| Fair Values | FAIR VALUES The fair value amounts recorded on the Statements of Condition and presented in the note disclosures have been determined by the FHLBank using available market and other pertinent information and reflect the FHLBank’s best judgment of appropriate valuation methods. Although the FHLBank uses its best judgment in estimating the fair value of its financial instruments, there are inherent limitations in any valuation technique. Therefore, the fair values may not be indicative of the amounts that would have been realized in market transactions as of December 31, 2016 and 2015 . Subjectivity of Estimates: Estimates of the fair value of advances with options, mortgage instruments, derivatives with embedded options and consolidated obligation bonds with options are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows, prepayment speed assumptions, expected interest rate volatility, methods to determine possible distributions of future interest rates used to value options, and the selection of discount rates that appropriately reflect market and credit risks. The use of different assumptions could have a material effect on the fair value estimates. Fair Value Hierarchy: The FHLBank records trading securities, available-for-sale securities, derivative assets and derivative liabilities at fair value on a recurring basis and on occasion, certain private-label MBS, impaired mortgage loans held for portfolio and non-financial assets on a non-recurring basis. The fair value hierarchy requires the FHLBank to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of the market observability of the fair value measurement for the asset or liability. The FHLBank must disclose the level within the fair value hierarchy in which the measurements are classified for all assets and liabilities. The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels: • Level 1 Inputs – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the FHLBank can access on the measurement date. • Level 2 Inputs – Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets and liabilities in active markets; (2) quoted prices for similar assets and liabilities in markets that are not active; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means. • Level 3 Inputs – Unobservable inputs for the asset or liability. The FHLBank reviews its fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. There were no reclassifications of assets or liabilities recorded at fair value on a recurring basis during the years ended December 31, 2016 and 2015 . The carrying value and fair value of the FHLBank’s financial assets and liabilities as of December 31, 2016 and 2015 are summarized in Tables 16.1 and 16.2 (in thousands). These values do not represent an estimate of the overall market value of the FHLBank as a going concern, which would take into account future business opportunities and the net profitability of assets and liabilities. Table 16.1 12/31/2016 Carrying Value Total Fair Value Level 1 Level 2 Level 3 Netting Adjustment and Cash Collateral Assets: Cash and due from banks $ 207,254 $ 207,254 $ 207,254 $ — $ — $ — Interest-bearing deposits 387,920 387,920 — 387,920 — — Securities purchased under agreements to resell 2,400,000 2,400,000 — 2,400,000 — — Federal funds sold 2,725,000 2,725,000 — 2,725,000 — — Trading securities 2,502,788 2,502,788 — 2,502,788 — — Available-for-sale securities 1,091,721 1,091,721 — 1,091,721 — — Held-to-maturity securities 4,502,224 4,487,252 — 4,276,650 210,602 — Advances 23,985,835 24,016,686 — 24,016,686 — — Mortgage loans held for portfolio, net of allowance 6,640,725 6,754,046 — 6,752,849 1,197 — Overnight loans to other FHLBanks 600,000 600,000 — 600,000 — — Accrued interest receivable 68,400 68,400 — 68,400 — — Derivative assets 60,900 60,900 — 76,405 — (15,505 ) Liabilities: Deposits 598,931 598,931 — 598,931 — — Consolidated obligation discount notes 21,775,341 21,774,950 — 21,774,950 — — Consolidated obligation bonds 20,722,335 20,568,653 — 20,568,653 — — Mandatorily redeemable capital stock 2,670 2,670 2,670 — — — Accrued interest payable 49,808 49,808 — 49,808 — — Derivative liabilities 7,171 7,171 — 106,667 — (99,496 ) Other Asset (Liability): Standby letters of credit (1,151 ) (1,151 ) — (1,151 ) — — Standby bond purchase agreements 6 6,016 — 6,016 — — Advance commitments — (6,241 ) — (6,241 ) — — Table 16.2 12/31/2015 Carrying Value Total Fair Value Level 1 Level 2 Level 3 Netting Adjustment and Cash Collateral Assets: Cash and due from banks $ 682,670 $ 682,670 $ 682,670 $ — $ — $ — Interest-bearing deposits 100,594 100,594 — 100,594 — — Securities purchased under agreements to resell 3,945,000 3,945,000 — 3,945,000 — — Federal funds sold 2,000,000 2,000,000 — 2,000,000 — — Trading securities 2,294,606 2,294,606 — 2,294,606 — — Available-for-sale securities 495,063 495,063 — 495,063 — — Held-to-maturity securities 4,770,817 4,765,095 — 4,497,911 267,184 — Advances 23,580,371 23,609,868 — 23,609,868 — — Mortgage loans held for portfolio, net of allowance 