Fair Value Disclosures

The fair value amounts recorded on the Statements of Condition and presented in the related note disclosures have been determined by the FHLBank using available market information and the FHLBank's best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the FHLBank as of June 30, 2011 and December 31, 2010. The fair values reflect the FHLBank's judgment of how a market participant would estimate the fair values.

The Fair Value Summary Table included in this note does 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 versus liabilities.

Table 19.1 - Fair Value Summary Table (in thousands)



	June 30, 2011				December 31, 2010
Financial Instruments	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Cash and due from banks	$	1,802,114	$	1,802,114	$	197,623	$	197,623
Interest-bearing deposits	157		157		108		108
Securities purchased under resale agreements	1,700,000		1,700,000		2,950,000		2,950,000
Federal funds sold	2,360,000		2,360,000		5,480,000		5,480,000
Trading securities	7,105,053		7,105,053		6,402,781		6,402,781
Available-for-sale securities	3,839,603		3,839,603		5,789,736		5,789,736
Held-to-maturity securities	12,934,943		13,302,931		12,691,545		13,019,799
Advances	29,172,490		29,383,231		30,181,017		30,386,792
Mortgage loans held for portfolio, net	7,546,238		7,922,341		7,770,040		8,094,128
Accrued interest receivable	124,546		124,546		132,355		132,355
Derivative assets	3,539		3,539		2,499		2,499

Liabilities:
Deposits	1,224,566		1,224,555		1,452,427		1,452,333
Consolidated Obligations:
Discount Notes	32,915,704		32,916,035		35,003,280		35,003,517
Bonds ⁽¹⁾	28,052,221		28,776,945		30,696,791		31,414,061
Mandatorily redeemable capital stock	323,698		323,698		356,702		356,702
Accrued interest payable	171,851		171,851		190,728		190,728
Derivative liabilities	199,561		199,561		227,982		227,982

Other:
Standby bond purchase agreements	—		1,924		—		2,361

(1) Includes (in thousands) $2,231,866 and $0 of Consolidated Bonds recorded under the fair value option at June 30, 2011 and December 31, 2010, respectively.

Fair Value Hierarchy. The FHLBank records trading securities, available-for-sale securities, derivative assets, derivative liabilities and certain Consolidated Obligation Bonds at fair value. The fair value hierarchy is used to prioritize the inputs of valuation techniques used to measure fair value for assets and liabilities carried at fair value on the Statements of Condition. The inputs are evaluated and an overall level for the measurement is determined. This overall level is an indication of how market observable the fair value measurement is.

Outlined below is the application of the fair value hierarchy to the FHLBank's financial assets and financial liabilities that are carried at fair value.

Level 1 - defined as those instruments for which inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - defined as those instruments for which inputs to the valuation methodology include quoted prices for similar instruments in active markets, and for which inputs are observable, either directly or indirectly, for substantially the full term of the financial instrument. The FHLBank's trading securities, available-for-sale securities, Consolidated Obligations Bonds and derivative instruments are considered Level 2 instruments based on the inputs utilized to derive fair value.

Level 3 - defined as those instruments for which inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The FHLBank utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

For instruments carried at fair value, the FHLBank reviews the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out at fair value as of the beginning of the quarter in which the changes occur. The FHLBank did not have any transfers during the six months ended June 30, 2011 or 2010.

Valuation Techniques and Significant Inputs.

Cash and due from banks: The fair value equals the carrying value.

Interest-bearing deposits: The fair value is determined based on each security's quoted prices, excluding accrued interest, as of the last business day of the period.

Securities purchased under agreements to resell: The fair value approximates the carrying value.

Federal funds sold: The fair value of overnight Federal funds sold approximates the carrying value. The fair value of term Federal funds sold is 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, as approximated by adding an estimated current spread to the LIBOR swap curve for Federal funds with similar terms. The fair value excludes accrued interest.

