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1 AUGUST 1, 2013 BANKING CREDIT FOCUS Federal Home Loan Bank System: Frequently Asked Questions Credit risks balanced by System s strategic importance, strong asset quality along with adequate profitability and capital levels. RATINGS Federal Home Loan Banks Senior Unsecured Aaa ST Issuer Rating P-1 KEY INDICATORS Total Assets ROA Private Label RMBS/Total Assets Total Regulatory Capital Ratio Analyst Contacts: NEW YORK Warren Kornfeld Senior Vice President warren.kornfeld@moodys.com Brian L. Harris Senior Vice President brian.harris@moodys.com Robert Young Managing Director - Financial Institutions robert.young@moodys.com Summary» The Federal Home Loan Bank System (FHLBank System or System) is the third-largest Government-Sponsored Entity (GSE) in the US, after Fannie Mae and Freddie Mac, with total assets as of March 31, 2013 of $739 billion. The FHLBank System is comprised of twelve independent regional Federal Home Loan Banks (FHLBanks), each of whose capital stock is held by member financial institutions (banks, insurance companies and credit unions) in their district. The System was created by the U.S. Congress in 1932 to provide member financial institutions with a stable source of funding to extend credit for residential mortgages and targeted community development. As such, the FHLBanks' primary business is extending secured advances (i.e., loans) to members, which the members use to finance mortgages held in their portfolios, along with purchasing mortgages from members 1.» This report answers some common questions we are asked with respect to the key credit concerns for the FHLBank System and the twelve individual FHLBanks, especially as they relate to the health of the economy and housing markets and the potential impact of GSE reform and other regulatory initiatives. Key takeaways from this discussion include: The FHLBanks Aaa-rated debt securities are not guaranteed by the US Government (Aaa stable). Although there is no explicit US Government guarantee, housing remains a key economic issue in the United States. The FHLBanks core mission is to provide liquidity to the US housing market and their member financial institutions. Therefore, we believe it is very likely that the US Government would support the FHLBank System in the event of financial distress, thereby lifting the System s debt rating from its a1 standalone baseline credit assessment (BCA) to the level of the US Government s Aaa bond rating with a stable outlook. 1 Other businesses of the FHLBanks include: providing credit products such as interest rate swaps and letters of credit, as well as offering safekeeping and settlement services. Each FHLBank also maintains an investment portfolio, primarily for liquidity.

2 The FHLBanks have identical deposit ratings, but there are material differences in their standalone credit strength. In addition to rating the System s consolidated debt obligations, we also evaluate the creditworthiness of each of the twelve FHLBanks. Although all the FHLBanks have identical long- and short-term deposit ratings owing to assumed US Government support (Aaa stable and P-1), their standalone baseline credit assessments (BCAs) range from aa3 to baa2, reflecting material differences in their credit strength. These differences particularly relate to their advance business, business mix and levels of privatelabel RMBS exposure. The asset quality of the FHLBanks is sound. In their more than 80-year history, no FHLBank has ever experienced a loss on an advance. Delinquencies and losses on the FHLBanks residential mortgage portfolios have been very low, especially compared with industry averages. Except for their private-label RMBS portfolios, the FHLBanks investment portfolios primarily comprise Aaa-rated securities, primarily US Government and agency bonds and US agency MBS. 1. What are the key credit risks of the FHLBanks? The standalone baseline credit assessments (BCAs) of the twelve FHLBanks range from aa3 to baa2, with the BCA of the entire System at a1, among the highest standalone assessments achieved for financial institutions either domestically or globally. We believe that the FHLBanks key credit risks are: 1) interest rate/asset liability management risk of their mortgage and MBS investment portfolios (see question 2), 2) the credit risk of their private-label RMBS investment portfolios, which as of year-end 2012 totaled $25 billion or approximately 3.3% of total assets and 50% of total shareholders equity (see question 4), and 3) their uncertain future role in the US mortgage finance market (see question 7). 2. Can you further describe the interest rate and asset liability management risk? The FHLBanks interest rate risk primarily arises from the difficulty of match funding mortgages and MBS held in the banks investment portfolios. Most US residential mortgages allow homeowners to refinance or repay their mortgage at any time, typically without any prepayment penalty. As a result, when interest rates decline, many homeowners opt to refinance their mortgage at a lower rate. Low interest rates also encourage greater home sale activity, which also increases prepayment rates. In a rising interest rate environment, on the other hand, mortgage prepayments typically decrease. As a result, the effective life or duration of a mortgage shortens as interest rates decline and lengthens as interest rates increase. In a rising interest rate environment, when the duration of a mortgage investor s portfolio increases, funding costs will typically increase. The difficulty of predicting precise borrower prepayment behavior thus exposes mortgage investors to potentially unhedged declining investment income or increased funding costs. The FHLBanks history of asset liability management is mixed, particularly for their mortgage loan portfolio. FHLBank Seattle and FHLBank Chicago both incurred financial stress during the mid 2000s due to asset liability mismatches in funding their mortgage loan portfolios. Currently, many of the FHLBanks use callable fixed-rate debt to mitigate the prepayment risk associated with long-term fixed-rate mortgage assets. 2 AUGUST 1, 2013 CREDIT FOCUS: FEDERAL HOME LOAN BANK SYSTEM: FREQUENTLY ASKED QUESTIONS

