62)
Firm commitment to issue a fixed rate advance Forward settling interest rate swap Protect against fair value risk Economic Hedge 35,077 (532)
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 4,200,000 (352)
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 2,822,646 (49,571)
Fixed rate non-MBS trading investments Pay fixed, receive variable interest rate swap Convert the investment’s fixed rate to a variable rate index Economic Hedge 1,898,500 248
Adjustable rate MBS with embedded caps Interest rate cap Offset the interest rate cap embedded in a variable rate investment Economic Hedge 1,130,000 117
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 790,045 (24,861)
Mortgage Loans Held for Portfolio
Fixed rate mortgage purchase commitments Mortgage purchase commitment Protect against fair value risk Economic Hedge 221,800 470
Consolidated Obligation Discount Notes
Fixed rate non-callable consolidated obligation discount notes with tenors of 6 to 12 months Receive fixed, pay variable interest rate swap Convert the discount note's fixed rate to a variable rate Fair Value Hedge 1,383,782 47
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 2,628,500 14,013
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 500,000 2,635
Variable rate consolidated obligation bonds Receive variable interest rate, pay variable interest rate swap Reduce basis risk by converting an undesirable variable rate index in the bond to a more desirable variable rate index Economic Hedge 370,000 (342)
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 110,000 95
TOTAL $ 20,899,934 $ (81,898)

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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
Statements of Condition as of December 31, 2020 and 2019
Statements of Income for the Years Ended December 31, 2020, 2019, and 2018
Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019, and 2018
Statements of Capital for the Years Ended December 31, 2020, 2019, and 2018
Statements of Cash Flows for the Years Ended December 31, 2020, 2019, and 2018
Notes to Financial Statements

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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.

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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 Chief Executive Officer (CEO), our principal executive officer/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, 2020. Based upon that evaluation, the CEO has concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2020.
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.

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

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10: Directors, Executive Officers and Corporate Governance
Information About Our Executive Officers
Table 63 sets forth certain information about each of our executive officers as of the date of this annual report on Form 10-K.
Table 63
Executive Officer Age Position Held
Mark E. Yardley 65 President and Chief Executive Officer
Patrick C. Doran 60 EVP/Chief Compliance and Ethics Officer and General Counsel
Sonia R. Betsworth 59 SVP/Chief Administrative Officer
Denise L. Cauthon 57 SVP/Chief Accounting Officer
Joe B. Edwards 64 SVP/Chief Information Officer
Dan J. Hess 55 SVP/Chief Business Officer
Thomas E. Millburn 50 SVP/Chief Audit Executive
Martin L. Schlossman, Jr. 52 SVP/Chief Risk Officer
No executive officer has any family relationship with any other executive officer or director. All executive officers, other than the Chief Compliance and Ethics Officer (CCEO) and General Counsel, the Chief Audit Executive, and the Chief Risk Officer (CRO), may be removed from office or discharged by the Board of Directors or the President and CEO with or without cause. The Chief Audit Executive may be removed from office, with or without cause, only with the approval of the Audit Committee. The CCEO and General Counsel and 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:
Mark E. Yardley became President and CEO in March 2017, after serving as Interim President and CEO starting in January 2017. From May 2010 through December 2016, he was Executive Vice President and CRO. Mr. Yardley previously served as Executive Vice President and CFO from February 2005 to May 2010, First Senior Vice President and CFO from December 1999 through February 2005 and as First Senior Vice President, Director of Finance, from January 1999 to December 1999. Mr. Yardley joined FHLBank in 1984 as Director of Internal Audit and was promoted to Assistant Vice President in 1990 and Vice President in 1991.
Patrick C. Doran became Executive Vice President, CCEO and General Counsel in December 2017. From March 2016 to December 2017, he served as Executive Vice President, Chief Compliance Officer and General Counsel, and from December 2015 to March 2016, he was Senior Vice President, General Counsel, Chief Compliance Officer and Corporate Secretary. He served as Senior Vice President, General Counsel and Corporate Secretary from when he joined FHLBank in May 2004 to December 2015.
Sonia R. Betsworth became Chief Administrative Officer (CAO) in March 2017, after serving as Interim CAO starting in January 2017. 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.
Denise L. Cauthon became Senior Vice President and Chief Accounting Officer in December 2010. Ms. Cauthon served as First Vice President and Chief Accounting Officer from May to December 2010, First Vice President and Controller from March 2007 to April 2010, and Vice President and Controller from January 2005 to March 2007. Ms. Cauthon joined FHLBank in 1989 as a staff internal auditor and was promoted to Assistant Liability Manager and then Financial Reporting Accountant in 1998. Ms. Cauthon was promoted to Financial Reporting and Operations Manager in 1999 and was named Assistant Vice President in 2000. She was promoted to Assistant Controller-Financial Reporting in 2002 and became Vice President in 2004.
Joe B. Edwards became Senior Vice President and Chief Information Officer (CIO) in July 2013. Prior to joining FHLBank in 2013, Mr. Edwards was Senior Vice President and CIO at ACE Cash Express, Inc., a multi-unit retailer of financial services, where he was responsible for IT development, operations, business intelligence and call center operations from January 1998 through his retirement in December 2012.
Dan J. Hess became Senior Vice President and Chief Business Officer in March 2013. Mr. Hess previously served as Senior Vice President, Director of Member Products from July 2009 to March 2013; First Vice President, Director of Sales from April 2002 to May 2009; and Senior Vice President, Director of Sales from May 2009 to July 2009. Mr. Hess joined FHLBank in 1995 as a Correspondent Banking Account Manager for Kansas. He was promoted to Lending Officer in 1997, to Assistant Vice President and Lending Manager in 1999, and to Vice President in 2000.
Thomas E. Millburn became Senior Vice President, Chief Audit Executive in March 2016. 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 then to First Vice President in March 2004.
Martin L. Schlossman, Jr. became CRO in March 2017, after serving as Interim CRO starting in January 2017. 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.
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 24, 2020, L. Kent Needham from the state of Kansas and Thomas H. Olson, Jr. from the state of Colorado were each declared elected as member directors and Milroy A. Alexander and Lynn Jenkins Katzfey were each declared elected as independent directors of FHLBank’s board of directors. Each of the directors elected in 2020 will serve four-year terms expiring December 31, 2024.
Table 64 sets forth certain information regarding each of our directors as of the date of this annual report on Form 10-K.
