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Fair Values

12 Months Ended

Dec. 31, 2019

Fair Values

Fair-Value Methodologies and Techniques

We have determined the fair-value amounts below using available market and other pertinent information and our best judgment of appropriate valuation methods. Fair value is the price in an orderly transaction between market participants to sell an asset or transfer a liability in the principal (or advantageous) market for the asset or liability at the measurement date (an exit price). Although we use our best judgment in estimating the fair value 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 our 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 fair values are not necessarily indicative of the amounts that would be realized in current market transactions, although they do reflect our judgment of how a market participant would estimate the fair values. Additionally, these values do not represent an estimate of the overall market value of the Bank as a going concern, which would take into account, among other things, future business opportunities and the net profitability of assets and liabilities.

Fair-Value Hierarchy.

GAAP establishes a fair-value hierarchy and requires an entity to maximize the use of significant observable inputs and minimize the use of significant 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 market observability of the fair-value measurement for the asset or liability. An entity must disclose the level within the fair value hierarchy in which the measurements are classified.

The fair-value hierarchy prioritizes the inputs used to measure fair value into three broad levels:


Level 1	Quoted prices (unadjusted) for identical assets or liabilities in an active market that the reporting entity can access on the measurement date. An active market for the asset or liability is a market in which the transaction for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2

Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified or 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; (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, volatilities, and prepayment speeds); and (4) inputs that are derived principally from or corroborated by observable market data (e.g., implied spreads).


Level 3	Unobservable inputs for the asset or liability.

We review the 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 would be reported as transfers in/out as of the beginning of the quarter in which the changes occur. There were no such transfers during the years ended December 31, 2019 and 2018.

Table 19.1 presents the carrying value, fair value, and fair value hierarchy of our financial assets and liabilities at December 31, 2019 and 2018. We record trading securities, available-for-sale securities, derivative assets, derivative liabilities, and certain other assets at fair value on a recurring basis, and on occasion certain private-label MBS, certain mortgage loans, and certain other assets on a non-recurring basis. We record all other financial assets and liabilities at amortized cost. Refer to Table 19.2 for further details about the financial assets and liabilities held at fair value on either a recurring or non-recurring basis.

Table 19.1 - Fair Value Summary (dollars in thousands)

	December 31, 2019
	Carrying Value			Total Fair Value			Level 1			Level 2			Level 3		Netting Adjustments and Cash Collateral⁽²⁾
Financial instruments
Assets:
Cash and due from banks	$	69,416		$	69,416		$	69,416		$	—		$	—	$	—
Interest-bearing deposits	1,253,873			1,253,873			1,253,873			—			—		—
Securities purchased under agreements to resell	3,500,000			3,500,003			—			3,500,003			—		—
Federal funds sold	860,000			859,999			—			859,999			—		—
Trading securities⁽¹⁾	2,250,264			2,250,264			—			2,250,264			—		—
Available-for-sale securities⁽¹⁾	7,409,000			7,409,000			—			7,344,348			64,652		—
Held-to-maturity securities	871,107			1,035,410			—			456,942			578,468		—
Advances	34,595,363			34,735,775			—			34,735,775			—		—
Mortgage loans, net	4,501,251			4,634,141			—			4,615,737			18,404		—
Accrued interest receivable	112,163			112,163			—			112,163			—		—
Derivative assets⁽¹⁾	159,731			159,731			—			15,329			—		144,402
Other assets ⁽¹⁾	31,939			31,939			13,894			18,045			—		—
Liabilities:
Deposits	(674,309		)	(674,269		)	—			(674,269		)	—		—
COs:
Bonds	(23,888,493		)	(24,226,123		)	—			(24,226,123		)	—		—
Discount notes	(27,681,169		)	(27,681,470		)	—			(27,681,470		)	—		—
Mandatorily redeemable capital stock	(5,806		)	(5,806		)	(5,806		)	—			—		—
Accrued interest payable	(104,477		)	(104,477		)	—			(104,477		)	—		—
Derivative liabilities⁽¹⁾	(10,271		)	(10,271		)	—			(43,805		)	—		33,534
Other:
Commitments to extend credit for advances	—			(3,884		)	—			(3,884		)	—		—
Standby letters of credit	(1,723		)	(1,723		)	—			(1,723		)	—		—



