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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
                                                                              For the transition period from to
Commission File Number: 000-51845
FEDERAL HOME LOAN BANK OF ATLANTA
(Exact name of registrant as specified in its charter)
Federally chartered corporation
 
56-6000442
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
1475 Peachtree Street, NE, Atlanta, Ga.
 
30309
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (404) 888-8000
____________________________

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class B Stock, par value $100
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨  Yes    x  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ¨  Yes   x  No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     x Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
x  
Smaller reporting company
¨
Emerging growth company
¨

 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨  Yes   x  No

Registrant’s stock is not publicly traded and is only issued to members of the registrant. Such stock is issued and redeemed at par value, $100 per share, subject to certain regulatory and statutory limits. As of June 30, 2018, the aggregate par value of the stock held by current and former members of the registrant was $5,301,373,500. As of February 28, 2019, 49,019,105 total shares were outstanding, including mandatorily redeemable capital stock.

Table of Contents

Table of Contents
 
 
PART I.
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
PART II.
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9
Item 9A.
Item 9B.
 
PART III.
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
PART IV.
 
Item 15.
Item 16.
 
 
 

Table of Contents


Important Notice About Information in this Annual Report
In this annual report on Form 10-K (Report), unless the context suggests otherwise, references to the “Bank” mean the Federal Home Loan Bank of Atlanta. “FHLBanks” means the 11 district Federal Home Loan Banks, including the Bank, and “FHLBank System” means the FHLBanks and the Federal Home Loan Banks Office of Finance (Office of Finance), as regulated by the Federal Housing Finance Agency (Finance Agency). “FHLBank Act” means the Federal Home Loan Bank Act of 1932, as amended.
The information contained in this Report is accurate only as of the date of this Report and as of the dates specified herein.
The product and service names used in this Report are the property of the Bank and, in some cases, the other FHLBanks. Where the context suggests otherwise, the products, services, and company names mentioned in this Report are the property of their respective owners.

Special Cautionary Notice Regarding Forward-looking Statements

This Report includes statements describing anticipated developments, projections, estimates, or future predictions of the Bank that are “forward-looking statements” within the meaning of section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbor provided by the same regulations. These statements may use forward-looking terminology such as, but not limited to, “anticipates,” “believes,” “expects,” “plans,” “intends,” “may,” “could,” “estimates,” “assumes,” “should,” “will,” ”likely,” or their negatives or other variations on these terms. The Bank cautions that, by their nature, forward-looking statements are subject to a number of risks or uncertainties, including the risk factors set forth in Item 1A—Risk Factors and the risks set forth below. Accordingly, the Bank cautions that actual results could differ materially from those expressed or implied in these forward-looking statements or could impact the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, the reader is cautioned not to place undue reliance on such statements. These forward-looking statements speak only as of the date they are made, and the Bank does not undertake to update any forward-looking statement herein or that may be made from time to time on its behalf.

Forward-looking statements in this report may include, among others, the Bank’s expectations for:

•
the Bank’s business strategy and changes in operations, including, without limitation, product growth and change in product mix;

•
future performance, including profitability, dividends, retained earnings, developments, or market forecasts;

•
repurchases of stock in excess of a stockholder’s total stock investment requirement (excess stock);

•
credit losses on advances and investments in mortgage loans and mortgage-backed securities (MBS), particularly private-label MBS;

•
balance sheet changes and components thereof, such as changes in advances balances and the size of the Bank’s portfolio of investments in mortgage assets;

•
the Bank’s minimum retained earnings target;

•
the interest rate environment in which the Bank does business;

•
forward-looking accounting and financial statement effects; and

•
those other factors identified and discussed in the Bank’s public filings with the Securities and Exchange Commission (SEC).

Actual results may differ from forward-looking statements for many reasons including, but not limited to:

•
future economic and market conditions, including, for example, inflation and deflation, the timing and volume of market activity; general consumer confidence and spending habits; the strength of local economies in which the Bank conducts its business; housing prices, employment rates, and interest-rate changes that affect the housing markets;

3
Table of Contents


•
changes in the demand for the Bank’s advances and other products and services resulting from changes in members’ deposit flows and credit demands, as well as from changes in other sources of funding and liquidity available to members;

•
changes in the financial health of the Bank’s members;

•
volatility of market prices, rates, and indices that could affect the value of collateral held by the Bank as security for the obligations of Bank members and counterparties to derivatives and similar agreements;

•
the risk of changes in interest rates on the Bank’s interest-rate sensitive assets and liabilities;

•
changes in various governmental monetary or fiscal policies, as well as legislative and regulatory changes, including changes in accounting principles generally accepted in the United States of America (GAAP) and related industry practices and standards, or the application thereof;

•
changes in the credit ratings of the U.S. government and/or the FHLBanks;

•
political, national, and world events, including acts of war, terrorism, natural disasters, or other catastrophic events, and legislative, regulatory, judicial, or other developments that affect the economy, the Bank’s market area, the Bank, its members, counterparties, its federal regulators, and/or investors in the consolidated obligations of the FHLBanks;

•
competitive forces, including other sources of funding available to Bank members, other entities borrowing funds in the capital markets, and the ability to attract and retain skilled individuals;

•
the Bank’s ability to develop, implement, promote the efficient performance of, and support and safeguard, technology and information systems, including those provided by third-parties, sufficient to measure and effectively manage the risks of the Bank’s business without significant interruption;

•
changes in investor demand for consolidated obligations of the FHLBanks and/or the terms of derivatives and similar agreements, including changes in investor preference and demand for certain terms of these instruments, which may be less attractive to the Bank, or which the Bank may be unable to offer;

•
the Bank’s ability to introduce, support, and manage the growth of new products and services and to successfully manage the risks associated with those products and services;

•
the Bank’s ability to successfully manage the credit and other risks associated with any new types of collateral securing advances;

•
the availability from acceptable counterparties, upon acceptable terms, of swaps, options, and other derivative financial instruments of the types and in the quantities needed for investment funding and risk-management purposes;

•
the uncertainty and costs of litigation, including litigation filed against one or more of the FHLBanks;

•
membership changes, including changes resulting from mergers or changes in the principal place of business of Bank members, which could result in decreased advances or other business from such members;

•
changes in the FHLBank Act or Finance Agency regulations that affect FHLBank operations and regulatory oversight or changes in other statutes or regulations applicable to the FHLBanks; and

•
adverse developments or events, including financial restatements, affecting or involving one or more other FHLBanks or the FHLBank System in general.
These risk factors are not exhaustive. New risk factors may emerge from time to time. The Bank cannot predict such new risk factors nor can it assess the impact, if any, of such new risk factors on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those implied by any forward-looking statements.

 


4
Table of Contents








PART I

Item 1. Business.

Overview

General. The Bank is a federally chartered corporation that was organized in 1932 and is one of 11 district FHLBanks. The FHLBanks, along with the Office of Finance, comprise the FHLBank System. The FHLBanks are U.S. government-sponsored enterprises (GSEs) organized under the authority of the FHLBank Act. Each FHLBank operates as a separate entity within a defined geographic district and has its own management, employees, and board of directors. The Bank’s defined geographic district includes Alabama, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, and the District of Columbia. The Bank is supervised and regulated by the Finance Agency, an independent federal agency in the executive branch of the United States government.

Cooperative. The Bank is a cooperative owned by member institutions that are required to purchase capital stock in the Bank as a condition of membership. Federally insured depository institutions, insurance companies, privately insured state-chartered credit unions, and community development financial institutions (CDFIs) located in the Bank’s defined geographic district and engaged in residential housing finance are eligible to apply for membership. The Bank’s capital stock is not publicly traded and is owned entirely by current or former members and certain non-members that own the Bank’s capital stock as a result of a merger with or acquisition of a Bank member. The Bank’s membership totaled 848 financial institutions, comprised of 505 commercial banks, 229 credit unions, 69 savings institutions, 37 insurance companies, and eight CDFIs as of December 31, 2018.

Business Model. As a cooperative, the Bank’s customers are also its owners. The Bank strategically focuses on positioning itself with its membership in a number of ways to enhance their total value in the cooperative by providing readily available, competitively priced funding to its member institutions, a potential return on investment, support for community investment activities, and other credit and noncredit products and services, including education opportunities on a range of topics. The Bank serves the public by providing its member institutions with a source of liquidity, thereby enhancing the availability of credit for residential mortgages and targeted community developments. The Bank primarily supports this mission by offering collateralized loans, known as advances, to its members.

The Bank’s primary source of funds is proceeds from the sale of FHLBank debt instruments to the public. These debt instruments, known as “consolidated obligations,” are the joint and several obligations of all the FHLBanks. Because of the FHLBanks’ GSE status, the FHLBanks are generally able to raise funds at favorable rates. The Bank’s cooperative ownership structure allows the Bank to pass along the benefit of these low funding rates to its members. The U.S. government does not guarantee the debt securities or other obligations of the Bank or the FHLBank System.

Business. The Bank manages its operations as one business segment. Management and the Bank’s board of directors review enterprise-wide financial information in order to make operating decisions and assess performance.

The Finance Agency assesses each FHLBank’s core mission achievement by evaluating its core mission asset ratio, calculated as the ratio of primary mission assets, which include advances and acquired member assets, to consolidated obligations. The Bank’s core mission activities primarily include the making of advances. This ratio is calculated annually at year-end, using annual average par values. Based on this ratio, the Finance Agency has provided the following expectations for each FHLBank’s strategic plan:

•
when the ratio is at least 70 percent or higher, the strategic plan should include an assessment of the FHLBank’s prospects for maintaining this level;

•
when the ratio is at least 55 percent but less than 70 percent, the strategic plan should explain the FHLBank’s plan to bring the ratio closer to the preferred ratio; and


5
Table of Contents

•
when the ratio is below 55 percent, the strategic plan should include an explanation of the circumstances that caused the ratio to be at that level and detailed plans to increase the ratio. If the FHLBank maintains a ratio below 55 percent over the course of several consecutive reviews, then the board of directors should consider possible strategic alternatives.

The Bank’s core mission asset ratio was 74.1 percent as of December 31, 2018.

Under the FHLBank Act, the Bank is exempt from ordinary federal, state, and local taxation, except employment and real property taxes. It does not have any subsidiaries nor does it sponsor any off-balance sheet special purpose entities.

For additional information regarding the Bank’s financial condition, changes in financial condition, and results of operations, refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.


Products and Services

The Bank’s products and services include the following:

•
Credit Products;

•
Community Investment Services; and

•
Cash Management and Other Services.

Credit Products

The credit products that the Bank offers to its members include advances and standby letters of credit.

Advances

Advances are the Bank’s primary product. Advances are fully secured loans made to members and eligible housing finance agencies, authorities, and organizations called “housing associates” (non-members that are approved mortgagees under Title II of the National Housing Act). The carrying value of the Bank’s outstanding advances was $108.5 billion and $102.4 billion as of December 31, 2018 and 2017, respectively, and advances represented 70.2 percent and 69.9 percent of total assets as of December 31, 2018 and 2017, respectively. Advances generated 67.0 percent, 53.8 percent, and 53.0 percent of total interest income for the years ended December 31, 2018, 2017, and 2016, respectively.

Advances serve as a funding source for the Bank’s members for a variety of conforming and nonconforming mortgages. Thus, advances support important housing markets, including those focused on low- and moderate-income households. For those members that choose to sell or securitize their mortgages, advances can supply interim funding.

Generally, member institutions use the Bank’s advances for one or more of the following purposes:

•
providing funding for mortgages held in the member’s portfolio, including both conforming and nonconforming mortgages;

•
providing temporary funding during the origination, packaging, and sale of mortgages into the secondary market;

•
providing funding for commercial real estate loans;

•
assisting with asset-liability management by matching the maturity and prepayment characteristics of mortgage loans or adjusting the sensitivity of the member’s balance sheet to interest-rate changes;

•
providing a cost-effective alternative to meet contingent liquidity needs and adhere to liquidity management strategies; and

•
providing funding for community investment and economic development.

Pursuant to statutory and regulatory requirements, the Bank may only make long-term advances to community financial institutions for the purpose of enabling a member to purchase or fund new or existing residential housing finance assets, which

6
Table of Contents

may include defined small business loans, small farm loans, small agri-business loans, and community development loans. The Bank’s management indirectly monitors the purpose for which members use advances through limitations on eligible collateral and as described below.
 
The Bank obtains a security interest in eligible collateral to secure a member’s advance prior to the time that the Bank originates or renews an advance. Eligible collateral is defined by the FHLBank Act, Finance Agency regulations, and the Bank’s credit and collateral policy. The Bank requires its borrowers to execute an advances and security agreement that establishes the Bank’s security interest in all collateral pledged by the borrower. The Bank perfects its security interest in collateral prior to making an advance to the borrower. As additional security for a member’s indebtedness, the Bank has a statutory and contractual lien on the member’s capital stock in the Bank. The Bank may also require additional or substitute collateral from a borrower, as provided in the FHLBank Act and the financing documents between the Bank and its borrowers.

The Bank’s management assesses member creditworthiness and financial condition, typically on a quarterly basis, to determine the term and maximum dollar amount of advances that the Bank will lend to a particular member. In addition, the Bank discounts eligible collateral and periodically revalues the collateral pledged by each member to secure its outstanding advances. The Bank has never experienced a credit loss on an advance.

The FHLBank Act affords any security interest granted to the Bank by any member of the Bank, or any affiliate of any such member, priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor), other than the claims and rights of a party that (1) would be entitled to priority under otherwise applicable law; and (2) is an actual bona fide purchaser for value or is an actual secured party whose security interest is perfected in accordance with applicable state law.

Pursuant to its regulations, the Federal Deposit Insurance Corporation (FDIC) has recognized the priority of an FHLBank’s security interest under the FHLBank Act and the right of an FHLBank to require delivery of collateral held by the FDIC, as receiver, for a failed depository institution.

The Bank offers standard and customized advances to fit a variety of member needs. Generally, the Bank offers maturities as described below, but longer maturities are available, which are subject to a member’s financial condition and available funding. The Bank’s advances include, among other products, the following:

Adjustable- or variable-rate indexed advances. Adjustable- or variable-rate indexed advances include the following:

•
Daily Rate Credit Advance (DRC Advance). The DRC Advance provides short-term funding with rate resets on a daily basis, similar to federal funds lines. The DRC Advance is available generally from one day to 12 months.

•
Adjustable Rate Credit Advance (ARC Advance). The ARC Advance is a long-term advance available for a term generally of up to 10 years with rate resets at specified intervals.

•
Float-to-Fixed Advance. This is an advance that floats to London Interbank Offered Rate (LIBOR) and changes to a predetermined fixed rate on a predetermined date prior to maturity. The Bank offers this product with a maturity generally of up to 15 years.

Fixed-rate advances. Fixed-rate advances include the following:

•
Fixed Rate Credit Advance (FRC Advance). The FRC Advance offers fixed-rate funds with principal due at maturity generally from one month to 20 years. The Bank allows for the inclusion of interest-rate caps and/or floors in certain FRC Advances with terms of 12 months or greater and a par value of $1 million or more.

•
Callable Advance. The callable advance is a fixed-rate advance with a fixed maturity and the option for the borrower to prepay the advance on an option exercise date(s) before maturity without a fee. The options can be Bermudan (periodically during the life of the advance) or European (one-time). The Bank offers this product with a maturity generally of up to 10 years with options generally from three months to 10 years.

•
Expander Advance. The expander advance is a fixed-rate advance with a fixed maturity and an option by the borrower to increase the amount of the advance in the future at a predetermined interest rate. The option may be Bermudan or European. The Bank has established internal limits on the amount of such options that may be sold based upon which quarter they will mature. The Bank offers this product with a maturity generally of two years to 20 years with an option exercise date that can be set generally from one month to 10 years.

7
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•
Principal Reducing Credit Advance (PRC Advance). The PRC Advance is a fixed-rate advance with a final maturity generally of up to 20 years and predetermined principal reductions on specific dates. The reduction schedule is predetermined by the borrower and may be scheduled on a monthly, quarterly, semi-annual, or annual basis. Amortization options include equal payments or structures similar to a mortgage.

Convertible advances. In a convertible advance, the Bank purchases an option from the borrower that allows the Bank to modify the interest rate on the advance from fixed to variable on certain specified dates. The Bank’s option can be Bermudan or European. The Bank offers this product with a maturity generally of up to 15 years with options generally from three months to 15 years.

Forward starting advances. With the forward starting advance, the borrower may enter into the terms of any structured advance, including the FRC Advance, ARC Advance, Expander Advance, or Float-to-Fixed Advance, with a future settlement date. Interest accrues beginning on the settlement date. A termination fee applies if the borrower voluntarily terminates the advance prior to the settlement date.

The following table presents the par value of outstanding advances by product characteristics (dollars in millions). See Note 9—Advances to the Bank’s 2018 audited financial statements for further information on the distinction between par value and carrying value of outstanding advances.

 
As of December 31,
 
2018
 
2017
 
Amount
 
Percent of Total  
 
Amount
 
Percent of Total  
Fixed rate (1)
$
62,458

 
57.61
 
$
57,245

 
55.98
Adjustable or variable-rate indexed
43,737

 
40.34
 
42,984

 
42.04
Principal reducing credit
1,232

 
1.14
 
1,327

 
1.30
Convertible
987

 
0.91
 
693

 
0.68
Total par value
$
108,414

 
100.00
 
$
102,249

 
100.00
 ____________
(1) Includes convertible advances whose conversion options have expired.

The Bank establishes interest rates on advances using the Bank’s cost of funds on consolidated obligations and the interest-rate swap market. The Bank establishes an interest rate applicable to each type of advance each day and then adjusts those rates during the day to reflect changes in the cost of funds and interest rates.

The Bank includes prepayment fee provisions in most advance transactions. With respect to callable advances, prepayment fees apply to prepayments on dates other than option exercise dates. The Bank also offers variable-rate prepayable advances, in which prepayment fees apply to prepayments made on dates other than certain specified dates. As required by Finance Agency regulations, the prepayment fee is intended to make the Bank financially indifferent to a borrower’s decision to prepay an advance before maturity or, with respect to a callable advance, on a date other than an option exercise date.


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The following table presents information on the Bank’s 10 largest borrowers of advances (dollars in millions):
 
 
 
 
As of December 31, 2018
Institution
 
State
 
Advances
 Par Value
 
Percent of Total Advances
 
Weighted-average Interest
Rate
(%) (1)
 
 
Bank of America, National Association
 
North Carolina
 
$
19,759

 
18.23
 
2.46
Navy Federal Credit Union
 
Virginia
 
13,058

 
12.05
 
2.86
Capital One, National Association
 
Virginia
 
9,301

 
8.58
 
2.50
TIAA, FSB
 
Florida
 
9,181

 
8.47
 
2.46
Regions Bank
 
Alabama
 
8,502

 
7.84
 
2.58
Branch Banking and Trust Company
 
North Carolina
 
6,180

 
5.70
 
2.78
SunTrust Bank
 
Georgia
 
5,003

 
4.62
 
2.56
BankUnited, National Association
 
Florida
 
4,796

 
4.42
 
2.51
Pentagon Federal Credit Union
 
Virginia
 
2,681

 
2.47
 
2.75
Synovus Bank
 
Georgia
 
1,750

 
1.61
 
2.55
Subtotal (10 largest borrowers)
 
 
 
80,211

 
73.99
 
2.59
Subtotal (all other borrowers)
 
 
 
28,203

 
26.01
 
2.46
Total par value
 
 
 
$
108,414

 
100.00
 
2.55
 ____________
(1) The average interest rate of the member’s advance portfolio weighted by each advance’s outstanding balance.

A description of the Bank’s credit risk management and collateral valuation methodology as it relates to its advance activity is contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk—Advances.

Standby Letters of Credit

The Bank issues irrevocable standby letters of credit on behalf of its members to support certain obligations of the members to third-party beneficiaries. Members may use standby letters of credit for residential housing financing and community lending or for liquidity and asset-liability management. In particular, members often use standby letters of credit as collateral for deposits from public sector entities. Standby letters of credit are generally available for nonrenewable terms of up to five years or for one-year terms that are renewable annually with a final expiration date of up to 10 years after issuance. The Bank requires members to fully collateralize the face amount of any standby letter of credit issued by the Bank during the term of the standby letter of credit. The Bank also charges members a fee based on the face amount of the standby letter of credit. If the Bank is required to make a payment for a beneficiary’s draw, the amount must be reimbursed by the member immediately or, subject to the Bank’s discretion, may be converted into an advance to the member. The Bank’s underwriting and collateral requirements for standby letters of credit are the same as they are for advances. Standby letters of credit are not subject to activity-based capital stock purchase requirements. The Bank has never experienced a credit loss related to a standby letter of credit reimbursement obligation. Unlike advances, standby letters of credit are accounted for as financial guarantees because a standby letter of credit may expire in accordance with its terms without ever being drawn upon by the beneficiary. The Bank had $30.3 billion and $30.2 billion of outstanding standby letters of credit as of December 31, 2018 and 2017, respectively.


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Advances and Standby Letters of Credit Combined

The following table presents information on the Bank’s 10 largest borrowers of advances and standby letters of credit combined (dollars in millions):

 
 
 
 
As of December 31, 2018
Institution
 
State
 
Advances Par Value and Standby Letters of Credit Balance
 
Percent of Total Advances Par Value and Standby Letters of Credit
Bank of America, National Association
 
North Carolina
 
$
28,909

 
20.84
Navy Federal Credit Union
 
Virginia
 
13,127

 
9.46
SunTrust Bank
 
Georgia
 
10,791

 
7.78
Capital One, National Association
 
Virginia
 
9,726

 
7.01
TIAA, FSB
 
Florida
 
9,332

 
6.73
Regions Bank
 
Alabama
 
8,502

 
6.13
Compass Bank
 
Alabama
 
8,423

 
6.07
Branch Banking and Trust Company
 
North Carolina
 
6,180

 
4.45
BankUnited, National Association
 
Florida
 
4,796

 
3.46
Pentagon Federal Credit Union
 
Virginia
 
4,241

 
3.06
Subtotal (10 largest borrowers)
 
 
 
104,027

 
74.99
Subtotal (all other borrowers)
 
 
 
34,695

 
25.01
Total advances par value and standby letters of credit
 
$
138,722

 
100.00

Community Investment Services

Each FHLBank must set aside 10 percent of its income subject to assessment for the Affordable Housing Program (AHP), or such additional prorated sums as may be required so that the aggregate annual contribution of the FHLBanks is not less than $100 million. For purposes of the AHP calculation, each FHLBank’s income subject to assessment is defined as the individual FHLBank’s net income before assessments, plus interest expense related to mandatorily redeemable capital stock. The assessment for AHP is further discussed under the Taxation/Assessments heading below.

