Federal Home Loan Bank of: Fhlbank Topeka Announces 2021 Second Quarter Results

The following excerpt is from the company's SEC filing.
July 29, 2021
- FHLBank Topeka (FHLBank) is reporting net income of $33.0 million computed in accordance with U.S. generally accepted accounting principles (GAAP) for the quarter ended June 30, 2021 compared to $20.2 million for the quarter ended June 30, 2020. FHLBank is reporting net income of $76.9 million for the six months ended June 30, 2021 compared to $32.1 million for the six months ended June 30, 2020. The $12.8 million increase for the quarter ended June 30, 2021 compared to the quarter ended June 30, 2020 was primarily attributed to an increase in net interest income of $10.5 million. The $44.8 million increase for the six months ended June 30, 2021 was primarily attributed to an increase in net interest income of $28.8 million and a net increase of $15.3 million related to fair value fluctuations on economic derivatives (i.e., derivatives not qualifying for hedge accounting) and trading securities.
Net interest income increased $10.5 million for the quarter, from $56.7 million for the quarter ended June 30, 2020 to $67.2 million for the quarter ended June 30, 2021. Net interest income increased $28.8 million for the current year-to-date period, from $111.8 million for the six months ended June 30, 2020 to $140.6 million for the six months ended June 30, 2021. The increase for both periods was a result of a significant decrease in FHLBank's cost of debt between periods. Net interest income for both the quarter and year-to-date periods was reduced by the decline in the average balance and average rate across most asset categories, most notably advances and mortgage loans, and the change in net interest settlements on fair value hedges. However, the reduction in interest income was more than offset by the significant decrease in FHLBank's cost of debt.
FHLBank expects to file its Form 10-Q for the quarter ended June 30, 2021 with the Securities and Exchange Commission (SEC) on or about August 11, 2021.
Operating Highlights
Net interest income/margin:
Net interest income of $67.2 million for the quarter ended June 30, 2021 increased $10.5 million compared to the same period in 2020. The decrease in market interest rates and improvement in funding spreads has allowed FHLBank to replace maturing and called debt at a lower cost, resulting in a 16 basis point increase in net interest margin and a 18 basis point increase in net interest spread for the quarter ended June 30, 2021 compared to the prior year period.
Total assets:
Total assets decreased from $52.6 billion as of December 31, 2020 to $46.3 billion as of June 30, 2021, driven largely by the decrease in the short-term liquidity portfolio between those periods.
Advances
: Advances remained relatively flat from December 31, 2020 to June 30, 2021, decreasing slightly to $21.0 billion. The average balance of advances declined $2.1 billion, or 8.7 percent, for the three months ended June 30, 2021 when compared to the prior year period. Advance demand dropped significantly in the second quarter of 2020 as deposit inflows generally outpaced loan demand at depository members due to pandemic-related economic stimulus. Additionally, some members began utilizing the Federal Reserve Bank's liquidity facility instead of advances because of its neutral effect on regulatory capital. Advance demand has stabilized since this initial decline and has held steady at approximately $21 billion since the second quarter of 2020.
Mortgage loans:
Mortgage loans decreased by $0.9 billion from December 31, 2020 to June 30, 2021, representing 18.0 percent of total assets as of June 30, 2021, compared to 17.5 percent as of December 31, 2020. Despite the decrease in mortgage loans, the decline in our liquidity and advance portfolios resulted in our mortgage loan portfolio representing a larger portion of our total assets compared to December 31, 2020. The average balance of mortgage loans decreased $2.7 billion, or 24.1 percent, for the three months ended June 30, 2021 when compared to the prior year period as prepayments outpaced acquisitions.
Performance ratios:
Return on average equity (ROE) increased to 4.83 percent for the quarter ended June 30, 2021 compared to 3.20 percent for the prior year period due primarily to the increase in net income for the current quarter, especially relative to the adverse income impacts from the pandemic-related market volatility in the prior year period.
Dividends:
The Class A Common Stock dividend rate of 0.25 percent per annum and the Class B Common Stock dividend rate of 5.25 percent per annum combined for a weighted average dividend rate for the quarter ended June 30, 2021 of 4.06 percent per annum, compared to a weighted average dividend rate of 3.69 percent for the same period in 2020.
Financial Highlights
Attached are highlights of FHLBank’s financial position as of June 30, 2021 and December 31, 2020 and results of operations for the three and six months ended June 30, 2021 and 2020.