3 Since it is easier and cheaper for the FHLBanks to match fund their advance/loan book, the level of interest rate and asset liability management risk in this business is lower than in their mortgage portfolios. Many of the FHLBanks advances to member institutions require the borrower to pay a prepayment penalty, typically in the form of a make-whole amount reimbursing the FHLBank for any interest rate loss. Advances without a pre-payment penalty are typically funded with callable debt that mirrors the provisions of the advance loan. Given their modest profitability as cooperative banks, the FHLBanks have limited ability to offset asset-liability losses with other earnings. The FHLBanks have been consistently profitable, but at low levels, with net income as a percent of average assets (ROAA) averaging just 0.22% over the last ten years. EXHIBIT 1 FHLBank Profitability $3,000 System Net Income (L - Axis) ROAA (R - Axis) Average ROAA (Last 10 Years) (R - Axis) 0.60% System Net Income $Millions $2,500 $2,000 $1,500 $1, % 0.40% 0.30% 0.20% $ % $ % Source: Federal Housing Finance Agency s 2012 Report to Congress, June 13, What is the FHLBanks mortgage exposure and how has it changed over time? As of year-end 2012, the FHLBanks mortgage exposures ranged widely from a low of 14% for FHLBank New York to a high of 47% for FHLBank Chicago (see Exhibit 2) with an average of just under 25% for the entire FHLBank System. EXHIBIT Year-End Mortgage Exposure by FHLBank 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Mortgage Loans / Total Assets Mortgage Investments / Total Assets System Average Source: Company Disclosures 3 AUGUST 1, 2013 CREDIT FOCUS: FEDERAL HOME LOAN BANK SYSTEM: FREQUENTLY ASKED QUESTIONS

4 The FHLBanks mortgage exposure has increased over the years (see Exhibit 3) from 14% of total assets in 2000 to 25% as of year-end EXHIBIT 3 FHLBank System Mortgage Exposure as a Percent of Total Assets 30% 25% 20% 15% 10% 5% 0% Source: Federal Housing Finance Agency s 2012 Report to Congress, June 13, What is the impact on the FHLBanks private-label RMBS portfolio in a stressed economic environment? The FHLBanks recognized $4.1 billion of credit related other than temporary impairments (OTTI) on their existing private-label RMBS portfolio from As the housing market improves the risk of further credit impairments decreases markedly. At only $112 million, impairments in 2012 were a fraction of the $856 million recognized in 2011 and $1,071 million recognized in Exhibit 4 analyzes the potential impact on capital of further credit deterioration in the FHLBanks private-label RMBS portfolios as of year-end The analysis assumes that cumulative impairments increase an additional 50%, or $2.1 billion, for the System as a whole, which is almost twenty times impairments incurred in 2012 or 8% of the $25 billion private-label investment portfolio currently outstanding. In such a scenario, shareholders equity to total assets of the System would only decline by 0.3% to 6.2% from 6.5%, still well above the 4% level of regulatory capital to assets that each FHLBank is required to maintain. 4 AUGUST 1, 2013 CREDIT FOCUS: FEDERAL HOME LOAN BANK SYSTEM: FREQUENTLY ASKED QUESTIONS