AHP provides no-cost or low-cost funds in the form of a direct subsidy or a subsidized advance to members to support the financing of rental and for-sale housing for very low-, low-, and moderate-income households. The Bank offers a Competitive AHP, a Set-aside AHP, and a discounted advance program that supports projects that provide affordable housing and economic development benefiting those households. A description of each program is as follows:

•
the Competitive AHP is offered annually through a competitive application process and provides funds for either rental or ownership real estate projects submitted through member financial institutions;

•
the Set-aside AHP currently consists of the following distinct products: First-time Homebuyer, Community Partners, Foreclosure Recovery, Veterans Purchase, Returning Veterans Purchase, Community Rebuild and Restore, and Structured Partnership Product. The Set-aside AHP products are available on a first-come, first-served basis and provide no-cost funds through member financial institutions to be used for down payments, closing costs, and other costs associated with the purchase, purchase/rehabilitation, or rehabilitation of homes for families at or below 80 percent of the area median income; and

•
the discounted advance program consists of the Community Investment Program and the Economic Development Program, which both provide the Bank’s members with access to low-cost funding to create affordable rental and homeownership opportunities and to engage in commercial and economic development activities that benefit low- and moderate-income individuals and neighborhoods.

The Bank’s AHP assessments were $46 million, $39 million, and $31 million for the years ended December 31, 2018, 2017, and 2016, respectively.


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In 2018, the Bank exercised its discretion to create a voluntary program that is funded, operated, and regulated totally separate and apart from AHP. This voluntary program is referred to as the Community Heroes initiative, which is a matching-grant initiative to enable law enforcement officers, firefighters, other first responders, and public school teachers to purchase a home under locally structured partnerships. Pursuant to this initiative, the Bank will provide up to $4.5 million in grant funding through its members to eligible recipients with the potential for match funding from local governments, counties, or housing finance agencies.


Cash Management and Other Services

The Bank provides a variety of services to help members meet day-to-day cash management needs. These services include cash management services that support member advance activity, such as daily investment accounts, automated clearing house (ACH) transactions, and custodial mortgage accounts. In addition to cash management services, the Bank provides other noncredit services, including wire transfer services and safekeeping services. These cash management, wire transfer, and safekeeping services do not generate material amounts of income and are performed primarily as ancillary services for the Bank’s members.

The Bank also acts as an intermediary to meet the derivatives needs of its smaller members that have limited or no access to the capital markets. This service assists members with asset-liability management by giving them indirect access to the capital markets. These intermediary transactions involve the Bank entering into a derivative with a member and then entering into a mirror-image derivative with one of the Bank’s approved counterparties. The derivatives entered into by the Bank as a result of its intermediary activities do not qualify for hedge accounting treatment and are separately marked to fair value through earnings. The Bank attempts to earn income from this service sufficient to cover its operating expenses through the minor difference in rates on these mirror-image derivatives. The net result of the accounting for these derivatives is not material to the operating results of the Bank. The Bank may require both the member and the counterparty to post collateral for any market value exposure that may exist during the life of the transaction.

Mortgage Loan Purchase Programs

The Bank’s mortgage loan purchase programs provide members an alternative to holding mortgage loans in a portfolio or selling them into the secondary market. Prior to 2008, the Bank purchased loans directly from member participating financial institutions (PFIs) through the Mortgage Partnership Finance® Program (MPF® Program), a program developed by FHLBank Chicago and the Mortgage Purchase Program (MPP), a program separately established by the Bank. The Bank ceased directly purchasing new mortgage assets under these mortgage programs in 2008. However, the Bank continues to support its existing MPP and MPF Program mortgage loan portfolios.

MPF Program

From time to time, the Bank has offered various products to members through the MPF Program. FHLBank Chicago, as the MPF provider, is responsible for providing transaction processing services, as well as developing and maintaining the underwriting criteria and program servicing guide. The Bank pays FHLBank Chicago a fee for providing these services. Conventional loans purchased from PFIs under the MPF Program are subject to varying levels of loss allocation and credit enhancement structures. Federal Housing Administration (FHA)-insured and Department of Veterans Affairs (VA)-guaranteed loans are not subject to the credit enhancement obligations applicable to conventional loans under the MPF Program. The PFI may retain the right and responsibility for servicing the loans or sell the servicing rights, and the PFI may be required to repurchase a loan in the event of a breach of eligibility requirement or other warranty.

The Bank maintains a portfolio of mortgage loans that were historically purchased directly from PFIs and are recorded on the balance sheet. Two of the Bank’s PFIs under the traditional MPF products, Branch Banking and Trust Company and SunTrust Bank, were among the Bank’s top 10 borrowers as of December 31, 2018.

Mortgage Partnership Finance® Program, “Mortgage Partnership Finance®”, and “MPF®” are registered trademarks of FHLBank Chicago.

MPP

The Bank’s MPP is independent of other FHLBanks’ mortgage loan programs. Therefore, the Bank has greater control over pricing, quality of customer service, relationships with any third-party service providers, and program changes. Certain benefits of greater Bank control include the Bank’s ability to control operating costs and to manage its regulatory relationship directly with the Finance Agency. There were no MPP PFIs that were among the Bank’s top 10 borrowers as of December 31, 2018.

The MPF Program and MPP are authorized under applicable regulations. Regulatory interpretive guidance provides that an FHLBank may sell loans acquired through its mortgage loan purchase programs so long as it also sells the related credit enhancement obligation. The Bank currently is not selling loans it has acquired through these mortgage loan purchase programs. The contractual maturity dates of some of the purchased loans extend out to 2047.


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Descriptions of the MPF Program and MPP underwriting and eligibility standards and credit enhancement structures are contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk—Mortgage Loan Programs.

Investments

The Bank maintains a portfolio of investment securities and other investments for liquidity purposes to provide for the availability of funds to meet member credit needs and to provide additional earnings for the Bank. As of December 31, 2018, the Bank’s investment securities consist of MBS issued by GSEs, U.S. government agencies, or private-label securities; securities issued by the U.S. government or U.S. government agencies; and state and local housing agency obligations. The Bank ceased purchasing private-label MBS in 2008. The investment securities portfolio generally provides the Bank with higher returns than those available in other investments. The Bank’s other investments may consist of interest-bearing deposits, overnight and term federal funds sold, and securities purchased under agreements to resell. U.S. agency and GSE securities were 53.1 percent and 61.0 percent of the Bank’s total investments as of December 31, 2018 and 2017, respectively, as discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Investments. Investments generated 32.4 percent, 44.6 percent, and 44.2 percent of total interest income for the years ended December 31, 2018, 2017, and 2016, respectively.

The Bank’s MBS investment practice is to purchase MBS from a group of Bank-approved dealers, which may include “primary dealers.” Primary dealers are banks and securities brokerages that trade in U.S. government securities with the Federal Reserve System. The Bank does not purchase MBS from its members, except in the case in which a member or its affiliate is on the Bank’s list of approved dealers. In all cases, the Bank bases its investment decisions on the relative rates of return of competing investments and does not consider whether an MBS is being purchased from or issued by a member or an affiliate of a member. The MBS balance included a carrying value of $684 million and $866 million, respectively, of MBS that were issued by one of the Bank’s members or an affiliate of a member as of December 31, 2018 and 2017. See Note 6—Available-for-sale Securities and Note 7—Held-to-maturity Securities to the Bank’s 2018 audited financial statements for a tabular presentation of the available-for-sale and held-to-maturity securities issued by members or affiliates of members.

Finance Agency regulations prohibit the Bank from investing in certain types of securities. These restrictions are discussed in more detail in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk—Investments.
 
Finance Agency regulations prohibit an FHLBank from purchasing MBS and asset-backed securities if its investment in such securities exceeds 300 percent of the FHLBank’s previous month-end regulatory capital on the day it purchases the securities. Regulatory capital is defined as the sum of permanent capital, the amount paid-in for Class A stock (if any), the amount of the Bank’s general allowance for losses (if any), and the amount of any other instruments identified in the capital plan and approved by the Finance Agency. For discussion regarding the Bank’s compliance with this regulatory requirement, refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Investments.
 
The Bank is subject to credit and market risk on its investments. For discussion as to how the Bank manages these risks, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk—Investments.

Funding Sources

Consolidated Obligations

Consolidated obligations, consisting of bonds and discount notes, are the joint and several obligations of the FHLBanks, backed only by the financial resources of the FHLBanks. Consolidated obligations are not obligations of the U.S. government, and the United States does not guarantee the consolidated obligations. The Office of Finance has responsibility for facilitating and executing the issuance of consolidated obligations for all the FHLBanks. It also services all outstanding debt. The Bank is primarily liable for its portion of consolidated obligations (i.e., those issued on its behalf); however, the Bank is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on consolidated obligations of all the FHLBanks. If the principal or interest on any consolidated obligation issued on behalf of the Bank is not paid in full when due, the Bank may not pay any extraordinary expenses or pay dividends to, or redeem or repurchase shares of capital stock from, any member of the Bank. At any time, the Finance Agency may require any FHLBank to make principal or interest payments due on any consolidated obligation, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation.

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To the extent that an FHLBank makes any payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank is entitled to reimbursement from the noncomplying FHLBank. However, if the Finance Agency determines that the noncomplying FHLBank is unable to satisfy its obligations, the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding or on any other basis the Finance Agency may determine.

Finance Agency regulations also state that the Bank must maintain the following types of assets that are free from any lien or pledge in an aggregate amount at least equal to the amount of the Bank’s portion of the consolidated obligations outstanding, provided that any assets that are subject to a lien or pledge for the benefit of the holders of any issue of consolidated obligations shall be treated as if they were assets free from any lien or pledge for purposes of this negative pledge requirement:

•
cash;

•
obligations of, or fully guaranteed by, the United States;
 
•
secured advances;

•
mortgages that have any guaranty, insurance, or commitment from the United States or any agency of the United States; and

•
investments described in Section 16(a) of the FHLBank Act which, among other items, include securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located.

The Bank was in compliance with this Finance Agency regulation as of December 31, 2018 and 2017.

Consolidated obligations are issued with either fixed- or variable-rate coupon payment terms that may use a variety of indices. The Bank, working through the Office of Finance, is able to customize consolidated obligations to meet investor demands. Customized features can include different indices and embedded derivatives. The Bank offsets these customized features predominantly by derivatives to reduce the market risk associated with the consolidated obligations.
 
Consolidated Obligation Bonds. Consolidated obligation bonds satisfy longer-term funding requirements. Typically, the maturity of these securities ranges from one year to 10 years, but the maturity is not subject to any statutory or regulatory limit. Consolidated obligation bonds can be issued and distributed through negotiated or competitively bid transactions with approved underwriters or selling group members. The FHLBanks also use the TAP issue program for fixed-rate, noncallable bonds. Under this program, the FHLBanks offer debt obligations at specific maturities that may be reopened daily, generally during a three-month period through competitive auctions. The goal of the TAP program is to aggregate frequent smaller issues into a larger bond issue that may have greater market liquidity.

Consolidated Obligation Discount Notes. Through the Office of Finance, the FHLBanks also issue consolidated obligation discount notes to provide short-term funds for advances to members, for the Bank’s other investments, and for the Bank’s variable-rate and convertible advance programs. These securities have maturities up to 366 days and are offered daily through a consolidated obligation discount note selling group. Discount notes are issued at a discount and mature at par.

Certification and Reporting Obligations. Under Finance Agency regulations, before the end of each calendar quarter and before paying any dividends for that quarter, the president of the Bank must certify to the Finance Agency that, based upon known current facts and financial information, the Bank will remain in compliance with applicable liquidity requirements and will remain capable of making full and timely payments of all current obligations (which includes the Bank’s obligation to pay principal and interest on consolidated obligations issued on its behalf through the Office of Finance) coming due during the next quarter. The Bank is required to provide notice to the Finance Agency upon the occurrence of any of the following:

•
the Bank is unable to provide the required certification;

•
the Bank projects, at any time, that it will fail to comply with its liquidity requirements or will be unable to meet all of its current obligations due during the quarter;

•
the Bank actually fails to comply with its liquidity requirements or to meet all of its current obligations due during the quarter; or


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•
the Bank negotiates to enter or enters into an agreement with one or more other FHLBanks to obtain financial assistance to meet its current obligations due during the quarter.

The Bank must file a consolidated obligation payment plan for Finance Agency approval upon the occurrence of any of the following:
 
•
the Bank becomes a noncomplying FHLBank as a result of failing to provide a required certification related to liquidity requirements and ability to meet all current obligations;

•
the Bank becomes a noncomplying FHLBank as a result of being required to provide notice to the Finance Agency of certain matters related to liquidity requirements or inability to meet current obligations; or

•
the Finance Agency determines that the Bank will cease to be in compliance with its liquidity requirements or will lack the capacity to meet all of its current obligations due during the quarter.

Regulations permit a noncompliant FHLBank to continue to incur and pay normal operating expenses in the regular course of business. However, a noncompliant FHLBank may not incur or pay any extraordinary expenses, declare or pay dividends, or redeem any capital stock until the Finance Agency has approved the FHLBank’s consolidated obligation payment plan or inter-FHLBank assistance agreement or has ordered another remedy, and the noncompliant FHLBank has paid all its direct obligations.

Deposits

The FHLBank Act allows the Bank to accept deposits from its members, any institution for which it is providing correspondent services, other FHLBanks, or other governmental instrumentalities. Deposits provide some of the Bank’s funding resources while also giving members a low-risk earning asset that satisfies their regulatory liquidity requirements. The Bank had demand and overnight deposits of $1.2 billion as of December 31, 2018 and 2017.

To support its member deposits, the FHLBank Act requires the Bank to have an amount equal to or greater than the current deposits received from its members as a reserve. These reserves are required to be invested in obligations of the United States, deposits in eligible banks or trust companies, or advances with maturities not exceeding five years. The Bank had excess deposit reserves of $114.3 billion and $106.4 billion as of December 31, 2018 and 2017, respectively.


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Capital and Capital Rules

The Bank must comply with regulatory requirements for total regulatory capital, leverage capital, and risk-based capital. To satisfy these capital requirements, the Bank maintains a capital plan. Each member’s minimum stock requirement is an amount equal to the sum of a “membership” stock component and an “activity-based” stock component under the plan. The FHLBank Act and applicable regulations require that the minimum stock requirement for members must be sufficient to enable the Bank to meet its minimum leverage and risk-based capital requirements. If necessary, the Bank may adjust the minimum stock requirement from time to time within the ranges established in the capital plan. Each member is required to comply promptly with any adjustment to the minimum stock requirement.

As of December 31, 2018, the membership stock requirement was 0.09 percent (nine basis points) of the member’s total assets, subject to a cap of $15 million.

As of December 31, 2018, the activity-based stock requirement was the sum of the following:

•
4.25 percent of the member’s outstanding par value of advances; and

•
8.00 percent of any outstanding targeted debt or equity investment (such as multifamily residential mortgage loan assets) sold by the member to the Bank on or after December 17, 2004.

In addition, the activity-based stock requirement may include a percentage of any outstanding balance of acquired member assets (such as residential mortgage loan assets), although this percentage was set at zero as of December 31, 2018. The Bank did not have any multifamily residential mortgage loan assets purchased from members or other targeted debt or equity investments outstanding; therefore, the 8.00 percent activity-based stock requirement was inapplicable as of December 31, 2018.

Although applicable regulations allow the Bank to issue Class A stock or Class B stock, or both, to its members, the Bank’s capital plan allows it to issue only Class B stock.

The Bank’s financial management policy contains provisions to help preserve the value of the members’ investment in the Bank and reasonably mitigate the effect on capital of unanticipated operating and accounting events. For additional information regarding the Bank’s capital and capital requirements, as well as information regarding the Bank’s retained earnings and dividends, refer to Item 5, Market for Registrant’s Common Equity—Related Stockholder Matters and Issuer Purchases of Equity Securities; Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Capital; and Note 14—Capital and Mandatorily Redeemable Capital Stock to the Bank’s 2018 audited financial statements.

Derivatives

Finance Agency regulations and the Bank’s Risk Management Policy (RMP) establish guidelines for derivatives. These policies and regulations prohibit the trading or speculative use of these instruments and limit permissible credit risk arising from these instruments. The Bank enters into derivatives to manage the exposure to interest-rate risk inherent in otherwise unhedged assets and funding positions, to achieve the Bank’s risk management objectives, and to act as an intermediary between its members and counterparties. These derivatives consist of interest-rate swaps (including callable and putable swaps), swaptions, interest-rate cap and floor agreements, and forward contracts. Generally, the Bank uses derivatives in its overall interest-rate risk management to accomplish one or more of the following objectives:


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•
preserve a favorable interest-rate spread between the yield of an asset (e.g., an advance) and the cost of the related liability (e.g., the consolidated obligation bond used to fund the advance) by converting both fixed-rate instruments to a variable rate using interest-rate swaps;

•
reduce funding costs by combining a derivative with a consolidated obligation because the cost of a combined funding structure can be lower than the cost of a comparable consolidated obligation bond;

•
reduce the interest-rate sensitivity and repricing gaps of assets and liabilities;

•
mitigate the adverse earnings effects of the shortening or lengthening of certain assets (e.g., mortgage assets) and liabilities;

•
protect the value of existing asset or liability positions;

•
manage embedded options in assets and liabilities; and

•
achieve overall asset/liability management objectives.

The total notional amount of the Bank’s outstanding derivatives was $59.5 billion and $58.9 billion as of December 31, 2018 and 2017, respectively. The contractual or notional amount of a derivative is not a measure of the amount of credit risk from that transaction; rather, the notional amount serves as a basis for calculating periodic interest payments or cash flows.

The Bank may enter into derivatives concurrently with the issuance of consolidated obligations with embedded options. When issuing bonds, the Bank generally simultaneously enters into derivatives to, in effect, convert fixed-rate liabilities into variable-rate liabilities. The continued attractiveness of such debt depends on price relationships in both the bond and derivatives markets. If conditions in these markets change, the Bank may alter the types or terms of the bonds issued. Similarly, the Bank may enter into derivatives in conjunction with the origination of advances with embedded options. Issuing fixed-rate advances while simultaneously entering into derivatives, in effect, converts fixed-rate advances into variable-rate earning assets.

The Bank is subject to credit risk in all derivatives due to potential nonperformance by the derivative counterparty. For further discussion as to how the Bank manages its credit risk and market risk on its derivatives, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation—Risk Management.

Competition

Advances. A number of factors affect demand for the Bank’s advances, including, but not limited to, the availability and cost of other sources of liquidity for the Bank’s members, such as demand deposits, brokered deposits, and the repurchase market. The Bank individually competes with other suppliers of secured and unsecured wholesale funding. Such other suppliers may include investment banks, commercial banks, and in certain circumstances, other FHLBanks. Smaller members may have access to alternative funding sources through sales of securities under agreements to repurchase, while larger members may have access to all the alternatives listed above. Larger members also may have independent access to the national and global credit markets. The availability of alternative funding sources to members can significantly influence the demand for the Bank’s advances and can vary as a result of a number of factors, including market conditions, member liquidity levels, members’ creditworthiness, and availability of collateral.

Debt Issuance. The Bank competes with Fannie Mae, Freddie Mac, and other GSEs, as well as corporate, sovereign, and supranational entities for funds raised through the issuance of unsecured debt in the national and global debt markets. Increases in the supply of competing debt products may, in the absence of increases in demand, result in higher debt costs or lesser amounts of debt issued at the same cost than otherwise would be the case. In addition, the availability and cost of funds raised through the issuance of certain types of unsecured debt may be affected adversely by regulatory initiatives that tend to reduce investments by certain depository institutions in unsecured debt with greater price volatility or interest-rate sensitivity than fixed-rate, fixed-maturity instruments of the same maturity. Further, a perceived or actual higher level of government support for other GSEs may increase demand for their debt securities relative to similar FHLBank securities.

Interest-rate Exchange Agreements. The sale of callable debt and the simultaneous execution of callable interest-rate swaps that mirror the debt have been important sources of competitive funding for the Bank. As such, the availability of markets for callable debt and interest-rate swaps may be an important determinant of the Bank’s relative cost of funds. There is considerable competition among high credit quality issuers in the markets for these instruments.


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Regulatory Oversight, Audits, and Examinations

The Finance Agency supervises and regulates the FHLBanks. The Finance Agency is responsible for ensuring that (1) the FHLBanks operate in a safe and sound manner, including maintenance of adequate capital and internal controls; (2) the operations and activities of the FHLBanks foster liquid, efficient, competitive, and resilient national housing finance markets; (3) the FHLBanks comply with applicable laws and regulations; and (4) the FHLBanks carry out their housing finance mission through authorized activities that are consistent with the public interest. In this capacity, the Finance Agency issues regulations and policies that govern, among other things, the permissible activities, powers, investments, risk-management practices, and capital requirements of the FHLBanks, and the authorities and duties of FHLBank directors. The Finance Agency conducts annual, on-site examinations of the Bank, as well as periodic off-site reviews. In addition, the Bank must submit to the Finance Agency monthly financial information on the condition and results of operations of the Bank. The Bank is also subject to regulation by the SEC, the Financial Crimes Enforcement Network (FinCEN), and the Commodity Futures Trading Commission.

The Government Corporation Control Act provides that, before a government corporation (which includes each of the FHLBanks) issues and offers obligations to the public, the Secretary of the Treasury shall prescribe (1) the form, denomination, maturity, interest rate, and conditions of the obligations; (2) the time and manner in which issued; and (3) the selling price. Under the FHLBank Act, the Secretary of the Treasury has the authority, at his discretion, to purchase consolidated obligations up to an aggregate principal amount of $4.0 billion. No borrowings under this authority have been outstanding since 1977.

The Comptroller General has authority under the FHLBank Act to audit or examine the Finance Agency and the Bank and to decide the extent to which they fairly and effectively fulfill the purposes of the FHLBank Act. Furthermore, the Government Corporation Control Act provides that the Comptroller General may review any audit of the financial statements conducted by an independent registered public accounting firm. If the Comptroller General conducts such a review, he or she must report the results and provide his or her recommendations to Congress, the Office of Management and Budget, and the FHLBank in question. The Comptroller General also may conduct his or her own audit of any financial statements of the Bank.

The Bank has an internal audit department; the Bank’s board of directors has an audit committee; and an independent registered public accounting firm audits the annual financial statements of the Bank. The independent registered public accounting firm conducts these audits following the standards of the Public Company Accounting Oversight Board (United States) and Government Auditing Standards issued by the Comptroller General. The Finance Agency receives the Bank’s Report and audited financial statements. The Bank must submit annual management reports to Congress, the President of the United States, the Office of Management and Budget, and the Comptroller General. These reports include audited financial statements, a statement of internal accounting and administrative control systems, and the report of the independent registered public accounting firm on the financial statements.

