| Estimated Fair Values | Estimated Fair Values The Bank records trading securities, available-for-sale securities, derivative assets and liabilities, and grantor trust assets (publicly-traded mutual funds) at estimated fair value on a recurring basis. Fair value is a market-based measurement and 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. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. In general, the transaction price will equal the exit price and therefore, represents the fair value of the asset or liability at initial recognition. In determining whether a transaction price represents the fair value of the asset or liability at initial recognition, each reporting entity is required to consider factors specific to the transaction, the asset or liability, the principal or most advantageous market for the asset or liability, and market participants with whom the entity would transact in the market. A fair value hierarchy is used to prioritize the inputs of valuation techniques used to measure fair value. The inputs are evaluated, and an overall level for the fair value measurement is determined. This overall level is an indication of how market-observable the fair value measurement is and defines the level of disclosure. In order to determine the fair value or the exit price, entities must determine the unit of account, highest and best use, principal market, and market participants. These determinations allow the reporting entity to define the inputs for fair value and level of hierarchy. Outlined below is the application of the “fair value hierarchy” to the Bank's financial assets and liabilities that are carried at fair value or disclosed in the notes to the financial statements. Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. The Bank carried grantor trust assets at fair value hierarchy Level 1 as of December 31, 2016 and 2015 . Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. The Bank carried trading securities and derivatives at fair value hierarchy Level 2 as of December 31, 2016 and 2015 . Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are supported by limited market activity and reflect the entity's own assumptions. The Bank carried available-for-sale securities at fair value hierarchy Level 3 as of December 31, 2016 and 2015 . The Bank utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. For financial instruments carried at fair value, the Bank reviews the fair value hierarchy classification of financial assets and liabilities on a quarterly basis. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities within the fair value hierarchy. Such reclassifications are reported as transfers in/out at fair value as of the beginning of the quarter in which the changes occur. There were no such transfers during the periods presented. Estimated Fair Value Measurements on a Recurring Basis. The following tables present, for each fair value hierarchy level, the Bank’s financial assets and liabilities that are measured at fair value on a recurring basis on its Statements of Condition. As of December 31, 2016 Fair Value Measurements Using Netting Adjustment (1) Level 1 Level 2 Level 3 Total Assets Trading securities: Government-sponsored enterprises debt obligations $ — $ 261 $ — $ — $ 261 State or local housing agency debt obligations — 1 — — 1 Total trading securities — 262 — — 262 Available-for-sale securities: Private-label residential MBS — — 1,345 — 1,345 Derivative assets: Interest-rate related — 282 — 73 355 Grantor trust (included in Other assets) 37 — — — 37 Total assets at fair value $ 37 $ 544 $ 1,345 $ 73 $ 1,999 Liabilities Derivative liabilities: Interest-rate related $ — $ 1,073 $ — $ (966 ) $ 107 Total liabilities at fair value $ — $ 1,073 $ — $ (966 ) $ 107 ____________ (1) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral held or placed with the same clearing agents and/or counterparties. As of December 31, 2015 Fair Value Measurements Using Netting Adjustment (1) Level 1 Level 2 Level 3 Total Assets Trading securities: Government-sponsored enterprises debt obligations $ — $ 1,212 $ — $ — $ 1,212 Another FHLBank’s bond — 52 — — 52 State or local housing agency debt obligations — 1 — — 1 Total trading securities — 1,265 — — 1,265 Available-for-sale securities: Private-label residential MBS — — 1,662 — 1,662 Derivative assets: Interest-rate related — 337 — (161 ) 176 Grantor trust (included in Other assets) 31 — — — 31 Total assets at fair value $ 31 $ 1,602 $ 1,662 $ (161 ) $ 3,134 Liabilities Derivative liabilities: Interest-rate related $ — $ 1,551 $ — $ (1,427 ) $ 124 Total liabilities at fair value $ — $ 1,551 $ — $ (1,427 ) $ 124 ____________ (1) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral held or placed with the same clearing agents and/or counterparties. The following table presents a reconciliation of available-for-sale securities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3). For the Years Ended December 31, 2016 2015 2014 Balance, beginning of year $ 1,662 $ 1,981 $ 2,299 Total (losses) gains realized and unrealized: (1) Included in net impairment losses recognized in earnings (3 ) (5 ) (3 ) Included in other comprehensive income 29 (23 ) (7 ) Accretion of credit losses in net interest income 53 42 34 Settlements (396 ) (333 ) (342 ) Balance, end of year $ 1,345 $ 1,662 $ 1,981 ____________ (1) Related to available-for-sale securities held at year end. Estimated Fair Value Measurements on a Nonrecurring Basis. The Bank periodically measures and recognizes certain assets at fair value on a nonrecurring basis in certain circumstances. Adjustments to fair value usually result from the application of lower of amortized cost or fair value accounting, or write-downs of individual assets due to impairment. The following table presents the fair value hierarchy and carrying value of all assets as of the last impairment date that were still held as of December 31, 2015 , for which a nonrecurring fair value adjustment was recorded during the period presented. The carrying value for each of the assets presented in the following