Estimated Fair Values

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 at September 30, 2012 and December 31, 2011. Although the Bank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any valuation technique. Therefore, these 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 values.

The carrying value and estimated fair value of the Bank’s financial instruments at September 30, 2012 and December 31, 2011 are presented in the table below. This table does not represent an estimate of the overall market value of the Bank as a going-concern, which would take into account future business opportunities and the net profitability of assets and liabilities.

Fair Value Summary Table

	September 30, 2012													December 31, 2011
(in thousands)	Carrying Value		Level 1		Level 2		Level 3		Netting Adjust.			Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets:
Cash and due from banks	$	246,723	$	246,723	$	—	$	—	$	—		$	246,723	$	634,278	$	634,278
Interest-bearing deposits	11,164		—		11,164		—		—			11,164		16,180		16,180
Securities purchased under agreement to resell	2,250,000		—		2,250,000		—		—			2,250,000		—		—
Federal funds sold	2,335,000		—		2,334,993		—		—			2,334,993		2,450,000		2,449,936
Trading securities	1,114,015		4,137		1,109,878		—		—			1,114,015		984,285		984,285
AFS securities	6,326,162		1,998		4,842,925		1,481,239		—			6,326,162		4,356,147		4,356,147
HTM securities	6,335,836		—		5,137,554		1,278,516		—			6,416,070		8,832,845		8,782,348
Advances	37,738,621		—		37,935,212		—		—			37,935,212		30,604,801		30,853,987
Mortgage loans held for portfolio, net	3,579,079		—		3,880,263		—		—			3,880,263		3,883,127		4,168,409
BOB loans, net	13,176		—		—		13,176		—			13,176		14,016		14,016
Accrued interest receivable	120,715		—		120,715		—		—			120,715		132,152		132,152
Derivative assets	25,394		—		366,947		—		(341,553		)	25,394		36,256		36,256

Liabilities:
Deposits	$	1,054,956	$	—	$	1,054,957	$	—	$	—		$	1,054,957	$	1,099,694	$	1,099,715
Discount notes	20,888,257		—		20,889,443		—		—			20,889,443		10,921,498		10,921,703
Bonds	33,665,452		—		34,381,802		—		—			34,381,802		35,613,036		36,474,950
Mandatorily redeemable capital stock	188,128		188,333		—		—		—			188,333		45,673		45,673
Accrued interest payable	145,672		—		145,672		—		—			145,672		125,564		125,564
Derivative liabilities	402,355		—		1,146,502		—		(744,147		)	402,355		441,975		441,975

Fair Value Hierarchy. The Bank records trading securities, AFS, derivative assets and derivative liabilities at fair value. The fair value hierarchy is used to prioritize the inputs used to measure fair value for those assets and liabilities carried at fair value on the Statement of Condition. 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 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 an active market that the reporting entity 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 or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active or in which little information is released publicly; and (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).

Level 3 Inputs - Unobservable inputs for the asset or liability.

The Bank 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. These reclassifications are reported as transfers in/out as of the beginning of the quarter in which the changes occur. There were no such transfers during the nine months ended September 30, 2012 and 2011.

Summary of Valuation Methodologies and Primary Inputs

Cash and Due from Banks. The fair values equal the carrying values.

Interest Bearing Deposits. The fair value is determined by calculating the present value of the future cash flows. The discount rates used in these calculations are the rates for interest-bearing deposits with similar terms.

Securities Purchased Under Agreement to Resell. The fair values are determined by calculating the present value of the future cash flows. The discount rates used in these calculations are the rates for securities with similar terms. For securities with variable rates or fixed rates with three months or less to maturity or repricing, the fair values approximate the carrying values.

Federal Funds Sold. The fair value of Federal funds sold is determined by calculating the present value of the future cash flows. The discount rates used in these calculations are the rates for Federal funds with similar terms.