Available Information

The Bank’s website is located at www.fhlbatl.com. The content of the Bank’s website is not incorporated by reference into this Report or in any other report or document that the Bank files with the SEC, and any references to the Bank’s website are intended to be inactive textual references only.

Personnel

As of December 31, 2018, the Bank employed 319 full-time and three part-time employees.

Taxation/Assessments

The Bank is exempt from ordinary federal, state, and local taxation, except employment and real property taxes. However, each FHLBank must set aside 10 percent of their income subject to assessment for the AHP, or such additional prorated sums as may be required so that the aggregate annual contribution of the FHLBanks is not less than $100 million. For purposes of the AHP calculation, each FHLBank’s income subject to assessment is defined as the individual FHLBank’s net income before assessments, plus interest expense related to mandatorily redeemable capital stock. If an FHLBank experiences a net loss for a full year, the FHLBank would have no obligation to the AHP for that year since each FHLBank’s required annual AHP contribution is limited to its annual income subject to assessment. AHP assessments for the Bank were $46 million, $39 million, and $31 million for the years ended December 31, 2018, 2017, and 2016, respectively.


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Item 1A. Risk Factors.

The following discussion summarizes some of the more important risks that the Bank faces. This discussion is not exhaustive, and there may be other risks that the Bank faces, which are not described below. These risks should be read in conjunction with the other information included in this Report, including, without limitation, in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, the financial statements and notes, and “Special Cautionary Notice Regarding Forward-looking Statements.” The risks described below, if realized, could negatively impact the Bank’s business operations, financial condition, and future results of operations and, among other things, could result in the Bank’s inability to pay dividends on, and/or repurchase or redeem, its capital stock.

Business and Regulatory Risk

The Bank is subject to a complex body of laws and regulations, which could change or be applied in a manner detrimental to the Bank’s operations.

The FHLBanks are GSEs, organized under the authority of the FHLBank Act, and governed by federal laws and regulations as adopted and applied by the Finance Agency. Congress may amend the FHLBank Act or amend or adopt other statutes in ways that significantly affect the rights and obligations of the FHLBanks and the manner in which the FHLBanks carry out their housing finance mission and business operations. New or modified legislation enacted by Congress or regulatory requirements applied or imposed by the Finance Agency or other financial services regulators could have a negative effect on the Bank’s ability to conduct business or on the cost of doing business. For example, from time to time, there have been several legislative efforts and policy proposals regarding reform of the federal support of U.S. housing finance, specifically targeting Fannie Mae and Freddie Mac. If implemented, these plans may also directly and indirectly impact other GSEs that support the U.S. housing market, including the FHLBanks. In addition, certain regulations affecting our members could impact the extent to which they can engage in business with the Bank. Due to recent changes in the U.S. government, there are additional uncertainties in the legislative and regulatory environment.

Changes in statutory or regulatory requirements, or their application, could result in, among other things, an increase in the FHLBanks’ cost of funding and regulatory compliance; a change in membership or permissible business activities; additional liquidity requirements; or a decrease in the size, scope, or nature of the FHLBanks’ lending or investment activities, any of which could negatively impact the Bank’s financial condition and results of operations.

Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Legislative and Regulatory Developments for a discussion of recent legislative and regulatory activity that could affect the Bank.

Competition for advances and refinancing risk on short-term advances could have an adverse effect on earnings.

We operate in a highly competitive environment. Advances are the Bank’s primary product offering and represented 70.2 percent of the Bank’s total assets for the year ended December 31, 2018. Demand for advances is affected by, among other factors, the cost and availability of other sources of liquidity for the Bank’s members, including deposits. The Bank competes with other suppliers of wholesale funding, both secured and unsecured. Such other suppliers may include the United States government, investment banks, commercial banks and, in certain circumstances, other FHLBanks with which members have a relationship through affiliates. Large institutions may also have independent access to the national and global credit markets. From time to time, these alternative funding sources may offer more favorable terms on their loans than the Bank does on its advances. Any change made by the Bank in the pricing of its advances in an effort to effectively compete with these competitive funding sources may decrease the Bank’s profitability on advances, which could have a material adverse impact on the Bank’s financial condition and results of operations, including dividend yields to members.

The prolonged low interest rate environment has resulted in a concentration of short-term advances. Although the Federal Reserve raised interest rates in each of 2016, 2017 and 2018, the Bank expects this short-term advance preference to continue during 2019. If members do not extend or renew these short-term advances as they come due, the Bank may experience a significant reduction in advances, which could have a material adverse impact on the Bank’s financial condition and results of operations. Advances due in one year or less comprised 66.7 percent of the Bank’s total advances outstanding as of December 31, 2018.






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The Bank is exposed to risks because of customer concentration.

The Bank is subject to customer concentration risk as a result of the Bank’s reliance on a relatively small number of member institutions for a large portion of the Bank’s total advances and resulting interest income. The Bank’s largest borrowers as of December 31, 2018, were Bank of America, National Association, which accounted for $19.8 billion, or 18.2 percent, and Navy Federal Credit Union, which accounted for $13.1 billion, or 12.1 percent, of the Bank’s total advances then outstanding. In addition, as of December 31, 2018, 10 of the Bank’s member institutions (including Bank of America, National Association, and Navy Federal Credit Union) collectively accounted for $80.2 billion, or 74.0 percent, of the Bank’s total advances then outstanding. The financial services industry continues to experience consolidation, including among the Bank’s members. If, for any reason, the Bank were to lose, or experience a decrease in the amount of, its business relationships with its largest borrower or a combination of several of its large borrowers - whether as the result of any such member becoming a party to a merger or other transaction, or as a result of market conditions, competition or otherwise - the Bank’s financial condition and results of operations could be negatively affected.

Liquidity Risk

The Bank’s funding depends upon its ability to regularly access the capital markets.

The Bank’s primary source of funds is from the sale of consolidated obligations in the capital markets, including the short-term discount note market. The Bank competes with Fannie Mae, Freddie Mac, and other GSEs as well as corporate, sovereign, and supranational entities for funds raised through the issuance of consolidated obligations. The Bank’s ability to obtain funds through the sale of consolidated obligations depends in part on prevailing conditions in the capital markets (including investor demand), such as the effects of any reduced liquidity in financial markets, which are beyond the Bank’s control. The failure to obtain such funds on terms and conditions favorable to the Bank could adversely impact the Bank’s ability to manage its future liquidity.

Compliance with regulatory contingency liquidity guidance could restrict investment activities and adversely impact net interest income.
Liquidity is necessary to satisfy members’ borrowing needs on a timely basis, repay maturing and called consolidated obligations, and meet other obligations and operating requirements. Many members rely on the Bank as a source of standby liquidity, so the Bank attempts to be in a position to meet member funding needs on a timely basis. The Bank complies with regulatory operational liquidity and contingent liquidity requirements, which are designed to provide sufficient liquidity and to protect against temporary disruptions in the capital markets that affect the FHLB System's access to funding. In 2018, the Finance Agency issued new liquidity requirements in a separate regulatory directive. These liquidity requirements may require the Bank to hold an additional amount of liquid assets, which could reduce the Bank’s ability to invest in higher-yielding assets and adversely impact net interest income.

Market Risk

Changes in interest rates could significantly affect the Bank’s earnings.

Like many financial institutions, the Bank realizes income primarily from the spread between interest earned on the Bank’s outstanding loans and investments and interest paid on the Bank’s borrowings and other liabilities. Although the Bank uses a number of measures to monitor and manage changes in interest rates, the Bank may experience “gaps” in the interest-rate sensitivities of its assets and liabilities resulting from duration mismatches. The existence of gaps in interest-rate sensitivities means that either the Bank’s interest-bearing liabilities will be more sensitive to changes in interest rates than its interest-earning assets, or vice versa. In either case, if interest rates move contrary to the Bank’s position, any such gap could adversely affect the net present value of the Bank’s interest-sensitive assets and liabilities, which could negatively affect the Bank’s financial condition and results of operations.

The Bank’s businesses and results of operations are affected by the fiscal and monetary policies of the U.S. government, foreign governments and their agencies. The Federal Reserve Board’s policies directly and indirectly influence the yield on interest-earning assets and the cost of interest-bearing liabilities, which could affect the success of the Bank’s asset and liability management activities and negatively affect the Bank’s financial condition and results of operations. Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Net Interest Income for further discussion of the Bank’s yield on assets and interest-rate spread.

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The Bank relies upon derivative instruments to reduce its interest-rate risk associated with certain assets and liabilities on the Bank's balance sheet, including MBS and advances, and the Bank may be required to change its investment strategies and advance product offerings if it is not able to enter into effective derivative instruments on acceptable terms.

The Bank uses a significant amount of derivative instruments to attempt to reduce its interest-rate risk and mortgage prepayment risk. The Bank determines the nature and quantity of hedging transactions based on various factors, including market conditions and the expected volume and terms of advances. As a result, the Bank's effective use of these instruments depends on the ability of the Bank to determine the appropriate hedging positions in light of the Bank's assets, liabilities, and prevailing and anticipated market conditions. In addition, the effectiveness of the Bank's hedging strategy depends upon the Bank's ability to enter into these instruments with acceptable parties, upon terms satisfactory to the Bank, and in the quantities necessary to hedge the Bank's corresponding obligations.

Certain changes to statutory and regulatory requirements for derivative transactions, including rules that would subject non-cleared swaps to a mandatory two-way initial margin requirement, among other things, could adversely affect the liquidity and pricing of derivative transactions entered into by the Bank, making derivative trades more costly and less attractive as risk management tools. Furthermore, many of the Bank’s derivative instruments are swapped to LIBOR based rates and indices, and there can be no assurances that ongoing efforts to transition away from LIBOR, including the market’s adoption of alternative benchmarks and new contractual terms for legacy transactions, will not adversely affect the trading market or value of derivatives.

If the Bank is unable to manage its hedging positions properly or is unable to enter into hedging instruments upon acceptable terms, the Bank may be unable to manage its interest-rate and other risks or may be required to change its investment strategies and advance product offerings, which could affect the Bank's financial condition and results of operations.

Prepayment or refinancing of mortgage assets could affect earnings.

The Bank invests in MBS and has at times invested in whole mortgage loans. Changes in interest rates can significantly affect the prepayment patterns of these assets, and such prepayment patterns could affect the Bank’s earnings. In the Bank’s experience, it is difficult to hedge prepayment risk in mortgage loans. Therefore, prepayments of mortgage assets could have an adverse effect on the income of the Bank.

The Bank may not be able to pay dividends or to repurchase or redeem members’ capital stock consistent with past practice.

The Bank’s board of directors may declare dividends on the Bank’s capital stock, payable to members, from the Bank’s unrestricted retained earnings and current net earnings. The Bank’s ability to pay dividends and to repurchase or redeem capital stock is subject to compliance with statutory and regulatory liquidity and capital requirements. The Bank’s financial management policy addresses regulatory guidance issued to all FHLBanks regarding retained earnings. It requires the Bank to establish a target amount of retained earnings by considering factors such as forecasted income, mark-to-market adjustments on derivatives and trading securities, market risk, operational risk, and credit risk, all of which may be influenced by events beyond the Bank’s control. The Bank’s capital plan addresses minimum regulatory capital requirements. Events such as changes in interest rates, collateral value, credit quality of members, and any future other-than-temporary impairment losses may affect the adequacy of the Bank’s retained earnings and may require the Bank to reduce its dividends, suspend dividends altogether, or limit capital stock repurchases and redemptions to achieve and maintain the targeted amount of retained earnings or regulatory capital requirements. These actions could cause a reduction in members’ demand for advances, or make it difficult for the Bank to retain existing members or to attract new members.

Credit Risk

The Bank’s exposure to credit risk could have an adverse effect on the Bank’s financial condition and results of operations.

The Bank faces credit risk on advances, standby letters of credit, investments, derivatives, and mortgage loan assets. The Bank requires advances and standby letters of credit to be fully secured with collateral. The Bank evaluates the types of collateral pledged by the member and assigns a borrowing capacity to the collateral, based on the risk associated with that type of collateral. If the Bank has insufficient collateral before or after an event of payment default or failure of the member or the Bank is unable to liquidate the collateral for the value assigned to it in the event of a payment default or failure of a member, the Bank could experience a credit loss on advances or standby letters of credit, which could adversely affect its financial condition and results of operations.

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The Bank assumes secured and unsecured credit risk exposure associated with securities transactions, money market transactions, supplemental mortgage insurance agreements, and derivative contracts. The Bank routinely executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. The insolvency or other inability of a significant counterparty to perform its obligations under a derivative contract or other agreement could have an adverse effect on the Bank’s financial condition and results of operations. The Bank’s credit risk may be exacerbated based on market movements that impact the value of the derivative or collateral positions, the failure of a counterparty to return collateral owed by the counterparty to the Bank, or when the collateral pledged to the Bank cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to the Bank. Any failure to properly perfect the Bank’s security interest in collateral or any disruption in the servicing of collateral in the event of a default could create credit losses for the Bank.

The Bank invests in U.S. agency (Fannie Mae, Freddie Mac, and Ginnie Mae) MBS and has historically invested in private-label MBS. As of December 31, 2018, 5.81 percent of the Bank’s MBS portfolio consisted of private-label MBS. Market prices for many of these private-label MBS have continued to improve since the 2008 financial crisis; however, given continued uncertainty in market conditions and the significant judgments involved in determining market value, there is a risk that declines in fair value in the Bank’s MBS portfolio may occur and that the Bank may record additional other-than-temporary impairment losses in future periods, which could materially adversely affect the Bank’s financial condition and results of operation.

The Bank uses master derivative contracts that contain provisions that require the Bank to net the exposure under all transactions with a counterparty to one amount in order to calculate collateral requirements. Although the Bank attempts to monitor the creditworthiness of all counterparties, it is possible that the Bank may not be able to terminate the agreement with a foreign commercial bank before the counterparty would become subject to an insolvency proceeding.

The Bank is jointly and severally liable for payment of principal and interest on the consolidated obligations issued by the other FHLBanks.

Each of the FHLBanks relies upon the issuance of consolidated obligations as a primary source of funds. Consolidated obligations are the joint and several obligations of all of the FHLBanks, backed only by the financial resources of the FHLBanks. Accordingly, the Bank is jointly and severally liable with the other FHLBanks for the consolidated obligations issued by the FHLBanks through the Office of Finance.

The Finance Agency by regulation, may require any FHLBank to make principal or interest payments due on any consolidated obligation at any time, whether or not the FHLBank that was the primary obligor has defaulted on the payment of that obligation. The Finance Agency may allocate the liability among one or more FHLBanks on a pro rata basis or on any other basis the Finance Agency may determine. Accordingly, the Bank could incur significant liability beyond its primary obligation under consolidated obligations due to the failure of other FHLBanks to meet their obligations, which could negatively impact the Bank’s financial condition and results of operations.

Changes in the Bank’s credit ratings may adversely affect the Bank’s ability to issue consolidated obligations on acceptable terms, and such changes may be outside the Bank’s control due to changes in the U.S. sovereign ratings.

As of December 31, 2018, the Bank has an issuer credit rating of Aaa/P-1 by Moody's Investors Service (Moody’s) and AA+/A-1+ by Standard and Poor's Ratings Services (S&P). The consolidated obligations of the FHLBanks (consolidated bonds and consolidated discount notes) carry credit ratings of Aaa/P-1 by Moody’s and AA+/A-1+ by S&P. All ratings are with a stable outlook. Because of the FHLBanks’ GSE status, the credit ratings of the FHLBank System and the FHLBanks are directly influenced by the sovereign credit of the U.S., which is beyond the Bank’s control. Downgrades to the U.S. sovereign credit rating and outlook would likely result in downgrades in the credit ratings and outlook on the Bank and the consolidated obligations of the FHLBanks even though the consolidated obligations are not obligations of the United States.

These ratings are subject to revision or withdrawal at any time by the rating agencies; therefore, the Bank may not be able to maintain these credit ratings. Negative ratings actions or negative guidance, including as a consequence of U.S. debt levels, the U.S. fiscal budget process, or other uncertainties may adversely affect the Bank’s cost of funds and ability to issue consolidated obligations or other financial instruments on acceptable terms, trigger additional collateral requirements under the Bank’s derivative contracts, and reduce the attractiveness of the Bank’s standby letters of credit. This could have a negative impact on the Bank’s financial condition and results of operations, including the Bank’s ability to make advances on acceptable terms, pay dividends, or redeem or repurchase capital stock.

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Operational Risk

The financial models and the underlying assumptions used to value financial instruments and manage risk may differ materially from actual results.

The Bank makes significant use of business and financial models for managing risk. For example, the Bank uses models to measure and monitor exposures to various risks, including interest rate, prepayment, and other market risks, as well as credit risk. The Bank also uses models in determining the fair value of certain financial instruments when independent price quotations are not available or reliable. The degree of judgment in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market parameters. If market quotes are not available, fair values are based on discounted cash flows using market estimates of interest rates and volatility, dealer prices or prices of similar instruments. Pricing models and their underlying assumptions are based on the Bank’s best estimates for discount rates, prepayments, market volatility, and other factors. These assumptions may have a significant effect on the reported fair values of assets and liabilities, including derivatives, the related income and expense, and the expected future behavior of assets and liabilities.

While models used by the Bank to value instruments and measure risk exposures are subject to periodic validation by the Bank’s staff and independent parties, rapid changes in market conditions could impact the value of the Bank’s instruments, as well as the Bank’s financial condition and results of operations. Models are inherently imperfect predictors of actual results because they are based on assumptions about future performance. Changes in any models or in any of the assumptions, judgments, or estimates used in the models may cause the results generated by the model to be materially different from actual results.

If the models are not reliable or the Bank does not use them appropriately, the Bank could make poor business decisions, including asset and liability management decisions, or other decisions, which could result in an adverse financial impact. Further, any strategies that the Bank employs to attempt to manage the risks associated with the use of models may not be effective.


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The Bank relies heavily upon information systems and other technology, and any disruption or failure of such information systems or other technology could adversely impact its reputation, financial condition, and results of operations.

The Bank relies heavily upon information systems and other technology to conduct and manage its business. The Bank owns some of these systems and technology, and third parties own and provide to the Bank some of those systems and technology. Computer systems, software, and networks can be vulnerable to failures and interruptions, including as the result of any cyberattacks (e.g., breaches, unauthorized access, misuse, computer viruses or other malicious code, and other events) or other breaches of technology security, that may derive from human error or malfeasance on the part of employees or third parties, other disruptions during the process of upgrading or replacing computer software or hardware, failure to implement key information technology initiatives, or accidental technological failure. These failures, interruptions, or cyberattacks could jeopardize the confidentiality or integrity of information, including personally identifiable information, result in fraudulent wire transfers, or otherwise interrupt the Bank’s ability to conduct and manage its business effectively, including, without limitation, its deposit account management, hedging activities, and advances activities. The Bank can make no assurance that it or its third-party vendors will be able to prevent, timely and adequately address, or mitigate the negative effects of any such failure, interruption, or cyberattack.

Like many financial institutions, the Bank has seen an increase in cyberattack attempts. For the Bank, these attempts have predominantly occurred through phishing and social engineering scams, and in particular, ransomware. The Bank’s operations rely on the availability and functioning of its main office and off-site backup facilities. The Bank devotes substantial resources and deploys preventative measures to secure the Bank’s systems, including firewalls, email security, and anti-virus solutions. These measures, or the Bank’s system redundancies and other continuity measures, may be ineffective or insufficient, and the Bank’s business continuity and disaster recovery planning may not be sufficient for all eventualities. A failure or interruption in our business continuity, disaster recovery or certain information systems, or a cybersecurity event, could significantly harm the Bank’s reputation, its customer relations, risk management, and profitability, and could result in financial losses, legal and regulatory sanctions, increased costs, or other harm. While the Bank maintains insurance coverage that is intended to address certain aspects of data security risks, such insurance may be insufficient to cover all losses or types of claims that may arise. As cyber threats continue to evolve, the Bank may be required to expend significant additional resources to continue to modify or enhance its layers of defense, to investigate and remediate any information security vulnerabilities, or to comply with regulatory requirements.

Additionally, the Bank relies on the Office of Finance to facilitate the issuance and servicing of its consolidated obligations. A failure or interruption of the Office of Finance's operating systems as a result of breaches of technology security or cyberattacks could disrupt the Bank’s access to funds, and could significantly harm the Bank’s reputation, its customer relations, risk management, and profitability, and could result in financial losses, legal and regulatory sanctions, increased costs or other harm.

The Bank’s controls and procedures may fail or be circumvented, and risk management policies and procedures may be inadequate.

The Bank may fail to identify and manage risks related to a variety of aspects of its business, including operational risk, legal and compliance risk, interest-rate risk, liquidity risk, market risk, and credit risk. The Bank has adopted controls, procedures, policies, and systems to monitor and manage these risks. The Bank’s management cannot provide complete assurance that those controls, procedures, policies, and systems are adequate to identify and manage the risks inherent in the Bank’s business. In addition, because the Bank’s business continues to evolve, the Bank may fail to fully understand the implications of changes in the business, and therefore, it may fail to enhance the Bank’s risk governance framework to timely or adequately address those changes. Failed or inadequate controls and risk management practices could have an adverse effect on the Bank’s financial condition and results of operations.


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An economic downturn or natural disaster in the Bank’s region could adversely affect the Bank’s profitability and financial condition.

Economic recession over a prolonged period or other unfavorable economic conditions in the Bank’s region (including on a state or local level) could have an adverse effect on the Bank’s business, including the demand for Bank products and services, and the value of the Bank’s collateral securing advances, investments, and mortgage loans held in portfolio. Portions of the Bank’s region also are subject to risks from hurricanes, tornadoes, floods, or other natural disasters, and all are subject to pandemic risk. These natural disasters, including those resulting from significant climate changes, could damage or dislocate the facilities of the Bank’s members, may damage or destroy collateral that members have pledged to secure advances or the mortgages the Bank holds for portfolio, or the livelihood of borrowers of the Bank’s members, or otherwise could cause significant economic dislocation in the affected areas of the Bank’s region.

Possible replacement of the LIBOR benchmark interest rate may have an impact on the Bank’s business, financial condition or results of operations.