6,390,708 6,571,563 — 6,569,749 1,814 — Accrued interest receivable 79,233 79,233 — 79,233 — — Derivative assets 51,591 51,591 — 66,286 — (14,695 ) Liabilities: Deposits 759,366 759,366 — 759,366 — — Consolidated obligation discount notes 21,813,446 21,813,507 — 21,813,507 — — Consolidated obligation bonds 19,866,034 19,851,097 — 19,851,097 — — Mandatorily redeemable capital stock 2,739 2,739 2,739 — — — Accrued interest payable 52,281 52,281 — 52,281 — — Derivative liabilities 31,492 31,492 — 214,666 — (183,174 ) Other Asset (Liability): Standby letters of credit (1,078 ) (1,078 ) — (1,078 ) — — Standby bond purchase agreements 98 6,995 — 6,995 — — Advance commitments — (3,737 ) — (3,737 ) — — Fair Value Methodologies and Techniques and Significant Inputs: Cash and Due from Banks: The fair values approximate the carrying values. Interest-bearing Deposits: The balance is comprised of interest-bearing deposits in banks. Based on the nature of the accounts, the carrying value approximates the fair value. Securities Purchased Under Agreements to Resell : The fair values are determined by calculating the present value of the future cash flows. The discount rates used in the calculations are rates for securities with similar terms. For overnight borrowings, the carrying value approximates fair value. Federal Funds Sold: The carrying value of overnight Federal funds approximates fair value, and term Federal funds are valued using projected future cash flows discounted at the current replacement rate. Investment Securities - Non-MBS: The fair values of short-term non-MBS investments are determined using an income approach derived from representative publicly available curves based on the short-term non-MBS investment type. For long-term non-MBS (as determined by original issuance date) securities, the FHLBank obtains prices from up to four designated third-party pricing vendors when available. The pricing vendors use various proprietary models to price investments. The inputs to those models are derived from various sources including, but not limited to: benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers and other market‑related data. Each pricing vendor has an established challenge process in place for all valuations, which facilitates resolution of potentially erroneous prices identified by the FHLBank. The use of multiple pricing vendors provides the FHLBank with additional data points regarding levels of inputs and final prices that are used to validate final pricing of investment securities. The utilization of the average of available vendor prices within a cluster tolerance and the evaluation of reasonableness of outlier prices described below does not discard available information. Annually, the FHLBank conducts reviews of the four pricing vendors to confirm and further augment its understanding of the vendors’ pricing processes, methodologies and control procedures. The FHLBank’s review process includes obtaining available vendors’ independent auditors’ reports regarding the internal controls over their valuation process, although the availability of pertinent reports varies by vendor. The FHLBank utilizes a valuation technique for estimating the fair values of long-term non-MBS securities as follows: ▪ The FHLBank’s valuation technique first requires the establishment of a median price for each security. If four prices are received, the average of the middle two prices is used; if three prices are received, the middle price is used; if two prices are received, the average of the two prices is used; and if one price is received, it is used subject to validation. ▪ All prices that are within a specified tolerance threshold of the median price are included in the cluster of prices that are averaged to compute a default price. ▪ Prices that are outside the threshold (outliers) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, and/or non‑binding dealer estimates) to determine if an outlier is a better estimate of fair value. ▪ If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price rather than the default price. ▪ If, on the other hand, the analysis confirms that an outlier (or outliers) is (are) in fact not representative of fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of the security. ▪ If all prices received for a security are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above. As of December 31, 2016 , four prices were received for substantially all of the FHLBank’s long-term non-MBS holdings with most vendor prices falling within the tolerances so the final prices for those securities were computed by averaging the prices received. Based on the FHLBank’s reviews of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or, in those instances in which there were outliers, the FHLBank’s additional analyses), the FHLBank has concluded that its final prices result in reasonable estimates of fair value and that the fair value measurements are classified appropriately in the fair value hierarchy. Based on the significant lack of market activity for