table was less than $1 as of December 31, 2016. As of December 31, 2015 Fair Value Measurements Using Level 1 Level 2 Level 3 Total Mortgage loans held for portfolio $ — $ — $ 1 $ 1 Real estate owned (included in Other assets) — — 3 3 Total nonrecurring assets at fair value $ — $ — $ 4 $ 4 Described below are the Bank's fair value measurement methodologies for financial assets and liabilities measured or disclosed at fair value. Cash and Due from Banks. The estimated fair value approximates the recorded carrying value due to the short-term nature and negligible credit risk. Interest-bearing Deposits. The estimated fair value is determined by calculating the present value of the expected future cash flows from the deposits and reducing this amount for accrued interest receivable. The discount rates used in these calculations are the rates for deposits with similar terms and represents market observable rates. Securities purchased under agreements to resell. The estimated fair value is determined by calculating the present value of the expected future cash flows. The discount rates used in these calculations are the rates for securities with similar terms and represent market observable rates. Federal Funds Sold. The estimated fair values of overnight federal funds sold approximate the carrying values. The estimated fair values of term federal funds sold are determined by calculating the present value of the expected future cash flows. The discount rates used in these calculations are the rates for federal funds with similar terms and represent market observable rates. Investment Securities . The Bank obtains prices from four designated third-party pricing vendors, when available, to estimate the fair value of its investment securities. The pricing vendors use various proprietary models to price investment securities. The inputs to those models are derived from various sources including, but not limited to, the following: benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers, and other market-related data. Since many investment securities do not trade on a daily basis, 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 investment securities valuations, which facilitates resolution of potentially erroneous prices identified by the Bank. The Bank periodically conducts reviews of the four pricing vendors to confirm and further augment its understanding of the vendors' pricing processes, methodologies, and control procedures for U.S. agency and private-label MBS. The Bank's valuation technique for estimating the fair value of its investment securities first requires the establishment of a “median” price for each security. 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. All 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. Alternatively, if the analysis does not provide evidence that an outlier is more representative of the 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. Four vendor prices were received for a majority of the Bank's investment securities holdings and the final prices for those securities were computed by averaging the prices received as of December 31, 2016 and 2015 . Based on the Bank's review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or the Bank's additional analysis in those instances in which there were outliers or significant yield variances), the Bank believes that its final prices are representative of the prices that would have been received if the assets had been sold at the measurement date (i.e., exit prices) and further that the fair value measurements are classified appropriately in the fair value hierarchy. Based on the lack of significant market activity for private-label MBS, the fair value measurement for those securities were classified as Level 3 within the fair value hierarchy as of December 31, 2016 and 2015 . Advances. The Bank determines the estimated fair values of advances by calculating the present value of expected future cash flows from the advances, excluding the amount of the accrued interest receivable. The discount rates used in these calculations are the equivalent to the replacement advance rates for advances with similar terms. The Bank calculates its replacement advance rates at a spread to its cost of funds. The Bank's cost of funds approximates the consolidated obligation curve (See "Consolidated Obligations" paragraph within this note for a discussion of the consolidated obligation curve). To estimate the fair values of advances with optionality, market-based expectations of future interest rate volatility implied from current market prices for similar options are also used. In accordance with the Finance Agency's advances regulations, advances with a maturity or repricing period greater than six months require a prepayment fee sufficient enough to make the Bank financially indifferent to the borrower's decision to prepay the advances, thereby removing prepayment risk from the fair value calculation. The Bank did not adjust the fair value measurement of advances for creditworthiness because advances were fully collateralized. Mortgage Loans Held for Portfolio. The estimated fair values for mortgage loans are determined based on quoted market prices of similar mortgage loans available in the pass-through securities market. These prices, however, can change rapidly based upon market conditions and are highly dependent upon the underlying prepayment assumptions. The estimated fair values of impaired mortgage loans are based on the current property value, as provided by a third party vendor, adjusted for estimated selling costs. Accrued Interest Receivable and Payable. The estimated fair value approximates the recorded carrying value due to the short-term nature and negligible credit risk. Derivative Assets and Liabilities. The Bank calculates the fair value of derivatives using a discounted cash flow analysis. The Bank’s discounted cash flow analysis utilizes market-observable inputs. Inputs by class of derivatives are as follows: • Interest-rate related - the Overnight Index Swap curve for collateralized derivatives; and • Mortgage delivery commitments - to be announced (TBA) securities prices adjusted for differences in coupon, average loan rate, and seasoning. Derivative instruments are transacted primarily in the institutional dealer market and priced with observable market assumptions at a mid-market valuation point. The Bank does not provide a credit valuation adjustment based on aggregate exposure by derivative counterparty when measuring the fair value of its derivatives. This is because the collateral provisions pertaining to the Bank's derivatives obviate the need to provide such a credit valuation adjustment. The fair values of the Bank's derivatives take into consideration the effects of legally enforceable master netting agreements, where applicable, that allow the Bank to settle positive and negative positions and offset cash collateral with the same counterparty on a net basis. The Bank and each uncleared derivative counterparty have collateral thresholds that take into account both the Bank's and the counterparty's credit ratings. As a result of these practices and agreements, the Bank has concluded that the impact of the credit differential between the Bank and its derivative counterparties was mitigated to an immaterial level, and no further adjustments were deemed necessary to the recorded fair values of derivative assets and liabilities on the Statements of Condition as of December 31, 2016 and 2015 . Grantor Trust Assets. Grantor trust assets, recorded in "Other assets" on the Statements of Condition, are carried at estimated fair value based on quoted market prices. Interest-bearing Deposits. The Bank determines estimated fair values of Bank deposits by calculating the present value of expected future cash flows from the deposits and reducing this amount for accrued interest payable. The discount rate used in these calculations is based on LIBOR. Consolidated Obligations. The Bank calculates the fair value of consolidated obligation bonds and discount notes by calculating the present value of future cash flows using cost of funds as the discount rate. The Office of Finance constructs an internal curve, referred to as the consolidated obligation 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 government-sponsored enterprise trades, and secondary market activity. To estimate the fair values of consolidated obligations with optionality, the Bank 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 mandatorily redeemable capital stock is par value and also includes estimated dividends earned at the time of reclassification from capital to liabilities, until such amount is paid. Capital stock can be acquired by members only at par value and redeemed by the Bank at par value. Capital stock is not traded and no market mechanism exists for the exchange of capital stock outside the cooperative structure. The following estimated fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank as of December 31, 2016 and 2015 . Although the Bank uses its best judgment in estimating the fair values of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for a portion of the Bank’s financial instruments, in certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. Therefore, these estimated fair values are not necessarily indicative of the amounts that would be realized in current market transactions, although they do reflect the Bank’s judgment of how a market participant would estimate the fair value. The fair value tables presented below do not represent an estimate of the overall fair value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities. The following tables present the carrying values and estimated fair values of the Bank’s financial instruments. As of December 31, 2016 Estimated Fair Value Carrying Value Total Level 1 Level 2 Level 3 Netting Adjustment (1) Assets: Cash and due from banks $ 1,815 $ 1,815 $ 1,815 $ — $ — $ — Interest bearing-deposits 1,106 1,106 — 1,106 — — Securities purchased under agreements to resell 1,386 1,386 — 1,386 — — Federal funds sold 7,770 7,770 — 7,770 — — Trading securities 262 262 — 262 — — Available-for-sale securities 1,345 1,345 — — 1,345 — Held-to-maturity securities 24,641 24,633 — 23,843 790 — Advances 99,077 99,062 — 99,062 — — Mortgage loans held for portfolio, net 523 569 — 569 — — Accrued interest receivable 171 171 — 171 — — Derivative assets 355 355 — 282 — 73 Grantor trust assets (included in Other assets) 37 37 37 — — — Liabilities: Interest-bearing deposits 1,118 1,118 — 1,118 — — Consolidated obligations, net: Discount notes 41,292 41,293 — 41,293 — — Bonds 88,647 88,768 — 88,768 — — Mandatorily redeemable capital stock 1 1 1 — — — Accrued interest payable 128 128 — 128 — — Derivative liabilities 107 107 — 1,073 — (966 ) ____________ (1) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral held or placed with the same clearing agents and/or counterparties. As of December 31, 2015 Estimated Fair Value Carrying Value Total Level 1 Level 2 Level 3 Netting Adjustment (1) Assets: Cash and due from banks $ 1,751 $ 1,751 $ 1,751 $ — $ — $ — Interest bearing-deposits 1,088 1,088 — 1,088 — — Securities purchased under agreements to resell 2,500 2,500 — 2,500 — — Federal funds sold 5,421 5,421 — 5,421 — — Trading securities 1,265 1,265 — 1,265 — — Available-for-sale securities 1,662 1,662 — — 1,662 — Held-to-maturity securities 23,239 23,263 — 22,179 1,084 — Advances 104,168 104,021 — 104,021 — — Mortgage loans held for portfolio, net 584 647 — 646 1 — Accrued interest receivable 171 171 — 171 — — Derivative assets 176 176 — 337 — (161 ) Grantor trust assets (included in Other assets) 31 31 31 — — — Liabilities: Interest-bearing deposits 1,084 1,084 — 1,084 — — Consolidated obligations, net: Discount notes 69,434 69,432 — 69,432 — — Bonds 63,953 63,940 — 63,940 — — Mandatorily redeemable capital stock 14 14 14 — — — Accrued interest payable 127 127 — 127 — — Derivative liabilities 124 124 — 1,551 — (1,427 ) ____________ (1) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral held or placed with the same clearing agents and/or counterparties. |