On July 27, 2017, the Financial Conduct Authority, a regulator of financial services firms in the United Kingdom, announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. The Alternative Reference Rates Committee, which was convened by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York in order to identify best practices for alternative reference rates, identify best practices for contract robustness, develop an adoption plan, and create an implementation plan with metrics of success and a timeline, has proposed the Secured Overnight Financing Rate (SOFR) as its recommended alternative to LIBOR. The Federal Reserve Bank of New York began publishing SOFR rates in April 2018. SOFR is intended to be a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. During the third quarter of 2018, certain market participants began moving towards the utilization of SOFR as a possible LIBOR replacement through the issuance of debt securities indexed to SOFR and in November 2018, the FHLBank System offered its first SOFR linked consolidated obligation. As noted throughout this report, many of the Bank’s assets and liabilities are indexed to LIBOR. The Bank is evaluating the potential impact of the possible replacement of the LIBOR benchmark interest rate, including the possibility of SOFR as the dominant replacement. The market transition away from LIBOR is expected to be gradual and complicated, including the development of term and credit adjustments to accommodate differences between LIBOR and alternative reference rates such as SOFR. Introduction of an alternative rate also may introduce additional basis risk for market participants including the Bank as an alternative index is utilized along with LIBOR. There can be no guarantee that alternatives may or may not be developed with additional complications. The Bank is not able to predict whether LIBOR will cease to be available after 2021, whether SOFR will become a widely accepted benchmark in place of LIBOR, or what the impact of a possible transition to SOFR or an alternate replacement will have on the Bank’s business, financial condition, or results of operations.

The loss of key personnel or difficulties recruiting and retaining qualified personnel could adversely impact the Bank’s business and financial results.

The Bank relies on key personnel for many of its functions and has a relatively small workforce, given the size and complexity of its business. The Bank’s ability to retain such personnel is important for it to conduct its operations and measure and maintain risk and financial controls. Additionally, the Bank must continue to recruit, retain and motivate a qualified and diverse pool of employees, both to maintain the Bank’s current business, including succession planning, and to execute its strategic initiatives. If the Bank is unable to recruit, retain and motivate such employees, its business and financial performance may be adversely affected.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

The Bank owns approximately 235,514 square feet of office space at 1475 Peachtree Street, NE, Atlanta, Georgia 30309. The Bank occupies approximately 219,260 square feet of this space and leases the remaining space to tenants. The Bank leases an off-site backup facilities comprising approximately 9,402 square feet for the Bank’s disaster recovery center. The Bank also leases 2,993 square feet of office space located in Washington, D.C., which is shared with two other FHLBanks. The Bank’s management believes these facilities are well maintained and are adequate for the purposes for which they currently are used.


Item 3. Legal Proceedings.
The Bank is subject to various legal proceedings and actions from time to time in the ordinary course of its business. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of those matters presently known to the Bank will have a material adverse impact on the Bank’s financial condition or results of operations.
 
Item 4. Mine Safety Disclosure.

Not applicable.


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PART II

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Bank’s members own substantially all of the capital stock of the Bank. Former members and certain non-members, which own the Bank’s capital stock as a result of a merger or acquisition of the Bank’s member, own the remaining capital stock to support business transactions still carried on the Bank’s balance sheet. The Bank’s capital stock is not publicly traded or quoted, and there is no established marketplace for it, nor does the Bank expect a market to develop. The FHLBank Act and the Bank’s capital plan prohibit the trading of its capital stock, except in connection with merger or acquisition activity.

A member may request in writing that the Bank redeem its excess capital stock at par value. Excess capital stock is FHLBank capital stock not required to be held by the member to meet its minimum stock requirement under an FHLBank’s capital plan. Any such redemption request is subject to a five year redemption period after the Bank receives the request, subject to certain regulatory requirements and to the satisfaction of any ongoing stock investment requirements applicable to the member. In addition, any member may withdraw from membership upon five years written notice to the Bank. Subject to the member’s satisfaction of any outstanding indebtedness and other statutory requirements, the Bank redeems the member’s capital stock at par value upon withdrawal from membership. The Bank, in its discretion, may repurchase shares held by a member in excess of its required stock holdings, subject to certain limitations and thresholds in the Bank’s capital plan. The par value of all capital stock is $100 per share, and the operating threshold for daily excess capital stock repurchases is $100 thousand. As of February 28, 2019, the Bank had 851 member and non-member shareholders and 49 million shares of its capital stock outstanding (including mandatorily redeemable shares).

Finance Agency regulations prohibit any FHLBank from issuing dividends in the form of capital stock or otherwise issuing new excess capital stock if that FHLBank has excess capital stock greater than one percent of that FHLBank’s total assets or if issuing such dividends or new excess capital stock would cause that FHLBank to exceed the one percent excess capital stock limitation. As of December 31, 2018, the Bank’s excess capital stock did not exceed one percent of its total assets. Historically, the Bank has not issued dividends in the form of capital stock or issued new excess capital stock, and a member’s existing excess activity-based stock is applied to any activity-based stock requirements related to new advances.

The Bank’s board of directors has adopted a financial management policy that includes a targeted amount of retained earnings separate and apart from the restricted retained earnings account. For further discussion of those provisions of the financial management policy, dividends, and the Amended Joint Capital Enhancement Agreement (Capital Agreement) pursuant to which the restricted retained earnings account was established, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Capital.

Because only members, former members, and certain non-member institutions, not individuals, may own the Bank’s capital stock, the Bank has no equity compensation plans.

The Bank also issues standby letters of credit in the ordinary course of its business. From time to time, the Bank provides standby letters of credit to support members’ obligations, members’ standby letters of credit, or obligations issued to support unaffiliated, third-party offerings of notes, bonds, or other securities. The Bank issued $39.2 billion, $40.7 billion, and $25.1 billion in standby letters of credit in 2018, 2017, and 2016, respectively. To the extent that these standby letters of credit are securities for purposes of the Securities Act of 1933, the issuance of the standby letter of credit by the Bank is exempt from registration pursuant to section 3(a)(2) thereof.


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Item 6. Selected Financial Data.

The following table presents selected historical financial data of the Bank and should be read in conjunction with the Bank’s 2018 audited financial statements and related notes thereto and with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are included elsewhere in this Report. The following data, insofar as it relates to each of the years 2014 to 2018, have been derived from annual financial statements, including the statements of condition as of December 31, 2018 and 2017 and the related statements of income for the years ended December 31, 2018, 2017, and 2016 and notes thereto appearing elsewhere in this Report. The financial information presented in the following table and in the financial statements included in this Report is not necessarily indicative of the financial condition or results of operations of any other interim or annual periods (dollars in millions):
 
As of and for the Years Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
Statements of Condition (as of year end)
 
 
 
 
 
 
 
 
 
Total assets (1)
$
154,476

 
$
146,566

 
$
138,671

 
$
142,246

 
$
138,344

Advances
108,462

 
102,440

 
99,077

 
104,168

 
99,644

Mortgage loans held for portfolio
361

 
436

 
524

 
586

 
749

Allowance for credit losses on mortgage loans
(1
)
 
(1
)
 
(1
)
 
(2
)
 
(3
)
Investments (2)
44,309

 
40,378

 
36,510

 
35,175

 
36,502

Interest-bearing deposits
1,176

 
1,177

 
1,118

 
1,084

 
1,110

Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
  Discount notes (1) (3)
66,025

 
50,139

 
41,292

 
69,434

 
37,162

  Bonds (1) (3)
79,114

 
87,523

 
88,647

 
63,953

 
92,088

Total consolidated obligations, net (1) (3)
145,139

 
137,662

 
129,939

 
133,387

 
129,250

Mandatorily redeemable capital stock
1

 
1

 
1

 
14

 
19

Affordable Housing Program payable
85

 
77

 
69

 
63

 
65

Capital stock - putable
5,486

 
5,154

 
4,955

 
5,101

 
5,150

Retained earnings
2,110

 
2,003

 
1,892

 
1,840

 
1,746

Accumulated other comprehensive income
51

 
110

 
104

 
75

 
95

Total capital
7,647

 
7,267

 
6,951

 
7,016

 
6,991

Statements of Income (for the year ended)
 
 
 
 
 
 
 
 
 
Net interest income
561

 
157

 
334

 
243

 
323

Reversal of provision for credit losses
—

 
—

 
(1
)
 
(1
)
 
(5
)
Net impairment losses recognized in earnings
(3
)
 
(2
)
 
(3
)
 
(5
)
 
(3
)
Net losses on trading securities
(1
)
 
(5
)
 
(30
)
 
(61
)
 
(60
)
Net gains on derivatives and hedging activities
29

 
341

 
119

 
261

 
120

Standby letters of credit fees
25

 
26

 
28

 
28

 
26

Other income (4)
1

 
7

 
(3
)
 
2

 
22

Noninterest expense
150

 
136

 
137

 
135

 
132

Income before assessment
462

 
388

 
309

 
334

 
301

Affordable Housing Program assessment
46

 
39

 
31

 
33

 
30

Net income
416

 
349

 
278

 
301

 
271

Performance Ratios (%)
 
 
 
 
 
 
 
 
 
Return on equity (5)
5.54

 
4.97

 
4.08

 
4.63

 
4.11

Return on assets (6)
0.27

 
0.25

 
0.20

 
0.23

 
0.21

Net interest margin (7)
0.37

 
0.11

 
0.24

 
0.19

 
0.25

Regulatory capital ratio (as of year end) (8)
4.92

 
4.88

 
4.94

 
4.89

 
5.00

Equity to assets ratio (9)
4.93

 
4.97

 
4.88

 
4.91

 
5.09

Dividend payout ratio (10)
74.12

 
68.40

 
81.08

 
68.48

 
67.30


26
Table of Contents

____________
(1) 
The Bank adopted new accounting guidance related to the presentation of debt issuance costs effective January 1, 2016. As a result, $7 million of debt issuance costs that were included in other assets were reclassified as a reduction in the corresponding consolidated obligations balance on the Bank’s Statements of Condition as of December 31, 2015.
(2) Investments consist of interest-bearing deposits, securities purchased under agreements to resell, federal funds sold, and securities classified as trading, available-for-sale, and held-to-maturity.
(3) The amounts presented are the Bank’s primary obligations on consolidated obligations outstanding. The par value of the other FHLBanks’ outstanding consolidated obligations for which the Bank is jointly and severally liable was as follows (in millions):
December 31, 2018
$
886,081

December 31, 2017
896,441

December 31, 2016
859,361

December 31, 2015
771,948

December 31, 2014
718,218


(4) Other income includes service fees and other items. For the year ended December 31, 2016, amount includes a $6 million loss on litigation settlements, net. For the year ended December 31, 2014, amount includes a $15 million gain on extinguishment of debt and a $4 million gain on litigation settlements, net.
(5) Calculated as net income, divided by average total equity.
(6) Calculated as net income, divided by average total assets.
(7) Net interest margin is net interest income as a percentage of average earning assets.
(8) Regulatory capital ratio is regulatory capital, which does not include accumulated other comprehensive income, but does include mandatorily redeemable capital stock, as a percentage of total assets as of year end.
(9) Calculated as average total equity, divided by average total assets.
(10) Calculated as dividends declared during the year, divided by net income during the year.


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis relates to the Bank’s financial condition as of December 31, 2018 and 2017, and results of operations for the years ended December 31, 2018, 2017, and 2016. This section explains the changes in certain key items in the Bank’s financial statements from year to year, the primary factors driving those changes, the Bank’s risk management processes and results, known trends or uncertainties that the Bank believes may have a material effect on the Bank’s future performance, as well as how certain accounting principles affect the Bank’s financial statements.

This discussion should be read in conjunction with the Bank’s audited financial statements and related notes for the year ended December 31, 2018 included in Item 8 of this Report. Readers also should carefully review “Special Cautionary Notice Regarding Forward-looking Statements” and Item 1A, Risk Factors, for a description of the forward-looking statements in this Report and a discussion of the factors that might cause the Bank’s actual results to differ, perhaps materially, from these forward-looking statements.

Executive Summary

Financial Condition
As of December 31, 2018, total assets were $154.5 billion, an increase of $7.9 billion, or 5.40 percent, from December 31, 2017. This increase was primarily due to a $6.0 billion, or 5.88 percent, increase in advances, and a $3.9 billion, or 9.74 percent, increase in total investments.
As of December 31, 2018, total liabilities were $146.8 billion, an increase of $7.5 billion, or 5.41 percent, from December 31, 2017. This increase was primarily due to a $7.5 billion, or 5.43 percent, increase in consolidated obligations as a result of the increased funding and liquidity needs during the year.
As of December 31, 2018, total capital was $7.6 billion, an increase of $380 million, or 5.23 percent, from December 31, 2017. This increase was primarily due to an increase in the Bank’s retained earnings and subclass B2 activity-based capital stock resulting from an increase in the total outstanding advances during the year.


27
Table of Contents

Results of Operations
The Bank recorded net income of $416 million for 2018, an increase of $67 million, or 19.5 percent, from net income of $349 million for 2017. This increase in net income was primarily due to increased interest rates during the year.
Net interest income was $561 million for 2018, an increase of $404 million, from net interest income of $157 million for 2017. This increase in net interest income was primarily due to prepayments of previously restructured and redesignated advances during 2017. These prepayments resulted in $307 million of accelerated amortization during 2017, which reduced net interest income for the year. This decrease in net interest income was offset by a corresponding increase in net gains on derivatives and hedging activities, reflected in noninterest income. The remaining changes in net interest income were primarily due to an increase in interest rates during the year.
One way in which the Bank analyzes its performance is by comparing its annualized return on equity (ROE) to three-month average LIBOR. The Bank has chosen to measure ROE as a spread to average three-month LIBOR because the Bank has significant assets and liabilities priced to average three-month LIBOR. The Bank’s ROE was 5.54 percent for 2018, compared to 4.97 percent for 2017. This increase in ROE was primarily due to the increase in net income during the year. ROE spread to average three-month LIBOR was 323 basis points for 2018, compared to 371 basis points for 2017. This decrease in the ROE spread to three-month average LIBOR was primarily due to the increase in three-month average LIBOR.
The Bank’s interest-rate spread was 28 basis points for 2018, compared to seven basis points for 2017. This increase in the Bank’s interest-rate spread was primarily due to the increased prepayments of previously restructured and redesignated advances discussed above, which decreased net interest income during 2017.

Business Outlook
The Bank’s business model continues to be focused on enhancing the total value of the cooperative for its members by serving as their trusted advisor. The Bank focuses these efforts on offering readily available, competitively priced advances, a potential return on investment, support for community investment activities, and other credit and noncredit products and services. As part of the Bank’s cooperative structure, the Bank has chosen to operate with narrow margins, passing on its low funding costs to members, which causes the Bank’s profitability to be sensitive to changes in market conditions.
The state of the economy is a significant component in determining the Bank’s overall business outlook as it impacts advance demand, asset and collateral values, member financial stability, funding costs, and many other facets of the Bank’s portfolio. While the U.S. economy has continued to experience strong growth in 2018, factors such as interest rates, liquidity levels at member institutions, fiscal and monetary policies, performance of global economies, and regulatory changes could have a significant effect - either positive or negative - on the Bank’s financial performance.
Interest rates are also a significant factor on the Bank’s business outlook. While the Federal Reserve raised interest rates during 2017 and 2018, there is uncertainty as to whether rates in 2019 will move up, down, or remain stable. This uncertainty can impact the Bank’s interest rate risk management, profitability, and ROE. It can also impact member advance demand, as rate uncertainty can impact deposit levels at members.
Merger activity involving the Bank’s members can impact the Bank’s business outlook. As the financial industry continues to experience consolidation, as evidenced by the recent announcement of a merger involving two of the Bank’s larger borrowers, our membership base may increase or decrease, and our advance balance and other business could increase or decrease significantly depending upon the size of the financial institutions involved in the merger. While the Bank’s balance sheet is designed to expand and contract based upon advance demand, the Bank’s business could be affected by this merger activity, including as a result of a single event, such as the loss of a member’s business due to acquisition by a non-member.
Management continues to be focused and engaged on developing and implementing an effective transition away from LIBOR. Many of the Bank’s assets and liabilities are indexed to LIBOR, and many of the Bank’s derivative instruments are swapped to LIBOR-based rates and indices. In addition to transitioning these items to an alternative rate, the transition will also require changes to the Bank’s information, operational, and modeling systems. All of these actions involve risks and considerable time and resources. The risks involved with the transition, and the uncertainty given that the market has not yet identified one standard alternative benchmark, can impact the Bank’s business outlook.


28
Table of Contents

Financial Condition
The following table presents the distribution of the Bank’s total assets, liabilities, and capital by major class as of the dates indicated (dollars in millions). These items are discussed in more detail below.
 
 
As of December 31,
 
 
 
 
 
2018
 
2017
 
Increase (Decrease)
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
Amount
 
Percent
Advances
$
108,462

 
70.21
 
$
102,440

 
69.89
 
$
6,022

 
5.88

Investment securities
24,799

 
16.05
 
26,322

 
17.96
 
(1,523
)
 
(5.78
)
Other investments
19,510

 
12.63
 
14,056

 
9.59
 
5,454

 
38.80

Mortgage loans, net
360

 
0.23
 
435

 
0.30
 
(75
)
 
(17.36
)
Loan to another FHLBank
500

 
0.33
 
200

 
0.14
 
300

 
150.00

Other assets
845

 
0.55
 
3,113

 
2.12
 
(2,268
)
 
(72.85
)
Total assets
$
154,476

 
100.00
 
$
146,566

 
100.00
 
$
7,910

 
5.40

Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
  Discount notes
$
66,025

 
44.97
 
$
50,139

 
35.99
 
$
15,886

 
31.69

  Bonds
79,114

 
53.88
 
87,523

 
62.83
 
(8,409
)
 
(9.61
)
Deposits
1,176

 
0.80
 
1,177

 
0.85
 
(1
)
 
(0.10
)
Other liabilities
514

 
0.35
 
460

 
0.33
 
54

 
11.56

Total liabilities
$
146,829

 
100.00
 
$
139,299

 
100.00
 
$
7,530

 
5.41

Capital stock
$
5,486

 
71.74
 
$
5,154

 
70.93
 
$
332

 
6.43

Retained earnings
2,110

 
27.59
 
2,003

 
27.56
 
107

 
5.38

Accumulated other comprehensive income
51

 
0.67
 
110

 
1.51
 
(59
)
 
(53.73
)
Total capital
$
7,647

 
100.00
 
$
7,267

 
100.00
 
$
380

 
5.23


Advances

The following table presents the Bank’s advances outstanding by year of maturity and the related weighted-average interest rate (dollars in millions):
 
As of December 31,
 
2018
 
2017
 
Amount
 
Weighted-average Interest Rate (%)
 
Amount
 
Weighted-average Interest Rate (%)
Overdrawn demand deposit accounts
$
33

 
2.50
 
$
—

 
—
Due in one year or less
72,300

 
2.50
 
60,794

 
1.51
Due after one year through two years
13,298

 
2.52
 
10,780

 
1.70
Due after two years through three years
5,403

 
2.65
 
14,210

 
1.68
Due after three years through four years
4,678

 
2.56
 
4,162

 
2.22
Due after four years through five years
3,997

 
2.81
 
3,729

 
2.19
Due after five years
8,705

 
3.30
 
8,574

 
2.92
Total par value
108,414

 
2.59
 
102,249

 
1.72
Discount on AHP advances
(4
)
 
 
 
(4
)
 
 
Discount on EDGE (1) advances
(2
)
 
 
 
(3
)
 
 
Hedging adjustments
54

 
 
 
198

 
 
Total
$
108,462

 
 
 
$
102,440

 
 
____________ 
(1) Economic Development and Growth Enhancement Program

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Table of Contents

Advances outstanding as of December 31, 2018 increased by 5.88 percent, compared to December 31, 2017. As a result of shareholder demand, the majority of new advances in 2018 were short-term advances. As of December 31, 2018 and 2017, 59.6 percent and 57.9 percent, respectively, of the Bank’s advances were fixed-rate. However, the Bank may simultaneously enter into derivatives with the issuance of advances to convert the rates, in effect, into short-term variable interest rates, the majority of which are based on LIBOR. As of December 31, 2018 and 2017, 45.3 percent and 42.1 percent, respectively, of the Bank’s fixed-rate advances were swapped, and 0.47 percent and 0.27 percent, respectively, of the Bank’s variable-rate advances were swapped. The Bank also offers variable-rate advances that may be tied to indices such as the federal funds rate, prime rate, SOFR, or constant maturity swap rates.

The Bank’s 10 largest borrowing member institutions had 74.0 percent of the Bank’s total advances outstanding as of December 31, 2018. Further information regarding the Bank’s 10 largest borrowing member institutions and breakdown of their individual advance balances as of December 31, 2018 is contained in Item 1, Business—Credit Products—Advances. Management believes that the Bank holds sufficient collateral, on a member-specific basis, to secure the advances to all borrowers, including these 10 institutions, and the Bank does not expect to incur any credit losses on these advances.

Supplementary financial data on the Bank’s advances is set forth under Item 8, Financial Statements and Supplementary Information (Unaudited).

Investments
The following table presents more detailed information regarding investments held by the Bank (dollars in millions).
 
 
As of December 31,
 
Increase (Decrease)
 
2018
 
2017
 
Amount    
 
Percent    
Investment securities:
 
 
 
 
 
 
 
State or local housing agency debt obligations
$
1

 
$
1

 
$
—

 
(22.56
)
Government-sponsored enterprises debt obligations
2,727

 
5,406

 
(2,679
)
 
(49.55
)
Mortgage-backed securities:
 
 
 
 
 
 
 
    U.S. agency obligations-guaranteed residential
118

 
157

 
(39
)
 
(24.53
)
    Government-sponsored enterprises residential
9,304

 
9,357

 
(53
)
 
(0.58
)
    Government-sponsored enterprises commercial
11,368

 
9,729

 
1,639

 
16.84

    Private-label residential
1,281

 
1,672

 
(391
)
 
(23.34
)
   Total mortgage-backed securities
22,071

 
20,915

 
1,156

 
5.53

Total investment securities
24,799

 
26,322

 
(1,523
)
 
(5.78
)
Other investments:
 
 
 
 
 
 
 
Interest-bearing deposits (1)
6,782

 
2,176

 
4,606

 
211.70

Securities purchased under agreements to resell
3,750

 
2,500

 
1,250

 
50.00

Federal funds sold
8,978

 
9,380

 
(402
)
 
(4.29
)
Total other investments
19,510

 
14,056

 
5,454

 
38.80

Total investments
$
44,309

 
$
40,378

 
$
3,931

 
9.74

____________ 
(1) 
Interest-bearing deposits include a $409 million and $401 million business money market account with Branch Banking and Trust Company, one of the Bank’s 10 largest borrowers, as of December 31, 2018 and 2017, respectively, and a $46 million business money market account with United Bank one of the Bank’s 10 largest borrowers as of December 31, 2017.