Trading securities: The FHLBank's trading portfolio consists of U.S. Treasury obligations, discount notes and bonds issued by Freddie Mac, Fannie Mae and/or the Federal Farm Credit Bank (non-mortgage-backed securities), and mortgage-backed securities issued by Ginnie Mae. Quoted market prices in active markets are not available for these securities.

In general, in order to determine the fair value of its non-mortgage backed securities, the FHLBank can use either (a) an income approach based on a market-observable interest rate curve that may be adjusted for a spread, or (b) prices received from third-party pricing vendors. The income approach uses indicative fair values derived from a discounted cash flow methodology. The FHLBank believes that both methodologies result in fair values that are reasonable and similar in all material respects based on the nature of the financial instruments being measured.

For its U.S. Treasury obligations and discount notes and bonds issued by Freddie Mac, Fannie Mae and/or the Federal Farm Credit Bank, the FHLBank determines the fair value using the income approach.

Table 19.2 - Significant Inputs for Non-Mortgage-Backed Securities in the Trading Portfolio Carried at Level 2 Within the Fair Value Hierarchy as of June 30, 2011 (in thousands)



	Interest Rate Curve/ Pricing Services	Spread Range to the Interest Rate Curve	Fair Value
U.S. Treasury obligations	Treasury	-	$	1,228,499
Government-sponsored enterprises	Agency Discount Note Curve	-	$	5,874,286

For mortgage-backed securities, the FHLBank's valuation technique incorporates prices from up to four designated third-party pricing vendors when available. These pricing vendors use methods that generally employ, but are not limited to, benchmark yields, recent trades, dealer estimates, valuation models, benchmarking of like securities, sector groupings, and/or matrix pricing. The FHLBank establishes a price for each mortgage-backed security using a formula that is based upon the number of prices received. 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 some type of validation as described below. In addition to using specified price tolerance thresholds, the computed prices are tested for reasonableness through a comparison to the FHLBank's expectation of prices based on its knowledge of the securities and their expected price sensitivity relative to changes in market rates. Computed prices within the established thresholds and expectations are generally accepted unless strong evidence suggests that using the formula-driven price would not be appropriate. Preliminary estimated fair values that are outside the tolerance thresholds, or that management believes may not be appropriate based on all available information (including those limited instances in which only one price is received), are subject to further analysis, including but not limited to, a comparison to the prices for similar securities and/or to non-binding dealer estimates and/or use of an internal model that is deemed most appropriate after consideration of all relevant facts and circumstances that a market participant would consider.

As of June 30, 2011, all of the FHLBank's mortgage-backed securities holdings were priced using the valuation technique incorporating prices from third-party pricing vendors. The relative lack of dispersion among the vendor prices received for each of the securities supported the FHLBank's conclusion that the final computed prices are reasonable estimates of fair value.

Available-for-sale securities: The FHLBank's available-for-sale portfolio consists of certificates of deposit and discount notes. Quoted market prices in active markets are not available for these securities. Therefore, the fair value is determined based on each security's indicative fair value obtained from a third-party vendor. The FHLBank performs several validation steps in order to verify the accuracy and reasonableness of these fair values. These steps may include, but are not limited to, a detailed review of instruments with significant periodic price changes and a derived fair value from an option-adjusted discounted cash flow methodology using market-observed inputs for the interest rate environment and similar instruments.

Table 19.3 - Significant Inputs for Non-Mortgage-Backed Securities in the Available-for-Sale Portfolio Carried at Level 2 Within the Fair Value Hierarchy as of June 30, 2011 (in thousands)



	Interest Rate Curve/ Pricing Services	Spread Range to the Interest Rate Curve	Fair Value
Certificates of deposit	Pricing Services	N/A	$	3,339,657
Other *	Pricing Services	N/A	$	499,946



	*	Consists of debt securities issued by International Bank for Reconstruction and Development.

