Other-Than-Temporary Impairment

The Bank evaluates its individual AFS and HTM securities in an unrealized loss position for OTTI on a quarterly basis. As part of this process, the Bank considers its intent to sell each debt security and whether it is more likely than not the Bank will be required to sell the security before its anticipated recovery. If either of these conditions is met, the Bank recognizes the maximum OTTI loss in earnings, which is equal to the entire difference between the security’s amortized cost basis and its fair value at the Statement of Condition date. For securities in an unrealized loss position that meet neither of these conditions, the Bank evaluates whether there is OTTI by performing an analysis to determine if any of these securities will incur a credit loss, which could be up to the difference between the security's amortized cost basis and its fair value.

Private Label Residential MBS and HELOCs. The Bank invests in MBS, which were rated AAA at the time of purchase with the exception of one pre-2004 vintage security that was rated AA at the time of purchase. Each MBS may contain one or more forms of credit protection/enhancements, including but not limited to guarantee of principal and interest, subordination, over-collateralization, and excess interest and insurance wrap.

To ensure consistency among the FHLBanks, the Bank completes its OTTI analysis of private label MBS based on the methodologies and key modeling assumptions provided by the OTTI Governance Committee. The OTTI analysis is a cash flow analysis that is run on a common platform. The Bank performs the cash flow analysis on all of its private label MBS portfolio that have available data. Private label MBS backed by HELOCs and certain other securities are not able to be cash flow tested using the FHLBanks’ common platform. For these types of private label MBS and certain securities where underlying collateral data is not available, alternate procedures, as prescribed by the OTTI Governance Committee, are used by the Bank to assess these securities for OTTI. Securities evaluated using alternative procedures were not significant to the Bank, as they represented approximately 5% of the par balance of private label MBS at September 30, 2012.

The Bank's evaluation includes estimating the projected cash flows that the Bank is likely to collect based on an assessment of all available information, including the structure of the applicable security and certain assumptions, to determine whether the Bank will recover the entire amortized cost basis of the security, such as:


•	the remaining payment terms for the security;


•	prepayment speeds and default rates;


•	loss severity on the collateral supporting each security based on underlying loan-level borrower and loan characteristics;


•	expected housing price changes; and


•	interest-rate assumptions.

To determine the amount of the credit loss, the Bank compares the present value of the cash flows expected to be collected from its private label residential MBS to its amortized cost basis. For the Bank’s private label residential MBS, the Bank uses a forward interest rate curve to project the future estimated cash flows. To calculate the present value of the estimated cash flows for fixed rate bonds the Bank uses the effective interest rate for the security prior to impairment. To calculate the present value of the estimated cash flows for variable rate and hybrid private label MBS, the Bank uses the contractual interest rate plus a fixed spread that sets the present value of cash flows equal to amortized cost before impairment. For securities previously identified as other-than-temporarily impaired, the Bank updates its estimate of future estimated cash flows on a quarterly basis and uses the previous effective rate or spread until there is a significant increase in cash flows. When the Bank determines there is a significant increase in cash flows, the effective rate is increased.

The Bank performed a cash flow analysis using two third-party models to assess whether the amortized cost basis of its private label residential MBS will be recovered. The first third-party model considers borrower characteristics and the particular attributes of the loans underlying the Bank's securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core-based statistical areas (CBSAs) which are based upon an assessment of the individual housing markets. CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the U.S. Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area with a population of 10,000 or more people. The OTTI Governance Committee's housing price forecast assumed current-to-trough home price declines ranging from 0% (for those housing markets that are believed to have reached their trough) to 4.0% over the nine month period beginning July 1, 2012. For the vast majority of markets where further home price declines are anticipated, the declines are projected to range from 1% to 2%. Thereafter, home prices were projected to recover using one of five different recovery paths that vary by housing market.