Table 64
Director Age Type of
Directorship Director Since Current Term
Expiration Board Committee
Membership1
Donald R. Abernathy, Jr. 64 Member January 2020 December 2023 (a), (d)
Milroy A. Alexander 71 Independent January 2015 December 2024 (a), (b), (c), (e) Chair
Robert E. Caldwell, II 50 Independent January 2004 December 2022 (b), (c) Vice Chair, (d)
G. Bridger Cox 68 Member January 2011 December 2023 (b), (c) Chair
Holly Johnson 57 Independent January 2016 December 2023 (a), (b)
Lynn Jenkins Katzfey 57 Independent July 2019 December 2024 (e), (f)
Jane C. Knight 77 Independent January 2004 December 2022 (d), (e)
Barry Lockard 55 Member January 2019 December 2022 (e), (f)
Richard S. Masinton 79 Independent April 2007 December 2021 (b) Chair, (c), (d)
Craig A. Meader 63 Member January 2020 December 2023 (e), (f)
L. Kent Needham 67 Member January 2013 December 2024 (a), (c), (d) Chair, (f)
Jeffrey R. Noordhoek 54 Independent July 2020 December 2021 (a), (f)
Mark J. O’Connor 56 Member May 2011 December 2021 (c), (d), (f) Chair
Thomas H. Olson, Jr. 55 Member January 2013 December 2024 (a), (b), (e)
Mark W. Schifferdecker 56 Member January 2011 December 2022 (a) Chair, (b), (c), (d)
Douglas E. Tippens 66 Member January 2015 December 2022 (b), (e), (f)
Gregg L. Vandaveer 68 Member January 2018 December 2021 (e), (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:
Donald R. Abernathy, Jr. has served as Senior Vice President at Legacy Bank, Hinton, Oklahoma, since December 2020. Prior to his position at Legacy Bank, Mr. Abernathy served as President and CEO of The Bankers Bank, Oklahoma City, Oklahoma, since 1993, and had served on the board of directors of Bankers Banc Investment Services, Inc., since December 2006. Although the board of directors did not participate in Mr. Abernathy's nomination since he is a member director, Mr. Abernathy possesses a bachelor's degree of business administration, has more than 40 years of banking experience, including 30 as a President and CEO, and served on the board of directors of the Independent Community Bankers of America, that assists in his service as a director. Prior to his current term, Mr. Abernathy served as a member director of FHLBank from January 2017 through December 2018.
Milroy A. Alexander has been a housing, financial and business consultant since 2010, serving nonprofit housing organizations, local housing authorities and the City of Denver Housing and Neighborhood Redevelopment department. 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 CPA, his more than 10 years as an auditor with Touche Ross & Co. (now Deloitte), his past service on the audit committees of many organizations 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.
Robert E. Caldwell, II is the Vice Chair of our board of directors. Mr. Caldwell is currently Executive Vice President and Chief Administrative Officer for Nebco, Inc., a supplier of materials to the construction industry to construct buildings, streets and highways, which he began in August 2014. Prior to his service at Nebco, Inc., Mr. Caldwell was the President and Chief Operating Officer of WRK Real Estate, LLC, which he began in January 2014. He previously served as President and CEO of Hampton Enterprises, Inc., a commercial real estate development, general contracting, construction management and property management firm, since 2006, and General Counsel for Linweld, Inc., a large independent manufacturer and distributor of industrial/medical gases and welding supplies. The board of directors considered Mr. Caldwell’s qualifications, skills and attributes, including his B.S. in business administration, his J.D. and MBA, his experience as General Counsel for Linweld, Inc., a subsidiary of a Japanese public company, his service as President and CEO of a commercial real estate and construction company, and his prior service as an FHLBank director, when making his nomination.
G. Bridger Cox is the Chair of our board of directors. Mr. Cox has been Chairman and President of Citizens Bank & Trust Company, Ardmore, Oklahoma, since 1996. Although the board of directors did not participate in Mr. Cox’s nomination since he is a member director, Mr. Cox is a graduate of the Stonier Graduate School of Banking at Rutgers University, possesses more than 30 years of banking management experience, has served on the board of directors of the Oklahoma Industrial Finance Authority and the Oklahoma Development Finance Authority, and has prior experience as an FHLBank director, that assists in his service as a director. Prior to his current term, Mr. Cox served as a member director of FHLBank from January 1998 through December 2006.
Holly Johnson, a Chickasaw citizen and certified public accountant, 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 current appointed commissioner of the Oklahoma Ethics Commission. 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 certified public accountant 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 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.
Jane C. Knight, now retired, served as Vice President of Site-based Strategies for Kansas Big Brothers Big Sisters from 2002 through 2005. Prior to that, she directed the Wichita office for Kansas Governor Bill Graves and was in charge of addressing constituent concerns, including housing issues. The board of directors considered Ms. Knight’s qualifications, skills and attributes, including her prior management skills, her service as Director of the Kansas Governor’s regional office, her experience with housing issues through the Governor’s office and Habitat for Humanity, her experience with not-for-profit organizations, her ability to enhance the diversity of viewpoints among the board of directors by providing the board of directors with gender diversity, and her prior service as an FHLBank director, when making her nomination.
Barry J. 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 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 12 years as a bank CEO, that assists in his service as a director.
Richard S. Masinton, now retired, was Executive Vice President of Quinn Capital, LLC, a private equity company in Leawood, Kansas from January 2009 through 2014. Mr. Masinton previously served as CFO, then Executive Vice President of Russell Stover Candies in Kansas City, Missouri, from 1996 until 2008. Mr. Masinton has served on the board of directors of No More Homeless Pets Kansas City, an animal welfare charity. He also sat on the boards of directors of Eco-Choice Springwater, LLC and CRB Biosoft, LLC. Mr. Masinton retired from the boards of directors of OneNeck IT Services Corp in 2008 and Enterprise Financial Services Corporation, a publicly owned bank holding company, in 2007. He has also served on the board of advisors of the University of Kansas School of Business and on an advisory board at the University of Oklahoma School of Business. The board of directors considered Mr. Masinton’s qualifications, skills and attributes, including his Master's Degree in Accounting, Finance and Economics, his certification as a CPA, his experience on the board of a publicly owned bank holding company, including his 7 years of experience as Chairman of the audit committee of such bank holding company, his 40 years of experience as a corporate executive, and his prior service as an FHLBank director, when making his nomination.
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 30 years as a bank CEO, that assists in his service as a director.
L. Kent Needham has served as Chairman, President and CEO of The First Security Bank, Overbrook, Kansas, since 2007. Although the board of directors did not participate in Mr. Needham’s nomination since he is a member director, Mr. Needham possesses an MBA, is a graduate of the Colorado Graduate School of Banking, and has over 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; and his experience overseeing a large team of information technology and IT security professionals, when making his nomination.
Mark J. O’Connor currently serves as President of Investments of FirstBank Holding Company, Lakewood, Colorado, and has served as Vice President of FirstBank since 2002. Although the board of directors did not participate in Mr. O’Connor’s most recent nomination since he is a member director, Mr. O’Connor has more than 30 years of banking experience. He is a graduate of the Pacific Coast Banking School, currently serves as the President of Investments and Chairs the ALCO Committee of a large bank holding company and has over 18 years of investment portfolio management experience. Mr. O’Connor serves on the Foundation Board of a local university and chairs its Investment Committee. 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 26 years of banking experience, including more than 21 years as CEO, that assists in his service as a director.
Mark W. Schifferdecker has been President and CEO of The GNBank, N.A., Girard, Kansas, since 2003. Although the board of directors did not participate in Mr. Schifferdecker’s nomination since he is a member director, Mr. Schifferdecker has experience as a CPA, possesses more than 17 years of experience as the CEO of a community bank, served more than 10 years as an auditor with KPMG, served six years on the board of directors of the Federal Reserve Bank of Kansas City, including two years as Chairman of the Audit Committee, and served on the board of directors of Bankers’ Bank of Kansas, N.A., including one year as Chairman, that assists in his service as a director.