Held-to-maturity securities: The FHLBank's held-to-maturity portfolio consists of discount notes issued by Freddie Mac and/or Fannie Mae, taxable municipal bonds, TLGP notes, and mortgage-backed securities. Quoted market prices are not available for these securities. The fair value for each individual mortgage-backed security is determined by using the third-party vendor approach described above. The fair value for discount notes is determined using the income approach described above. The fair value for taxable municipal bonds and TLGP notes is determined based on each security's indicative market price obtained from a third-party vendor excluding accrued interest. The FHLBank uses various techniques to validate the fair values received from third-party vendors for accuracy and reasonableness.

Advances: The FHLBank determines the fair values of Advances by calculating the present value of expected future cash flows from the Advances excluding accrued interest. The discount rates used in these calculations are the replacement rates for Advances with similar terms, as approximated either by adding an estimated current spread to the LIBOR swap curve or by using current indicative market yields, as indicated by the FHLBank's pricing methodologies for Advances with similar current terms. Advance pricing is determined based on the FHLBank's rates on Consolidated Obligations. In accordance with Finance Agency Regulations, Advances with a maturity and repricing period greater than six months require a prepayment fee sufficient to make the FHLBank financially indifferent to the borrower's decision to prepay the Advances. Therefore, the fair value of Advances does not assume prepayment risk.

For swapped option-based Advances, the fair value is determined (independently of the related derivative) by the discounted cash flow methodology based on the LIBOR swap curve and forward rates at period end adjusted for the estimated current spread on new swapped Advances to the swap curve. For swapped Advances with a conversion option, the conversion option is valued by taking into account the LIBOR swap curve and forward rates at period end and the market's expectations of future interest rate volatility implied from current market prices of similar options.

Mortgage loans held for portfolio, net: The fair values of mortgage loans are determined based on quoted market prices offered to approved members as indicated by the FHLBank's Mortgage Purchase Program pricing methodologies for mortgage loans with similar current terms excluding accrued interest. The quoted prices offered to members are based on Fannie Mae price indications on to-be-announced mortgage-backed securities and FHA price indications on government-guaranteed loans; the FHLBank then adjusts these indicative prices to account for particular features of the FHLBank's Mortgage Purchase Program that differ from the Fannie Mae and FHA securities. These features include, but may not be limited to:


▪	the Mortgage Purchase Program's credit enhancements; and


▪	marketing adjustments that reflect the FHLBank's cooperative business model and preferences for particular kinds of loans and mortgage note rates.

These quoted prices, however, can change rapidly based upon market conditions and are highly dependent upon the underlying prepayment assumptions.

In order to determine the fair values, the adjusted prices are also reduced for the FHLBank's estimate of expected credit losses.

Accrued interest receivable and payable: The fair value approximates the carrying value.

Derivative assets/liabilities: The FHLBank's derivative assets/liabilities consist of interest rate swaps, to-be-announced mortgage-backed securities (forward rate agreements), and mortgage delivery commitments. The FHLBank's interest rate swaps are not listed on an exchange. Therefore, the FHLBank determines the fair value of each individual interest rate swap using market value models that use readily observable market inputs as their basis (inputs that are actively quoted and can be validated to external sources). The FHLBank uses a mid-market pricing convention as a practical expedient for fair value measurements within a bid-ask spread. These models reflect the contractual terms of the interest rate swaps, including the period to maturity, as well as the significant inputs noted below. The fair value determination uses the standard valuation technique of discounted cash flow analysis.

The FHLBank performs several validation steps to verify the reasonableness of the fair value output generated by the primary market value model. In addition to an annual model validation, the FHLBank prepares a monthly reconciliation of the model's fair values to estimates of fair values provided by the derivative counterparties and to another third-party model. The FHLBank believes these processes provide a reasonable basis for it to place continued reliance on the derivative fair values generated by the primary model.

The fair value of TBA mortgage-backed securities is based on independent indicative and/or quoted prices generated by market transactions involving comparable instruments. The FHLBank determines the fair value of mortgage delivery commitments using market prices from the TBA/mortgage-backed security market or TBA/Ginnie Mae market and adjustments noted below.

