XML 30 R17.htm IDEA: XBRL DOCUMENT

Estimated Fair Values

9 Months Ended

Sep. 30, 2020

Fair value amounts have been determined by the Bank using available market information and appropriate valuation methods. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). These estimates are based on recent market data and other pertinent information available to the Bank at September 30, 2020 and December 31, 2019. Although the management of the Bank believes that the valuation methods are appropriate and provide a reasonable determination of the fair value of these financial instruments, there are inherent limitations in any valuation technique. Therefore, these fair values are not necessarily equal to 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, 2020 and December 31, 2019 are presented in the table below.


Fair Value Summary Table
	September 30, 2020
(in thousands)	Carrying Value		Level 1		Level 2		Level 3		Netting Adjustment and Cash Collateral (1)		Estimated Fair Value
Assets:
Cash and due from banks	$	1,386,471	$	1,386,471	$	—	$	—	$	—	$	1,386,471
Interest-bearing deposits	1,084,526		1,077,235		7,291		—		—		1,084,526
Federal funds sold	1,950,000		—		1,949,997		—		—		1,949,997
Securities purchased under agreement to resell (2)	1,350,000		—		1,349,998		—		—		1,349,998
Trading securities	1,287,548		—		1,287,548		—		—		1,287,548
AFS securities	10,153,022		—		9,885,398		267,624		—		10,153,022
HTM securities	1,967,036		—		1,947,582		99,772		—		2,047,354
Advances	35,841,036		—		35,981,783		—		—		35,981,783
Mortgage loans held for portfolio, net	5,089,745		—		5,398,229		—		—		5,398,229
BOB loans, net	21,213		—		—		21,213		—		21,213
Accrued interest receivable	104,597		—		104,597		—		—		104,597
Derivative assets	160,986		—		7,452		—		153,534		160,986
Liabilities:
Deposits	$	990,571	$	—	$	990,571	$	—	$	—	$	990,571
Discount notes	13,995,722		—		13,997,567		—		—		13,997,567
Bonds	41,583,307		—		42,067,719		—		—		42,067,719
Mandatorily redeemable capital stock (3)	223,052		227,124		—		—		—		227,124
Accrued interest payable (3)	93,364		—		89,292		—		—		89,292
Derivative liabilities	1,751		—		5,329		—		(3,578)		1,751


	December 31, 2019
(in thousands)	Carrying Value		Level 1		Level 2		Level 3		Netting Adjustment and Cash Collateral (1)		Estimated Fair Value
Assets:
Cash and due from banks	$	21,490	$	21,490	$	—	$	—	$	—	$	21,490
Interest-bearing deposits	1,476,890		1,471,717		5,173		—		—		1,476,890
Federal funds sold	3,770,000		—		3,769,965		—		—		3,769,965
Securities purchased under agreement to resell (2)	2,200,000		—		2,199,973		—		—		2,199,973
Trading securities	3,631,650		—		3,631,650		—		—		3,631,650
AFS securities	11,097,769		—		10,771,623		326,146		—		11,097,769
HTM securities	2,395,691		—		2,316,109		124,179		—		2,440,288
Advances	65,610,075		—		65,662,578		—		—		65,662,578
Mortgage loans held for portfolio, net	5,114,625		—		5,313,973		—		—		5,313,973
BOB loans, net	19,706		—		—		19,706		—		19,706
Accrued interest receivable	193,352		—		193,352		—		—		193,352
Derivative assets	140,251		—		16,201		—		124,050		140,251
Liabilities:
Deposits	$	573,382	$	—	$	573,382	$	—	$	—	$	573,382
Discount notes	23,141,362		—		23,142,588		—		—		23,142,588
Bonds	66,807,807		—		66,981,400		—		—		66,981,400
Mandatorily redeemable capital stock (3)	343,575		350,287		—		—		—		350,287
Accrued interest payable (3)	205,118		—		198,406		—		—		198,406
Derivative liabilities	3,024		—		8,869		—		(5,845)		3,024

Notes:

(1) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral held and related interest accrued or placed by the Bank with the same clearing agent and/or counterparties.

(2) Based on the fair value of the related collateral held, the securities purchased under agreements to resell were fully collateralized for the periods presented. There were no offsetting liabilities related to these securities at September 30, 2020 and December 31, 2019. These instruments’ maturity term is overnight.

(3) The estimated fair value amount for the mandatorily redeemable capital stock line item includes accrued dividend interest; this amount is excluded from the estimated fair value for the accrued interest payable line item.

Fair Value Hierarchy. The fair value hierarchy is used to prioritize the inputs used to measure fair value by maximizing the use of observable inputs. 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. 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.

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; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, and implied volatilities) and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.

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

The 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.

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.