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, 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 L. Vandaveer has served as President and CEO of Sooner State Bank, Tuttle, Oklahoma, since April 2001. 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 Southwest Graduate School of Banking at SMU, and has more than 38 years of banking experience, including 22 years as President and 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 CCEO and General Counsel of FHLBank at 500 SW Wanamaker, Topeka, Kansas, 66606.
Audit Committee Financial Expert
We have a separately-designated, standing audit committee, which consists of Mark W. Schifferdecker (chair), Donald R. Abernathy, Jr., Milroy A. Alexander, Holly Johnson, L. Kent Needham, Jeffrey R. Noordhoek and Thomas H. Olson, Jr.
The board of directors has determined that Mark W. Schifferdecker is an “audit committee financial expert” as that term is defined under SEC regulations. Mr. Schifferdecker 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.”

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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 2020 were comprised of the President and CEO, the Executive Vice President and CCEO and General Counsel, our former Senior Vice President and CFO, the Senior Vice President and CAO, and the Senior Vice President and CIO (collectively, the Named Executive Officers). Our former Senior Vice President and CFO, William W. Osborn, ceased to serve as an executive officer on July 10, 2020 and is referred to herein as CFO. In a Form 8-K filed on March 15, 2021, FHLBank announced that Jeff Kuzbel has been named FHLBank's CFO, effective April 1, 2021.
In determining the appropriate total compensation package for our Named Executive Officers for 2020, 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 2020, 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 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 2020 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 and salary adjustments of the CCEO and General Counsel, CFO, CAO, and CIO, as recommended by the CEO;
▪Approving the annual and deferred cash incentive awards of the CEO, CCEO and General Counsel, CFO, CAO, and CIO; and
▪Recommending to the board of directors the base salary, including any salary adjustments, of the CEO.
Elements of Executive Compensation in 2020: To implement our compensation objectives, the elements of our 2020 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 2020 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 pulled from a proprietary survey database and is calculated by considering three peer groups: (1) commercial banks with $20 billion or more in assets, including Federal Reserve Banks (excluding former "bulge bracket" investment banks); (2) other FHLBanks; and (3) publicly available proxy data for regional and community banks with assets between $10 billion and $20 billion. 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. For the third peer group, salary rank is used except for the CEO and CFO where the actual position is used; in addition, the low quartile is used.
In addition to the FHLBanks, the following is a list of survey participants that were included by McLagan in the FHLBank Custom Compensation Survey that was used for the 2020 compensation review:
AIB ICBC Financial Services
Ally Financial Inc. ING
Associated Bank Intesa Sanpaolo
Australia & New Zealand Banking Group Investors Bancorp, Inc
Banco Bilbao Vizcaya Argentaria JP Morgan Chase
Banco ltau Unibanco KBC Bank
Bank Hapoalim KeyCorp
Bank of America Merrill Lynch Landesbank Baden-Wuerttemberg
Bank of New York Mellon Lloyds Banking Group
Bank of Nova Scotia M&T Bank Corporation
Bank of the West Macquarie Bank
Bayerische Landesbank MB Financial Bank
BBVA Compass MUFG Bank, Ltd.
BMO Financial Group MUFG Securities
BNP Paribas National Australia Bank
BOK Financial Corporation Natixis
Branch Banking & Trust Co. New York Community Bank
Brown Brothers Harriman Nord/LB
Capital One Nordea Bank
Charles Schwab & Co. Norinchukin Bank, New York Branch
China Construction Bank Northern Trust Corporation
CIBC World Markets PacWest Bancorp
CIT Group People's United Bank, National Assoc
Citigroup PNC Bank
Citizens Financial Group Popular Community Bank
City National Bank Rabobank
Comerica Regions Financial Corporation
Commerce Bank Royal Bank of Canada
Commerzbank Royal Bank of Scotland Group
Commonwealth Bank of Australia Santander Bank, NA
Credit Agricole CIB Signature Bank - NY
Credit lndustriel et Commercial - N.Y. Societe Generale
Cullen Frost Bankers, Inc. Standard Chartered Bank
DBS Bank State Street Corporation
DZ Bank Sterling National Bank
East West Bancorp Sumitomo Mitsui Banking Corporation
Fannie Mae Sumitomo Mitsui Trust Bank
Federal Reserve Bank of Atlanta SunTrust Banks
Federal Reserve Bank of Boston SVB Financial Group
Federal Reserve Bank of Cleveland Synchrony Financial
Federal Reserve Bank of New York Synovus
Federal Reserve Bank of Richmond TD Ameritrade
Federal Reserve Bank of San Francisco TD Securities
Federal Reserve Bank of St Louis Texas Capital Bank
Fifth Third Bank The PrivateBank
First Citizens Bank U.S. Bancorp
First Republic Bank UMB Financial Corporation
First Tennessee Bank/ First Horizon Umpqua Holding Corporation
FNB Omaha UniCredit Bank AG
Freddie Mac Valley National Bank
GE Capital Webster Bank
Hancock Bank Wells Fargo Bank
HSBC Westpac Banking Corporation
Huntington Bancshares, Inc. Zions Bancorporation
The following is a list of regional and community banks with $10 billion to $20 billion in assets, which is the peer group used for the 2020 compensation benchmarks:
Arvest FirstBank Holding Company
Bank of Hawaii Flagstar Bank
Berkshire Bank Golden 1 Credit Union
Boeing Employees Credit Union Great Western Bank
Bremer Financial Corporation MidFirst Bank
Cathay General Bancorp SchoolsFirst Federal Credit Union
Chemical Financial Corporation Simmons First National Corporation
City National Bank of Florida South State Bank
Community Bank System Inc. Trustmark Corporation
Eastern Bank United Bank - VA
First Interstate BancSystem Inc United Community Banks, Inc
First Midwest Bank
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.
Of the FHLBank-based survey data and the broader survey data utilized, the Compensation Committee considered the 25th percentile, 50th percentile (median) and 75th percentile compensation ranges for analyzing executive positions similar to those of our Named Executive Officers in 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. Generally, the Compensation Committee and CEO recommend below median pay for poor performance and above median pay for superior performance. While survey information is one factor in setting compensation for our Named Executive Officers, we believe that surveys 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 were made effective January 1st, following an analysis of our total compensation practices and FHLBank’s performance.
For 2020, 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 2020 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 peer group survey compensation information 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 2020, 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. Table 65 presents the total base salary and the percentage of salary increase for the Named Executive Officers, effective January 1, 2020:
Table 65
Named Executive Officer Percentage Increase Salary
Mark E. Yardley, President & CEO1
6.2 % $ 725,000
Patrick C. Doran, EVP, CCEO & General Counsel2
3.2 415,000
William W. Osborn, Former SVP & CFO2
3.2 385,000
Sonia R. Betsworth, SVP & CAO2
3.3 335,000
Joe B. Edwards, SVP & CIO2
3.7 318,000
1 Salary increase recommended by the Compensation Committee and approved by the board of directors.
2 Salary increase recommended by the CEO and approved by the Compensation Committee.
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 2020, generally we achieved the pre-established goal targets. Goal attainment varied between the threshold, target, and optimum pre-established levels.