state or local housing agency obligations, the fair value measurements for those securities were classified as Level 3 within the fair value hierarchy as of December 31, 2016 and 2015 . Investment Securities - MBS: For MBS securities, the FHLBank obtains prices from up to four designated third-party pricing vendors when available. These pricing vendors use various proprietary models to price investments. The inputs to those models are derived from various sources including, but not limited to: benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers and other market-related data (certain inputs are actively quoted and can be validated to external sources). Since many MBS are not traded daily, the pricing vendors use available information as applicable such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual securities. Each pricing vendor has an established challenge process in place for all valuations, which facilitates resolution of potentially erroneous prices identified by the FHLBank. The use of multiple pricing vendors provides the FHLBank with additional data points regarding levels of inputs and final prices that are used to validate final pricing of investment securities. The utilization of the average of available vendor prices within a cluster tolerance and the evaluation of reasonableness of outlier prices does not discard available information. Similar to the description above for long-term non-MBS securities, the FHLBank has conducted reviews of the four pricing vendors and has established a price for each MBS using a formula that was based upon the number of prices received, subject to review of outliers. As of December 31, 2016 , four vendor prices were received for substantially all of the FHLBank’s MBS holdings with most vendor prices falling within the tolerances so the final prices for those securities were computed by averaging the prices received. Based on the FHLBank’s reviews of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or, in those instances in which there were outliers, the FHLBank’s additional analyses), the FHLBank has concluded that its final prices result in reasonable estimates of fair value and that the fair value measurements are classified appropriately in the fair value hierarchy. Based on the significant lack of market activity for private-label MBS, the fair value measurements for those securities were classified as Level 3 within the fair value hierarchy as of December 31, 2016 and 2015 . Advances: The fair values of advances are determined by calculating the present values of the expected future cash flows from the advances, excluding the amount of accrued interest receivable. The discount rates used in these calculations are equivalent to the replacement advance rates for advances with similar terms. The inputs used to determine the fair values of advances are as follows: ▪ Consolidated Obligation (CO) curve and LIBOR curve. The Office of Finance constructs an internal curve, referred to as the CO curve, using the U.S. Treasury curve as a base curve that is then adjusted by adding indicative spreads obtained from market observable sources. These market indications are generally derived from pricing indications from dealers, historical pricing relationships, recent GSE trades and secondary market activity. The CO curve is used for fixed rate callable and non-callable advances. The LIBOR curve is used for variable rate advances and certain fixed rate advances with other optionality. ▪ Volatility assumption. To estimate the fair values of advances with optionality, the FHLBank uses market-based expectations of future interest rate volatility implied from current market prices for similar options. ▪ Spread adjustment. The spread adjustment represents an adjustment to the CO curve or LIBOR curve. In accordance with Finance Agency regulations, an advance with a maturity or repricing period greater than six months requires a prepayment fee sufficient to make the FHLBank financially indifferent to the borrower’s decision to prepay the advance. Therefore, the fair value of an advance does not assume prepayment risk. The FHLBank did not adjust the fair value measurement for creditworthiness primarily because advances were fully collateralized. Mortgage Loans Held for Portfolio: The fair values of mortgage loans are determined based on quoted market prices of similar mortgage loans. These prices, however, can change rapidly based upon market conditions and are highly dependent upon the underlying prepayment assumptions. Overnight Loans to Other FHLBanks: The carrying value of overnight loans to other FHLBanks approximates fair value. Accrued Interest Receivable and Payable: The fair values approximate the carrying values. Derivative Assets/Liabilities: The FHLBank bases the fair values of derivatives on instruments with similar terms or market prices, when available. However, active markets do not exist for many of the FHLBank’s derivatives. Consequently, fair values for these instruments are generally estimated using standard valuation techniques such as discounted cash flow analysis and comparisons to similar instruments. The FHLBank is subject to credit risk due to the risk of nonperformance by counterparties to its derivative transactions. For uncleared derivatives, the degree of credit risk depends on the extent to which master netting arrangements are included in these contracts to mitigate the risk. In addition, the FHLBank requires collateral agreements with collateral delivery thresholds on the majority of its uncleared derivatives. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral is posted daily through a clearing agent for changes in the value of cleared derivatives. The FHLBank has evaluated the potential for the fair value of the instruments to be impacted by counterparty credit risk and its own credit risk and has determined that no adjustments were significant or necessary to the overall fair value measurements of derivatives. The fair values of the FHLBank’s derivative assets and liabilities include accrued interest receivable/payable and cash collateral, including initial and variation margin, remitted to/received from counterparties. The estimated fair values of the accrued interest receivable/payable and cash collateral approximate their carrying values due to their short-term nature. Derivatives are presented on a net basis by clearing agent by Clearinghouse or by counterparty when it has met the netting requirements. If these netted amounts are positive, they are classified as an asset and, if negative, a liability. The discounted cash flow model uses market-observable inputs. Inputs by class of derivative are as follows: ▪ Interest-rate related: • Discount rate assumption - Overnight Index Swap (OIS) curve; • Forward interest rate assumption for rate resets - LIBOR swap curve; • Volatility assumptions - market-based expectations of future interest rate volatility implied from current market prices for similar options; and • Prepayment assumptions. ▪ Mortgage delivery commitments: • To be announced (TBA) price - market-based prices of TBAs by coupon class and expected term until settlement. Deposits: The fair values of term deposits are determined by calculating the present values of the expected future cash flows from the deposits. The calculated present values are reduced by the accrued interest payable. The discount rates used in these calculations are the cost of deposits with similar terms. The carrying value of demand and overnight deposits approximates fair value. Consolidated Obligations: The fair values for consolidated obligation bonds and discount notes are determined by using standard valuation techniques and inputs based on the cost of raising comparable term debt. The inputs used to determine the fair values of consolidated obligations are as follows: ▪ CO curve and LIBOR curve. Fixed rate consolidated obligations that do not contain options are discounted using a replacement rate based on the CO curve. Variable rate consolidated obligations that do not contain options are discounted using LIBOR. Consolidated obligations that contain optionality are discounted using LIBOR. ▪ Volatility assumption. To estimate the fair values of consolidated obligations with optionality, the FHLBank uses market-based expectations of future interest rate volatility implied from current market prices for similar options. Mandatorily Redeemable Capital Stock: The fair value of capital stock subject to mandatory redemption is generally par value. Fair value also includes estimated dividends earned at the time of reclassification from equity to liabilities, until such amount is paid, and any subsequently declared stock dividend. The FHLBank’s dividends are declared and paid at each quarter end; therefore, fair value equaled par value as of the end of the periods presented. Stock can only be acquired by members at par value and redeemed or repurchased at par value. Stock is not traded and no market mechanism exists for the exchange of stock outside the cooperative structure. Standby Letters of Credit: The fair values of standby letters of credit are based on the present value of fees currently charged for similar agreements. The value of these guarantees is recognized and recorded in other liabilities. Standby Bond Purchase Agreements: The fair values of the standby bond purchase agreements are estimated using the present value of the future fees on existing agreements with fees determined using rates currently charged for similar agreements. Advance Commitments: The fair values of advance commitments are based on the present value of fees currently charged for similar agreements, taking into account the remaining terms of the agreement and the difference between current levels of interest rates and the committed rates. Fair Value Measurements: Tables 16.3 and 16.4 present, for each hierarchy level, the FHLBank’s assets and liabilities that are measured at fair value on a recurring or nonrecurring basis on the Statements of Condition as of or for the periods ended December 31, 