| 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. GAAP defines fair value 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 (i.e., an exit price). 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, 2018 and 2017 . Additionally, these values do not represent an estimate of the overall market value of the FHLBank as going concern, which would take into account future business opportunities and the net profitability of assets and liabilities. 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 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 transfers of assets or liabilities between fair value levels during the years ended December 31, 2018 and 2017 . Tables 16.1 and 16.2 present the carrying value, fair value and fair value hierarchy of financial assets and liabilities as of December 31, 2018 and 2017 . 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, certain mortgage loans held for portfolio, and certain other assets at fair value on a nonrecurring basis. The FHLBank measures all other financial assets and liabilities at amortized cost. Further details about the financial assets and liabilities held at fair value on either a recurring or non-recurring basis are presented in Tables 16.3 and 16.4 . The carrying value, fair value and fair value hierarchy of the FHLBank’s financial assets and liabilities as of December 31, 2018 and 2017 are summarized in Tables 16.1 and 16.2 (in thousands): Table 16.1 12/31/2018 Carrying Value Total Fair Value Level 1 Level 2 Level 3 Netting Adjustment and Cash Collateral 1 Assets: Cash and due from banks $ 15,060 $ 15,060 $ 15,060 $ — $ — $ — Interest-bearing deposits 670,660 670,660 — 670,660 — — Securities purchased under agreements to resell 1,251,096 1,251,096 — 1,251,096 — — Federal funds sold 50,000 50,000 — 50,000 — — Trading securities 2,151,113 2,151,113 — 2,151,113 — — Available-for-sale securities 1,725,640 1,725,640 — 1,725,640 — — Held-to-maturity securities 4,456,873 4,447,078 — 4,364,127 82,951 — Advances 28,730,113 28,728,201 — 28,728,201 — — Mortgage loans held for portfolio, net of allowance 8,410,462 8,388,885 — 8,387,425 1,460 — Accrued interest receivable 109,366 109,366 — 109,366 — — Derivative assets 36,095 36,095 — 88,472 — (52,377 ) Liabilities: Deposits 473,820 473,820 — 473,820 — — Consolidated obligation discount notes 20,608,332 20,606,743 — 20,606,743 — — Consolidated obligation bonds 23,966,394 23,727,705 — 23,727,705 — — Mandatorily redeemable capital stock 3,597 3,597 3,597 — — — Accrued interest payable 87,903 87,903 — 87,903 — — Derivative liabilities 7,884 7,884 — 41,502 — (33,618 ) Other Asset (Liability): Industrial revenue bonds 35,000 32,154 — 32,154 — — Financing obligation payable (35,000 ) (32,154 ) — (32,154 ) — — 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 . Table 16.2 12/31/2017 Carrying Value Total Fair Value Level 1 Level 2 Level 3 Netting Adjustment and Cash Collateral 1 Assets: Cash and due from banks $ 268,050 $ 268,050 $ 268,050 $ — $ — $ — Interest-bearing deposits 442,682 442,682 — 442,682 — — Securities purchased under agreements to resell 3,161,446 3,161,446 — 3,161,446 — — Federal funds sold 1,175,000 1,175,000 — 1,175,000 — — Trading securities 2,869,415 2,869,415 — 2,869,415 — — Available-for-sale securities 1,493,231 1,493,231 — 1,493,231 — — Held-to-maturity securities 4,856,825 4,856,996 — 4,690,582 166,414 — Advances 26,295,849 26,306,432 — 26,306,432 — — Mortgage loans held for portfolio, net of allowance 7,286,397 7,400,508 — 7,398,878 1,630 — Accrued interest receivable 85,547 85,547 — 85,547 — — Derivative assets 37,030 37,030 — 60,486 — (23,456 ) Liabilities: Deposits 461,769 461,769 — 461,769 — — Consolidated obligation discount notes 20,420,651 20,419,168 — 20,419,168 — — Consolidated obligation bonds 24,514,468 24,374,595 — 24,374,595 — — Mandatorily redeemable capital stock 5,312 5,312 5,312 — — — Accrued interest payable 56,116 56,116 — 56,116 — — Derivative liabilities 2,417 2,417 — 41,686 — (39,269 ) Other Asset (Liability): Industrial revenue bonds 29,000 27,137 — 27,137 — — Financing obligation payable (29,000 ) (27,137 ) — (27,137 ) — — 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. Fair Value Methodologies and Techniques and Significant Inputs: The valuation methodologies and primary inputs used to develop the measurement of fair value for assets and liabilities that are measured at fair value on a recurring or nonrecurring basis in the Statements of Condition are listed below. The fair values and level within the fair value hierarchy of these assets and liabilities are reported in Tables 16.3 and 16.4 . 