In the fourth quarter of 2019, goal metrics, metric performance ranges and metric weights for award opportunities under the 2020 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 2020 performance objectives, as appropriate, before submitting the objectives to the board of directors for approval.
For the Base Performance Period of January 1, 2020 to December 31, 2020, 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, 2021 to December 31, 2023, over which FHLBank applies a six percent compounding interest rate per year, 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. Table 66 presents the Total Base Opportunity for each Named Executive Officer for each achievement level for the Base Performance Period:
Table 66
Position Total Base Opportunity
Threshold Target Optimum
CEO 37.5 % 75.0 % 112.5 %
CCEO and General Counsel 30.0 60.0 90.0
CFO and CAO 27.5 55.0 82.5
CIO 25.0 50.0 75.0
The Total Base Opportunity Goal Metrics for 2020 are described in Table 67:
Table 67
Total Base Opportunity Goal Metric Definition
Adjusted Return Spread on Total Regulatory Capital1
The spread between: (a) adjusted net income divided by the daily average total regulatory capital and (b) the average daily Overnight Federal funds effective rate (Fed Effective).
GAAP Return Spread on Total Regulatory Capital The spread between: (a) GAAP net income divided by the daily average total regulatory capital; and (b) the Fed Effective rate.
Adjusted Net Income after Capital Charge
The dollar amount of adjusted net income as defined in the above metric that exceeds the cost of the required return on capital.
GAAP Net Income after Capital Charge
The dollar amount of GAAP net income that exceeds the cost of the required return on capital.
Member Product Utilization
Member product utilization is defined as the weighted average 2020 attainment in member utilization in each of three product categories: (1) Line of Credit or advances; (2) MPF Program; and (3) Letters of Credit.
Diversity and Inclusion
FHLBank’s Diversity and Inclusion (D&I) initiative is defined as the advancement of D&I, to the maximum extent possible in balance with financially safe and sound business practices, through inclusion and utilization of diverse-owned business and individuals within its workforce, as defined in the D&I Policy, in all business activities of FHLBank. Points are awarded by achievement of the following (one point awarded for each): (1) attain a workforce ratio of at least 11.0 percent business partners of color as of December 31, 2020; (2) increase the number of viable diverse suppliers registered to do business with FHLBank in SupplierGateway by 12; (3) 80 percent of business partners attend one D&I Awareness Activity; (4) 80 percent of business partners complete one D&I Training event; and (5) participate in 15 outreach opportunities with potential diverse directors and/or in Workforce, Vendors, Capital Markets and/or with members.
Risk Management - Market, Credit and Liquidity Risks
Management of FHLBank risks as determined by the weighted average rating by the board of directors in an annual evaluation of the Risk Appetite metrics in this area using a 1 (lowest) to 5 (highest) point scale. General risk categories are market, credit and liquidity risks.
Risk Management - Compliance, Business and Operations Risks
Management of FHLBank risks as determined by the weighted average rating by the board of directors in an annual evaluation of the Risk Appetite metrics in this area using a 1 (lowest) to 5 (highest) point scale. General risk categories are compliance, business and operations risks.
1 As part of evaluating our financial performance and measuring EICP performance, we begin with the components of “adjusted income” and “adjusted ROE,” non-GAAP financial measures defined in Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations.” We adjust net income reported in accordance with GAAP for the impact of: (1) AHP assessments (equivalent to an effective minimum income tax rate of 10 percent); (2) fair value changes on derivatives and hedging activities (excludes net interest settlements); and (3) unpredictable items, such as prepayment fees, gains/losses on retirement of debt, gains/losses on mortgage loans held for sale, and gains/losses on securities. For measuring our EICP performance, we further adjust for other items excluded because they are not considered a part of our routine operations or ongoing business model, such as interest expense on mandatorily redeemable capital stock, amortization of derivative option costs and amortization/accretion of premium/discount on unswapped MBS classified as trading. This resulting EICP adjusted income, also a non-GAAP financial measure of income, is used to compute an EICP adjusted ROE that is then compared to the average overnight Federal funds effective rate with the difference referred to as EICP adjusted ROE spread.
The profit-oriented objectives of “Adjusted Return Spread on Total Regulatory Capital” and “Adjusted Net Income after Capital Charge” (non-GAAP financial measures) and "GAAP Return Spread on Total Regulatory Capital" and "GAAP Net Income after Capital Charge" were based on the belief that profitability is critical to the long-term viability of the organization. The "Member Product Utilization" objective reflects our desire to be our members preferred source of liquidity and funding for housing finance, community lending and financial management activities. We divided the member product objective to focus on Line of Credit or advances, the MPF Program, and Letters of Credit. The performance objective for “Diversity and Inclusion” establishes our commitment to advancing D&I. Finally, the “Risk Management” objectives were included in recognition of the impact that the Named Executive Officers have on management of business, compliance, credit, liquidity, market and operations risks and an effort to reward positive risk management performance as determined by the board of directors. We divided the risk management objectives to provide balance and focus in the amount of risk exposure we are willing to accept/retain in pursuit of stakeholder value.
Award levels were set at Threshold, Target and Optimum percentages of annual base salary. Table 68 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 2020:
Table 68
Total Base Opportunity Goal Metrics Annual Performance Range Actual Achievement Incentive Payout
Threshold Target Optimum
Adjusted Return Spread on Total Regulatory Capital 3.69 % 4.41 % 5.13 % 4.05 % 75.00 %
GAAP Return Spread on Total Regulatory Capital 3.55 % 4.72 % 5.90 % 4.10 % 73.50 %
Adjusted Net Income after Capital Charge $ 79,433,000 $ 99,291,000 $ 119,149,000 $ 88,044,318 71.68 %
GAAP Net Income after Capital Charge $ 72,086,000 $ 102,980,000 $ 133,875,000 $ 89,415,694 78.05 %
Member Product Utilization - Line of Credit or advances 61.00 % 67.00 % 73.00 % 56.90 %
Member Product Utilization - MPF Program 24.00 % 25.50 % 27.00 % 25.29 % 54.81 %
Member Product Utilization - Letters of Credit 30.00 % 32.00 % 34.00 % 33.05 %
Diversity and Inclusion Achieve 3 of 5 Achieve 4 of 5 Achieve 5 of 5 5 150.00 %
Risk Management - Market, Credit and Liquidity Risks (5.0 point scoring scale)
4.00 4.50 5.00 4.38 88.00 %
Risk Management - Compliance, Business and Operations Risks (5.0 point scoring scale)
3.00 4.00 5.00 3.83 91.50 %
TOTAL WEIGHTED AVERAGE INCENTIVE PAYOUT
85.96 %
We believe the goals incorporated into the EICP are indicative of our balanced approach to profitability and risk management. As reflected in Table 68, we exceeded Threshold for the profitability goals. We exceeded Target for the Letters of Credit component of the Member Product Utilization goal and exceeded Threshold for the MPF Program component, but were below Threshold for the Line of Credit or advances component. We exceeded Threshold performance for each of the Risk Management goals and achieved Optimum for the Diversity and Inclusion goal in 2020.