Investment Securities – non-MBS. The Bank uses the income approach to determine the estimated fair value of non-MBS investment securities. The significant inputs include a market-observable interest rate curve and a discount spread, if applicable. The market-observable interest rate curves used by the Bank and the related instrument types they measure are as follows:


•	Treasury curve: U.S. Treasury obligations


•	LIBOR Swap curve: certificates of deposit


•	CO curve: Government-sponsored enterprises, state and local agency, and other U.S. obligations

Investment Securities – MBS. To value MBS holdings, the Bank obtains prices from four designated third-party pricing vendors, when available. The pricing vendors use various proprietary models to price MBS. 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. Since many MBS 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 MBS valuations, which facilitates resolution of potentially erroneous prices identified by the Bank. The Bank considers these inputs to be Level 2 inputs. However, based on the current lack of significant market activity for private label residential MBS, the Bank believes as of September 30, 2012 private label residential MBS inputs should be classified as Level 3.

During the year, the Bank conducts reviews of the four pricing vendors to enhance its understanding of the vendors' pricing processes, methodologies and control procedures for agency and private label MBS. To the extent available, the Bank also reviews the vendors' independent auditors' reports regarding the internal controls over their valuation processes.

The Bank's valuation technique 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. 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 an additional step, the Bank reviewed the final fair value estimates of its private-label MBS holdings as of September 30, 2012 for reasonableness using an implied yield test. The Bank calculated an implied yield for each of its private label MBS using the estimated fair value derived from the process described above and the security's projected cash flows from the Bank's OTTI process and compared such yield to the market yield for comparable securities according to dealers and other third-party sources to the extent comparable market yield data was available. This analysis did not indicate that any adjustments to the fair value estimates were necessary.

As of September 30, 2012, four vendor prices were received for a majority of the Bank's MBS holdings, and the final prices for a majority of those securities were computed by averaging the four prices. Based on the Bank'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 or significant yield variances, the Bank's additional analyses), the Bank believes the 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.

Mutual Funds Offsetting Deferred Compensation and Employee Benefit Plan Obligations. Fair values for publicly traded mutual funds are based on quoted market prices.

Advances. The Bank determines the fair value by calculating the present value of expected future cash flows from the advances. The discount rates used in these calculations are equivalent to the replacement advance rates for advances with similar terms. The inputs used to determine fair value of advances are the LIBOR curve, a volatility assumption for advances with optionality, and a spread adjustment.

Mortgage Loans Held For Portfolio. The fair value is determined based on quoted market prices for new MBS issued by U.S. GSEs. Prices are then adjusted for differences in coupon, seasoning and credit quality between the Bank’s mortgage loans and the referenced MBS. The prices of the referenced MBS are highly dependent upon the underlying prepayment assumptions priced in the secondary market. Changes in the prepayment rates can have a material effect on the fair value estimates. Prepayment assumptions are susceptible to material changes in the near term because they are made at a specific point in time.

Accrued Interest Receivable and Payable. The fair values approximate the carrying values.

Derivative Assets/Liabilities. The Bank bases the fair values of derivatives with similar terms on market prices, when available. However, market prices do not exist for many types of derivative instruments. Consequently, fair values for these instruments are estimated using standard valuation techniques such as discounted cash flow analysis and comparisons to similar instruments. Estimates developed using these methods are highly subjective and require judgment regarding significant matters such as the amount and timing of future cash flows, volatility of interest rates 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. Because these estimates are made as of a specific point in time, they are susceptible to material near-term changes.

The Bank is subject to credit risk in derivatives transactions due to the potential nonperformance by the derivatives counterparties, all of which are highly rated institutions. To mitigate this risk, the Bank has entered into master-netting agreements for interest rate exchange agreements with highly rated institutions. In addition, the Bank has entered into bilateral security agreements with all active derivatives counterparties that provide for delivery of collateral at specified levels tied to those counterparties’ credit ratings to limit the Bank’s net unsecured credit exposure to these counterparties. The Bank has evaluated the potential for the fair value of the instruments to be affected by counterparty credit risk and has determined that no adjustments were significant or necessary to the overall fair value measurements.

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

The discounted cash flow analysis used to determine the fair value of derivative instruments utilizes market-observable inputs (inputs that are actively quoted and can be validated to external sources). Inputs by class of derivative are as follows:

Interest-rate related:


•	LIBOR Swap Curve.