The increase in total investments was primarily due to an increase in total other investments from December 31, 2017 to December 31, 2018 as the Bank positioned itself to meet new Finance Agency liquidity requirements. Additionally, the amount held in other investments will vary each day based on the Bank’s liquidity needs as a result of advances demand, the earnings rates, and the availability of high quality counterparties in the federal funds market.
 
The Finance Agency regulations prohibit an FHLBank from purchasing MBS and asset-backed securities if its investment in such securities would exceed 300 percent of the FHLBank’s previous month-end regulatory capital on the day it would purchase the securities. The Bank was in compliance with this regulatory requirement as of December 31, 2018 and 2017, as these investments amounted to 290 percent of regulatory capital.
Refer to Note 6—Available-for-sale Securities and Note 7—Held-to-maturity Securities to the Bank’s 2018 audited financial statements for information on securities with unrealized losses as of December 31, 2018 and 2017.

30
Table of Contents

The Bank evaluates its individual investment securities for other-than-temporary impairment on a quarterly basis, as described in Note 8—Other-than-temporary Impairment to the Bank’s 2018 audited financial statements.

Mortgage Loans Held for Portfolio
The decrease in mortgage loans held for portfolio from December 31, 2018 to December 31, 2017 was primarily due to the maturity and prepayments of these assets during the year.
Members that sold mortgage loans to the Bank were located primarily in the southeastern United States; therefore the Bank’s conventional mortgage loan portfolio was concentrated in that region as of December 31, 2018 and 2017. The following table presents the percentage of unpaid principal balance of conventional residential mortgage loans held for portfolio for the five largest state concentrations.
 
 
As of December 31,
 
2018
 
2017
 
Percent of Total
 
Percent of Total
Florida
22.76

 
23.14

South Carolina
20.40

 
20.80

Georgia
10.12

 
10.22

Virginia
11.23

 
10.70

North Carolina
8.19

 
8.62

All other
27.30

 
26.52

Total
100.00

 
100.00


Supplementary financial data on the Bank’s mortgage loans is set forth under Item 8, Financial Statements and Supplementary Data—Supplementary Financial Information (Unaudited).

Consolidated Obligations
The Bank funds its assets primarily through the issuance of consolidated obligation bonds and consolidated obligation discount notes. The increase in consolidated obligations from December 31, 2017 to December 31, 2018 was a result of increased advance demand and other funding and liquidity needs during the year. Consolidated obligation issuances financed 94.0 percent of the $154.5 billion in total assets as of December 31, 2018, remaining relatively stable compared to the financing ratio of 93.9 percent as of December 31, 2017.
Consolidated obligations outstanding were primarily variable rate as of December 31, 2018 and 2017. The Bank often simultaneously enters into derivatives with the issuance of consolidated obligation bonds to convert the interest rates, in effect, into short-term variable interest rates, usually based on LIBOR. As of December 31, 2018 and 2017, 80.7 percent and 80.8 percent, respectively, of the Bank’s fixed-rate consolidated obligation bonds were swapped. None of the Bank’s variable-rate consolidated obligation bonds were swapped as of December 31, 2018 and 2017. None of the Bank’s fixed-rate consolidated obligation discount notes were swapped as of December 31, 2018 and 4.78 percent of the Bank’s fixed-rate consolidated obligation discount notes were swapped as of December 31, 2017.
Supplementary financial data on the Bank’s short-term borrowings is set forth under Item 8, Financial Statements and Supplementary Data—Supplementary Financial Information (Unaudited).

Deposits

The Bank offers demand and overnight deposit programs to members and qualifying non-members primarily as a liquidity management service. In addition, a member that services mortgage loans may deposit funds in the Bank that are collected in connection with the mortgage loans, pending disbursement of those funds to the owners of the mortgage loans. For demand deposits, the Bank pays interest at the overnight rate. Most of these deposits represent member liquidity investments, which members may withdraw on demand. Therefore, the total account balance of the Bank’s deposits may fluctuate significantly. As a matter of prudence, the Bank typically invests deposit funds in liquid short-term assets. Member loan demand, deposit flows, and liquidity management strategies influence the amount and volatility of deposit balances carried with the Bank.


31
Table of Contents

Capital
The FHLBank Act and Finance Agency regulations specify that each FHLBank must meet certain minimum regulatory capital standards. The Bank must maintain (1) total regulatory capital in an amount equal to at least four percent of its total assets; (2) leverage capital in an amount equal to at least five percent of its total assets; and (3) permanent capital in an amount equal to at least its regulatory risk-based capital requirement. Permanent capital is defined by the FHLBank Act and applicable regulations as the sum of paid-in capital for Class B stock and retained earnings. Mandatorily redeemable capital stock is considered capital for regulatory purposes. These regulatory capital requirements, and the Bank’s compliance with these requirements, are presented in detail in Note 14—Capital and Mandatorily Redeemable Capital Stock to the Bank’s 2018 audited financial statements.
Finance Agency regulations establish criteria for four capital classifications, based on the amount and type of capital held by an FHLBank, as follows:
•
Adequately Capitalized - FHLBank meets or exceeds both risk-based and minimum capital requirements;
•
Undercapitalized - FHLBank does not meet one or both of its risk-based or minimum capital requirements;
•
Significantly Undercapitalized - FHLBank has less than 75 percent of one or both of its risk-based or minimum capital requirements; and
•
Critically Undercapitalized - FHLBank total capital is two percent or less of total assets.
Under the regulations, the Director of the Finance Agency (Director) will make a capital classification for each FHLBank at least quarterly and notify the FHLBank in writing of any proposed action and provide an opportunity for the FHLBank to submit information relevant to such action. The Director is permitted to make discretionary classifications. An FHLBank must provide written notice to the Finance Agency within 10 days of any event or development that has caused or is likely to cause its permanent or total capital to fall below the level required to maintain its most recent capital classification or reclassification. In the event that an FHLBank is not adequately capitalized, the regulations delineate the types of prompt corrective actions that the Director may order, including submission of a capital restoration plan by the FHLBank and restrictions on its dividends, stock redemptions, executive compensation, new business activities, or any other actions the Director determines will ensure safe and sound operations and capital compliance by the FHLBank. On December 13, 2018, the Bank received notification from the Director that, based on September 30, 2018 data, the Bank meets the definition of “adequately capitalized.”

All of the FHLBanks entered into a Capital Agreement, which is intended to enhance the capital position of each FHLBank. Under the Capital Agreement, each FHLBank allocates 20 percent of its net income each quarter to a separate restricted retained earnings account until the account balance equals at least one percent of the FHLBank’s average balance of outstanding consolidated obligations for the previous quarter. Restricted retained earnings are not available to pay dividends and are presented separately on the Statements of Condition.

Finance Agency regulations require the Bank to perform annual stress tests under various scenarios and publicly disclose a summary of the stress test results for the severely adverse scenario. The Bank filed the results of its stress test with the Finance Agency on August 30, 2018, and publicly disclosed a summary of the adverse scenario results on November 15, 2018.

Under the Bank’s financial management policy, the Bank targets to maintain (1) a capital-to-assets ratio of 4.50 percent to 5.00 percent; (2) a retained earnings account balance equal to the restricted retained earnings account balance, plus extremely stressed scenario losses; and (3) unrestricted retained earnings greater than the retained earnings target. The Bank believes that daily excess stock repurchases and consistent dividends give members greater certainty of a return of their principal or the receipt of a dividend, which in turn may have a positive impact on members’ appetite for advances. The Bank seeks to pay an amount of dividends each quarter that are consistent with an attractive rate of return on capital to its member shareholders relative to an established benchmark, LIBOR, after providing for retained earnings as discussed above. Historically, the Bank’s dividend rate has increased with increases in LIBOR, while the spread between the dividend rate and LIBOR may shrink. Conversely, the dividend rate may decrease during periods of lower LIBOR, while the spread may increase. The Bank’s ability to maintain dividends consistent with its recent trend depends on LIBOR remaining relatively stable, the Bank’s actual financial performance, its ability to maintain adequate retained earnings, other factors described in Item 1A, Risk Factors, and the discretion of the Bank’s board of directors. Information about dividends paid by the Bank during 2018, 2017, and 2016, is contained in Note 14—Capital and Mandatorily Redeemable Capital Stock to the Bank’s 2018 audited financial statements.


32
Table of Contents

Results of Operations

The following is a discussion and analysis of the Bank’s results of operations for the years ended December 31, 2018, 2017, and 2016.

Net Income
The following table presents the Bank’s significant income items for the years ended December 31, 2018, 2017, and 2016, and provides information regarding the changes during those years (dollars in millions). These items are discussed in more detail below.
 
 
 
 
 
 
 
 
Increase (Decrease)    
 
For the Years Ended December 31,
 
2018 vs. 2017
 
2017 vs. 2016
 
2018
 
2017
 
2016
 
Amount
 
Percent
 
Amount
 
Percent
Net interest income
$
561

 
$
157

 
$
334

 
$
404

 
257.96

 
$
(177
)
 
(53.12
)
Reversal of provision for credit losses
—

 
—

 
(1
)
 
—

 
73.29

 
1

 
40.48

Noninterest income
51

 
367

 
111

 
(316
)
 
(86.04
)
 
256

 
228.54

Noninterest expense
150

 
136

 
137

 
14

 
10.02

 
(1
)
 
(0.86
)
Affordable Housing Program assessment
46

 
39

 
31

 
7

 
19.46

 
8

 
25.11

Net income
$
416

 
$
349

 
$
278

 
$
67

 
19.46

 
$
71

 
25.26



Net Interest Income

The primary source of the Bank’s earnings is net interest income. Net interest income equals interest earned on assets (including member advances, mortgage loans, MBS held in portfolio, and other investments), less the interest expense incurred on liabilities (including consolidated obligations, deposits, and other borrowings). Also included in net interest income are miscellaneous related items such as prepayment fees, the amortization of debt issuance discounts, concession fees, and certain derivative instruments and hedging activities related adjustments. The Bank also recognizes significant improvements in expected cash flows related to other-than-temporary impairment securities through net interest income as an adjustment to the yield on the investment securities.

As discussed above, net interest income includes components of hedging activity. When hedging relationships qualify for hedge accounting, the interest components of the hedging derivatives will be reflected in interest income or expense. When a hedging relationship is discontinued, the cumulative fair value adjustment on the hedged item will be amortized into interest income or expense over the remaining life of the asset or liability. The impact of hedging on net interest income was a decrease of $91 million, $536 million, and $442 million during the years ended December 31, 2018, 2017 and 2016, respectively.

The increase in net interest income during 2018, compared to 2017, was primarily due to increased prepayments of previously restructured and redesignated advances during 2017. These prepayments resulted in $307 million of accelerated amortization during 2017. This accelerated amortization reduced net interest income and was offset by a corresponding increase in net gains on derivatives and hedging activities, reflected in noninterest income. The 2017 prepayments of previously restructured and redesignated advances primarily relate to a single member institution. The remaining change in net interest income was primarily due to an increase in interest rates, which impacted interest-earning assets more than the offsetting increase in consolidated obligation expense.

The decrease in net interest income during 2017, compared to 2016, was primarily due to the increased prepayments of restructured and redesignated advances during 2017, as discussed above. These prepayments resulted in $307 million of accelerated amortization during 2017, compared to $16 million of accelerated amortization during 2016. This accelerated amortization reduced net interest income during the years. The remaining change in net interest income was due to an increase in interest rates, which impacted interest-earning assets more than the offsetting increase in consolidated obligation expense.


33
Table of Contents

The following table presents key components of net interest income for the years presented (in millions):
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
Interest income:
 
 
 
 
 
   Advances
$
2,227

 
$
817

 
$
586

   Investments
1,075

 
677

 
489

   Mortgage loans
21

 
25

 
31

Total interest income
3,323

 
1,519

 
1,106

 
 
 
 
 
 
Interest expense:
 
 
 
 
 
   Consolidated obligations
2,743

 
1,351

 
768

   Interest-bearing deposits
19

 
11

 
4

Total interest expense
2,762

 
1,362

 
772

Net interest income
$
561

 
$
157

 
$
334



34
Table of Contents

The following table presents spreads between the average yield on total interest-earning assets and the average cost of interest-bearing liabilities for the years ended December 31, 2018, 2017, and 2016 (dollars in millions). The interest-rate spread is affected by the inclusion or exclusion of net interest income or expense associated with the Bank’s derivatives. For example, as discussed above, if the derivatives qualify for fair-value hedge accounting under GAAP, the interest income or expense associated with the derivatives is included in net interest income and in the calculation of interest-rate spread. If the derivatives do not qualify for fair-value hedge accounting under GAAP, the interest income or expense associated with the derivatives is excluded from net interest income and from the calculation of interest-rate spread and is recorded in “Noninterest income (loss)” as “Net gains on derivatives and hedging activities.” Amortization associated with some hedging-related basis adjustments is also reflected in net interest income, which affects interest-rate spread.

The Bank’s interest-rate spread was 28 basis points, seven basis points, and 21 basis points for 2018, 2017, and 2016, respectively. The decrease in interest-rate spread during 2017, compared to 2016 and 2018, was primarily due to the increased prepayments of previously restructured and redesignated advances during 2017 as previously discussed, which decreased net interest income during 2017.

 
For the Years Ended December 31,
 
2018
 
2017
 
2016
 
Average        
Balance
 
Interest
 
Yield/    
Rate
(%)
 
Average        
Balance
 
Interest
 
Yield/    
Rate
(%)
 
Average        
Balance
 
Interest
 
Yield/    
Rate
(%)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (1)
$
4,856

 
$
101

 
2.08
 
$
1,751

 
$
29

 
1.68
 
$
2,718

 
$
17

 
0.64
Securities purchased under agreements to resell
2,410

 
46

 
1.92
 
1,023

 
10

 
1.01
 
992

 
4

 
0.38
Federal funds sold
11,818

 
223

 
1.89
 
12,016

 
128

 
1.06
 
8,501

 
36

 
0.42
Investment securities (2)
26,067

 
705

 
2.71
 
25,671

 
510

 
1.99
 
26,696

 
432

 
1.62
Advances
105,674

 
2,227

 
2.11
 
97,988

 
817

 
0.83
 
98,396

 
586

 
0.60
Mortgage loans (3)
396

 
21

 
5.28
 
486

 
25

 
5.20
 
520

 
31

 
5.96
Loans to other FHLBanks
3

 
—

 
1.59
 
5

 
—

 
0.76
 
4

 
—

 
0.40
Total interest-earning assets
151,224

 
3,323

 
2.20
 
138,940

 
1,519

 
1.09
 
137,827

 
1,106

 
0.80
Allowance for credit losses on mortgage loans
(1
)
 
 
 
 
 
(1
)
 
 
 
 
 
(2
)
 
 
 
 
Other assets
1,131

 
 
 
 
 
1,999

 
 
 
 
 
1,881

 
 
 
 
Total assets
$
152,354

 
 
 
 
 
$
140,938

 
 
 
 
 
$
139,706

 
 
 
 
Liabilities and Capital
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (4)
$
1,067

 
19

 
1.74
 
$
1,173

 
11

 
0.92
 
$
1,190

 
4

 
0.31
Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
60,847

 
1,139

 
1.87
 
48,676

 
436

 
0.90
 
58,744

 
249

 
0.42
Bonds
82,175

 
1,604

 
1.95
 
83,198

 
915

 
1.10
 
70,877

 
519

 
0.73
Other borrowings
4

 
—

 
4.29
 
4

 
—

 
3.54
 
9

 
—

 
4.80
Total interest-bearing liabilities
144,093

 
2,762

 
1.92
 
133,051

 
1,362

 
1.02
 
130,820

 
772

 
0.59
Other liabilities
746

 
 
 
 
 
882

 
 
 
 
 
2,067

 
 
 
 
Total capital
7,515

 
 
 
 
 
7,005

 
 
 
 
 
6,819

 
 
 
 
Total liabilities and capital
$
152,354

 
 
 
 
 
$
140,938

 
 
 
 
 
$
139,706

 
 
 
 
Net interest income and net yield on interest-earning assets
 
 
$
561

 
0.37
 
 
 
$
157

 
0.11
 
 
 
$
334

 
0.24
Interest-rate spread
 
 
 
 
0.28
 
 
 
 
 
0.07
 
 
 
 
 
0.21
Average interest-earning assets to interest-bearing liabilities
 
 
 
 
104.95
 
 
 
 
 
104.43
 
 
 
 
 
105.36
___________ 
(1) 
Includes amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative counterparties.
(2) 
Includes trading securities at fair value and available-for-sale securities at amortized cost.
(3) 
Nonperforming mortgage loans are included in average balances used to determine average rate.
(4) 
Includes amounts recognized for the right to return cash collateral received under master netting agreements with derivative counterparties.


35
Table of Contents

Net interest income for the years presented was affected by changes in average balances (volume change) and changes in average rates (rate change) of interest-earning assets and interest-bearing liabilities. The following table presents the extent to which volume changes and rate changes affected the Bank’s interest income and interest expense (in millions). As presented in the table below, the overall changes in net interest income between 2018 and 2017 and between 2017 and 2016, were primarily rate related.
 
2018 vs. 2017
 
2017 vs. 2016
 
Volume (1)
 
Rate (1)
 
Increase (Decrease)    
 
Volume (1)
 
Rate (1)
 
Increase (Decrease)
Increase (decrease) in interest income:
 
 
 
 
 
 
 
 
 
 
 
 Interest-bearing deposits
$
63

 
$
9

 
$
72

 
$
(8
)
 
$
20

 
$
12

 Securities purchased under agreements to resell
22

 
14

 
36

 
—

 
6

 
6

 Federal funds sold
(2
)
 
97

 
95

 
20

 
72

 
92

 Investment securities
8

 
187

 
195

 
(17
)
 
95

 
78

 Advances
69

 
1,341

 
1,410

 
(2
)
 
233

 
231

Mortgage loans
(5
)
 
1

 
(4
)
 
(2
)
 
(4
)
 
(6
)
Total
155

 
1,649

 
1,804

 
(9
)
 
422

 
413

Increase (decrease) in interest expense:
 
 
 
 
 
 
 
 
 
 
 
 Interest-bearing deposits
(1
)
 
9

 
8

 
—

 
7

 
7

 Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
    Discount notes
131

 
572

 
703

 
(49
)
 
236

 
187

    Bonds
(11
)
 
700

 
689

 
102

 
294

 
396

Total
119

 
1,281

 
1,400

 
53

 
537

 
590

Increase (decrease) in net interest income
$
36

 
$
368

 
$
404

 
$
(62
)
 
$
(115
)
 
$
(177
)
____________ 
(1) 
Volume change is calculated as the change in volume multiplied by the previous rate, while rate change is calculated as the change in rate multiplied by the previous volume. The rate/volume change, calculated as the change in rate multiplied by the change in volume, is allocated between volume change and rate change at the ratio each component bears to the absolute value of its total.
Noninterest Income (Loss)
The following table presents the components of noninterest income (loss) (dollars in millions):
 
 
 
 
 
 
 
 
Increase (Decrease)
 
For the Years Ended December 31,
 
2018 vs. 2017
 
2017 vs. 2016
 
2018
 
2017
 
2016
 
Amount
 
Percent
 
Amount
 
Percent
Net impairment losses recognized in earnings
$
(3
)
 
$
(2
)
 
$
(3
)
 
$
(1
)
 
(61.92
)
 
$
1

 
15.12

Net losses on trading securities
(1
)
 
(5
)
 
(30
)
 
4

 
80.45

 
25

 
81.95

Net gains on derivatives and hedging activities
29

 
341

 
119

 
(312
)
 
(91.55
)
 
222

 
185.87

Standby letters of credit fees
25

 
26

 
28

 
(1
)
 
(4.35
)
 
(2
)
 
(3.23
)
Loss on litigation settlements, net
—

 
—

 
(6
)
 
—

 
—

 
6

 
100.00

Other
1

 
7

 
3

 
(6
)
 
(77.47
)
 
4

 
96.15

Total noninterest income
$
51

 
$
367

 
$
111

 
$
(316
)
 
(86.04
)
 
$
256

 
228.54


The decrease in total noninterest income during 2018, compared to 2017, was primarily due to increased prepayments of restructured and redesignated advances during 2017, which resulted in $307 million of accelerated amortization during 2017. This accelerated amortization reduced net interest income during 2017 and was offset by a corresponding increase in net gains on derivatives and hedging activities. The remaining changes in derivatives and hedging activities were primarily related to changes in interest rates.

The increase in total noninterest income during 2017, compared to 2016, was primarily due to the increased prepayments of restructured and redesignated advances during 2017, as discussed above. These prepayments resulted in $307 million of accelerated amortization during 2017, compared to $16 million of accelerated amortization during 2016. The remaining changes in derivatives and hedging activities were primarily related to changes in interest rates. Additionally, the decreased losses on trading securities were primarily due to a smaller trading securities portfolio in 2017, compared to 2016.


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Table of Contents

The following tables present the net effect of derivatives and hedging activity on the Bank’s results of operations (in millions): 
 
For the Year Ended December 31, 2018
 
Advances
 
Investments
 
Consolidated
Obligation
Bonds
 
Consolidated
Obligation
Discount
Notes
 
Balance Sheet         
 
Other(4)
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization or accretion of hedging activities in net interest income (1)
$
(28
)
 
$
—

 
$
(1
)
 
$
—

 
$
—

 
$
—

 
$
(29
)
Net interest settlements included in net interest income (2)
(20
)
 
—

 
(40
)
 
(2
)
 
—

 
—

 
(62
)
Total effect on net interest income
$
(48
)
 
$
—

 
$
(41
)
 
$
(2
)
 
$
—

 
$
—

 
$
(91
)
Net gains on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 Gains (losses) on fair value hedges
$
32

 
$
—

 
$
1

 
$
(1
)
 
$
—

 
$
—

 
$
32

 Losses (gains) on derivatives not receiving hedge accounting including net interest settlements
(1
)
 
1

 
—

 
—

 
1

 
—

 
1

Price alignment on derivatives
—

 
—

 
—

 
—

 
—

 
(4
)
 
(4
)
Total net gains (losses) on derivatives and hedging activities
31

 
1

 
1

 
(1
)
 
1

 
(4
)
 
29

Net losses on trading securities (3)
—

 
(1
)
 
—

 
—

 
—

 
—

 
(1
)
Total effect on noninterest income
$
31

 
$
—

 
$
1

 
$
(1
)
 
$
1

 
$
(4
)
 
$
28

____________ 
(1) Represents the amortization or accretion of hedging fair value adjustments for both open and closed hedge positions.
(2) Represents interest income or expense on derivatives included in net interest income.
(3) Includes only those gains or losses on trading securities or financial instruments held at fair value that have an economic derivative “assigned;” therefore, this line item may not agree to the income statement.
(4) Amount in “Other” includes the price alignment amount on derivatives for which variation margin is characterized as daily settled contract.
 