Table 69 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 2020:
Table 69
Performance Objective Metric Weight
Adjusted Return Spread on Total Regulatory Capital 15 %
GAAP Return Spread on Total Regulatory Capital 5
Adjusted Net Income after Capital Charge 15
GAAP Net Income after Capital Charge 5
Member Product Utilization 10
Diversity and Inclusion 10
Risk Management - Market, Credit, and Liquidity 20
Risk Management - Compliance, Business, and Operations 20
TOTAL 100 %
Table 70 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, 2020 to December 31, 2020 and the Deferral Performance Period, which is the three-year period from January 1, 2021 to December 31, 2023:
Table 70
Named Executive Officer Base Salary Incentive
Percent of Base Salary Total Base Opportunity Cash
Incentive1
Deferred Incentive
Mark E. Yardley, President & CEO $ 725,000 64.47 % $ 467,411 $ 233,706 $ 233,705
Patrick C. Doran, EVP, CCEO & General Counsel 415,000 51.58 214,042 107,021 107,021
Sonia R. Betsworth, SVP & CAO 335,000 47.28 158,383 79,192 79,191
Joe B. Edwards, SVP & CIO 318,000 42.98 136,678 68,339 68,339
William W. Osborn, Former SVP & CFO 204,346 47.28 96,612 48,306 48,306
1 Cash Incentive is included as non-equity incentive plan compensation in Table 75 for all Named Executive Officers.
The final value of the Deferred Incentive portion of the Total Base Opportunity for the calendar year 2021 to calendar year 2023 is measured by applying a six percent interest credit, compounded annually, to the Deferred Incentive presented in Table 70, 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. As noted above, for Participants to be eligible to receive a Final Deferred Incentive Award, FHLBank must have an MVE of not less than 100 percent of FHLBank’s TRCS outstanding, as of the last day of the Deferral Performance Period.
Under the EICP Targets for the 2018-2020 Deferral Performance Period, the achievement of base award opportunities is measured over a three-year performance period. The metric weight for the 2018-2020 performance goals as a percent of the total EICP award opportunity for all Named Executive Officers and the 2018-2020 goal achievement percentage is included in Table 71:
Table 71
Objective Metric Weight 2018-2020
Goal
Achievement Percentage
Total Return 50.0 % 116.67 %
MVE/Total Regulatory Capital 50.0 125.00
Overall Payout Percentage 100.0 % 120.84 %
Based on the performance results, Table 72 presents the Final Deferred Incentive Award for the 2018-2020 Deferral Performance Period for each Named Executive Officer:
Table 72
Named Executive Officer Deferred Incentive Goal Achievement Percentage Final Deferred Incentive Award1
Mark E. Yardley, President & CEO $ 239,464 120.84 % $ 289,369
Patrick C. Doran, EVP, CCEO & General Counsel 111,809 120.84 135,110
Sonia R. Betsworth, SVP & CAO 87,351 120.84 105,555
Joe B. Edwards, SVP & CIO 85,381 120.84 103,175
William W. Osborn, Former SVP & CFO 103,312 120.84 124,843
1 The amount reflected is subject to Compensation Committee approval following completion of the calculation of award payable amounts and the non-disapproval of the FHFA and is included as non-equity incentive plan compensation in Table 75 for all Named Executive Officers.
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 his or her employment or for a period of one year following his or her 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. There were no such bonuses awarded to a Named Executive Officer in 2020.
Retirement and Other Benefits - In 2020, we maintained a comprehensive retirement program for our eligible employees comprised of two qualified retirement plans: (1) the Pentegra Defined Benefit Plan for Financial Institutions, a tax-qualified multiple-employer defined-benefit plan (DB Plan), which was hard frozen December 31, 2019; and (2) 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) in order to maintain the competitive level of our total compensation for executive officers, including the Named Executive Officers. Generally, the BEP is characterized as a non-qualified “excess benefit” plan, which restores those retirement benefits that exceed the IRC limits applicable to the qualified DB Plan and DC Plan. In this respect, the BEP is an extension of our retirement commitment to our Named Executive Officers and other eligible highly compensated employees that preserves and restores the full pension 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; (2) revise the BEP to cease any further accrual of pension benefit under the BEP (as described further below); and (3), freeze the Pentegra Defined Benefit Plan, thereby discontinuing the future accrual of new benefits under that plan.
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 2020, four of the Named Executive Officers (the CEO, CCEO and General Counsel, CAO, and the former CFO) 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 of completing five years of employment equal to 2.0 percent of his/her highest three-year average salary multiplied by his/her years of benefit service, up to 30 years. Two Named Executive Officer participants (Mr. Yardley 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 old 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 5-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 his/her age and benefit service added together totaled 70 (Rule of 70), the normal retirement benefit amount would be reduced by 1.5 percent for each year between the age of the early retiree and age 65 for the portion of the normal retirement benefit accrued prior to September 1, 2003.
DC Plan - The DC Plan is a tax-qualified, defined contribution pension 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 2020, matching ratios for all employees, including the Named Executive Officers, 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 participants in the BEP 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.
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 2020, the rate of return earned on the defined contribution portion of the BEP was 6.57 percent, which was our 2019 return on equity calculated for EICP purposes.
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, 2020, each of the Named Executive Officers would be entitled to receive his or her respective balance of compensation deferred through participation under the BEP within ninety days of any such Named Executive Officer’s termination of employment due to death, disability or retirement and upon a change in control as defined in the BEP and in accordance with IRC Section 409A and applicable regulations. For each Named Executive Officer, these amounts are listed in Table 79 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, 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 perquisites that were provided to the Named Executive Officers in 2020 include cell phone reimbursement, limited spousal travel and limited club dues. Total perquisites to any single Named Executive Officer did not exceed $10,000.
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 73 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, 2020, 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 73
Officer Months Severance Amount1
COBRA2
Severance Total
Mark E. Yardley 12 $ 725,000 $ 20,374 $ 745,374
Patrick C. Doran 9 311,250 22,168 333,418
Sonia R. Betsworth 6 167,500 10,093 177,593
Joe B. Edwards 6 159,000 10,187 169,187
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.
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 his or her compensation multiplier. The Compensation Committee approved the following Participants in the Change in Control Plan and their effective Tiers: CEO at Tier 1; CCEO and General Counsel at Tier 2; and CAO at Tier 3.
Table 74 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, 2020 subject to FHLBank’s Change in Control Plan, as currently in effect:
Table 74
Officer Severance Amount1
Incentive2
COBRA3
Change in Control Total
Mark E. Yardley $ 2,167,750 $ 1,625,813 $ 61,123 $ 3,854,686
Patrick C. Doran 830,000 498,000 59,114 1,387,114
Sonia R. Betsworth 335,000 184,250 20,187 539,437
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 2020 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.