Recovery Ranges of Housing Price Change
Months	Annualized Rates %
1 - 6	0.0%	-	2.8%
7 - 18	0.0%	-	3.0%
19 - 24	1.0%	-	4.0%
25 - 30	2.0%	-	4.0%
31 - 42	2.0%	-	5.0%
43 - 66	2.0%	-	6.0%
Thereafter	2.3%	-	5.6%

The month-by-month projection of future loan performance derived from the first model is the mean of 100 projections and reflects projected prepayments, defaults and loss severities. These projections are input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities is derived from the presence of subordinate securities, losses are generally allocated first to the subordinate securities until their principal balance is reduced to zero. The projected cash flows are based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations. The scenario of cash flows determined based on the model approach described above reflects a best estimate scenario and includes a base case current to trough housing price forecast and a base case housing price recovery path described above.

For those securities for which an OTTI credit loss was determined to have occurred during the three months ended September 30, 2012 (that is, a determination was made that the entire amortized cost basis will not likely be recovered), the following tables present a summary of the significant inputs used to measure the amount of the credit loss recognized in earnings during the three months ended September 30, 2012 as well as the related credit enhancement (CE). CE is defined as the percentage of subordinated tranches and over-collateralization, if any, in a security structure that will generally absorb losses before the Bank will experience a loss on the security. The calculated averages represent the dollar weighted averages of the significant inputs used to measure the credit loss. The CUSIP classification (Prime, Alt-A and subprime) is based on the classification as determined by the first model used to run the estimated cash flows for the CUSIP and not the classification at the time of issuance.



	Significant Inputs for OTTI Residential MBS
	Prepayment Rates				Default Rates				Loss Severities				Current Credit Enhancement
Year of Securitization	Weighted Avg %	Range %			Weighted Avg %	Range %			Weighted Avg %	Range %			Weighted Avg %	Range %
Prime:
2006	9.8			9.8	19.8			19.8	36.2			36.2	5.5			5.5
Alt-A:
2006	11.0	8.8	-	13.1	29.4	20.2	-	39.3	46.3	43.6	-	49.2	1.7	0.0	-	3.3
Total Residential MBS - OTTI	10.8	8.8	-	13.1	27.2	19.8	-	39.3	44.0	36.2	-	49.2	2.6	0.0	-	5.5

All of the Bank's other-than-temporarily impaired securities were classified as AFS as of September 30, 2012. The "Total OTTI securities" balances summarize the Bank’s securities as of September 30, 2012 for which an OTTI has been recognized during the third quarter 2012 and during the life of the security. The "Private label MBS with no OTTI" balances represent AFS securities on which an OTTI was not taken so that the sum of these two reflects the entire AFS private label MBS portfolio balance.



	OTTI Recognized During the Three Months Ended September 30, 2012						OTTI Recognized During the Life of the Security
(in thousands)	Unpaid Principal Balance		Amortized Cost⁽¹⁾		Fair Value		Unpaid Principal Balance		Amortized Cost⁽¹⁾		Fair Value
Private label residential MBS:
Prime	$	30,705	$	28,718	$	28,215	$	877,756	$	757,481	$	775,666
Alt-A	103,218		88,481		83,103		902,109		710,574		685,975
Subprime	—		—		—		2,446		1,375		1,389
HELOCs	—		—		—		21,592		15,344		14,575
Total OTTI securities	133,923		117,199		111,318		1,803,903		1,484,774		1,477,605

Private label MBS with no OTTI	1,674,036		1,371,631		1,369,921		4,056		4,056		3,634
Total AFS private label MBS	$	1,807,959	$	1,488,830	$	1,481,239	$	1,807,959	$	1,488,830	$	1,481,239

Notes:

⁽¹⁾Amortized cost includes adjustments made to the cost basis of an investment for accretion and/or amortization, collection of cash, and/or previous OTTI recognized in earnings.

The tables below summarize the impact of OTTI credit and noncredit losses recorded on AFS investment securities for the three and nine months ended September 30, 2012 and 2011.