For the Year Ended December 31, 2017
 
Advances
 
Investments
 
Consolidated
Obligation
Bonds
 
Consolidated
Obligation
Discount
Notes
 
Balance Sheet         
 
Other(4)
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization or accretion of hedging activities in net interest income (1)
$
(356
)
 
$
—

 
$
2

 
$
—

 
$
—

 
$
—

 
$
(354
)
Net interest settlements included in net interest income (2)
(254
)
 
—

 
75

 
(3
)
 
—

 
—

 
(182
)
Total effect on net interest income
$
(610
)
 
$
—

 
$
77

 
$
(3
)
 
$
—

 
$
—

 
$
(536
)
Net gains on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 Gains on fair value hedges
$
340

 
$
—

 
$
2

 
$
1

 
$
—

 
$
—

 
$
343

 Losses on derivatives not receiving hedge accounting including net interest settlements
—

 
—

 
—

 
—

 
(3
)
 
—

 
(3
)
 Price alignment on derivatives
—

 
—

 
—

 
—

 
—

 
1

 
1

Total net gains (losses) on derivatives and hedging activities
340

 
—

 
2

 
1

 
(3
)
 
1

 
341

Net losses on trading securities (3)
—

 
(6
)
 
—

 
—

 
—

 
—

 
(6
)
Total effect on noninterest income
$
340

 
$
(6
)
 
$
2

 
$
1

 
$
(3
)
 
$
1

 
$
335

____________ 
(1) 
Represents the amortization or accretion of hedging fair value adjustments for both open and closed hedge positions.
(2) 
Represents interest income or expense on derivatives included in net interest income.
(3) 
Includes only those gains or losses on trading securities or financial instruments held at fair value that have an economic derivative “assigned;” therefore, this line item may not agree to the income statement.
(4) Amount in “Other” includes the price alignment amount on derivatives for which variation margin is characterized as daily settled contract.


37
Table of Contents

 
For the Year Ended December 31, 2016
 
Advances
 
Investments
 
Consolidated
Obligation
Bonds
 
Consolidated
Obligation
Discount
Notes
 
Balance Sheet         
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
 
 
Amortization or accretion of hedging activities in net interest income (1)
$
(140
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
(140
)
Net interest settlements included in net interest income (2)
(529
)
 
—

 
230

 
(3
)
 
—

 
(302
)
Total effect on net interest income
$
(669
)
 
$
—

 
$
230

 
$
(3
)
 
$
—

 
$
(442
)
Net gains on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) on fair value hedges
$
131

 
$
—

 
$
(8
)
 
$
(3
)
 
$
—

 
$
120

(Losses) gains on derivatives not receiving hedge accounting including net interest settlements
—

 
(2
)
 
2

 
—

 
(1
)
 
(1
)
Total net gains (losses) on derivatives and hedging activities
131

 
(2
)
 
(6
)
 
(3
)
 
(1
)
 
119

Net losses on trading securities (3)
—

 
(30
)
 
—

 
—

 
—

 
(30
)
Total effect on noninterest income
$
131

 
$
(32
)
 
$
(6
)
 
$
(3
)
 
$
(1
)
 
$
89

____________ 
(1) 
Represents the amortization or accretion of hedging fair value adjustments for both open and closed hedge positions.
(2) 
Represents interest income or expense on derivatives included in net interest income.
(3) 
Includes only those gains or losses on trading securities or financial instruments held at fair value that have an economic derivative “assigned;” therefore, this line item may not agree to the income statement.


Noninterest Expense and AHP Assessments
 
For the Years Ended December 31,
 
 Increase (Decrease)
 
2018
 
2017
 
2016
 
2018 vs. 2017
 
2017 vs. 2016
Noninterest expense:
 
 
 
 
 
 
 
 
 
Compensation and benefits
$
93

 
$
78

 
$
75

 
$
15

 
$
3

Cost of quarters
5

 
5

 
5

 
—

 
—

Other operating expenses
33

 
31

 
32

 
2

 
(1
)
Total operating expenses
131

 
114

 
112

 
17

 
2

Finance Agency and Office of Finance
15

 
15

 
15

 
—

 
—

Other
4

 
7

 
10

 
(3
)
 
(3
)
Total noninterest expense
150

 
136

 
137

 
14

 
(1
)
Affordable Housing Program assessment
46

 
39

 
31

 
7

 
8

Total noninterest expense and AHP assessment
$
196

 
$
175

 
$
168

 
$
21

 
$
7


The increase in total noninterest expense during 2018, compared to 2017, was primarily due to an increase in compensation and benefits expense primarily due to the Bank making an additional voluntary $13 million retirement plan contribution during 2018. Total noninterest expense remained relatively stable during 2017 and 2016. For 2016, “Other” includes $2 million of voluntary contributions to AHP in excess of regulatory requirements.

The changes in assessments each period was due to a change in income before assessments. If income before assessments increases (decreases), then assessments increases (decreases).

Liquidity and Capital Resources
Liquidity is necessary to satisfy members’ borrowing needs on a timely basis, repay maturing and called consolidated obligations, and meet other obligations and operating requirements. Many members rely on the Bank as a source of standby liquidity, so the Bank attempts to be in a position to meet member funding needs on a timely basis. The Bank complies with operational liquidity and contingent liquidity, as well as other regulatory requirements. The Bank also performs a separate and independent measure of liquidity, a 45-day liquidity measurement, to validate the level of liquidity reserves.
Finance Agency regulations require the Bank to maintain operational liquidity (generally, the ready cash and borrowing capacity available to meet the Bank’s intraday needs) and contingent liquidity in an amount sufficient to meet its liquidity needs for five business days if it is unable to access the capital markets. The Bank met these regulatory liquidity requirements throughout 2018. The Finance Agency has also provided liquidity guidance to the FHLBanks generally to provide ranges of

38
Table of Contents

days for which each FHLBank should maintain positive cash balances based upon different assumptions and scenarios. The Bank has operated within these ranges since the Finance Agency issued this guidance.
On August 23, 2018, the Finance Agency issued a final Advisory Bulletin on FHLBank liquidity that communicates the Finance Agency’s expectations with respect to the maintenance of sufficient liquidity to enable the FHLBanks to provide advances and letters of credit for members for a specified time without access to the capital markets or other unsecured funding sources. Portions of the Liquidity Guidance Advisory Bulletin were implemented on December 31, 2018, with further implementation to take place on March 31, 2019, and full implementation on December 31, 2019. Refer to “Legislative and Regulatory Developments” for a description of the Liquidity Guidance Advisory Bulletin and anticipated impact to the Bank.
The Bank has established an internal liquidity measurement separate from the Finance Agency requirements described above. The Bank performs a supplemental analysis to confirm that liquidity reserves are sufficient to service debt obligations for at least 45 days. This analysis assumes no access to debt market issuance and other management assumptions, which are completely independent of the operational and contingent liquidity calculation measured above. The Bank met its 45 day internal liquidity goal throughout 2018.
The Bank’s principal source of liquidity is consolidated obligation debt instruments. To provide additional liquidity, the Bank also may use other short-term borrowings, such as federal funds purchased, securities sold under agreements to repurchase, and loans from other FHLBanks. The Bank’s consolidated obligations are not obligations of the United States and are not guaranteed by either the United States or any government agency, but have historically received the same credit rating as the government bond credit rating of the United States. As a result, the Bank generally has comparatively stable access to funding through a diverse investor base at relatively favorable spreads to U.S. Treasury rates. The Bank’s income and liquidity would be adversely affected if it were not able to access the capital markets at competitive rates for an extended period.

The Bank maintained continual access to funding and adapted its debt issuance to meet the needs of its members throughout 2018. The Bank’s short-term funding was generally driven by member demand and was achieved through the issuance of consolidated discount notes and short-term consolidated bonds during 2018. Access to short-term debt markets has been reliable because investors, driven by increased liquidity preferences and risk aversion, including the effects of money market fund reform, have sought the Bank’s short-term debt as an asset of choice, which has led to advantageous funding opportunities and increased utilization of debt maturing in one year or less.

The Bank is focused on maintaining an adequate liquidity balance and a funding balance between its financial assets and financial liabilities and the FHLBanks work collectively to manage the system-wide liquidity and funding needs.  Management and the FHLBanks jointly monitor the combined refinancing risk primarily by tracking the maturities of financial assets and financial liabilities. The Bank monitors the funding balance between financial assets and financial liabilities and is committed to prudent risk management practices.  In managing and monitoring the amounts of assets that require refunding, the Bank considers contractual maturities of its financial assets, as well as certain assumptions regarding expected cash flows (i.e. estimated prepayments and scheduled amortizations). External factors including Bank member borrowing needs, supply and demand in the debt markets, and other factors may also affect the liquidity balances and the funding balance between financial assets and financial liabilities. See the notes to the Bank’s 2018 audited financial statements for more information regarding contractual maturities of certain of the Bank’s financial assets and liabilities.
Contingency plans are in place that prioritize the allocation of liquidity resources in the event of operational disruptions at the Bank or the Office of Finance. Under the FHLBank Act, the Secretary of Treasury has the authority, at his discretion, to purchase consolidated obligations up to an aggregate amount of $4.0 billion. No borrowings under this authority have been outstanding since 1977.

Off-balance Sheet Commitments
The Bank’s primary off-balance sheet commitments are as follows:
•
the Bank’s joint and several liability for all FHLBank consolidated obligations; and
•
the Bank’s outstanding commitments arising from standby letters of credit.
Should an FHLBank be unable to satisfy its payment obligation under a consolidated obligation for which it is the primary obligor, any of the other FHLBanks, including the Bank, could be called upon to repay all or any part of such payment obligation, as determined or approved by the Finance Agency. As of December 31, 2018, none of the other FHLBanks defaulted on their consolidated obligations; the Finance Agency was not required to allocate any obligation among the FHLBanks; and no amount of the joint and several obligation was fixed. Accordingly, the Bank has not recognized a liability for its joint and several obligations related to other FHLBanks’ consolidated obligations as of December 31, 2018 and 2017. As

39
Table of Contents

of December 31, 2018, the FHLBanks had $1.0 trillion in aggregate par value of consolidated obligations issued and outstanding, $145.5 billion of which was attributable to the Bank. No FHLBank has ever defaulted on its principal or interest payments under any consolidated obligation, and the Bank has never been required to make payments under any consolidated obligation as a result of the failure of another FHLBank to meet its obligations.
The Bank generally requires standby letters of credit to contain language permitting the Bank, upon annual renewal dates and prior notice to the beneficiary, to choose not to renew the standby letter of credit, which effectively terminates the standby letter of credit prior to its scheduled final expiration date. Based on the creditworthiness of the member applicant and appropriate additional fees, the Bank may issue standby letters of credit that have terms of longer than one year without annual renewals or that have no stated maturity and are subject to renewal on an annual basis.
Commitments to extend credit, including standby letters of credit, are agreements to lend. The Bank issues a standby letter of credit on behalf of a member in exchange for a fee. A member may use these standby letters of credit to facilitate a financing arrangement. Management regularly reviews its standby letter of credit pricing in light of several factors, including the Bank’s potential liquidity needs related to draws on its standby letters of credit. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to have an allowance for credit losses for these unfunded standby letters of credit as of December 31, 2018.
Refer to Note 19—Commitments and Contingencies to the Bank’s 2018 audited financial statements for more information about the Bank’s outstanding standby letters of credit.


Contractual Obligations

The following table presents the payment due dates or expiration terms of the Bank’s long-term contractual obligations and commitments as of December 31, 2018 (in millions).

 
One year or less
 
After one year
through three years
 
After three years
through five years
 
After five years
 
Total
Consolidated obligations bonds
$
55,386

 
$
16,679

 
$
5,313

 
$
1,888

 
$
79,266

Commitments to fund additional advances
48

 
—

 
—

 
—

 
48

Pension and post-retirement contributions
20

 
14

 
23

 
21

 
78

Operating leases
1

 
1

 
—

 
—

 
2

Mandatorily redeemable capital stock
—

 
—

 
1

 
—

 
1

Total
$
55,455

 
$
16,694

 
$
5,337

 
$
1,909

 
$
79,395


Refer to the respective footnotes in Item 8, Financial Statements and Supplementary Data for more information on each of the contractual obligations and commitments listed in the above table.

Critical Accounting Policies and Estimates

The preparation of the Bank’s financial statements in accordance with GAAP requires management to make a number of judgments and assumptions that affect the Bank’s reported results and disclosures. Several of the Bank’s accounting policies are inherently subject to valuation assumptions and other subjective assessments and are more critical than others to the Bank’s results. The Bank has identified the following policies that, given the assumptions and judgment used, are critical to an understanding of the Bank’s financial condition and results of operations:

•
Fair Value Measurements;

•
Allowance for Credit Losses; and

•
Derivatives and Hedging Activities.


40
Table of Contents

Fair Value Measurements

The Bank carries certain assets and liabilities, including investments classified as trading and available-for-sale, and all derivatives on the balance sheet at fair value. Fair value is defined 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, representing an exit price.

Fair values play an important role in the valuation of certain assets, liabilities, and hedging transactions of the Bank. Fair values are based on quoted market prices or market-based prices, if such prices are available, even in situations in which trading volume may be low when compared with prior periods as has been the case during the current market environment. If quoted market prices or market-based prices are not available, the Bank determines fair values based on valuation models that use discounted cash flows, using market estimates of interest rates and volatility.

Valuation models and their underlying assumptions are based on the best estimates of the Bank’s management with respect to:

•
market indices (primarily LIBOR and the Overnight Index Swap curve);

•
discount rates;

•
prepayments;

•
market volatility; and

•
other factors, including default and loss rates.

These assumptions, particularly estimates of market indices and discount rates, may have a significant effect on the reported fair values of assets and liabilities, including derivatives, and the income and expense related thereto. The use of different assumptions, as well as changes in market conditions, could result in a materially different net income and retained earnings. The assumptions used in the models are corroborated by and independently verified against market observable data where possible.

The Bank categorizes its financial instruments carried at fair value into a three-level classification in accordance with GAAP. The valuation hierarchy is based upon the transparency (observable or unobservable) of inputs to the valuation of an asset or liability as of the measurement date. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Bank’s market assumptions. The Bank utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

Refer to Note 18—Estimated Fair Values to the Bank’s 2018 audited financial statements for further discussion regarding how the Bank measures financial assets and financial liabilities at fair value.

Allowance for Credit Losses

The Bank is required to assess potential credit losses and establish an allowance for credit losses, if required, for each identified portfolio segment of financing receivables. A portfolio segment is the level at which the Bank develops and documents a systematic method for determining its allowance for credit losses. The Bank has established a reserve methodology for each of the following portfolio segments of financing receivables: advances and standby letters of credit, conventional residential mortgage loans, government-guaranteed or -insured residential mortgage loans, term federal funds sold, and term securities purchased under agreements to resell.

The Bank considers the application of these standards to its advances, standby letters of credit, mortgage loans, federal fund portfolio, and securities purchased under agreements to resell a critical accounting policy because determining the appropriate amount of the allowance for credit losses requires the Bank to make a number of assumptions. The Bank’s assumptions are based on information available as of the date of the financial statements. Actual results may differ from these estimates.

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Advances and Standby Letters of Credit

Finance Agency regulations require the Bank to obtain eligible collateral from borrowers to protect against potential credit losses. Eligible collateral is defined by statute and regulation. The Bank monitors the financial condition of borrowers and regularly verifies the existence and characteristics of a risk-based sample of mortgage collateral pledged to secure advances. Each borrower’s collateral requirements and the scope and frequency of its collateral verification reviews are dependent upon certain risk factors. Since its establishment in 1932, the Bank has never experienced a credit loss on an advance or standby letter of credit. Based on the collateral held as security, the Bank’s collateral policies, credit analysis, and the repayment history on advances, the Bank did not anticipate any credit losses on advances or standby letters of credit as of December 31, 2018 and 2017. Accordingly, the Bank has not recorded any allowance for credit losses on advances, nor has the Bank recorded any liability to reflect an allowance for credit losses for off-balance sheet credit exposure. Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk for further discussion regarding the Bank’s credit risk policies and practice.

Conventional Residential Mortgage Loans

Modified loans that are considered a troubled debt restructuring are evaluated individually for impairment when determining the related allowance for credit losses. This credit loss is measured by factoring in expected cash shortfalls (i.e., loss severity rate) incurred as of the reporting date, as well as the economic loss attributable to delaying the original contractual principal and interest due dates.

All other conventional residential mortgage loans are evaluated collectively for impairment. The allowance for these loans is determined by an analysis (performed at least quarterly) that includes segregating the portfolio into various aging groups. For loans that are 60 days or less past due, the Bank calculates a loss severity, default rate, and the expected loss based on individual loan characteristics. For loans that are more than 60 days past due, the allowance is determined using an automated valuation model.

Government-Guaranteed or -Insured Residential Mortgage Loans

The Bank also invests in government-guaranteed or -insured fixed-rate mortgage loans secured by one-to-four family residential properties. Government-guaranteed or -insured mortgage loans are mortgage loans guaranteed or insured by the VA or the FHA. Any losses from such loans are expected to be recovered from those entities. Any losses from such loans that are not recovered from those entities are absorbed by the servicers. Therefore, the Bank does not record an allowance for credit losses on government-guaranteed or -insured mortgage loans.

Term Federal Funds Sold
Term federal funds sold are generally short-term, their recorded balance approximates fair value, and they are transacted with counterparties that the Bank considers to be of investment quality. The Finance Agency defines investment quality as a security with adequate financial backing, so that full and timely payment of principal and interest on such security is expected, and there is minimal risk that the timely payment of principal and interest would not occur because of adverse changes in economic and financial conditions during the projected life of the security. If the Bank’s investment in federal funds sold is not paid when due, it is evaluated for purposes of an allowance for credit losses. All investments in federal funds sold are unsecured and were repaid or expected to be repaid according to the contracted terms as of December 31, 2018 and 2017. The Bank determined that no allowance for credit losses was needed for federal funds sold as of December 31, 2018 and 2017.

Term Securities Purchased Under Agreements to Resell

Securities purchased under agreements to resell are considered collateralized financing arrangements and effectively represent short-term loans transacted with counterparties that the Bank considers to be of investment quality. The terms of these loans are structured such that if the fair value of the underlying securities decrease below the fair value required as collateral, the counterparty must place an equivalent amount of additional securities as collateral or remit an equivalent amount of cash. If an agreement to resell is deemed to be impaired, the difference between the fair value of the collateral and the amortized cost of the agreement is recognized in earnings. Based upon the collateral held as security, the Bank determined that no allowance for credit losses was needed for the securities purchased under agreements to resell as of December 31, 2018 and 2017.


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See Note 2—Summary of Significant Accounting Policies—Allowance for Credit Losses to the Bank’s 2018 audited financial statements and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk for a further discussion of management’s estimate of credit losses.

Derivatives and Hedging Activities

General

The Bank records all derivatives at fair value on the balance sheet with changes in fair value recognized in current-period earnings. The Bank designates derivatives as either fair-value hedging instruments or non-qualifying hedging instruments for which hedge accounting is not applied. The Bank has not entered into any cash-flow hedges as of December 31, 2018 and 2017. The Bank uses derivatives in its risk management program for the following purposes:

•
conversion of a fixed rate to a variable rate;

•
conversion of a variable rate with a fixed component to another variable rate; and

•
macro hedging of balance sheet risks.

To qualify for hedge accounting, the Bank documents the following concurrently with the execution of each hedging relationship:

•
the hedging strategy;

•
identification of the hedging instrument and the hedged item;

•
determination of the appropriate accounting designation;

•
the method used for the determination of effectiveness for transactions qualifying for hedge accounting; and

•
the method for recording ineffectiveness for hedging relationships.

The Bank also evaluates each debt issuance, advance made, and financial instrument purchased to determine whether the cash item contains embedded derivatives that meet the criteria for bifurcation. If, after evaluation, it is determined that an embedded derivative must be bifurcated, the Bank will measure the fair value of the embedded derivative.

Assessment of Hedge Effectiveness

An assessment must be made to determine the effectiveness of qualifying hedging relationships. To make such an assessment, the Bank either uses (1) the short-cut method; or (2) the long-haul method.

If the hedging instrument is a swap and meets specific criteria, the hedging relationship may qualify for the short-cut method of assessing effectiveness. The short-cut method allows for an assumption of no ineffectiveness, which means that the change in the fair value of the hedged item is assumed to be equal and offsetting to the change in fair value of the hedging instrument. For periods beginning after May 31, 2005, the Bank determined that it would no longer apply the short-cut method to new hedging relationships.

The long-haul method of effectiveness is used to assess effectiveness for hedging relationships that qualify for hedge accounting but do not meet the criteria for the use of the short-cut method. The long-haul method requires separate valuations of both the hedged item and the hedging instrument. If the hedging relationship is determined to be highly effective, the change in fair value of the hedged item related to the designated risk is recognized in current period earnings in the same period as the change in fair value of the hedging instrument. If the hedging relationship is determined not to be highly effective, hedge accounting will either not be allowed or cease at that point. The Bank performs effectiveness testing on a monthly basis and uses statistical regression analysis techniques to determine whether a long-haul hedging relationship is highly effective.

Accounting for Ineffectiveness and Hedge De-designation

The Bank accounts for any ineffectiveness for all long-haul fair-value hedges using the dollar offset method. In the case of non-qualifying hedges that do not qualify for hedge accounting, the Bank reports only the change in the fair value of the derivative.

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The Bank reports all ineffectiveness for qualifying hedges and non-qualifying hedges in the “Noninterest income (loss)” section of the Statements of Income within “Net gains on derivatives and hedging activities.”

The Bank may discontinue hedge accounting for a hedging transaction (de-designation) if it fails effectiveness testing or for other asset-liability-management reasons. The Bank also treats modifications to hedged items as a discontinuance of a hedging relationship. When a hedging relationship is discontinued, the Bank will cease marking the hedged item to fair value and will amortize the cumulative basis adjustment resulting from hedge accounting. The Bank reports related amortization as interest income or expense over the remaining life of the associated hedged item. The associated derivative will continue to be marked to fair value through earnings until it matures or is terminated.