	December 31, 2018
	Carrying Value			Total Fair Value			Level 1			Level 2			Level 3		Netting Adjustments and Cash Collateral⁽²⁾
Financial instruments
Assets:
Cash and due from banks	$	10,431		$	10,431		$	10,431		$	—		$	—	$	—
Interest-bearing deposits	593,199			593,199			593,199			—			—		—
Securities purchased under agreements to resell	6,499,000			6,499,078			—			6,499,078			—		—
Federal funds sold	1,500,000			1,500,002			—			1,500,002			—		—
Trading securities⁽¹⁾	163,038			163,038			—			163,038			—		—
Available-for-sale securities⁽¹⁾	5,849,944			5,849,944			—			5,800,343			49,601		—
Held-to-maturity securities	1,295,023			1,528,929			—			638,164			890,765		—
Advances	43,192,222			43,167,700			—			43,167,700			—		—
Mortgage loans, net	4,299,402			4,238,087			—			4,217,487			20,600		—
Accrued interest receivable	112,751			112,751			—			112,751			—		—
Derivative assets⁽¹⁾	22,403			22,403			—			13,832			—		8,571
Other assets⁽¹⁾	25,059			25,059			9,988			15,071			—		—
Liabilities:
Deposits	(474,878		)	(474,848		)	—			(474,848		)	—		—
COs:
Bonds	(25,912,684		)	(25,843,163		)	—			(25,843,163		)	—		—
Discount notes	(33,065,822		)	(33,062,585		)	—			(33,062,585		)	—		—
Mandatorily redeemable capital stock	(31,868		)	(31,868		)	(31,868		)	—			—		—
Accrued interest payable	(112,043		)	(112,043		)	—			(112,043		)	—		—
Derivative liabilities⁽¹⁾	(255,800		)	(255,800		)	—			(309,552		)	—		53,752
Other:
Commitments to extend credit for advances	—			(4,164		)	—			(4,164		)	—		—
Standby letters of credit	(1,257		)	(1,257		)	—			(1,257		)	—		—

_______________________


(1)	Carried at fair value and measured on a recurring basis.


(2)	These amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty.

Summary of Valuation Methodologies and Primary 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 Statement of Condition are listed below. The fair values and level within the fair value hierarchy of these assets and liabilities are reported in Table 19.2.

Investment Securities. We determine the fair values of our investment securities, other than HFA floating-rate securities, based on prices obtained for each of these securities that we request from multiple designated third-party pricing vendors. The fair value of each such security is the average of such vendor prices that are within a cluster pricing tolerance range. A cluster is defined as a group of available vendor prices for a given security that is within a defined price tolerance range of the median vendor price depending on the security type. An outlier is any vendor price that is outside of the defined cluster and is evaluated for reasonableness.

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. Vendor prices that are outside of a defined cluster are identified as outliers and are subject to additional review including, but not limited to, comparison to prices provided by an additional third-party valuation vendor, prices for similar securities, and/or nonbinding dealer estimates, or the use of internal model prices, which we believe reflect the facts and circumstances that a market participant would consider. We also perform this analysis in those limited instances

where no third-party vendor price or only one third-party vendor price is available to determine fair value. If the analysis indicates that an outlier is not representative of fair value and that the average of the vendor prices within the tolerance threshold of the median price is the best estimate, then we use the average of the vendor prices within the tolerance threshold of the median price as the final price. If, on the other hand, we determine that an outlier (or some other price identified in the analysis) is a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price. In all cases, the final price is used to determine the fair value of the security.

As of December 31, 2019, multiple vendor prices were received for substantially all of our investment securities and the final prices for substantially all of those securities were computed by averaging the prices received. The relative proximity of the prices received supports our conclusion that the final computed prices are reasonable estimates of fair value. Based on the current low level of market activity for private-label residential MBS, the nonrecurring fair-value measurements for such securities as of December 31, 2019 and 2018, fell within Level 3 of the fair-value hierarchy. Our fixed-rate HFA securities fall within Level 3 of the fair-value hierarchy due to the current lack of market activities for these bonds.