5 EXHIBIT 4 Private-Label Credit Loss Stress Analysis Row # Notes Atlanta Boston Chicago Cin Dallas Des Moines Indianapolis NY Pitts San Fran Seattle Topeka System Total Assets 1 Dec 31, 2012 Financials 123,705 40,209 69,584 81,562 35,755 47,367 41, ,989 64,616 86,421 35,421 33, ,454 Shareholders' Equity 2 Dec 31, 2012 Financials Shareholders' Equity / Total Assets 2008 to 2012 Credit Related OTTI Stressed Additional OTTI Shareholders Equity Minus Stressed Additional OTTI Shareholders Equity Minus Stressed Additional OTTI / Total Assets Decrease In Shareholders' Equity / Total Assets 3 Row 2 / Row to 2012 Financials 6,315 3,782 3,454 4,748 1,775 2,844 2,667 5,515 3,861 9,956 2,760 1,726 49, % 9.4% 5.0% 5.8% 5.0% 6.0% 6.5% 5.4% 6.0% 11.5% 7.8% 5.1% 6.5% , , % of Row ,062 6 Row 2 minus Row 5 7 Row 6 / Row 1 8 Row 3 minus Row 7 Note: Shareholders Equity includes mandatorily redeemable capital stock Source: Moodys, Company Disclosures 6,022 3,533 3,096 4,748 1,769 2,844 2,612 5,497 3,697 9,258 2,545 1,721 47, % 8.8% 4.4% 5.8% 4.9% 6.0% 6.3% 5.3% 5.7% 10.7% 7.2% 5.1% 6.2% 0.2% 0.6% 0.5% 0.0% 0.0% 0.0% 0.1% 0.0% 0.3% 0.8% 0.6% 0.0% 0.3% 5. If the obligations of the FHLBanks are not guaranteed by the US Government, how do you arrive at a Aaa bond rating for the Federal Home Loan Bank System? Our standalone BCA for the FHLBank System is a1. In arriving at the FHLBank System s BCA, we consider the individual BCA of each of the FHLBanks as well as the profile of the FHLBank System as if it were one combined entity given the joint and several liability of all FHLBank consolidated obligations. The FHLBank System s core mission is to provide liquidity to the US housing market through their member financial institutions. With more than $600 billion combined of advances to members (which are secured primarily by residential mortgages), residential mortgage loans held, and residential mortgage-related security investments, the FHLBank System provides residential mortgage funding for approximately 6% of the $10 trillion US residential mortgage market (see Exhibit 5). During the financial crisis, these figures were even higher, with the FHLBank System s total funding peaking at almost $1.3 trillion in AUGUST 1, 2013 CREDIT FOCUS: FEDERAL HOME LOAN BANK SYSTEM: FREQUENTLY ASKED QUESTIONS

6 EXHIBIT 5 FHLBanks Mortgage Funding 1992 to 2012 $ Millions 1,200,000 1,100,000 1,000, , , , , , , , , ,000 Advances Mortgage Loans Held Mortgage Related Securities Source: Federal Housing Finance Agency s 2012 Report to Congress, June 13, 2013 EXHIBIT 6 FHLBanks Mortgage Funding During the Financial Crisis 1,400,000 Advances Mortgage Loans Held Mortgage Related Securities 1,200,000 1,000,000 $ Millions 800, , , ,000 - Q Q Q Q Q Q Q Q Q Q Q Q Source: Quarterly - Company Disclosures; Annual - Federal Housing Finance Agency s 2012 Report to Congress, June 13, 2013 Given the significant role of the FHLBank System in providing relatively inexpensive mortgage funding and liquidity to the economically important US housing market, we believe it is very likely that the US Government would support the FHLBank System in the event of financial distress, thereby lifting the FHLBank System s debt rating from its a1 BCA to the level of the US Government s Aaa bond rating with a stable outlook. 6. The standalone baseline credit assessments of the twelve FHLBanks range from aa3 for FHLBank New York to baa2 for FHLBank Seattle. What accounts for these generally high assessments? Can you comment on the primary drivers of any differences? With BCAs mostly concentrated around a1, the FHLBanks rank among the strongest of any financial institution on a standalone basis, either domestically or globally. This is primarily based upon the strength of the FHLBanks business activities that consist primarily of: 1) providing secured loans (advances) or letters of credit to members, 2) purchasing mortgage loans from member financial institutions, and 3) managing an investment portfolio. The FHLBank System has never incurred a loss on an advance in its 80-year history. The FHLBanks' collateral requirements on advances, and their preferred creditor status, support asset quality in the event a member defaults on its advances. 6 AUGUST 1, 2013 CREDIT FOCUS: FEDERAL HOME LOAN BANK SYSTEM: FREQUENTLY ASKED QUESTIONS