	Three months ended September 30, 2012							Nine months ended September 30, 2012
(in thousands)	OTTI Related to Credit Loss			OTTI Related to Noncredit Loss		Total OTTI Losses		OTTI Related to Credit Loss			OTTI Related to Noncredit Loss		Total OTTI Losses
Private label residential MBS:
Prime	$	(82	)	$	82	$	—	$	(8,566	)	$	6,375	$	(2,191	)
Alt-A	(104		)	104		—		(1,051		)	1,051		—
Subprime	—			—		—		(323		)	323		—
HELOCs	—			—		—		(1,084		)	1,084		—
Total OTTI on private label MBS	$	(186	)	$	186	$	—	$	(11,024	)	$	8,833	$	(2,191	)



	Three months ended September 30, 2011								Nine months ended September 30, 2011
(in thousands)	OTTI Related to Credit Loss			OTTI Related to Noncredit Loss		Total OTTI Losses			OTTI Related to Credit Loss			OTTI Related to Noncredit Loss		Total OTTI Losses
Private label residential MBS:
Prime	$	(1,805	)	$	1,701	$	(104	)	$	(12,000	)	$	8,777	$	(3,223	)
Alt-A	(4,218		)	4,218		—			(24,608		)	24,608		—
Subprime	—			—		—			(134		)	134		—
HELOCs	(150		)	150		—			(787		)	787		—
Total OTTI on private label MBS	$	(6,173	)	$	6,069	$	(104	)	$	(37,529	)	$	34,306	$	(3,223	)

The following tables present the rollforward of the amounts related to OTTI credit losses recognized during the life of the security for which a portion of the OTTI charges was recognized in AOCI for the three and nine months ended September 30, 2012 and 2011.



	2012
(in thousands)	Three months ended September 30,			Nine months ended September 30,
Beginning balance	$	328,937		$	322,589
Additions:
Credit losses for which OTTI was not previously recognized	—			74
Additional OTTI credit losses for which an OTTI charge was previously recognized⁽¹⁾	186			10,950
Reductions:
Securities sold and matured during the period	265			265
Increases in cash flows expected to be collected, recognized over the remaining life of the securities⁽²⁾	(2,209		)	(6,699		)
Ending balance	$	327,179		$	327,179



	2011
(in thousands)	Three months ended September 30,			Nine months ended September 30,
Beginning balance	$	312,891		$	317,344
Additions:
Credit losses for which OTTI was not previously recognized	—			659
Additional OTTI credit losses for which an OTTI charge was previously recognized⁽¹⁾	6,173			36,870
Reductions:
Securities sold and matured during the period	—			(30,687		)
Increases in cash flows expected to be collected, recognized over the remaining life of the securities⁽²⁾	(2,110		)	(7,232		)
Ending balance	$	316,954		$	316,954

Notes:

⁽¹⁾For the three months ended September 30, 2012 and 2011, OTTI "previously recognized" represents securities that were impaired prior to July 1, 2012 and 2011. For the nine months ended September 30, 2012 and 2011, OTTI "previously recognized" represents securities that were impaired prior to January 1, 2012 and 2011.

⁽²⁾This activity represents the increase in cash flows recognized in interest income during the period.

All Other AFS and HTM Investments. At September 30, 2012, the Bank held certain securities in an unrealized loss position. These unrealized losses were considered temporary as the Bank expects to recover the entire amortized cost basis on the remaining securities in unrealized loss positions and neither intends to sell these securities nor considers it more likely than not that the Bank would be required to sell the security before its anticipated recovery. As a result, the Bank did not consider any of the following investments to be other-than-temporarily impaired at September 30, 2012.

State and Local Housing Finance Agency Obligations. The Bank has determined that all unrealized losses on these investments were temporary given the creditworthiness of the issuers and the underlying collateral.

Certificates of Deposit. The Bank evaluates the creditworthiness of the issuer to determine if an unrealized loss is temporary on certificates of deposit. At September 30, 2012, there were no unrealized losses on certificates of deposit.

Other U.S. Obligations and GSE Investments. For other U.S. obligations, GSE non-MBS investments and GSE MBS investments, the Bank has determined that the strength of the issuers’ guarantees through direct obligations or support from the U.S. government was sufficient to protect the Bank from losses based on current expectations. As a result, the Bank has determined that as of September 30, 2012, all of these unrealized losses were temporary.