2016 and 2015 (in thousands). The FHLBank measures certain held-to-maturity securities at fair value on a nonrecurring basis due to the recognition of a credit loss. For held-to-maturity securities that had credit impairment recorded during a period for which no total impairment was recorded (the full amount of additional credit impairment was a reclassification from non-credit impairment previously recorded in AOCI), these securities were recorded at their carrying values and not fair value. The FHLBank measures certain impaired mortgage loans held for portfolio at fair value on a nonrecurring basis when, upon individual evaluation for impairment, the estimated fair value less costs to sell is lower than the recorded investment. REO is measured at fair value when the asset’s fair value less costs to sell is lower than its carrying amount. Table 16.3 12/31/2016 Total Level 1 Level 2 Level 3 Netting Adjustment and Cash Collateral 1 Recurring fair value measurements - Assets: Trading securities: GSE obligations 2 $ 1,563,351 $ — $ 1,563,351 $ — $ — U.S. obligation MBS 3 690 — 690 — — GSE MBS 4 938,747 — 938,747 — — Total trading securities 2,502,788 — 2,502,788 — — Available-for-sale securities: GSE MBS 5 1,091,721 — 1,091,721 — — Total available-for-sale securities 1,091,721 — 1,091,721 — — Derivative assets: Interest-rate related 60,686 — 76,191 — (15,505 ) Mortgage delivery commitments 214 — 214 — — Total derivative assets 60,900 — 76,405 — (15,505 ) TOTAL RECURRING FAIR VALUE MEASUREMENTS - ASSETS $ 3,655,409 $ — $ 3,670,914 $ — $ (15,505 ) Recurring fair value measurements - Liabilities: Derivative liabilities: Interest-rate related $ 6,799 $ — $ 106,295 $ — $ (99,496 ) Mortgage delivery commitments 372 — 372 — — Total derivative liabilities 7,171 — 106,667 — (99,496 ) TOTAL RECURRING FAIR VALUE MEASUREMENTS - LIABILITIES $ 7,171 $ — $ 106,667 $ — $ (99,496 ) Nonrecurring fair value measurements - Assets 6 : Held-to-maturity securities: Private-label residential MBS $ 4,781 $ — $ — $ 4,781 $ — Impaired mortgage loans 1,205 — — 1,205 — Real estate owned 1,086 — — 1,086 — TOTAL NONRECURRING FAIR VALUE MEASUREMENTS - ASSETS $ 7,072 $ — $ — $ 7,072 $ — 1 Represents the effect of legally enforceable master netting agreements that allow the FHLBank to net settle positive and negative positions and also derivative cash collateral and related accrued interest held or placed with the same clearing agent or derivative counterparty. 2 Represents debentures issued by other FHLBanks, Fannie Mae, Freddie Mac, Farm Credit and Farmer Mac. GSE securities are not guaranteed by the U.S. government. 3 Represents single-family MBS issued by Ginnie Mae, which are guaranteed by the U.S. government. 4 Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac. 5 Represents multi-family MBS issued by Fannie Mae. 6 Includes assets adjusted to fair value during the year ended December 31, 2016 and still outstanding as of December 31, 2016 . Table 16.4 12/31/2015 Total Level 1 Level 2 Level 3 Netting Adjustment and Cash Collateral 1 Recurring fair value measurements - Assets: Trading securities: GSE obligations 2 $ 1,338,639 $ — $ 1,338,639 $ — $ — U.S. obligation MBS 3 801 — 801 — — GSE MBS 4 955,166 — 955,166 — — Total trading securities 2,294,606 — 2,294,606 — — Available-for-sale securities: GSE MBS 5 495,063 — 495,063 — — Total available-for-sale securities 495,063 — 495,063 — — Derivative assets: Interest-rate related 51,520 — 66,215 — (14,695 ) Mortgage delivery commitments 71 — 71 — — Total derivative assets 51,591 — 66,286 — (14,695 ) TOTAL RECURRING FAIR VALUE MEASUREMENTS - ASSETS $ 2,841,260 $ — $ 2,855,955 $ — $ (14,695 ) Recurring fair value measurements - Liabilities: Derivative liabilities: Interest-rate related $ 31,428 $ — $ 214,602 $ — $ (183,174 ) Mortgage delivery commitments 64 — 64 — — Total derivative liabilities 31,492 — 214,666 — (183,174 ) TOTAL RECURRING FAIR VALUE MEASUREMENTS - LIABILITIES $ 31,492 $ — $ 214,666 $ — $ (183,174 ) Nonrecurring fair value measurements - Assets 6 : Held-to-maturity securities: Private-label residential MBS $ 6,151 $ — $ — $ 6,151 $ — Impaired mortgage loans 1,823 $ 1,823 Real estate owned 2,168 — — 2,168 — TOTAL NONRECURRING FAIR VALUE MEASUREMENTS - ASSETS $ 10,142 $ — $ — $ 10,142 $ — 1 Represents the effect of legally enforceable master netting agreements that allow the FHLBank to net settle positive and negative positions and also derivative cash collateral and related accrued interest held or placed with the same clearing agent or derivative counterparty. 2 Represents debentures issued by other FHLBanks, Fannie Mae, Freddie Mac and Farm Credit. GSE securities are not guaranteed by the U.S. government. 3 Represents single-family MBS issued by Ginnie Mae, which are guaranteed by the U.S. government. 4 Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac. 5 Represents multi-family MBS issued by Fannie Mae. 6 Includes assets adjusted to fair value during the year ended December 31, 2015 and still outstanding as of December 31, 2015 . |