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 (as determined by original issuance date) non-MBS securities, the FHLBank obtains prices from multiple 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 multiple 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 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, 2018 , multiple prices were received for all of the FHLBank’s long-term non-MBS holdings with all 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, 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. Investment Securities - MBS: For MBS securities, the FHLBank obtains prices from multiple 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. As of December 31, 2018 , multiple prices were received for 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. Impaired Mortgage Loans Held for Portfolio and Real Estate Owned: The estimated fair values of impaired mortgage loans held for portfolio and REO on a nonrecurring basis are generally based on broker prices or property values obtained from a third-party pricing vendor. All estimated fair values of impaired mortgage loans held for portfolio and REO are net of any estimated selling costs. 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 all 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 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 - 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. 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, 2018 and 2017 (in thousands). Table 16.3 12/31/2018 Total Level 1 Level 2 Level 3 Netting Adjustment and Cash Collateral 1 Recurring fair value measurements - Assets: Trading securities: U.S. Treasury obligations 252,377 — 252,377 — — GSE obligations 2 1,000,495 — 1,000,495 — — U.S. obligation MBS 3 467 — 467 — — GSE MBS 4 897,774 — 897,774 — — Total trading securities 2,151,113 — 2,151,113 — — Available-for-sale securities: GSE MBS 5 1,725,640 — 1,725,640 — — Total available-for-sale securities 1,725,640 — 1,725,640 — — Derivative assets: Interest-rate related 35,543 — 87,920 — (52,377 ) Mortgage delivery commitments 552 — 552 — — Total derivative assets 36,095 — 88,472 — (52,377 ) TOTAL RECURRING FAIR VALUE MEASUREMENTS - ASSETS $ 3,912,848 $ — $ 3,965,225 $ — $ (52,377 ) Recurring fair value measurements - Liabilities: Derivative liabilities: Interest-rate related $ 7,881 $ — $ 41,499 $ — $ (33,618 ) Mortgage delivery commitments 3 — 3 — — Total derivative liabilities 7,884 — 41,502 — (33,618 ) TOTAL RECURRING FAIR VALUE MEASUREMENTS - LIABILITIES $ 7,884 $ — $ 41,502 $ — $ (33,618 ) Nonrecurring fair value measurements - Assets 6 : Impaired mortgage loans $ 1,463 $ — $ — $ 1,463 $ — Real estate owned 1,028 — — 1,028 — TOTAL NONRECURRING FAIR VALUE MEASUREMENTS - ASSETS $ 2,491 $ — $ — $ 2,491 $ — 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, Farm Credit and Farmer Mac. 3 Represents single-family MBS issued by Ginnie Mae. 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, 2018 and still outstanding as of December 31, 2018 . Table 16.4 12/31/2017 Total Level 1 Level 2 Level 3 Netting Adjustment and Cash Collateral 1 Recurring fair value measurements - Assets: Trading securities: Certificates of deposit $ 584,984 $ — $ 584,984 $ — $ — GSE obligations 2 1,353,083 — 1,353,083 — — U.S. obligation MBS 3 580 — 580 — — GSE MBS 4 930,768 — 930,768 — — Total trading securities 2,869,415 — 2,869,415 — — Available-for-sale securities: GSE MBS 5 1,493,231 — 1,493,231 — — Total available-for-sale securities 1,493,231 — 1,493,231 — — Derivative assets: Interest-rate related 36,957 — 60,413 — (23,456 ) Mortgage delivery commitments 73 — 73 — — Total derivative assets 37,030 — 60,486 — (23,456 ) TOTAL RECURRING FAIR VALUE MEASUREMENTS - ASSETS $ 4,399,676 $ — $ 4,423,132 $ — $ (23,456 ) Recurring fair value measurements - Liabilities: Derivative liabilities: Interest-rate related $ 2,374 $ — $ 41,643 $ — $ (39,269 ) Mortgage delivery commitments 43 — 43 — — Total derivative liabilities 2,417 — 41,686 — (39,269 ) TOTAL RECURRING FAIR VALUE MEASUREMENTS - LIABILITIES $ 2,417 $ — $ 41,686 $ — $ (39,269 ) Nonrecurring fair value measurements - Assets 6 : Held-to-maturity securities: Private-label residential MBS $ 4,097 $ — $ — $ 4,097 $ — Impaired mortgage loans 1,633 — — 1,633 — Real estate owned 1,031 — — 1,031 — TOTAL NONRECURRING FAIR VALUE MEASUREMENTS - ASSETS $ 6,761 $ — $ — $ 6,761 $ — 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, Farm Credit and Farmer Mac. 3 Represents single-family MBS issued by Ginnie Mae. 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, 2017 and still outstanding as of December 31, 2017 . |
