Other-Than-Temporary Impairment (OTTI)

The Bank evaluates its individual AFS and HTM securities in an unrealized loss position for OTTI on a quarterly basis. The Bank assesses whether there is OTTI by performing an analysis to determine if any securities will incur a credit loss, the amount of which could be up to the difference between the security’s amortized cost basis and its fair value, and records any difference in its Statement of Income. The Bank completes its OTTI analysis of private label MBS based on the methodologies and key modeling assumptions provided by the FHLBanks’ OTTI Governance Committee. The OTTI analysis is a cash flow analysis generated on a common platform. The Bank performs the cash flow analysis on all of its private label MBS portfolio that have available data. For certain securities where underlying collateral data is not available, alternate procedures, as prescribed by the FHLBanks’ 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.

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. During the fourth quarter of 2017, the OTTI Governance Committee developed a short-term housing price forecast using whole percentages with changes ranging from (5.0)% to 12.0% over the 12 month period beginning October 1, 2017. For the vast majority of markets the short-term forecast has changes from 2.0% to 6.0%. Thereafter, a unique path is projected for each geographic area based on an internally developed framework derived from historical data.

The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults, and loss severities, are then 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.

All of the Bank's other-than-temporarily impaired securities were classified as AFS as of December 31, 2017. The “Total OTTI securities” balances below summarize the Bank’s securities as of December 31, 2017 for which an OTTI has been recognized during the life of the security. The “Private label MBS with no OTTI” balances below represent AFS securities on which an OTTI was not taken. The sum of these two amounts reflects the total AFS private label MBS balance.



	OTTI Recognized During the Life of the Security
(in thousands)	Unpaid Principal Balance		Amortized Cost⁽¹⁾		Fair Value
Private label residential MBS:
Prime	$	249,854	$	194,823	$	232,453
Alt-A	332,555		253,754		289,077
Total OTTI securities	582,409		448,577		521,530
Private label MBS with no OTTI	3,160		3,160		3,013
Total AFS private label MBS	$	585,569	$	451,737	$	524,543

Notes:

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

The following table presents 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 2017, 2016 and 2015.



(in thousands)	2017			2016			2015
Beginning balance	$	236,461		$	265,379		$	290,935
Additions:
Credit losses for which OTTI was not previously recognized	—			—			1,794
Additional OTTI credit losses for which an OTTI charge was previously recognized ⁽¹⁾	959			239			55
Reductions:
Securities sold and matured during the period⁽²⁾	95			(3,875		)	—
Increases in cash flows expected to be collected (accreted as interest income over the remaining lives of the applicable securities)	(26,640		)	(25,282		)	(27,405		)
Ending balance	$	210,875		$	236,461		$	265,379

Notes:

⁽¹⁾ For 2017, 2016 and 2015, additional OTTI credit losses for which an OTTI charge was previously recognized relates to all securities that were also previously impaired prior to January 1 of the applicable year.

⁽²⁾ Represents reductions related to securities sold or having reached final maturity during the period, and therefore are no longer held by the Bank at the end of the period.

All Other AFS and HTM Investments. At December 31, 2017, the Bank held certain securities in an unrealized loss position. These unrealized losses were considered to be temporary as the Bank expects to recover the entire amortized cost basis on the remaining securities in unrealized loss positions based on the creditworthiness of the underlying creditor, guarantor, or implicit government support, and the Bank neither intends to sell these securities nor considers it more likely than not that the Bank would be required to sell any such security before its anticipated recovery. As a result, the Bank did not consider any of these other investments to be other-than-temporarily impaired at December 31, 2017.