Exhibit 99.1
Non-GAAP Measures
A reconciliation of GAAP net income to adjusted income for the three and six months ended June 30, 2021 and 2020 is calculated as follows:
Three Months Ended
Six Months Ended
06/30/2021
06/30/2020
Calculation of Adjusted Income
(Amounts in thousands)
Unaudited
Net income, as reported under GAAP for the period
32,964 
20,242 
76,870 
32,074 
Affordable Housing Program (AHP) assessments
3,663 
2,250 
8,543 
3,568 
Income before AHP assessments
36,627 
22,492 
85,413 
35,642 
Derivative (gains) losses
(11,105)
1,182 
(47,680)
126,745 
Trading (gains) losses
13,411 
(5,375)
40,158 
(99,764)
Prepayment fees on terminated advances
(1,864)
(3,013)
(2,996)
(3,185)
Net (gains) losses on sale of available-for-sale securities
(1,523)
Total excluded items
(7,206)
(10,518)
22,273 
Adjusted income (a non-GAAP measure)
37,069 
15,286 
74,895 
57,915 
_________                   
    Consists of fair value changes on all derivatives and hedging activities excluding net interest settlements on economic hedges.
A reconciliation of GAAP net interest income and GAAP net interest margin to adjusted net interest income and adjusted net interest margin for the three and six months ended June 30, 2021 and 2020 is calculated as follows:
Calculation of Adjusted Net Interest Income
(Dollar amounts in thousands)
Net interest income, as reported under GAAP for the period
67,230 
56,677 
140,599 
111,763 
(Gains) losses on derivatives qualifying for hedge accounting recorded in net interest income
1,931 
(1,227)
(4,230)
7,057 
Net interest settlements on derivatives not qualifying for hedge accounting
(13,054)
(12,962)
(25,895)
(18,116)
Adjusted net interest income (a non-GAAP measure)
54,243 
39,475 
107,478 
97,519 
Net interest margin, as calculated under GAAP for the period
Adjusted net interest margin (a non-GAAP measure)
Adjusted ROE spread for the three and six months ended June 30, 2021 and 2020 is calculated as follows:
Calculation of Adjusted ROE Spread
Average GAAP total capital for the period
2,738,120 
2,547,842 
2,728,403 
2,636,722 
ROE, based upon GAAP net income
Adjusted ROE, based upon adjusted income
Average overnight Federal funds effective rate
GAAP ROE as a spread to average overnight Federal funds effective rate
Adjusted ROE as a spread to average overnight Federal funds effective rate
This earnings release contains certain supplemental financial information that has been determined by methods other than GAAP that management uses in the analysis of FHLBank’s financial performance. FHLBank management believes that certain non-GAAP financial measures are helpful in understanding FHLBank's operating results and provide meaningful period-to-period comparison of FHLBank's 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. FHLBank's business model is primarily one of holding assets and liabilities to maturity. However, FHLBank may engage in periodic instrument sales for liquidity purposes or to reduce its exposure to LIBOR-indexed instruments. FHLBank reports the following non-GAAP financial measures in the previous tables that it believes are useful to stakeholders as key measures of its operating performance: (1) adjusted income, (2) adjusted net interest income, (3) adjusted net interest margin, and (4) adjusted ROE. Although FHLBank calculates its 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 the above 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 FHLBank believes the non-GAAP measures contained in this announcement are frequently used by FHLBank’s stakeholders in the evaluation of FHLBank's 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.
The information contained in this announcement contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include statements describing the objectives, projections, estimates or future predictions of FHLBank’s operations. These statements may be identified by the use of forward-looking terminology such as “anticipates,” “believes,” “may,” “is likely,” “could,” “estimate,” “expect,” “will,” “intend,” “probable,” “project,” “should” or their negatives or other variations on these terms. FHLBank cautions that by their nature forward-looking statements involve risks or uncertainties and that actual results may differ materially from those expressed in any forward-looking statements as a result of such risks and uncertainties, including but not limited to: changes in economic and market conditions, including conditions in our district and the U.S. and global economy, as well as the mortgage, housing, and capital markets; the impact of the ongoing and evolving COVID-19 pandemic on our members, our business, the economy and financial markets; governmental actions, including legislative, regulatory, judicial or other developments that affect FHLBank, our members, counterparties or investors, housing government-sponsored enterprises, or the FHLBank System in general; effects of derivative accounting treatment and other accounting rule requirements, or changes in such requirements; competitive forces, including competition for loan demand, purchases of mortgage loans and access to funding; the ability of FHLBank to introduce new products and services to meet market demand and to manage successfully the risks associated with all products and services; changes in demand for FHLBank products and services or consolidated obligations of the FHLBank System; membership changes, including changes resulting from member failures or mergers, changes due to member eligibility, or changes in the principal place of business of members; changes in the U.S. government's long-term debt rating and the long-term credit rating of the senior unsecured debt issues of the FHLBank System; soundness of other financial institutions, including FHLBank members, non-member borrowers, counterparties and the other FHLBanks; the ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which FHLBank has joint and several liability; the volume and quality of eligible mortgage loans originated and sold by participating members to FHLBank through its various mortgage finance products; changes in the fair value and economic value of, impairment of, and risks associated with FHLBank’s investments in mortgage loans and mortgage-backed securities or other assets and the related credit enhancement protections; changes in the value or liquidity of collateral underlying advances to FHLBank members or nonmember borrowers or collateral pledged by reverse repurchase and derivative counterparties; volatility of market prices, changes in interest rates and indices and the timing and volume of market activity, including the effects of these factors on amortization/accretion; gains/losses on derivatives or on trading investments and the ability to enter into effective derivative instruments on acceptable terms; upcoming discontinuance of LIBOR and the related effect on FHLBank's LIBOR-based financial products, investments, and contracts; changes in FHLBank's capital structure; our ability to declare dividends or to pay dividends at rates consistent with past practices; and the ability of FHLBank to keep pace with technological changes and the ability to develop and support technology and information systems, including the ability to securely access the internet and internet-based systems and services, sufficient to effectively manage the risks of FHLBank's business. Additional risks that might cause FHLBank’s results to differ from these forward-looking statements are provided in detail in FHLBank’s filings with the SEC, which are available at
All forward-looking statements contained in this announcement are expressly qualified in their entirety by reference to this cautionary notice. The reader should not place undue reliance on such forward-looking statements, since the statements speak only as of the date that they are made, and FHLBank has no obligation and does not undertake publicly to update, revise or correct any forward-looking statement for any reason to reflect events or circumstances after the date of this announcement.