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 2020 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 2020 particularly allowed us to provide total compensation that we believe appropriately balanced reasonable guaranteed pay through carefully considered base salary determinations with additional at-risk cash compensation opportunities for the Named Executive Officers. This means that while we strived to match an appropriate level of compensation comparable to that reflected by our perceived peer groups and internal pay analysis through annual base salary and retirement benefits components, we also strived to provide a component of compensation that is at-risk in both the shorter term and the longer term. These at-risk awards represent an opportunity to reward our Named Executive Officers based on the achievement of both our annual and long-term performance goals and the discretion vested in our Compensation Committee.
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 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
Richard S. Masinton, Chair
Milroy A. Alexander
Robert E. Caldwell, II
G. Bridger Cox
Holly Johnson
Thomas H. Olson, Jr., Chair Designate
Mark W. Schifferdecker
Douglas E. Tippens
Table 75 presents the Summary Compensation Table for the Named Executive Officers.
Table 75
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
2020 $ 725,000 $ - $ 523,075 $ 1,233,185 $ 99,021 $ 2,580,281
President & CEO 2019 682,500 - 437,126 2,360,858 62,290 3,542,774
2018 650,000 - 306,822 1,044,036 60,175 2,061,033
Patrick C. Doran5
2020 415,000 - 242,131 291,196 60,423 1,008,750
EVP, CCEO & General 2019 402,100 - 258,903 513,675 35,881 1,210,559
Counsel 2018 388,500 - 202,515 129,384 33,855 754,254
Sonia R. Betsworth6
2020 335,000 - 184,747 540,074 45,145 1,104,966
SVP & CAO
2019 324,200 - 187,491 889,388 25,588 1,426,667
2018 313,200 - 155,810 78,397 25,752 573,159
Joe B. Edwards7
2020 318,000 - 171,514 5,874 32,860 528,248
SVP & CIO
2019 306,750 - 192,368 2,346 25,207 526,671
2018 290,745 - 158,241 161 25,847 474,994
William W. Osborn8
2020 204,346 - 173,149 218,241 64,156 659,892
Former SVP & CFO 2019 373,000 - 241,950 409,268 29,047 1,053,265
2018 360,400 - 175,583 77,427 29,163 642,573
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.
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 2020 components of All Other Compensation are provided in Table 76.
4 Above market earnings attributable to the BEP for Mr. Yardley were $65,185, $48,858, and $51,036 for 2020, 2019, and 2018, respectively. The aggregate change in the value of Mr. Yardley’s accumulated benefit under FHLBank’s DB Plan was $383,000, $406,000, and $(44,000) for 2020, 2019, and 2018, respectively. The aggregate change in the value of his accumulated benefit under the defined benefit portion of the BEP was $785,000, $1,906,000, and $1,037,000 for 2020, 2019, and 2018, respectively.
5 Above market earnings attributable to the BEP for Mr. Doran were $15,196, $10,675, and $10,384 for 2020, 2019, and 2018, respectively. The aggregate change in the value of Mr. Doran’s accumulated benefit under FHLBank’s DB Plan was $148,000, $259,000, and $12,000 for 2020, 2019, and 2018, respectively. The aggregate change in the value of his accumulated benefit under the defined benefit portion of the BEP was $128,000, $244,000, and $107,000 in 2020, 2019, and 2018, respectively.
6 Above market earnings attributable to the BEP for Ms. Betsworth were $19,074, $13,388, and $13,397 for 2020, 2019, and 2018, respectively. The aggregate change in the value of Ms. Betsworth's accumulated benefit under FHLBank’s DB Plan was $361,000, $470,000, and $(119,000) for 2020, 2019, and 2018, respectively. The aggregate change in the value of her accumulated benefit under the defined benefit portion of the BEP was $160,000, $406,000, and $184,000 for 2020, 2019, and 2018, respectively.
7 Above market earnings attributable to the BEP for Mr. Edwards were $5,874, $2,346 and $161 in 2020, 2019, and 2018, respectively.
8 Above market earnings attributable to the BEP for Mr. Osborn were $3,747, $3,268, and $2,427 for 2020, 2019, and 2018, respectively. The aggregate change in the value of Mr. Osborn's accumulated benefit under FHLBank’s DB Plan was $139,000, $227,000 and $2,000 for 2020, 2019, and 2018, respectively. The aggregate change in the value of his accumulated benefit under the defined benefit portion of the BEP was $75,494, $179,000 and $73,000 for 2020, 2019, and 2018, respectively. Mr. Osborn ceased to serve as an executive officer on July 10, 2020 and is no longer an employee of the FHLBank.
Table 76 presents the components of “All Other Compensation” for 2020 as summarized in Table 75.
Table 76
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 $ 8,913 $ 28,500 $ 60,182 $ 571 $ 99,021
Patrick C. Doran 703 5,542 26,904 26,403 871 60,423
Sonia R. Betsworth 565 689 18,899 24,121 871 45,145
Joe B. Edwards 538 653 28,500 2,298 871 32,860
William W. Osborn1
372 448 27,296 5,883 30,157 64,156
1 Other Miscellaneous for Mr. Osborn includes accrued vacation payout of $29,614.
Table 77 presents the Grants of Plan Based Awards Table for the Named Executive Officers.
Table 77
Name Plan Estimated Future Payouts Under Non-Equity Incentive Plan Awards1
Threshold Target Optimum
Mark E. Yardley EICP-Cash Incentive $ 135,938 $ 271,875 $ 407,813
President & CEO EICP-Deferred Incentive Opportunity 135,937 271,875 407,812
Patrick C. Doran EICP-Cash Incentive 62,250 124,500 186,750
EVP, CCEO & General Counsel EICP-Deferred Incentive Opportunity 62,250 124,500 186,750
Sonia R. Betsworth EICP-Cash Incentive 46,063 92,125 138,188
SVP & CAO EICP-Deferred Incentive Opportunity 46,062 92,125 138,187
Joe B. Edwards EICP-Cash Incentive 39,750 79,500 119,250
SVP & CIO EICP-Deferred Incentive Opportunity 39,750 79,500 119,250
William W. Osborn EICP-Cash Incentive2
52,938 105,875 158,813
Former SVP & CFO EICP-Deferred Incentive Opportunity2
52,937 105,875 158,812
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, 2020. 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.
2 Based on the retirement definition outlined in the EICP, Mr. Osborn may receive a prorated payout.
Pension Benefits: Table 78 presents the 2020 Pension Benefits Table for the participating Named Executive Officers.
Table 78
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 $ 3,190,000 $ -
President & CEO FHLBank Benefit Equalization Plan 30.000 6,403,000 -
Patrick C. Doran Pentegra Defined Benefit Plan for Financial Institutions 14.667 1,193,000 -
EVP, CCEO & General Counsel FHLBank Benefit Equalization Plan 14.667 988,000 -
Sonia R. Betsworth Pentegra Defined Benefit Plan for Financial Institutions 30.000 2,699,000 -
SVP & CAO FHLBank Benefit Equalization Plan 30.000 1,152,000 -
William W. Osborn Pentegra Defined Benefit Plan for Financial Institutions 12.583 931,000 -
Former SVP & CFO FHLBank Benefit Equalization Plan 12.583 - 617,494
Deferred Compensation: Table 79 presents the 2020 Nonqualified Deferred Compensation Table for the participating Named Executive Officers. Our fiscal year (FY) is 2020, with a fiscal year end (FYE) of December 31, 2020.