The discounted cash flow analysis utilizes market-observable inputs (inputs that are actively quoted and can be validated to external sources). Significant inputs, by class of derivative, are as follows:

Interest-rate swaps:


▪	LIBOR swap curve; and


▪	Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options.

To-be-announced mortgage-backed securities:


▪	Market-based prices by coupon class and expected term until settlement.

Mortgage delivery commitments:


▪	TBA price. Market-based prices of TBAs by coupon class and expected term until settlement, adjusted to reflect the contractual terms of the mortgage delivery commitments, similar to the mortgage loans held for portfolio process. The adjustments to the market prices are market observable, or can be corroborated with observable market data.

The FHLBank is subject to credit risk in derivatives transactions due to potential nonperformance by its derivatives counterparties, all of which are highly rated institutions. To mitigate this risk, the FHLBank has entered into master netting agreements with all of its derivative counterparties. In addition, to limit the FHLBank's net unsecured credit exposure to these counterparties, the FHLBank has entered into bilateral security agreements with all active derivatives dealer counterparties that provide for delivery of collateral at specified levels tied to counterparty credit ratings. The FHLBank has evaluated the potential for the fair value of the instruments to be impacted by counterparty credit risk and has determined that no adjustments were significant or necessary to the overall fair value measurements at June 30, 2011 or December 31, 2010.

The fair values of the FHLBank's derivatives 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. The fair values of derivatives are netted by counterparty pursuant to the provisions of the FHLBank's master netting agreements. If these netted amounts are positive, they are classified as an asset and if negative, they are classified as a liability.

Deposits: The FHLBank determines the fair values of FHLBank deposits with fixed rates by calculating the present value of expected future cash flows from the deposits and reducing this amount for accrued interest payable. The discount rates used in these calculations are the cost of deposits with similar terms.

Consolidated Obligations: The FHLBank determines the fair values of Discount Notes by calculating the present value of expected future cash flows from the Discount Notes excluding accrued interest. The discount rates used in these calculations are current replacement rates for Discount Notes with similar current terms, as approximated by adding an estimated current spread to the LIBOR swap curve. Each month's cash flow is discounted at that month's replacement rate.

The FHLBank determines the fair values of non-callable Consolidated Obligation Bonds (both unswapped and swapped) by calculating the present value of scheduled future cash flows from the bonds excluding accrued interest. Significant inputs used to determine fair value of these Consolidated Obligation Bonds are as follows:


▪	The discount rates used, which are estimated current market yields, as indicated by the Office of Finance, for bonds with similar current terms. There was no spread adjustment to the Office of Finance indications used to value the non-callable Consolidated Obligations carried at fair value on the Statements of Condition.

The FHLBank determines the fair values of callable Consolidated Obligation Bonds (both unswapped and swapped) by calculating the present value of expected future cash flows from the bonds excluding accrued interest. The fair values are determined by the discounted cash flow methodology based on the following significant inputs for these Consolidated Obligations:


▪	LIBOR swap curve;


▪	Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options; and


▪	Spread assumption. As of June 30, 2011 the spread adjustment to the LIBOR Swap Curve was -40 to -15 basis points for callable Consolidated Obligations carried at fair value on the Statements of Condition.

Adjustments may be necessary to reflect the 12 FHLBanks' credit quality when valuing Consolidated Obligation Bonds measured at fair value. Due to the joint and several liability for Consolidated Obligations, the FHLBank monitors its own creditworthiness and the creditworthiness of the other FHLBanks to determine whether any credit adjustments are necessary in its fair value measurement of Consolidated Obligation Bonds. The credit ratings of the FHLBanks and any changes to these credit ratings are the basis for the FHLBanks to determine whether the fair values of Consolidated Obligation Bonds have been significantly affected during the reporting period by changes in the instrument-specific credit risk. The FHLBank had no adjustments during the six months ended June 30, 2011 or 2010.