7 The FHLBanks' conforming mortgage loan purchase programs, MPF and MPP, provide members with an alternative to Fannie Mae and Freddie Mac. The FHLBanks' mortgage assets are more susceptible to asset liability management risk and credit loss than the advance business, and also carry heightened operational complexity. Nonetheless, the credit performance of the MPF and MPP programs has been very good, with delinquencies far lower than that of Fannie Mae and Freddie Mac. Aside from their private-label RMBS portfolios, the credit risk within the FHLBanks investment portfolios is very low. Holdings consist primarily of US agency MBS securities, as well as US Treasury securities, commercial paper, federal funds, and resale agreements. Beyond these shared strengths, there are several points of differentiation in the FHLBanks performance that are reflected in their individual BCAs, including: 1) the strength of each FHLBanks advance business, 2) their exposure to private-label RMBS investments, and 3) the level of interest rate risk from their exposure to mortgage-related assets (mortgage loan portfolio and MBS investments). For example, as shown in Exhibit 7, we have assigned FHLBank New York the highest BCA at aa3 because it has a large concentration in the lowest risk business of the FHLBanks its advance portfolio of $72 billion is also 70% of total assets and it has the lowest level of mortgage-related assets to total assets (14.1%); i.e., it has the lowest level of interest rate risk among the FHLBanks. At the other end of the spectrum is FHLBank Seattle, with a baa2 BCA, two notches below its next-lowest peer. FHLBank Seattle has by far the fewest advances ($8.9 billion), has the secondlowest ratio of advances to total assets (25.1%), and has the second-highest percent of private-label RMBS to total assets (5.3%). EXHIBIT 7 Summary of Key Indicators as of Year-End 2012 NY Atlanta Cin Dallas Des Moines Indianapolis Topeka San Fran Boston Chicago Pitts Seattle System Stand-alone credit assessment aa3 a1 a1 a1 a1 a1 a1 a2 a3 a3 a3 baa2 a1 Total assets 102, ,705 81,562 35,755 47,367 41,228 33,819 86,421 40,209 69,584 64,616 35, ,454 Total Advances 72,292 83,870 53,621 17,928 26,055 17,382 16,109 43,180 20,270 14,340 39,671 8, ,600 Advances / Total Assets 70.2% 67.8% 65.7% 50.1% 55.0% 42.2% 47.6% 50.0% 50.4% 20.6% 61.4% 25.1% 54.2% Private Label RMBS / Total Assets 0.1% 4.4% 0.0% 0.6% 0.1% 2.1% 1.5% 12.2% 3.2% 2.2% 4.1% 5.3% 3.3% Total Mortgage Related Assets / Total Assets Source: Moodys, Company Disclosures 14.1% 14.1% 24.9% 14.7% 29.1% 33.6% 33.1% 27.4% 28.0% 47.3% 20.5% 26.3% 24.6% 7. Can you comment on the potential impact of GSE reform, Basel III and other regulatory initiatives? GSE Reform We continue to believe that GSE reform is several years away. To date, the debate has primarily focused on the roles of Fannie Mae and Freddie Mac, but the FHLBanks are likely to be included in any reform. In a May speech, Ed DeMarco, the acting director of the Federal Housing Finance Agency (FHFA), the regulator of the FHLBanks, stated Clearly, resolving the conservatorships of Fannie Mae and Freddie Mac are central to the future of the secondary mortgage market. But the FHLBanks can and should be a part of the larger discussion of our housing finance reform. 7 AUGUST 1, 2013 CREDIT FOCUS: FEDERAL HOME LOAN BANK SYSTEM: FREQUENTLY ASKED QUESTIONS