Investment Securities – HFA Floating Rate Securities. The 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. Our floating rate HFA securities fall within Level 3 of the fair-value hierarchy due to the current lack of market activity for these bonds.

Mortgage Loans. The fair value of impaired conventional mortgage loans is based on the lower of the carrying value of the loans or fair value of the collateral less estimated costs to sell. The fair value of impaired government mortgage loans is equal to the unpaid principal balance.

REO. Fair value is derived from third-party valuations of the property, which fall within Level 3 of the fair-value hierarchy.

Derivative Assets/Liabilities - Interest-Rate-Exchange Agreements. We base the fair values of interest-rate-exchange agreements on available market prices of derivatives having similar terms, including accrued interest receivable and payable. The fair-value methodology uses standard valuation techniques for derivatives such as discounted cash-flow analysis and comparisons with similar instruments.

The fair values of all interest-rate-exchange agreements are netted by clearing member and/or by counterparty, including cash collateral received from or delivered to the counterparty. If these netted amounts are positive, they are classified as an asset, and if negative, they are classified as a liability. We generally use a midmarket pricing convention based on the bid-ask spread as a practical expedient for fair-value measurements. Because these estimates are made at a specific point in time, they are susceptible to material near-term changes. We have evaluated the potential for the fair value of the instruments to be affected by counterparty risk and our own credit risk and have determined that no adjustments were significant to the overall fair-value measurements.

The discounted cash-flow model uses market-observable inputs (inputs that are actively quoted and can be validated to external sources), including the following:


•	Discount rate assumption. At December 31, 2019 and 2018, we used either the OIS rate based on the federal funds effective rate curve or the LIBOR swap curve depending on the terms of the International Swaps and Derivatives Association (ISDA) agreement we have with each derivative counterparty.


•	Forward interest-rate assumption. LIBOR swap curve or OIS based on the federal funds effective rate.


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

Derivative Assets/Liabilities – Commitments to Invest in Mortgage Loans. Commitments to invest in mortgage loans are recorded as derivatives in the statement of condition. The fair values of such commitments are based on the end-of-day delivery commitment prices provided by the FHLBank of Chicago and a spread, derived from MBS TBA delivery commitment prices with adjustment for the contractual features of the MPF program, such as servicing and credit-enhancement features.

Subjectivity of Estimates. Estimates of the fair value of financial assets and liabilities using the methodologies 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. Since these estimates are made as of a specific point in time, they are susceptible to material near-term changes.

Fair Value Measured on a Recurring and Nonrecurring Basis.

Table 19.2 - Fair Value of Assets and Liabilities Measured at Fair Value on a Recurring and Nonrecurring Basis (dollars in thousands)

	December 31, 2019
	Level 1		Level 2			Level 3		Netting Adjustments and Cash Collateral ⁽¹⁾		Total
Assets:
Carried at fair value on a recurring basis
Trading securities:
Corporate bonds	$	—	$	5,896		$	—	$	—	$	5,896
U.S. Treasury obligations			2,240,236							2,240,236
U.S. government-guaranteed – single-family MBS	—		4,047			—		—		4,047
GSE – single-family MBS	—		85			—		—		85
Total trading securities	—		2,250,264			—		—		2,250,264
Available-for-sale securities:
HFA securities	—		—			64,652		—		64,652
Supranational institutions	—		416,429			—		—		416,429
U.S. government-owned corporations	—		296,761			—		—		296,761
GSE	—		123,786			—		—		123,786
U.S. government guaranteed – single-family MBS	—		57,714			—		—		57,714
U.S. government guaranteed – multifamily MBS	—		282,617			—		—		282,617
GSE – single-family MBS	—		2,590,271			—		—		2,590,271
GSE – multifamily MBS	—		3,576,770			—		—		3,576,770
Total available-for-sale securities	—		7,344,348			64,652		—		7,409,000
Derivative assets:
Interest-rate-exchange agreements	—		15,102			—		144,402		159,504
Mortgage delivery commitments	—		227			—		—		227
Total derivative assets	—		15,329			—		144,402		159,731
Other assets	13,894		18,045			—		—		31,939
Total assets carried at fair value on a recurring basis	$	13,894	$	9,627,986		$	64,652	$	144,402	$	9,850,934
Carried at fair value on a nonrecurring basis⁽²⁾
Held-to-maturity securities:
Private-label MBS	$	—	$	—		$	6,856	$	—	$	6,856
Mortgage loans held for portfolio	—		—			1,198		—		1,198
REO	—		—			78		—		78
Total assets carried at fair value on a nonrecurring basis	$	—	$	—		$	8,132	$	—	$	8,132
Liabilities:
Carried at fair value on a recurring basis
Derivative liabilities
Interest-rate-exchange agreements	$	—	$	(43,805	)	$	—	$	33,534	$	(10,271	)
Total liabilities carried at fair value on a recurring basis	$	—	$	(43,805	)	$	—	$	33,534	$	(10,271	)