Mandatorily redeemable capital stock: The fair value of capital stock subject to mandatory redemption is par value for the dates presented, as indicated by member contemporaneous purchases and sales at par value. FHLBank stock can only be acquired by members at par value and redeemed at par value. FHLBank stock is not traded and no market mechanism exists for the exchange of stock outside the cooperative structure.

Commitments: The fair values of standby bond purchase agreements are based on the present value of the estimated fees taking into account the remaining terms of the agreements.

Subjectivity of estimates. Estimates of the fair values of Advances with options, mortgage instruments, derivatives with embedded options and bonds with options using the methods described above and other methods are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows, prepayment speeds, interest rate volatility, distributions of future interest rates used to value options, and discount rates that appropriately reflect market and credit risks. The judgments also include the parameters, methods, and assumptions used in models to value the options. The use of different assumptions could have a material effect on the fair value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near term changes.

Fair Value on a Recurring Basis.

Table 19.4 presents the fair value of financial assets and liabilities, by level, within the fair value hierarchy which are recorded on a recurring basis at June 30, 2011 and December 31, 2010.

Table 19.4 - Hierarchy Level for Assets and Liabilities (in thousands)



	Fair Value Measurements at June 30, 2011
	Level 1		Level 2		Level 3		Netting Adjustment and Cash Collateral ⁽¹⁾			Total
Assets
Trading securities:
U.S. Treasury obligations	$	—	$	1,228,499	$	—	$	—		$	1,228,499
Government-sponsored enterprises debt securities			5,874,286							5,874,286
Other U.S. obligation residential mortgage-backed securities	—		2,268		—		—			2,268
Total trading securities	—		7,105,053		—		—			7,105,053
Available-for-sale securities:
Certificates of deposit	—		3,339,657		—		—			3,339,657
Other non-mortgage-backed securities	—		499,946		—		—			499,946
Total available-for-sale securities	—		3,839,603		—		—			3,839,603
Derivative assets:
Interest rate swaps	—		94,725		—		(92,657		)	2,068
Forward rate agreement			603							603
Mortgage delivery commitments	—		868		—		—			868
Total derivative assets	—		96,196		—		(92,657		)	3,539
Total assets at fair value	$	—	$	11,040,852	$	—	$	(92,657	)	$	10,948,195

Liabilities
Consolidated Obligation Bonds ⁽²⁾	$	—	$	2,231,866	$	—	$	—		$	2,231,866
Derivative liabilities:
Interest rate swaps	—		692,178		—		(495,479		)	196,699
Forward rate agreement	—		1,490		—		—			1,490
Mortgage delivery commitments	—		1,372		—		—			1,372
Total derivative liabilities	—		695,040		—		(495,479		)	199,561
Total liabilities at fair value	$	—	$	2,926,906	$	—	$	(495,479	)	$	2,431,427


(1)	Amounts represent the effects of legally enforceable master netting agreements that allow the FHLBank to settle positive and negative positions and of cash collateral held or placed with the same counterparties.


(2)	Includes Consolidated Obligation Bonds recorded under the fair value option.



	Fair Value Measurements at December 31, 2010
	Level 1		Level 2		Level 3		Netting Adjustment and Cash Collateral ⁽¹⁾			Total
Assets
Trading securities:
U.S. Treasury obligations	$	—	$	1,904,834	$	—	$	—		$	1,904,834
Government-sponsored enterprises debt securities	—		4,495,516		—		—			4,495,516
Other U.S. obligation residential mortgage-backed securities	—		2,431		—		—			2,431
Total trading securities	—		6,402,781		—		—			6,402,781
Available-for-sale securities:
Certificates of deposit	—		5,789,736		—		—			5,789,736
Derivative assets:
Interest rate swaps	—		117,117		—		(114,913		)	2,204
Mortgage delivery commitments	—		295		—		—			295
Total derivative assets	—		117,412		—		(114,913		)	2,499
Total assets at fair value	$	—	$	12,309,929	$	—	$	(114,913	)	$	12,195,016