FHLBANK TOPEKA
Financial Highlights (unaudited)
Selected Financial Data (dollar amounts in thousands)
12/31/2020
Financial Position
Investments
16,248,714 
17,251,975 
20,995,508 
21,226,823 
Mortgage loans held for portfolio, net
8,328,063 
9,205,207 
46,310,400 
52,591,712 
Deposits
1,088,865 
1,229,361 
Consolidated obligations, net
42,418,168 
48,530,494 
Total liabilities
43,663,829 
49,923,945 
Total capital stock
1,456,736 
1,574,004 
Retained earnings
1,096,291 
1,051,455 
2,646,571 
2,667,767 
Regulatory capital
2,554,570 
2,627,083 
Results of Operations
Interest income
108,811 
171,551 
231,067 
472,232 
Interest expense
41,581 
114,874 
90,468 
360,469 
Net interest income before loan loss provision (reversal)
Provision (reversal) for credit losses on mortgage loans
2,312 
1,337 
2,298 
Net gains (losses) on trading securities
(13,411)
5,375 
(40,158)
99,764 
Net gains (losses) on derivatives and hedging activities
(15,355)
17,566 
(137,607)
Other income
3,280 
6,554 
4,362 
Other expenses
18,145 
22,596 
36,850 
42,039 
Income before assessments
Weighted average dividend rate
    Investments include held-to-maturity securities, available-for-sale securities, trading securities, interest-bearing deposits, Federal funds sold and securities purchased under agreements to resell.
    Regulatory capital is defined as the sum of FHLBank’s permanent capital, plus the amounts paid in by its stockholders for Class A Common Stock; any general loss allowance, if consistent with GAAP and not established for specific assets; and other amounts from sources determined by the Federal Housing Finance Agency as available to absorb losses. Permanent capital is defined as the amount paid in for Class B Common Stock plus the amount of FHLBank’s retained earnings, as determined in accordance with GAAP. Regulatory capital includes all capital stock subject to mandatory redemption that has been reclassified to a liability.
    Weighted average dividend rates are dividends paid in cash and stock on both classes of stock divided by the average capital stock eligible for dividends.
Average Balances and Yields (dollar amounts in thousands)
Interest-earning assets:
18,015,434 
22,398,531 
18,133,341 
21,792,051 
22,402,746 
24,531,947 
22,928,092 
26,732,849 
8,469,116 
11,165,315 
8,685,488 
11,005,911 
Other interest-earning assets
40,365 
42,525 
40,176 
48,410 
Total earning assets
48,927,661 
58,138,318 
49,787,097 
59,579,221 
Interest-bearing liabilities:
1,057,511 
832,539 
1,084,722 
745,389 
44,842,325 
54,131,094 
45,668,901 
55,797,179 
Other borrowings
55,703 
43,759 
49,786 
51,970 
Total interest-bearing liabilities
45,955,539 
55,007,392 
46,803,409 
56,594,538 
Net interest spread
    The fair value adjustments on available-for-sale securities are excluded from the average balance for calculations of yield since the changes are adjustments to equity.
    Advance income includes prepayment fees on terminated advances.
    Credit enhancement fee payments are netted against interest earnings on the mortgage loans.
    Mortgage loans average balances include outstanding principal for non-performing conventional loans. However, these loans no longer accrue interest.
    Consolidated obligations are bonds and discount notes that FHLBank is primarily liable to repay.
    Net interest margin is defined as net interest income as a percentage of average earning assets.

The above information was disclosed in a filing to the SEC. To see the filing, click here.

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