Investment Securities – non-MBS. The Bank uses either the income or market approach to determine the estimated fair value of non-MBS investment securities.

For instruments that use the income approach, the significant inputs include a market-observable interest rate curve and a discount spread, if applicable. The market-observable interest rate curves and the related instrument types are as follows:

•LIBOR Swap curve: certificates of deposit

•CO curve: GSE and other U.S. obligations

The Bank uses a market approach for its state and local agency bonds and U.S. Treasury obligations. For state and local agency bonds, the Bank obtains prices from multiple designated third-party vendors when available, and the default price is the average of the prices obtained. Otherwise, the approach is generally consistent with the approach outlined below for Investment Securities - MBS. For U.S. Treasury obligations, prices are obtained from a third-party vendor based on daily trade activity or dealer quotes. For certain short-term U.S. Treasury obligations, market prices are not available, and the Bank uses an income approach.

Investment Securities – MBS. To value MBS holdings, the Bank obtains prices from multiple 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 such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual securities, as applicable. 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.

During the year, the Bank conducts reviews of its pricing vendors to enhance its understanding of the vendors' pricing processes, methodologies and control procedures. 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 price rather than the default price. If, on the other hand, the analysis confirms that an outlier (or outliers) is (are) in fact not representative of fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of the security. If all prices received for a security are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.

As of September 30, 2020, for substantially all of its MBS, the Bank received a price from all of its vendors and the default price was the final price. Based on the Bank's reviews of the pricing methods including inputs 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. There continues to be unobservable inputs and a lack of significant market activity for private label MBS; therefore, the Bank classified private label MBS as Level 3.

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. In addition, the fair value estimates for these instruments include accrued interest receivable/payable which approximate their carrying values due to their short-term nature.

The discounted cash flow analysis used to determine the net present 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:

•Discount rate assumption. SOFR curve for SOFR indexed swaps. Overnight Index Swap (OIS) curve for all other swaps.

•Forward interest rate assumption (rates projected in order to calculate cash flows through the designated term of the hedge relationship). LIBOR Swap curve, OIS curve or SOFR curve.

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

Mortgage delivery commitments:

•TBA securities prices. Market-based prices of TBAs are determined by coupon class and expected term until settlement and a pricing adjustment reflective of the secondary mortgage market.

The Bank is subject to credit risk on uncleared derivatives transactions due to the potential nonperformance by the derivatives counterparties. To mitigate this risk, the Bank has entered into netting arrangements and security agreements that provide for delivery of collateral at specified levels. As a result, uncleared derivatives are recognized as collateralized-to-market and the fair value of uncleared derivatives excludes netting adjustments and collateral. The Bank has evaluated the potential for fair value adjustment due to uncleared counterparty credit risk and has concluded that no adjustments are necessary.

The Bank's credit risk exposure on cleared derivatives is mitigated through the delivery of initial margin to offset future changes in value and daily delivery of variation margin to offset changes in market value. This is executed through the use of a central counterparty, CME. Variation margin payments are daily settlement payments rather than collateral. Initial margin continues to be treated as collateral and accounted for separately.

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

Impaired Mortgage Loans Held for Portfolio and REO. The estimated fair values of impaired mortgage loans held for portfolio and real estate owned are determined based on values provided by a third party's retail-based AVM. The Bank adjusts the AVM value based on the amount it has historically received on liquidation.

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 Measurements. The following tables present, for each hierarchy level, the Bank’s assets and liabilities that are measured at fair value on a recurring or non-recurring basis on its Statement of Condition at September 30, 2020 and December 31, 2019. The Bank measures certain mortgage loans held for portfolio at fair value when a charge-off is recognized and subsequently when the fair value of collateral less costs to sell is lower than the carrying amount. Real estate owned is measured using fair value when the assets' fair value less costs to sell is lower than the carrying amount.


	September 30, 2020
(in thousands)	Level 1		Level 2		Level 3		Netting Adjustment and Cash Collateral(1)		Total
Recurring fair value measurements - Assets
Trading securities:
Non MBS:
U.S. Treasury obligations	$	—	$	1,028,642	$	—	$	—	$	1,028,642
GSE and TVA obligations	—		258,906		—		—		258,906
Total trading securities	$	—	$	1,287,548	$	—	$	—	$	1,287,548
AFS securities:
Non MBS:

GSE and TVA obligations	$	—	$	1,658,671	$	—	$	—	$	1,658,671
State or local agency obligations	—		247,890		—		—		247,890
MBS:
U.S. obligations single-family MBS	—		658,687		—		—		658,687
GSE single-family MBS	—		3,704,537		—		—		3,704,537
GSE multifamily MBS	—		3,615,613		—		—		3,615,613
Private label MBS	—		—		267,624		—		267,624
Total AFS securities	$	—	$	9,885,398	$	267,624	$	—	$	10,153,022
Derivative assets:
Interest rate related	$	—	$	7,403	$	—	$	153,534	$	160,937
Mortgage delivery commitments	—		49		—		—		49
Total derivative assets	$	—	$	7,452	$	—	$	153,534	$	160,986