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

Mortgage delivery commitments:


•	To Be Announced (TBA) securities prices. Market-based prices of TBAs are determined by coupon class and expected term until settlement.

BOB Loans. The fair value approximates the carrying value.

Deposits. The Bank determines the fair value by calculating the present value of expected future cash flows from the deposits. The discount rates used in these calculations are the cost of deposits with similar terms.

Consolidated Obligations. The Bank’s internal valuation model determines fair values of consolidated obligations bonds and discount notes by calculating the present value of expected cash flows using market-based yield curves. The inputs used to determine fair value of consolidated obligations are a CO curve and a LIBOR swap curve, a volatility assumption for consolidated obligations with optionality, and a spread adjustment.

Mandatorily Redeemable Capital Stock. The fair value of capital stock subject to mandatory redemption is generally equal to its par value as indicated by contemporaneous member purchases and sales at par value. Fair value also includes an estimated dividend earned at the time of reclassification from equity to liabilities, until such amount is paid, and any subsequently-declared dividend. FHLBank stock can only be acquired and redeemed at par value. FHLBank stock is not traded and no market mechanism exists for the exchange of stock outside the FHLBank System's cooperative structure.

Commitments. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit is based on the present value of fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. The fair value of the Bank's commitments to extend credit for advances and letters of credit was immaterial at September 30, 2012 and December 31, 2011.

Commitments to Extend Credit for Mortgage Loans. Certain mortgage loan purchase commitments are recorded as derivatives at their fair value.

Subjectivity of Estimates. Estimates of the fair value of financial assets and liabilities using the methods described above 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, 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. These estimates are susceptible to material near term changes because they are made as of a specific point in time.

Fair Value on a Recurring Basis. The following tables present, for each hierarchy level, the Bank’s assets and liabilities that are measured at fair value on a recurring basis on its Statement of Condition at September 30, 2012 and December 31, 2011.



	September 30, 2012
(in thousands)	Level 1		Level 2		Level 3		Netting Adjustment⁽¹⁾			Total
Assets:
Trading securities:
U.S. Treasury bills	$	—	$	1,109,878	$	—	$	—		$	1,109,878
Mutual funds offsetting deferred compensation	4,137		—		—		—			4,137
Total trading securities	$	4,137	$	1,109,878	$	—	$	—		$	1,114,015
AFS securities:
Other U.S. obligations	$	—	$	21,020	$	—	$	—		$	21,020
GSE securities	—		1,374,584		—		—			1,374,584
State and local Agency	—		12,972		—		—			12,972
Mutual funds partially securing employee benefit plan obligations	1,998		—		—		—			1,998
Other U.S. obligations MBS	—		326,041		—		—			326,041
GSE residential MBS	—		3,108,308		—		—			3,108,308
Private label MBS:
Private label residential	—		—		1,466,664		—			1,466,664
HELOCs	—		—		14,575		—			14,575
Total AFS securities	$	1,998	$	4,842,925	$	1,481,239	$	—		$	6,326,162
Derivative assets:
Interest rate related	$	—	$	366,270	$	—	$	(341,553	)	$	24,717
Mortgage delivery commitments	—		677		—		—			677
Total derivative assets	$	—	$	366,947	$	—	$	(341,553	)	$	25,394
Total assets at fair value	$	6,135	$	6,319,750	$	1,481,239	$	(341,553	)	$	7,465,571
Liabilities:
Derivative liabilities:
Interest rate related	$	—	$	1,146,498	$	—	$	(744,147	)	$	402,351
Mortgage delivery commitments	—		4		—		—			4
Total derivative liabilities ⁽²⁾	$	—	$	1,146,502	$	—	$	(744,147	)	$	402,355