Table 79
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 $ 57,396 $ 60,182 $ 102,694 $ - $ 1,689,419
Patrick C. Doran,
EVP, CCEO & General Counsel 27,307 26,403 23,940 - 414,256
Sonia R. Betsworth,
SVP & CAO 50,269 24,121 30,049 - 514,604
Joe B. Edwards,
SVP & CIO 68,846 2,298 9,254 - 161,471
William W. Osborn,
Former SVP & CFO 8,349 5,883 5,904 (125,463) 15,567
1 All amounts are also included in the salary column of Table 75.
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 (2006-2019) was $264,459 for Mr. Yardley, $44,681 for Mr. Doran, $35,850 for Ms. Betsworth, $2,507 for Mr. Edwards, and $6,478 for Mr. Osborn,. The amounts reported as preferential (above market) earnings for the current year are presented in Table 75.
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 2020 (see methodology below).
Methodology used to determine the Median Employee
We identified the Median Employee by comparing the 2020 compensation (i.e., 2020 annual earnings and incentive earned for 2019 paid in 2020) for each of the employees who were employed by FHLBank on December 1, 2020, and ranking all 233 employees by that consistently applied compensation measure from lowest to highest, excluding the CEO. We next identified the initial median employee based on that calculation, and identified the five employees with 2020 compensation higher than that initial median employee and the five employees with 2020 compensation lower than that initial median employee, constituting a total pool of 11 employees (the "Identified Pool"). We then calculated the 2020 Total Compensation for each employee in the Identified Pool for 2020 in the same manner as “Total Compensation” for 2020 is shown for our CEO in the Summary Compensation Table (see Table 75), 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 2020 Total Compensation for each employee in the Identified Pool from lowest to highest, and the median employee from the Identified Pool based on 2020 Total Compensation was identified as our Median Employee. The employees in the calculation included all full-time and part-time employees, and we annualized all such employees' earnings who were not employed by us for all of 2020. Interns and those employees retiring at the end of 2020 were not included in the calculation. As indicated above, this analysis was reviewed to identify the Median Employee reflected herein.
Methodology used to determine the CEO Pay Ratio for 2020
For the year ended December 31, 2020, the ratio of our CEO’s Total Compensation to the Total Compensation of our Median Employee was approximately 18:1. For the year ended December 31, 2020, the Total Compensation of the CEO, as reported in the Summary Compensation Table, was $2,580,281, and the Total Compensation of the Median Employee for the same year ended December 31, 2020 was $140,283. 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 80 presents the Director Compensation Table for the persons who served on our board of directors during 2020.
Table 80
Name Fees Earned or Paid in Cash
Nonqualified Deferred Compensation Earnings1
Total
Donald R. Abernathy, Jr. $ 112,500 $ 1,877 $ 114,377
Milroy A. Alexander 122,500 2,271 124,771
Robert E. Caldwell, II 122,500 122,500
G. Bridger Cox 142,500 7,274 149,774
Holly Johnson 112,500 112,500
Lynn Katzfey 112,500 112,500
Jane C. Knight 112,500 3,429 115,929
Barry J. Lockard 112,500 112,500
Richard S. Masinton 122,500 12,416 134,916
Neil F. M. McKay 112,500 112,500
Craig A. Meader 112,500 112,500
L. Kent Needham 122,500 3,621 126,121
Jeffrey R. Noordhoek 56,557 56,557
Mark J. O’Connor 122,500 122,500
Thomas H. Olson, Jr. 112,500 112,500
Mark W. Schifferdecker 122,500 122,500
Douglas E. Tippens 112,500 11,351 123,851
Gregg Vandaveer 112,500 6,401 118,901
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 meeting attendance. Our 2020 Board of Directors Compensation Policy (2020 Policy) was adopted September 20, 2019 and became effective January 1, 2020. 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. In order to compensate them for their time while serving as directors, our 2020 Policy provided that each director shall be paid one-fourth of his or her 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.
In determining reasonable compensation for our directors, we participated in an FHLBank System review of director compensation, which included a study prepared by McLagan. FHLBank director compensation that was established by the Board under the 2020 Policy reflected this analysis. The 2020 Policy established annual compensation limits of $142,500 for the Chair, $122,500 for the Vice-Chair and Committee Chairs and $112,500 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 his or her 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 2021 Board of Directors Compensation Policy (2021 Policy) governing compensation for board meeting attendance on October 30, 2020. The 2021 Policy is similar to the 2020 Policy, and no adjustments to the Board of Directors established annual compensation limits were made. 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. The board of directors also adopted revisions to the BEP effective January 1, 2018, discussed above and as disclosed in the Form 8-K filed on February 5, 2018, 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.

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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 81 presents information on member institutions holding five percent or more of the total outstanding capital stock, which includes mandatorily redeemable capital stock, of FHLBank as of February 28, 2021. No affiliated officer or director of these stockholders currently serves on our board of directors.
Table 81
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 3,821,037 24.6 %
United of Omaha Life Ins. Co. Mutual of Omaha Plaza Omaha NE 918,118 5.9
TOTAL 4,739,155 30.5 %
Additionally, because of the fact that a majority of our board of directors is nominated and elected from our membership (“member directors”), these member directors are officers or directors of member institutions that own our capital stock. Table 82 presents total outstanding capital stock, which includes mandatorily redeemable capital stock, held as of February 28, 2021, for member institutions whose affiliated officers or directors currently serve on our board of directors:
Table 82
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
FirstBank 10403 W Colfax Ave Lakewood CO 119,096 0.8 %
GNBank, NA 100 E Forest Girard KS 50,134 0.3
Cornhusker Bank 8310 O Street Lincoln NE 46,194 0.3
Points West Community Bank 1291 Main Street Windsor CO 18,451 0.1
Legacy Bank 101 West Main Street Hinton OK 15,138 0.1
Citizens Bank & Trust Co of Ardmore 1100 N Commerce Street Ardmore OK 10,199 0.1
First National Bank of Kansas 600 N 4th Street Burlington KS 5,580 -
BancFirst 101 N Broadway Ste 200 Oklahoma City OK 5,556 -
First Security Bank 312 Maple Street Overbrook KS 3,585 -
Sooner State Bank 2 SE 4th Street Tuttle OK 3,246 -
Bank of Estes Park 255 Park Lane Estes Park CO 1,351 -
Nebraska State Bank 218 Main Street Oshkosh NE 1,074 -
Impact Development Fund 200 E. 7th Street, Suite 412 Loveland CO 368 -
TOTAL 279,972 1.7 %

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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.