8 DeMarco noted that, in addition to their traditional role of providing mortgage funding for financial institutions, the FHLBanks could become mortgage aggregators, assisting smaller institutions without the necessary scale to gain access to the securitization markets or, less likely, act as guarantors of mortgage-backed securities. We would view the expansion of the FHLBanks beyond their current core businesses as credit negative, and depending on the extent and risk of these activities, could negatively affect the FHLBanks standalone BCAs. Basel III The proposed Basel III bank regulatory capital framework introduces, among other things, two new liquidity requirements: the liquidity coverage ratio (a 30-day test) and net-stable funding ratio (a one-year test). Neither the Basel III framework nor the proposed US rules give banks credit for undrawn FHLBank commitments as a source of funding in calculating these two new metrics, a potential credit negative for the FHLBanks. If banks reduce their reliance on FHLBanks funding in response to the new requirements, this could reduce the size and importance of the FHLBank System. If, on the other hand, banks elected to fund their increased Basel III liquidity requirements by increasing the amount they borrow from the FHLBanks (as opposed to maintaining undrawn commitments), this would increase the FHLBanks revenues and profitability with limited incremental risk, a credit positive. Other Regulatory Initiatives The Federal Housing Finance Agency and the US Treasury have expressed support for several regulatory initiatives that could affect the FHLBanks: 1) limiting all of the bank subsidiaries of an individual bank holding company to membership in one FHLBank. Currently, each bank subsidiary of a bank holding company may be a member of the FHLBank where such bank subsidiary is chartered. As a result, many bank families obtain FHLBank advances from more than one FHLBank. Since bank funding is partly fungible across different bank subsidiaries of a bank holding company, this creates competition among FHLBanks to provide advances to members. If such competition were reduced by the proposed regulation, it would be credit positive for the FHLBanks. Prior to full implementation, however, the measure would likely increase competition in the short-term, a credit negative, as the FHLBanks competed to provide all advance funding for individual bank holding companies. 2) setting a maximum amount that an individual member can borrow from the FHLBank System. Although a regulatory limit on the amount of low-cost FHLBank funding that a single financial institution can receive would decrease the level of member concentration, in our opinion it would be credit negative. We believe that the reduced importance of the FHLBank System would offset any credit benefit gained from reduced concentration. 3) limiting the size of the FHLBanks investment portfolio. While investment portfolios have helped restore the financial health of the FHLBanks, by leveraging their low funding costs, some have questioned whether an investment portfolio beyond liquidity needs is a core mission of the FHLBanks. We believe that a limitation on the size of the investment portfolio would be modestly credit positive. A smaller investment portfolio reduces risk and further simplifies their business model. This would likely more than offset the resulting reduction in profitability. 8 AUGUST 1, 2013 CREDIT FOCUS: FEDERAL HOME LOAN BANK SYSTEM: FREQUENTLY ASKED QUESTIONS

9 Moody s Related Research Credit Opinions for the System and the twelve FHLBanks:» Federal Home Loan Banks, July 2013» Federal Home Loan Bank of Chicago, July 2013» Federal Home Loan Bank of Atlanta, July 2013» Federal Home Loan Bank of New York, July 2013» Federal Home Loan Bank of Boston, July 2013» Federal Home Loan Bank of Seattle, July 2013» Federal Home Loan Bank of Topeka, July 2013» Federal Home Loan Bank of Indianapolis, July 2013» Federal Home Loan Bank of San Francisco, July 2013» Federal Home Loan Bank of Cincinnati, July 2013» Federal Home Loan Bank of Pittsburgh, July 2013» Federal Home Loan Bank of Dallas, July 2013» Federal Home Loan Bank of Des Moines, July 2013 To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients. 9 AUGUST 1, 2013 CREDIT FOCUS: FEDERAL HOME LOAN BANK SYSTEM: FREQUENTLY ASKED QUESTIONS

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