Recently Issued and Adopted Accounting Guidance
See Note 3—Recently Issued and Adopted Accounting Guidance to the Bank’s 2018 audited financial statements for a discussion of recently issued and adopted accounting guidance.

Legislative and Regulatory Developments

The legislative and regulatory environment in which the Bank and its members operate continues to evolve as a result of regulations enacted pursuant to the Housing Act and the Dodd-Frank Act. The Bank’s business operations, funding costs, rights, obligations, and/or the environment in which the Bank carries out its housing finance and community lending mission are likely to continue to be significantly impacted by these changes. Significant regulatory actions and developments for the period covered by this report are summarized below.

Final Rule on FHLBank Capital Requirements. On February 20, 2019, the Finance Agency published a final rule, effective January 1, 2020, that adopts, with amendments, the regulations of the Federal Housing Finance Board (predecessor to the Finance Agency) (“Finance Board”) pertaining to the capital requirements for the FHLBanks. The final rule carries over most of the prior Finance Board regulations without material change but substantively revises the credit risk component of the risk-based capital requirement, as well as the limitations on extensions of unsecured credit. The main revisions remove requirements that the FHLBanks calculate credit risk capital charges and unsecured credit limits based on ratings issued by a Nationally Recognized Statistical Rating Organization (NRSRO), and instead require that the FHLBanks establish and use their own internal rating methodology. The rule imposes a new credit risk capital charge for cleared derivatives. The final rule also revises the percentages used in the regulation’s tables to calculate credit risk capital charges for advances and for non-mortgage assets. The final rule also rescinds certain contingency liquidity requirements that were part of the Finance Board regulations, as these requirements are now addressed in an Advisory Bulletin on FHLBank Liquidity Guidance issued by the Finance Agency in 2018 (see “Advisory Bulletin 2018-07 Federal Home Loan Bank Liquidity Guidance” below).

The Bank does not expect this rule to materially affect its financial condition or results of operations.

FDIC Final Rule on Reciprocal Deposits. On February 4, 2019, the FDIC issued a final rule, effective March 6 2019, related to the treatment of “reciprocal deposits” that implements Section 202 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The final rule exempts, for certain insured depository institutions (“depositories”), certain reciprocal deposits -

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deposits acquired by a depository from a network of participating depositories that enables depositors to receive FDIC insurance coverage for the entire amount of their deposits - from being subject to FDIC restrictions on brokered deposits. Under the rule, well-capitalized and well-rated depositories are not required to treat reciprocal deposits as brokered deposits up to the lesser of twenty percent of their total liabilities or $5 billion. Reciprocal deposits held by depositories that are not well-capitalized and well-rated may also be excluded from brokered deposit treatment in certain circumstances.

The Bank continues to evaluate the potential impact of the final rule, but currently does not expect the rule to materially affect its financial condition or results of operations. The rule could, however, enhance depositories’ liquidity by increasing the attractiveness of deposits that exceed FDIC insurance limits. This could affect the demand for certain advance products.

Final Rule on Golden Parachute and Indemnification Payments. On December 20, 2018, the Finance Agency published a final rule, effective January 22, 2019, on golden parachute and indemnification payments (“Golden Parachute Rule”) to better align the Golden Parachute Rule with areas of the Finance Agency’s supervisory concern and reduce administrative and compliance burdens. The Golden Parachute Rule sets forth the standards the Finance Agency would take into consideration when limiting or prohibiting golden parachute and indemnification payments by an FHLBank or the Office of Finance to an entity-affiliated party when such entity is in a troubled condition, in conservatorship or receivership, or insolvent. The final rule amendments:

•
focus the standards on payments to and agreements with executive officers, broad-based plans covering large numbers of employees (such as severance plans), and payments made to non-executive-officer employees who may have engaged in certain types of wrongdoing; and
•
revise and clarify definitions, exemptions and procedures to implement the Finance Agency’s supervisory approach.
 
The Bank does not expect this rule to materially impact its financial condition or results of operations.

Final Rule Amending AHP Regulations. On November 28, 2018, the Finance Agency published a final rule, effective December 28, 2018, that amends the operating requirements of the FHLBanks’ AHP.  The final rule retains a scoring criteria method for awarding competitive AHP subsidies, but allows the Bank to create multiple pools of competitive funds in order to target specific affordable housing needs in the Bank’s district. The final rule amendments also:
 
•
revise the scoring criteria to create different and new scoring priorities;
•
authorize the Banks to establish separate competitive funds that target specific affordable housing needs in their districts;
•
remove the retention agreement requirement on owner-occupied units using the subsidy solely for rehabilitation
•
increase the per-household set-aside grant amount to $22,000 with an annual housing price inflation adjustment (up from the current fixed limit of $15,000);
•
clarify the requirements for remediating AHP noncompliance;
•
prohibit our Board of Directors from delegating approval of AHP strategic policy decisions to a committee; and
•
further align AHP monitoring with certain federal government funding programs.

The majority of the rule’s provisions take effect January 1, 2021, while the owner-occupied retention agreement requirements take effect January 1, 2020. The Bank does not expect this rule to materially affect its financial condition or results of operations.
 
Finance Agency Proposed Rule on Housing Goals. On November 2, 2018, the Finance Agency published a proposed rule that would amend the existing Federal Home Loan Bank Housing Goals regulation. The proposed amendments are intended to replace existing FHLBank housing goals with a more streamlined set of goals. While the existing housing goals are established retrospectively, the proposed rule would establish the levels of annual housing goals in advance, thereby eliminating uncertainty about housing goals from year-to-year. If adopted as proposed, the proposed amendments would:

•
eliminate the $2.5 billion acquired member assets mortgage purchase volume threshold that triggers the application of housing goals;
•
establish the target level for the new prospective acquired member assets mortgage purchase housing goal at 20 percent of total acquired member assets mortgage purchases that are for very low-income families, low-income families, or families in low-income areas, and require that at least 75 percent of all mortgage purchases that count toward the goal be for borrowers with incomes at or below 80 percent of the area median income;
•
establish a goal that 50 percent of acquired member assets program users meet the definition of “small members” whose assets do not exceed the “community financial institution” asset cap, which under Finance Agency regulations is currently $1.199 billion; and

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•
allow the FHLBanks to request FHFA approval of alternative target percentages for mortgage purchase housing goals and small member participation goals.

The Bank submitted a joint comment letter with the other FHLBanks on the proposed rule on January 29, 2019. The Bank continues to evaluate the proposed rule but does not expect this rule, if adopted as proposed, to materially affect its financial condition or results of operation.

Final Rule on Indemnification Payments. On October 4, 2018, the Finance Agency published a final rule, effective November 5, 2018 establishing standards for identifying when an indemnification payment by an FHLBank or the Office of Finance to an officer, director, employee, or other affiliated party in connection with an administrative proceeding or civil action instituted by the Finance Agency is prohibited or permissible. The rule generally prohibits these payments except in the following circumstances:

•
premiums for any commercial insurance or fidelity bonds for directors and officers, to the extent that the insurance or fidelity bond covers expenses and restitution, but not a judgment in favor of the Finance Agency or a civil money penalty imposed by the Finance Agency;
•
expenses of defending an action, subject to an agreement to repay those expenses in certain instances; and
•
amounts due under an indemnification agreement entered into with a named affiliated party on or prior to September 20, 2016 (the date the rule was proposed).

The rule also outlines the process the board of directors must undergo prior to making a permitted payment related to expenses of defending an action. The rule became effective November 5, 2018. The Bank does not expect the rule to materially affect its financial condition or results of operations.

Advisory Bulletin 2018-07 Federal Home Loan Bank Liquidity Guidance. On August 23, 2018, the Finance Agency issued an Advisory Bulletin on FHLBank liquidity (Liquidity Guidance AB) that communicates the Finance Agency’s expectations with respect to the maintenance of sufficient liquidity to enable the FHLBanks to provide advances and letters of credit for members for a specified time without access to the capital markets or other unsecured funding sources. The Liquidity Guidance AB rescinds the 2009 liquidity guidance previously issued by the Finance Agency. Contemporaneously with the issuance of the Liquidity Guidance AB, the Finance Agency issued a supervisory letter that identifies initial thresholds for measures of liquidity within the established ranges set forth in the Liquidity Guidance AB.

The Liquidity Guidance AB provides guidance on the level of on-balance sheet liquid assets related to base case liquidity. As part of the base case liquidity measure, the guidance also includes a separate provision covering off-balance sheet commitments from standby letters of credit. In addition, the Liquidity Guidance AB provides guidance related to asset/liability maturity funding gap limits.

With respect to base case liquidity, the Finance Agency revised previous guidance that required the FHLBanks to assume a 5-day period without access to capital markets due to a change in certain assumptions underlying that guidance. Under the Liquidity Guidance AB, FHLBanks are required to hold positive cash flow assuming no access to capital markets and assuming renewal of all maturing advances for a period of between ten to thirty calendar days. The Liquidity Guidance AB also sets forth the initial cash flow assumptions and formula to calculate base case liquidity. With respect to standby letters of credit, the guidance states that FHLBanks should maintain a liquidity reserve of between one percent and 20 percent of its outstanding standby letters of credit commitments.

With respect to funding gaps and possible asset and liability mismatches, the Liquidity Guidance AB provides guidance on maintaining appropriate funding gaps for three-month (-10 to -20 percent) and one-year (-25 to -35 percent) maturity horizons. The Liquidity Guidance AB provides for these limits to reduce the liquidity risks associated with a mismatch in asset and liability maturities, including an undue reliance on short-term debt funding, which may increase debt rollover risk.

The Liquidity Guidance AB also addresses liquidity stress testing, contingency funding plans and an adjustment to the FHLBank’s core mission achievement calculation. Portions of the Liquidity Guidance AB were implemented on December 31, 2018, with further implementation to take place on March 31, 2019 and full implementation on December 31, 2019. While the Banks is still analyzing the impact of the Liquidity Guidance AB, it may require the Bank to hold an additional amount of liquid assets to meet the new guidance, which could reduce the Bank’s ability to invest in higher-yielding assets. Further, the Bank’s cost of funding may increase if it is required to achieve the appropriate funding gap with longer-term funding. The Bank does not expect these changes to have a material effect on the Bank’s financial condition or results of operations or the Bank’s dividend rate.


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Adoption of Single-Counterparty Credit Limits for Bank Holding Companies and Foreign Banking Organizations by Board of Governors of the Federal Reserve System. On August 6, 2018, the Board of Governors of the Federal Reserve System published a final rule, effective October 5, 2018, establishing single-counterparty credit limits applicable to bank holding companies and foreign banking organizations with total consolidated assets of $250 billion or more, including global systemically important bank holding companies (GSIBs) in the United States. These entities are considered to be covered companies under the rule. The FHLBanks are themselves exempt from the limits and reporting requirements contained in this rule. However, credit exposure to individual FHLBanks must be monitored, and reported on as required, by any entity that is a covered company under this rule.

Under the final rule, a covered company and its subsidiaries may not have aggregate net credit exposure to an FHLBank and, if applicable, (in certain cases) economically interdependent entities in excess of 25 percent of the company’s tier 1 capital. Such credit exposure does not include advances from an FHLBank, but generally includes collateral pledged to an FHLBank in excess of a covered company’s outstanding advances. Also included towards a covered company’s net credit exposure is its investment in FHLBank capital stock and debt instruments, deposits with an FHLBank, FHLBank-issued letters of credit where a covered company is the named beneficiary, and other obligations to an FHLBank, including repurchase or reverse repurchase transactions net of collateral that create a credit exposure to an FHLBank. Intra-day exposures are exempt from the final rule.

With respect to the FHLBanks’ consolidated obligations held by a covered company, the company must monitor, and report on as required, its credit exposure for such obligations. It is not clear if the Federal Reserve will require consolidated obligations to be aggregated with other exposures to an FHLBank or the FHLBank System.
 
The final rule gives major covered companies (i.e., the GSIBs) until January 1, 2020 to comply, and all other covered companies will have until July 1, 2020 to comply. The Bank does not expect the rule to materially affect its financial condition or results of operations.



Risk Management
The Bank’s lending, investment and funding activities, and use of derivative hedge instruments expose the Bank to a number of risks. A robust risk management framework aligns risk-taking activities with the Bank’s strategies and risk appetite. A risk management framework also balances risks and rewards. The Bank’s risk management framework consists of risk governance, risk appetite, and risk management policies.
The Bank’s board of directors and management recognize that risks are inherent to the Bank’s business model and that the process of establishing a risk appetite does not imply that the Bank seeks to mitigate or eliminate all risk. By defining and managing to a specific risk appetite, the board of directors and management ensure that there is a common understanding of the Bank’s desired risk profile, which enhances strategic and tactical decisions. Additionally, the Bank aspires to (1) sustain a corporate culture of transparency, integrity, and adherence to legal and ethical obligations; and (2) achieve and exceed best practices in governance, ethics, and compliance.
The Bank’s board of directors and management have established a risk appetite statement and risk metrics for controlling and escalating actions based on the following eight continuing objectives that represent the foundation of the Bank’s strategic and tactical planning:

•
Capital Adequacy - maintain adequate levels of capital components (retained earnings and capital stock) that protect against the risks inherent on the Bank’s balance sheet and provide sufficient resiliency to withstand potential stressed losses.

•
Market Risk/Earnings - maintain an adequate ROE spread to average three-month LIBOR, while providing attractive funding for advance products, consistent payment of dividends, reliable access to funding, and maintenance of retained earnings in excess of stressed retained earnings targets within a conservative risk management framework.

•
Liquidity Risk - maintain sufficient liquidity and funding sources to allow the Bank to meet expected and unexpected obligations.

•
Credit and Concentration Risk - avoid credit losses by managing credit and collateral risk exposures within acceptable parameters. Achieve this objective through data-driven analysis (and when appropriate, perform shareholder-specific

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analysis), monitoring, and verification. Monitor through enhanced reporting any elevated risk concentrations, and when appropriate, manage and mitigate the increased risk.

•
Governance/Compliance/Legal - compliance with all applicable laws and regulations and manage other legal exposures.

•
Mission/Business Model - (1) deliver financial services and consistent access to affordable funds that are the size and structure shareholders desire, helping them to manage risk and extend credit in their communities, while achieving the Bank’s affordable housing mission goals; and (2) provide value through the consistent payment of dividends and the repurchasing of excess stock.

•
Operational Risk - (1) manage the key risks associated with operational availability of critical systems and services, the integrity and security of the Bank’s information, and the alignment of technology investment with key business objectives through enterprise-wide risk management practices and governance based on industry standards; (2) deliver an employee value proposition that allows the Bank to build, retain, engage, and develop staff to meet the evolving needs of the Bank’s key stakeholders and effectively manage enterprise-wide risks; and (3) manage the key risks associated with cyber security threats.

•
Reputation - recognize the importance of and promote positive awareness and perception of the Bank and its mission among key external stakeholders impacting the Bank’s ability to achieve its mission.

The board and management recognize that risk and risk producing events are dynamic and constantly being presented. Accordingly, the Bank believes that reporting, analyzing, and mitigating risks are paramount to successful corporate governance.

The RMP also governs the Bank’s approach to managing the above risks. The Bank’s board of directors reviews the RMP annually and approves amendments to the RMP from time to time as necessary. To promote compliance with the RMP, the Bank has established internal management committees to provide oversight of these risks. The Bank produces a comprehensive risk assessment report on an annual basis that is reviewed by the board of directors. In addition to the established risk appetite and the RMP, the Bank is also subject to Finance Agency regulations and policies regarding risk management.

Below is a more specific discussion of how the Bank manages its market risk, liquidity risk, credit risk, operational risk, and business risk within this risk management and appetite framework.

Market Risk

General

The Bank is exposed to market risk because changes in interest rates and spreads can have a direct effect on the value of the Bank’s assets and liabilities. As a result of the volume of its interest-earning assets and interest-bearing liabilities, the interest-rate risk component of market risk has the greatest impact on the Bank’s financial condition and results of operations.

Interest-rate risk represents the risk that the aggregate market value or estimated fair value of the Bank’s asset, liability, and derivative portfolios will decline as a result of interest-rate volatility or that net earnings will be affected significantly by interest-rate changes. Interest-rate risk can occur in a variety of forms including repricing risk, yield-curve risk, basis risk, and option risk. The Bank faces repricing risk whenever an asset and a liability reprice at different times and with different rates, resulting in interest-margin sensitivity to changes in market interest rates. Yield-curve risk reflects the possibility that changes in the shape of the yield curve may affect the market value of the Bank’s assets and liabilities differently because a liability used to fund an asset may be short-term, while the asset is long-term, or vice versa. Basis risk occurs when yields on assets and costs on liabilities are based on different bases, such as LIBOR, versus the Bank’s cost of funds. Different bases can move at different rates or in different directions, which can cause erratic changes in revenues and expenses. Option risk is presented by the optionality that is embedded in some assets and liabilities. Mortgage assets represent the primary source of option risk.

The primary goal of the Bank’s interest-rate risk measurement and management efforts is to control the above risks through prudent asset-liability management strategies so that the Bank may provide members with dividends that are consistently competitive with existing market interest rates on alternative short-term and variable-rate investments. The Bank attempts to manage interest-rate risk exposure by using appropriate funding instruments and hedging strategies. Hedging may occur at the micro level, for one or more specifically identified transactions, or at the macro level. Management evaluates the Bank’s macro hedge position and funding strategies on a daily basis and makes adjustments as necessary.


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The Bank measures its potential market risk exposure in a number of ways. These include asset, liability, and equity duration analyses; and earnings forecast scenario analyses that reflect repricing gaps. The Bank establishes tolerance limits for these financial metrics and uses internal models to measure each of these risk exposures at least monthly.

Use of Derivatives

The Bank enters into derivatives to reduce the interest-rate risk exposure inherent in otherwise unhedged assets and funding positions and attempts to do so in the most cost-efficient manner. The Bank does not engage in speculative trading of these instruments. The Bank’s derivative positions may include interest-rate swaps, options, swaptions, interest-rate cap and floor agreements, and forward contracts. These derivatives are used to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve risk-management objectives. Within its risk management strategy, the Bank uses derivative financial instruments in the following two ways:

•
As a fair-value hedge of an underlying financial instrument or a firm commitment. For example, the Bank uses derivatives to reduce the interest-rate net sensitivity of consolidated obligations, advances, and investments by, in effect, converting them to a short-term interest rate, usually based on LIBOR. The Bank also uses derivatives to manage embedded options in assets and liabilities and to hedge the market value of existing assets and liabilities. The Bank’s management reevaluates its hedging strategies from time to time and may change the hedging techniques used or adopt new strategies as deemed prudent.

•
As an asset-liability management tool, for which hedge accounting is not applied (non-qualifying hedge). The Bank may enter into derivatives that do not qualify for hedge accounting. As a result, the Bank recognizes the change in fair value and interest income or expense of these derivatives in the “Noninterest income (loss)” section of the Statements of Income as “Net gains on derivatives and hedging activities” with no offsetting fair-value adjustments of the hedged asset, liability, or firm commitment. Consequently, these transactions can introduce earnings volatility.


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The following table presents the notional amounts of derivative financial instruments (in millions). The category “Fair value hedges” represents hedge strategies for which hedge accounting is achieved. The category “Non-qualifying hedges” represents hedge strategies for which the derivatives are not in designated hedging relationships that formally meet the hedge accounting requirements under GAAP.
 
 
 
 
 
 
As of December 31,
 
 
 
 
 
 
2018
 
2017
Hedged Item / Hedging Instrument
 
Hedging Objective
 
Hedge
Accounting
Designation
 
Notional Amount
 
Notional Amount
Advances
 
 
 
 
 
 
 
 
Pay fixed, receive variable interest rate swap (without options)
 
Converts the advance’s fixed rate to a variable-rate index.
 
Fair value
hedges
 
$
3,716

 
$
4,722

Pay fixed, receive variable interest rate swap (with options)
 
Converts the advance’s fixed rate to a variable-rate index and offsets option risk in the advance.
 
Fair value
hedges
 
25,590

 
20,182

Pay variable with embedded features, receive variable interest rate swap (non-callable)
 
Reduces interest rate sensitivity and repricing gaps by converting the advance’s variable rate to a different variable-rate index and/or offsets embedded option risk in the advance.
 
Fair value
hedges
 
206

 
118

 
 
 
 
Total
 
29,512

 
25,022

Investments
 
 
 
 
 
 
 
 
Pay fixed, receive variable interest rate swap
 
Converts the investment’s fixed rate to a variable-rate index.
 
Non-qualifying
hedges
 
56

 
56

Consolidated Obligation Bonds
 
 
 
 
 
 
 
 
Receive fixed, pay variable interest rate swap (without options)
 
Converts the bond’s fixed rate to a variable-rate index.
 
Fair value
hedges
 
6,791

 
10,067

Receive fixed, pay variable interest rate swap (with options)
 
Converts the bond’s fixed rate to a variable-rate index and offsets option risk in the bond.
 
Fair value
hedges
 
14,124

 
7,585

 
 
 
 
Total
 
20,915

 
17,652

Consolidated Obligation Discount Notes
 
 
 
 
 
 
 
 
Receive fixed, pay variable interest rate swap
 
Converts the discount note’s fixed rate to a variable-rate index.
 
Fair value hedges
 
—

 
2,383

Balance Sheet
 
 
 
 
 
 
 
 
Pay fixed, receive variable interest rate swap
 
Converts the asset or liability fixed rate to a variable-rate index.
 
Non-qualifying
hedges
 
100

 
105

Interest rate cap or floor
 
Protects against changes in income of certain assets due to changes in interest rates.
 
Non-qualifying hedges
 
8,000

 
13,000

 
 
 
 
Total
 
8,100

 
13,105

Intermediary Positions and Other
 
 
 
 
 
 
Pay fixed, receive variable interest rate swap, and receive-fixed, pay variable interest rate swap
 
To offset interest rate swaps executed with members by executing interest rate swaps with derivatives counterparties.
 
Non-qualifying
hedges
 
852

 
715

Interest-rate cap or floor
 
To offset interest-rate caps or floors executed with members by executing interest-rate caps or floors with derivatives counterparties.
 
Non-qualifying hedges
 
83

 
—

 
 
 
 
Total
 
935

 
715

Total notional amount
 
 
 
 
 
$
59,518

 
$
58,933


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Interest-rate Risk Exposure Measurement

The Bank measures interest-rate risk exposure by various methods. The primary methods used are (1) calculating the effective duration of assets, liabilities, and equity under various scenarios; and (2) calculating the theoretical market value of equity. Effective duration, normally expressed in years or months, measures the price sensitivity of the Bank’s interest-bearing assets and liabilities to changes in interest rates. As effective duration lengthens, market-value changes become more sensitive to interest-rate changes. The Bank employs sophisticated modeling systems to measure effective duration.