In order to assist the board of directors in making an affirmative determination of each director’s independence under the Nasdaq Independence Standards, the board of directors: (1) applied categorical standards for independence contained in the Guidelines and under the Nasdaq Independence Standards; (2) determined subjectively the independence of each director; and (3) considered the recommendation of the Audit Committee following its assessment of the independence of each director. The board of directors’ determination of independence under the Nasdaq Independence Standards rested upon a finding that each director has no relationship which, in the opinion of the board of directors, would interfere with that director’s exercise of independent judgment in carrying out the responsibilities of the director. Since under 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), in order to be considered independent, a member of the Audit Committee may not, other than in his or her capacity as a member of the Board of Directors or any other Board Committee: (1) accept any consulting, advisory, or other compensation from 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, in order 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.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14: Principal Accountant Fees and Services
Prior to approving PricewaterhouseCoopers LLP as our independent accountants for 2020, 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 2020 and 2019. 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 83 sets forth the aggregate fees we were billed for the years ended December 31, 2020 and 2019 by our external accounting firm, PricewaterhouseCoopers LLP (in thousands):
Table 83
2020 2019
Audit fees $ 902 $ 936
Audit-related fees 72 70
Tax fees - -
All other fees 1 1
TOTAL $ 975 $ 1,007
Audit fees during the years ended December 31, 2020 and 2019 were for professional services rendered for the audits of our annual financial statements and review of financial statements included in our annual reports on Form 10-K and quarterly reports on Form 10-Q.
Audit-related fees during the years ended December 31, 2020 and 2019 were for discussions regarding miscellaneous accounting-related matters.
We are assessed our proportionate share of the costs of operating the Office of Finance, which includes the expenses associated with the annual audits of the combined financial statements of the 11 FHLBanks. The audit fees for the combined financial statements are billed directly by PricewaterhouseCoopers LLP to the Office of Finance and we are assessed our proportionate share of these expenses. In 2020 and 2019, we were assessed $40,000 and $38,000, respectively, for the costs associated with PricewaterhouseCoopers LLP’s audits of the combined financial statements for those years. These assessments are not included in the table above.
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, 2020 and 2019.
All other fees during the years ended December 31, 2020 and 2019 were for a license fee for an electronic disclosure checklist application.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15: Exhibits, Financial Statement Schedules
a) The financial statements included as part of this Form 10-K are identified in the index to Audited Financial Statements appearing in Item 8 of this Form 10-K and which index is incorporated in this Item 15 by reference.
b) Exhibits.
We have incorporated by reference certain exhibits as specified below pursuant to Rule 12b-32 under the Exchange Act.
Exhibit No. Description
3.1
Exhibit 3.1 to the FHLBank’s registration statement on Form 10, filed May 15, 2006, and made effective on July 14, 2006 (File No. 000-52004) (the “Form 10 Registration Statement”), Federal Home Loan Bank of Topeka Articles and Organization Certificate, is incorporated herein by reference as Exhibit 3.1.
3.2
Exhibit 3.1 to the Current Report on Form 8-K, filed November 5, 2020, Federal Home Loan Bank of Topeka Amended and Restated Bylaws, is incorporated herein by reference as Exhibit 3.3.
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 4.1 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 4.1.
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 10.4 to the Form 10 Registration Statement, Federal Home Loan Bank of Topeka Office Complex Lease Agreement, is incorporated herein by reference as Exhibit 10.2.
Exhibit No. Description
10.2.1
Exhibit 10.4.1 to the Form 10 Registration Statement, Federal Home Loan Bank of Topeka Office Complex Lease Amendment, is incorporated herein by reference as Exhibit 10.2.1.
10.2.2
Exhibit 10.4.2 to the Form 10 Registration Statement, Federal Home Loan Bank of Topeka Office Complex Second Lease Amendment, is incorporated herein by reference as Exhibit 10.2.2.
10.2.3
Exhibit 10.2.3 to the 2013 Annual Report on Form 10-K, filed March 14, 2014, Federal Home Loan Bank of Topeka Office Complex Third Lease Amendment, is incorporated herein by reference as Exhibit 10.2.3
10.2.4
Exhibit 10.2.4 to the 2017 Annual Report on Form 10-K, filed March 15, 2018, Federal Home Loan Bank of Topeka Office Complex Fourth Lease Amendment, is incorporated herein by reference as Exhibit 10.2.4.
10.2.5
Exhibit 10.1 to the Current Report on Form 8-K, filed January 31, 2018, Federal Home Loan Bank of Topeka Office Complex Fifth Lease Amendment, is incorporated herein by reference as Exhibit 10.2.5.
10.3
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 10.3.
10.4
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 10.4.
10.5
Exhibit 10.6 to the 2013 Annual Report on Form 10-K, filed March 14, 2014, Federal Home Loan Bank of Topeka Form of Confirmation of Advance, is incorporated herein by reference as Exhibit 10.5.
10.6
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 10.6.
10.7
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 10.7.
10.8
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 10.8.
10.9
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 10.9.
10.10*
Exhibit 10.1 to the Current Report on Form 8-K, filed January 8, 2019, Executive Incentive Compensation Plan, is incorporated herein by reference as Exhibit 10.10.
10.11*
Exhibit 10.16 to the 2015 Annual Report on Form 10-K, filed March 10, 2016, Federal Home Loan Bank of Topeka 2016 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 15, 2017, Federal Home Loan Bank of Topeka 2017 Executive Incentive Compensation Plan Targets, is incorporated herein by reference as Exhibit 10.12.
10.13*
Exhibit 10.1 to the Current Report on Form 8-K, filed January 22, 2018, Federal Home Loan Bank of Topeka 2018 Executive Incentive Compensation Plan Targets, is incorporated herein by reference as Exhibit 10.13.
10.14*
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 10.14
10.15*
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 10.15.
10.16*
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 10.16.
10.17*
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 10.17.
10.18*
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 10.18.
10.19*
Exhibit 10.1 to the Current Report on Form 8-K, filed November 19, 2019 Federal Home Loan Bank of Topeka 2020 Board of Directors Compensation Policy, is incorporated herein by reference as Exhibit 10.19.
10.20*
Exhibit 10.1 to the Current Report on Form 8-K, filed November 24, 2020 Federal Home Loan Bank of Topeka 2021 Board of Directors Compensation Policy, is incorporated herein by reference as Exhibit 10.20.
10.21*
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 10.21.
10.22*
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 10.22.
10.23***
Exhibit 10.25 to the 2017 Annual Report on Form 10-K, filed March 15, 2018, Federal Home Loan Bank of Topeka 2016 Non-NEO Executive Incentive Compensation Plan Targets, is incorporated herein by reference as Exhibit 10.23.
Exhibit No. Description
14.1
Exhibit 14.1 to the 2017 Annual Report on Form 10-K, filed March 15, 2018, Federal Home Loan Bank of Topeka Code of Ethics, is incorporated herein by reference as Exhibit 14.1.
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 Interim Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of President and Chief Executive Officer (Principal Executive Officer) and Interim 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**
XBRL Instance Document
101.SCH**
XBRL Taxonomy Extension Schema Document
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**
XBRL Taxonomy Extension Label Linkbase Document
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF**
XBRL Taxonomy Extension Definition Linkbase Document
* Represents a management contract or a compensatory plan or arrangement.
** The financial information contained in these XBRL documents is unaudited.
*** FHLBank has requested confidential treatment of the redacted portions of this exhibit pursuant to Rule 246-2 under the Exchange Act.