Total recurring assets at fair value	$	—	$	11,180,398	$	267,624	$	153,534	$	11,601,556
Recurring fair value measurements - Liabilities
Derivative liabilities:
Interest rate related	$	—	$	5,226	$	—	$	(3,578)	$	1,648
Mortgage delivery commitments	—		103		—		—		103
Total recurring liabilities at fair value (2)	$	—	$	5,329	$	—	$	(3,578)	$	1,751
Non-recurring fair value measurements - Assets
Impaired mortgage loans held for portfolio	$	—	$	—	$	14,931	$	—	$	14,931
REO	—		—		1,112		—		1,112
Total non-recurring assets at fair value	$	—	$	—	$	16,043	$	—	$	16,043


	December 31, 2019
(in thousands)	Level 1		Level 2		Level 3		Netting Adjustment and Cash Collateral(1)		Total
Recurring fair value measurements - Assets
Trading securities:
Non MBS:
U.S. Treasury obligations	$	—	$	3,390,772	$	—	$	—	$	3,390,772
GSE and TVA obligations	—		240,878		—		—		240,878
Total trading securities	$	—	$	3,631,650	$	—	$	—	$	3,631,650
AFS securities:
Non MBS:
GSE and TVA obligations	$	—	$	1,550,699	$	—	$	—	1,550,699
State or local agency obligations	—		247,894		—		—		247,894
MBS:
U.S. obligations single-family MBS	—		807,586		—		—		807,586
GSE single-family MBS	—		4,055,859		—		—		4,055,859
GSE multifamily MBS	—		4,109,585		—		—		4,109,585
Private label MBS	—		—		326,146		—		326,146
Total AFS securities	$	—	$	10,771,623	$	326,146	$	—	$	11,097,769
Derivative assets:
Interest rate related	$	—	$	16,172	$	—	$	124,050	$	140,222
Mortgage delivery commitments	—		29		—		—		29
Total derivative assets	$	—	$	16,201	$	—	$	124,050	$	140,251
Total recurring assets at fair value	$	—	$	14,419,474	$	326,146	$	124,050	$	14,869,670
Recurring fair value measurements - Liabilities
Derivative liabilities:
Interest rate related	$	—	$	8,790	$	—	$	(5,845)	$	2,945
Mortgage delivery commitments	—		79		—		—		79
Total recurring liabilities at fair value (2)	$	—	$	8,869	$	—	$	(5,845)	$	3,024
Non-recurring fair value measurements - Assets
Impaired mortgage loans held for portfolio	$	—	$	—	$	7,850	$	—	$	7,850
REO	—		—		2,449		—		2,449
Total non-recurring assets at fair value	$	—	$	—	$	10,299	$	—	$	10,299

Notes:

(1) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the Bank with the same clearing agent and/or counterparties.

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

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 nine months ended September 30, 2020 and 2019. For instruments carried at fair value, the Bank reviews the fair value hierarchy classifications each quarter. 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. There were no Level 3 transfers during the first nine months of 2020 or 2019.


	AFS Private Label MBS
	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2020		2019		2020		2019
Balance, beginning of period	$	280,882	$	371,402	$	326,146	$	409,550
Total gains (losses) (realized/unrealized) included in:

(Provision) benefit for credit losses (1)	(117)		—		(1,691)		—
Accretion of credit losses in interest income	3,000		4,794		8,938		11,589
Net OTTI losses, credit portion	—		(271)		—		(330)
Net unrealized gains (losses) on AFS in OCI	1,400		(14)		(15,114)		18
Reclassification of non-credit portion included in net income	—		271		—		330
Unrealized gains (losses) on OTTI AFS in OCI	—		(4,880)		—		(9,383)
Purchases, issuances, sales, and settlements:

Settlements	(17,541)		(26,796)		(50,655)		(67,268)
Balance at September 30	$	267,624	$	344,506	$	267,624	$	344,506
Total amount of gains for the periods presented included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at September 30	$	2,883	$	3,558	$	7,247	$	8,887
Change in unrealized gains (losses) for the period included in other comprehensive income for assets held September 30 (2)	$	1,400	N/A		$	(15,114)	N/A

Notes:

(1) Due to the adoption of ASU 2016-13, effective January 1, 2020, the Bank was required to record an ACL for expected credit losses on AFS securities.

(2) Due to the prospective adoption of ASU 2018-13: Changes to the Disclosure Requirements for Fair Value Measurement, effective January 1, 2020, this is not applicable for 2019.

- 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.

+ References + Details