	December 31, 2011
(in thousands)	Level 1		Level 2		Level 3		Netting Adjustment⁽¹⁾			Total
Assets:
Trading securities:
U.S. Treasury bills	$	—	$	729,994	$	—	$	—		$	729,994
TLGP investments	—		250,080		—		—			250,080
Mutual funds offsetting deferred compensation	4,211		—		—		—			4,211
Total trading securities	$	4,211	$	980,074	$	—	$	—		$	984,285
AFS securities:
GSE securities	$	—	$	900,574	$	—	$	—		$	900,574
Mutual funds partially securing employee benefit plan obligations	1,998		—		—		$	—		$	1,998
GSE residential MBS	—		1,807,141		—		—			1,807,141
Private label MBS:
Private label residential	—		—		1,631,361		—			1,631,361
HELOCs	—		—		15,073		—			15,073
Total AFS securities	$	1,998	$	2,707,715	$	1,646,434	$	—		$	4,356,147
Derivative assets:
Interest rate related	$	—	$	373,683	$	—	$	(337,585	)	$	36,098
Mortgage delivery commitments	—		158		—		—			158
Total derivative assets	$	—	$	373,841	$	—	$	(337,585	)	$	36,256
Total assets at fair value	$	6,209	$	4,061,630	$	1,646,434	$	(337,585	)	$	5,376,688
Liabilities:
Derivative liabilities:
Interest rate related	$	—	$	1,313,279	$	—	$	(871,312	)	$	441,967
Mortgage delivery commitments	—		8		—		—			8
Total derivative liabilities ⁽²⁾	$	—	$	1,313,287	$	—	$	(871,312	)	$	441,975

Note:

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

⁽²⁾Derivative liabilities represent the total liabilities at fair value.

There were no transfers between Levels 1 and 2 during the first nine months of 2012 or 2011.

Level 3 Disclosures for all Assets and Liabilities That Are Measured at Fair Value on a Recurring Basis. The following table presents a reconciliation of all assets and liabilities that are measured at fair value on the Statement of Condition using significant unobservable inputs (Level 3) for the first nine months of 2012 and 2011. For instruments carried at fair value, the Bank 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 in the quarter in which the changes occur. Transfers are reported as of the beginning of the period.



(in thousands)	AFS Private Label MBS-Residential Nine Months Ended September 30, 2012			AFS Private Label MBS- HELOCs Nine Months Ended September 30, 2012
Balance at January 1	$	1,631,361		$	15,073
Total gains (losses) (realized/unrealized) included in:
Accretion of credit losses in interest income	(4,380		)	692
Net OTTI losses, credit portion	(9,866		)	(1,084		)
Net unrealized gains on AFS in OCI	213			—
Reclassification of non-credit portion included in net income	8,411			1,084
Net change in fair value on OTTI AFS in OCI	116,632			1,119
Unrealized gains on OTTI AFS and included in OCI	34,190			171
Purchases, issuances, sales, and settlements:
Settlements	(321,165		)	(2,480		)
Transfer of OTTI securities from HTM to AFS	11,268			—
Balance at September 30	$	1,466,664		$	14,575
Total amount of losses for the period presented included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at September 30, 2012	$	(14,247	)	$	(392	)



(in thousands)	AFS Private Label MBS-Residential Nine Months Ended September 30, 2011			AFS Private Label MBS-HELOCs Nine Months Ended September 30, 2011
Balance at January 1	$	2,200,438		$	15,357
Total gains (losses) (realized/unrealized) included in:
Net gains on sale of AFS securities	7,278			—
Net OTTI losses, credit portion	(36,320		)	(787		)
AOCI	83,625			4,541
Purchases, issuances, sales, and settlements:
Sales	(132,362		)	—
Settlements	(436,368		)	(3,142		)
Transfer of OTTI securities from HTM to AFS	90,925			—
Balance at September 30	$	1,777,216		$	15,969
Total amount of losses for the period presented included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at September 30, 2011	$	(36,320	)	$	(787	)

During the first nine months of 2012, the Bank transferred one private label MBS from its HTM portfolio to its AFS portfolio in the period in which the OTTI charge was recorded. During the first nine months of 2011, the Bank transferred four private label MBS from its HTM portfolio to its AFS portfolio. Because transfers of OTTI securities are separately reported in the quarter in which they occur, the net OTTI losses and noncredit losses recognized on these securities are not separately reflected in the tables above. Further details, including the OTTI charges relating to these transfers and the rationale for these transfers, are presented in Notes 4 and 6 to the Financial Statements.