	December 31, 2018
	Level 1		Level 2			Level 3		Netting Adjustments and Cash Collateral ⁽¹⁾		Total
Assets:
Carried at fair value on a recurring basis
Trading securities:
Corporate bonds	$	—	$	6,102		$	—	$	—	$	6,102
U.S. government-guaranteed – single-family MBS	—		5,344			—		—		5,344
GSE – single-family MBS	—		148			—		—		148
GSE – multifamily MBS	—		151,444			—		—		151,444
Total trading securities	—		163,038			—		—		163,038
Available-for-sale securities:
HFA securities	—		—			49,601		—		49,601
Supranational institutions	—		405,155			—		—		405,155
U.S. government-owned corporations	—		273,169			—		—		273,169
GSE	—		115,627			—		—		115,627
U.S. government guaranteed – single-family MBS	—		75,658			—		—		75,658
U.S. government guaranteed – multifamily MBS	—		361,134			—		—		361,134
GSE – single-family MBS	—		3,562,159			—		—		3,562,159
GSE – multifamily MBS	—		1,007,441			—		—		1,007,441
Total available-for-sale securities	—		5,800,343			49,601		—		5,849,944
Derivative assets:
Interest-rate-exchange agreements	—		13,493			—		8,571		22,064
Mortgage delivery commitments	—		339			—		—		339
Total derivative assets	—		13,832			—		8,571		22,403
Other assets	9,988		15,071			—		—		25,059
Total assets carried at fair value on a recurring basis	$	9,988	$	5,992,284		$	49,601	$	8,571	$	6,060,444
Carried at fair value on a nonrecurring basis⁽²⁾
Held-to-maturity securities:
Private-label MBS	$	—	$	—		$	1,668	$	—	$	1,668
Mortgage loans held for portfolio	—		—			1,144		—		1,144
REO	—		—			361		—		361
Total assets carried at fair value on a nonrecurring basis	$	—	$	—		$	3,173	$	—	$	3,173
Liabilities:
Carried at fair value on a recurring basis
Derivative liabilities
Interest-rate-exchange agreements	$	—	$	(309,552	)	$	—	$	53,752	$	(255,800	)
Total liabilities carried at fair value on a recurring basis	$	—	$	(309,552	)	$	—	$	53,752	$	(255,800	)

_______________________


(1)	These amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty.

(2)

We measure certain held-to-maturity investment securities, mortgage loans held for portfolio, and REO at fair value on a nonrecurring basis, that is, they are not measured at fair value on an ongoing basis but are subject to fair-value adjustments only in certain circumstances (for example, upon recognizing an other-than-temporary impairment on a held-to-maturity security). The fair values presented are as of the date the fair value adjustment was recorded.

Table 19.3 presents a reconciliation of available-for-sale securities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 31, 2019, 2018, and 2017.

Table 19.3 - Roll Forward of Level 3 Available-for-Sale Securities (dollars in thousands)

	For the Year Ended December 31,
	2019		2018			2017
Balance at beginning of year	$	49,601	$	37,683		$	8,146
Purchases	13,820		12,800			33,350
Unrealized gains (losses) included in other comprehensive income	1,231		(882		)	(3,813		)
Balance at end of year	$	64,652	$	49,601		$	37,683

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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