Liabilities
Derivative liabilities:
Interest rate swaps	$	—	$	782,465	$	—	$	(554,988	)	$	227,477
Forward rate agreements	—		124		—		—			124
Mortgage delivery commitments	—		381		—		—			381
Total derivative liabilities	—		782,970		—		(554,988		)	227,982
Total liabilities at fair value	$	—	$	782,970	$	—	$	(554,988	)	$	227,982


(1)	Amounts represent the effects of legally enforceable master netting agreements that allow the FHLBank to settle positive and negative positions and of cash collateral held or placed with the same counterparties.

Fair Value Option. The fair value option provides an irrevocable option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments not previously carried at fair value. It requires a company to display the fair value of those assets and liabilities for which it has chosen to use fair value on the face of the Statements of Condition. Fair value is used for both the initial and subsequent measurement of the designated assets, liabilities and commitments, with the changes in fair value recognized in net income. If elected, interest income and interest expense on Advances and Consolidated Bonds carried at fair value are recognized based solely on the contractual amount of interest due or unpaid and any transaction fees or costs are immediately recognized into other non-interest income or other non-interest expense. Additionally, concessions paid on Consolidated Obligations designated under the fair value option are expensed as incurred in other non-interest expense.

During the six months ended June 30, 2011, the FHLBank elected the fair value option for certain Consolidated Obligation Bond transactions. The FHLBank elected the fair value option for these transactions so as to mitigate the income statement volatility that can arise when only the corresponding derivatives are marked at fair value in transactions that do not, or may not, meet hedge effectiveness requirements or otherwise qualify for hedge accounting (i.e., economic hedging transactions).

The following table summarizes the activity related to financial liabilities for which the fair value option was elected during the three and six months ended June 30, 2011.

Table 19.5 – Fair Value Option Financial Liabilities (in thousands)



	Three Months Ended June 30, 2011
	Consolidated Bonds
Balance at March 31, 2011	$	(1,131,591	)
New transactions elected for fair value option	(1,665,000		)
Maturities and terminations	566,000
Net losses on instruments held under fair value option	(427		)
Change in accrued interest	(848		)
Balance at June 30, 2011	$	(2,231,866	)



	Six Months Ended June 30, 2011
	Consolidated Bonds
Balance at December 31, 2010	$	—
New transactions elected for fair value option	(3,796,000		)
Maturities and terminations	1,566,000
Net losses on instruments held under fair value option	(538		)
Change in accrued interest	(1,328		)
Balance at June 30, 2011	$	(2,231,866	)

Table 19.6 – Changes in Fair Values for Items Measured at Fair Value Pursuant to the Election of the Fair Value Option at June 30, 2011 (in thousands)



	Interest Expense			Net Losses on Changes in Fair Value Under Fair Value Option			Total Changes in Fair Value Included in Current Period Earnings
Consolidated Bonds	$	(3,308	)	$	(538	)	$	(3,846	)

For items recorded under the fair value option, the related contractual interest income and contractual interest expense are recorded as part of net interest income on the Statement of Income. The remaining changes in fair value for instruments in which the fair value option has been elected are recorded as “Net losses on Consolidated Obligation Bonds held under fair value option” in the Statements of Income. The change in fair value does not include changes in instrument-specific credit risk. The FHLBank has determined that no adjustments to the fair values of its instruments recorded under the fair value option for instrument-specific credit risk were necessary as of June 30, 2011.

The following table reflects the difference between the aggregate unpaid principal balance outstanding and the aggregate fair value for Consolidated Bonds for which the fair value option has been elected.

Table 19.7 – Aggregate Unpaid Balance and Aggregate Fair Value at June 30, 2011 (in thousands)



	Aggregate Unpaid Principal Balance		Aggregate Fair Value		Fair Value Over/(Under) Aggregate Unpaid Principal Balance
Consolidated Bonds	$	2,230,000	$	2,231,866	$	1,866