Effective duration of equity aggregates the estimated sensitivity of market value for each of the Bank’s financial assets and liabilities to changes in interest rates. Effective duration of equity is computed by taking the market value-weighted effective duration of assets, less the market value-weighted effective duration of liabilities, and dividing the remainder by the market value of equity. Market value of equity is not indicative of the market value of the Bank as a going concern or the value of the Bank in a liquidation scenario. An effective duration gap is the measure of the difference between the estimated effective durations of portfolio assets and liabilities and summarizes the extent to which the estimated cash flows for assets and liabilities are matched, on average, over time and across interest-rate scenarios.

A positive effective duration of equity or a positive effective duration gap results when the effective duration of assets is greater than the effective duration of liabilities. A negative effective duration of equity or a negative effective duration gap results when the effective duration of assets is less than the effective duration of liabilities. A positive effective duration of equity or a positive effective duration gap generally indicates that the Bank has some exposure to interest-rate risk in a rising rate environment, and a negative effective duration of equity or a negative effective duration gap generally indicates some exposure to interest-rate risk in a declining interest-rate environment. Higher effective duration numbers, whether positive or negative, indicate greater volatility of market value of equity in response to changing interest rates.

Bank policy requires the Bank to maintain its effective duration of equity within a range of plus five years to minus five years, assuming current interest rates, and within a range of plus seven years to minus seven years, assuming an instantaneous parallel increase or decrease in market interest rates of 200 basis points.

The following table presents the Bank’s effective duration exposure measurements as calculated in accordance with Bank policy (in years).
 
As of December 31,
 
2018
 
2017
 
Up 200 Basis Points    
 
Current    
 
Down 200 Basis
 Points    
 
Up 200 Basis Points    
 
Current
 
Down 200 Basis 
Points (1)    
Assets
0.25

 
0.20

 
0.14

 
0.27

 
0.19

 
0.16

Liabilities
0.21

 
0.25

 
0.25

 
0.15

 
0.17

 
0.17

Equity
0.99

 
(0.80
)
 
(1.95
)
 
2.54

 
0.51

 
0.07

Effective duration gap
0.04

 
(0.05
)
 
(0.11
)
 
0.12

 
0.02

 
(0.01
)
____________ 
(1) The “down 200 basis points” scenarios as of December 31, 2017 are considered to be “constrained shocks,” intended to prevent the possibility of negative interest rates when a designated low rate environment exists.

The Bank uses both sophisticated computer models and an experienced professional staff to measure the amount of interest-rate risk in the balance sheet, thus allowing management to monitor the risk against policy and regulatory limits. Management regularly reviews the major assumptions and methodologies used in the Bank’s models and will make adjustments to the Bank’s assumptions and methodologies in response to rapid changes in economic conditions.

The prepayment risk in both advances and investment assets can significantly affect the Bank’s effective duration of equity and effective duration gap. Current regulations require the Bank to mitigate advance prepayment risk by establishing prepayment fees that make the Bank financially indifferent to a borrower’s decision to prepay an advance that carries a rate above current market rates unless the advance contains explicit par value prepayment options. The Bank’s prepayment fees for advances without embedded options are generally based on the present value of the difference between the rate on the prepaid advance and the current rate on an advance with an identical maturity date. Prepayment fees for advances that contain embedded options are generally based on the inverse of the market value of the derivative instrument that the Bank used to hedge the advance.
The prepayment options embedded in mortgage loan and mortgage security assets may shorten or lengthen both the actual and expected cash flows when interest rates change. Current Finance Agency policies limit this source of interest-rate risk by limiting the types of MBS the Bank may own to those with defined estimated average life changes under specific interest-rate

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shock scenarios. These limits do not apply to mortgage loans purchased from members. The Bank typically hedges mortgage prepayment uncertainty by using callable debt as a funding source and by using interest-rate cap, floor, and swaption transactions. The Bank also uses derivatives to reduce effective duration and option risks for investment securities other than MBS. Effective duration and option risk exposures are measured on a regular basis for all investment assets under alternative rate scenarios.

The Bank also analyzes its interest-rate risk and market exposure by evaluating the theoretical market value of equity. The market value of equity represents the net result of the present value of future cash flows discounted to arrive at the theoretical market value of each balance sheet item. By using the discounted present value of future cash flows, the Bank is able to factor in the various maturities of assets and liabilities, similar to the effective duration analysis discussed above. The Bank determines the theoretical market value of assets and liabilities utilizing a Level 3 pricing approach as more fully described in Note 18—Estimated Fair Values to the Bank’s 2018 audited financial statements. The difference between the market value of total assets and the market value of total liabilities is the market value of equity. A more volatile market value of equity under different shock scenarios tends to result in a higher effective duration of equity, indicating increased sensitivity to interest rate changes.

The following table presents the Bank’s market value of equity measurements as calculated in accordance with Bank policy (in millions). 
 
As of December 31,
 
2018
 
2017
 
Up 200 Basis Points    
 
Current
 
Down 200 Basis
Points    
 
Up 200 Basis Points    
 
Current
 
Down 200 Basis
Points (1)  
Assets
$
153,290

 
$
153,977

 
$
154,492

 
$
145,420

 
$
146,087

 
$
147,041

Liabilities
145,710

 
146,378

 
147,120

 
138,283

 
138,732

 
139,131

Equity
7,580

 
7,599

 
7,372

 
7,137

 
7,355

 
7,910

____________ 
(1) The “down 200 basis points” scenarios as of December 31, 2017 are considered to be “constrained shocks,” intended to prevent the possibility of negative interest rates when a designated low rate environment exists.

Under the Bank’s RMP, the Bank’s market value of equity must not decline by more than 15 percent, assuming an immediate, parallel, and sustained interest-rate shock of 200 basis points in either direction.

If effective duration of equity or market value of equity is approaching the boundaries of the Bank’s RMP ranges, management will initiate remedial action or review alternative strategies at the next meeting of the board of directors or appropriate committee thereof.

Liquidity Risk

Liquidity risk is the risk that the Bank will be unable to meet its obligations as they come due or meet the credit needs of its members and borrowers in a timely and cost-efficient manner. The Bank’s objective is to meet operational and member liquidity needs under all reasonable economic and operational situations. The Bank uses liquidity to absorb fluctuations in asset and liability balances and to provide an adequate reservoir of funding to support attractive and stable advance pricing. The Bank meets its liquidity needs from both asset and liability sources.

The Bank faces the following two basic types of liquidity risk: operational and contingent. The Bank maintains operational and contingent liquidity in compliance with regulatory requirements and performs a supplemental analysis to confirm that the Bank has sufficient liquidity reserves, as discussed in further detail in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources above.

Credit Risk
The Bank faces credit risk primarily with respect to its advances, investments, derivatives, and mortgage loan assets.


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Advances

Secured advances to member financial institutions account for the largest category of Bank assets; thus, advances are a major source of the Bank’s credit risk exposure. The Bank uses a risk-focused approach to credit and collateral underwriting. The Bank attempts to reduce credit risk on advances by monitoring the financial condition of borrowers and the quality and value of the assets that borrowers pledge as eligible collateral.
The Bank utilizes a credit risk rating system for its members, which focuses primarily on an institution’s overall financial health and takes into account the quality of assets, earnings, and capital position. The Bank assigns each borrower that is an insured depository institution or an insurance company a credit risk rating from one to 10 according to the relative amount of credit risk that such borrower poses to the Bank (one being the least amount of credit risk and 10 the greatest amount of credit risk). In general, borrowers in category 10 may have more restrictions on the types of collateral they may use to secure advances, may be required to maintain higher collateral maintenance levels and deliver loan collateral, may be restricted from obtaining further advances, and may face more stringent collateral reporting requirements. At times, based upon the Bank’s assessment of the borrower and its collateral, the Bank may place more restrictive requirements on a borrower than those generally applicable to borrowers with the same rating. The Bank assigns each borrower that is not an insured depository institution or insurance company, such as housing associates, CDFIs, and corporate credit unions, a risk level rating based on a risk matrix developed for each entity type. Each matrix has risk levels that generally correspond to the one to 10 credit risk rating for insured depository institutions and insurance companies. Development of these risk matrices for borrowers that are not insured depository institutions or insurance companies enables the Bank to monitor and analyze the financial condition of these borrowers in a more consistent and complete manner. The par value of advances to these institutions totaled $541 million as of December 31, 2018. Management and the board also monitor the Bank’s concentration in secured credit and letters of credit exposure to individual borrowers.
The following table presents the number of borrowers and the par value of advances outstanding to borrowers with the specified ratings as of the specified dates (dollars in millions).
 
 
 
As of December 31,
 
 
2018
 
2017
Rating                 
 
Number of        
Borrowers
 
Outstanding        
Advances
 
Number of        
Borrowers
 
Outstanding        
Advances
1
 
97

 
$
2,176

 
16

 
$
2,380

2
 
50

 
18,472

 
51

 
20,549

3
 
75

 
22,207

 
84

 
53,972

4
 
104

 
60,897

 
79

 
6,366

5
 
57

 
3,083

 
104

 
13,557

6
 
13

 
361

 
60

 
3,021

7
 
9

 
140

 
28

 
740

8
 
3

 
262

 
10

 
321

9
 
6

 
190

 
9

 
139

10
 
5

 
85

 
12

 
180


The Bank establishes a credit limit for each borrower. The credit limit is not a committed line of credit, but rather an indication of the borrower’s general borrowing capacity with the Bank. The Bank determines the credit limit in its sole and absolute discretion by evaluating a wide variety of factors that indicate the borrower’s overall creditworthiness. The credit limit is generally expressed as a percentage equal to the ratio of the borrower’s total liabilities to the Bank (including the face amount of outstanding standby letters of credit, the par value of outstanding advances, and the total exposure of the Bank to the borrower under any derivative contract) to the borrower’s total assets. Generally, borrowers are held to a credit limit of no more than 30 percent. However, the Bank’s board of directors, or a relevant committee thereof, may approve a higher limit at its discretion, and such borrowers may be subject to certain additional collateral reporting and maintenance requirements. Five borrowers have been approved for a credit limit higher than 30 percent, and their total outstanding advance and standby letters of credit balance was $25.2 billion and $1.83 billion, respectively, as of December 31, 2018.


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Table of Contents

The Bank obtains collateral on advances to protect against losses, but Finance Agency regulations permit the Bank to accept only certain types of collateral. Each borrower must maintain an amount of qualifying collateral that, when discounted to the lendable collateral value (LCV), is equal to at least 100 percent of the borrower’s outstanding par value of all advances and other liabilities from the Bank. The LCV is the value that the Bank assigns to each type of qualifying collateral for purposes of determining the amount of credit that such qualifying collateral will support. For each type of qualifying collateral, the Bank discounts the market value of the qualifying collateral to calculate the LCV. The Bank regularly reevaluates the appropriate level of discounting. The Bank had rights to collateral on a borrower-by-borrower basis with an estimated value equal to or greater than its outstanding extension of credit as of December 31, 2018 and December 31, 2017. The following table presents information about the types of collateral held for the Bank’s advances (dollars in millions).
 
Total Par Value of Outstanding Advances
 
LCV of Collateral Pledged by Members
 
First Mortgage Collateral (%)
 
Securities Collateral (%)
 
Other Real Estate Related Collateral (%)
As of December 31, 2018
$
108,414

 
$
338,362

 
64.96
 
8.85
 
26.19
As of December 31, 2017
102,249

 
330,093

 
67.96
 
5.43
 
26.61
For purposes of determining each member’s LCV, the Bank estimates the current market value of all residential first mortgage loans, commercial real estate loans, home equity loans, and lines of credit pledged as collateral based on information provided by the member on its loan portfolio or on individual loans through the regular collateral reporting process. The estimated market value is discounted to account for the (1) price volatility of loans, (2) model data uncertainty, and (3) estimated liquidation and servicing costs in the event of the member’s default. Market values, and thus LCVs, change monthly. The use of this market-based valuation methodology allows the Bank to establish its collateral discounts with greater precision and to provide greater transparency with respect to the valuation of collateral pledged for advances and other credit products offered by the Bank.

The FHLBank Act affords any security interest granted to the Bank by any member of the Bank, or any affiliate of any such member, priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor) other than the claims and rights of a party that (1) would be entitled to priority under otherwise applicable law; and (2) is an actual bona fide purchaser for value or is an actual secured party whose security interest is perfected in accordance with applicable state law.
In its history, the Bank has never experienced a credit loss on an advance. In consideration of this and the Bank’s policies and practices detailed above, the Bank has not established an allowance for credit losses on advances as of December 31, 2018 and 2017.

Investments

The Bank is subject to credit risk on unsecured investments, such as interest-bearing deposits and federal funds sold. These investments are generally transacted with government agencies and large financial institutions that are considered to be of investment quality.
In addition to Finance Agency regulations, the Bank has established guidelines approved by its board of directors regarding unsecured extensions of credit, with respect to term limits and eligible counterparties.
Finance Agency regulations prohibit the Bank from investing in any of the following securities:
•
instruments, such as common stock, that represent an ownership interest in an entity, other than stock in small business investment companies, or certain investments targeted to low-income people or communities;
•
instruments issued by non-United States entities, other than those issued by United States branches and agency offices of foreign commercial banks;
•
debt instruments that are not of investment quality, other than certain investments targeted to low-income people or communities and instruments that the Bank determined became less than investment quality because of developments or events that occurred after purchase by the Bank;
•
whole mortgages or other whole loans, other than the following: (1) those acquired under the Bank’s mortgage purchase programs; (2) certain investments targeted to low-income people or communities; (3) certain marketable direct obligations of state, local, or tribal government units or agencies that are of investment quality; (4) MBS or asset-

54
Table of Contents

backed securities that are backed by manufactured housing loans or home equity loans; and (5) certain foreign housing loans that are authorized under section 12(b) of the FHLBank Act;
•
interest-only or principal-only stripped MBS, collateralized mortgage obligations (CMOs), collateralized debt obligations, and real estate mortgage investment conduits (REMICs);
•
residual-interest or interest-accrual classes of CMOs and REMICs;
•
fixed-rate or variable-rate MBS, CMOs, and REMICs that are at rates equal to their contractual cap on the trade date and that have average lives that vary by more than six years under an assumed instantaneous interest-rate change of 300 basis points; and
•
non-U.S. dollar denominated securities.

Finance Agency regulations do not permit the Bank to rely exclusively on NRSRO ratings with respect to its investments. The Bank is required to make a determination of whether a security is of investment quality based on its own documented analysis, which includes the NRSRO rating as one of the factors that is assessed to determine investment quality. The Bank monitors the financial condition of investment counterparties to ensure that they are in compliance with the Bank’s RMP and Finance Agency regulations. Unsecured credit exposure to any counterparty is limited by the credit quality and capital of the counterparty and by the capital of the Bank. On a regular basis, management produces financial monitoring reports detailing the financial condition of the Bank’s counterparties. These reports are reviewed by the Bank’s board of directors. In addition to the Bank’s RMP and regulatory requirements, the Bank may limit or suspend overnight and term trading. Limiting or suspending counterparties limits the pool of available counterparties, shifts the geographical distribution of counterparty exposure, and may reduce the Bank’s overall investment opportunities.

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Table of Contents

The Bank only enters into investments with U.S. counterparties or U.S. branch offices of foreign banks that have been approved by the Bank through its internal approval process, but the Bank may still have exposure to foreign entities if a counterparty’s parent entity is located in another country. The following tables present the Bank’s gross exposure, by instrument type, according to the location of the parent company of the counterparty (in millions).
 
 
As of December 31, 2018
 
Federal Funds Sold         
 
Interest-bearing  
Deposits
 
Net Derivative Exposure (1)    
 
Total 
Australia
$
1,965

 
$
—

 
$
—

 
$
1,965

Austria
400

 
—

 
—

 
400

Canada
1,935

 
—

 
—

 
1,935

Finland
500

 
—

 
—

 
500

France
—

 
—

 
3

 
3

Germany
1,640

 
—

 
—

 
1,640

Netherlands
588

 
—

 
—

 
588

Norway
375

 
—

 
—

 
375

Switzerland
—

 
—

 
3

 
3

United States of America
1,575

 
6,782

 
2

 
8,359

Total
$
8,978

 
$
6,782

 
$
8

 
$
15,768

____________ 
(1) Amounts do not reflect collateral; see the table under Risk Management–Credit Risk–Derivatives below for a breakdown of the credit ratings of and the Bank’s credit exposure to derivative counterparties, including net exposure after collateral.

 
As of December 31, 2017
 
Federal Funds Sold         
 
Interest-bearing  
Deposits
 
Net Derivative Exposure (1)     
 
Total 
Australia
$
1,920

 
$
—

 
$
—

 
$
1,920

Austria
640

 
—

 
—

 
640

Canada
1,250

 
—

 
—

 
1,250

France
100

 
—

 
—

 
100

Germany
350

 
—

 
—

 
350

Netherlands
1,255

 
—

 
—

 
1,255

Norway
1,125

 
—

 
—

 
1,125

Sweden
750

 
—

 
—

 
750

Switzerland
—

 
—

 
33

 
33

United States of America
1,990

 
2,176

 
—

 
4,166

Total
$
9,380

 
$
2,176

 
$
33

 
$
11,589

____________ 
(1) Amounts do not reflect collateral; see the table under Risk Management–Credit Risk–Derivatives below for a breakdown of the credit ratings of and the Bank’s credit exposure to derivative counterparties, including net exposure after collateral.

The Bank experienced an increase in unsecured credit exposure in its investment portfolio related to non-U.S. government and non-U.S. government agency counterparties from $11.5 billion as of December 31, 2017 to $15.7 billion as of December 31, 2018. The following two counterparties each represented greater than 10 percent and collectively represented 25.3 percent of the total unsecured credit exposure to non-U.S. government or non-U.S. government agencies counterparties: Australia & New Zealand Banking Group and State Street Bank. As of December 31, 2018, this unsecured credit portfolio consisted primarily of federal funds sold with overnight maturities.
The Bank’s RMP permits the Bank to invest in U.S. agency (i.e., Fannie Mae, Freddie Mac and Ginnie Mae) obligations including the following: (1) CMOs and REMICS that are backed by such securities; and (2) other MBS, CMOs, and REMICS that are of sufficient investment quality, which typically have the highest credit ratings issued by S&P or Moody’s at the time of purchase. The private-label MBS purchased by the Bank originally attained their triple-A ratings through credit enhancements, which primarily consisted of the subordination of the claims of the other tranches of these securities. In addition to NRSRO ratings, the Bank considers a variety of credit quality factors when analyzing potential investments, such as collateral performance, marketability, asset class considerations, local and regional economic conditions, and the financial health of the underlying issuer.

56
Table of Contents

The following tables present information on the credit ratings of the Bank’s investments held as of December 31, 2018 and 2017 (in millions), based on their credit ratings as of December 31, 2018 and 2017, respectively. The credit ratings reflect the lowest long-term credit ratings as reported by an NRSRO.
 
 
As of December 31, 2018
 
 
 
Carrying Value (1)
 
 
 
Investment Grade
 
Below Investment Grade
 
 
 
 
 
AAA
 
AA
 
A
 
BBB
 
BB
 
B
 
CCC
 
CC
 
D
 
Unrated
 
Total
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State or local housing agency debt obligations
$
—

 
$
1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1

Government-sponsored enterprises debt obligations
—

 
2,727

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2,727

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency obligations-guaranteed residential
—

 
118

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
118

Government-sponsored enterprises residential
—

 
9,304

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
9,304

Government-sponsored enterprises commercial
522

 
10,846

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
11,368

Private-label
—

 
77

 
92

 
112

 
119

 
50

 
246

 
44

 
68

 
473

 
1,281

Total mortgage-backed securities
522

 
20,345

 
92

 
112

 
119

 
50

 
246

 
44

 
68

 
473

 
22,071

Total investment securities
522

 
23,073

 
92

 
112

 
119

 
50

 
246

 
44

 
68

 
473

 
24,799

Other investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Interest-bearing deposits
—

 
2,032

 
4,703

 
47

 
—

 
—

 
—

 
—

 
—

 
—

 
6,782

Securities purchased under agreements to resell
—

 
750

 
2,000

 
1,000

 
—

 
—

 
—

 
—

 
—

 
—

 
3,750

  Federal funds sold
—

 
2,865

 
4,668

 
1,445

 
—

 
—

 
—

 
—

 
—

 
—

 
8,978

Total other investments
—

 
5,647

 
11,371

 
2,492

 
—

 
—

 
—

 
—

 
—

 
—

 
19,510

Total investments
$
522

 
$
28,720

 
$
11,463

 
$
2,604

 
$
119

 
$
50

 
$
246

 
$
44

 
$
68

 
$
473

 
$
44,309

____________
(1)
Investment amounts noted in the above table represent the carrying value and do not include related accrued interest receivable of $42 million as of December 31, 2018.


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Table of Contents

 
As of December 31, 2017
 
 
 
 
 
Carrying Value (1)
 
 
 
 
 
Investment Grade
 
Below Investment Grade
 
 
 
 
 
AAA
 
AA
 
A
 
BBB
 
BB
 
B
 
CCC
 
CC
 
C
 
D
 
Unrated
 
Total
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State or local housing agency debt obligations
$
—

 
$
1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1

Government-sponsored enterprises debt obligations
—

 
5,406

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
5,406

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency obligations-guaranteed residential
—

 
157

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
157

Government-sponsored enterprises residential
—

 
9,357

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
9,357

Government-sponsored enterprises commercial
577

 
9,152

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
9,729

Private-label residential
—

 
1

 
15

 
206

 
261

 
131

 
659

 
56

 
9

 
246

 
88

 
1,672

Total mortgage-backed securities
577

 
18,667

 
15

 
206

 
261

 
131

 
659

 
56

 
9

 
246

 
88

 
20,915

Total investment securities
577

 
24,074

 
15

 
206

 
261

 
131

 
659

 
56

 
9

 
246

 
88

 
26,322

Other investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Interest-bearing deposits
—

 
1,729

 
401

 
46

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2,176

Securities purchased under agreements to resell
—

 
1,500

 
1,000

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2,500

  Federal funds sold
—

 
2,670

 
5,050

 
1,660

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
9,380

Total other investments
—

 
5,899

 
6,451

 
1,706

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
14,056

Total investments
$
577

 
$
29,973

 
$
6,466

 
$
1,912

 
$
261

 
$
131

 
$
659

 
$
56

 
$
9

 
$
246

 
$
88

 
$
40,378

____________
(1) 
Investment amounts noted in the above table represent the carrying value and do not include related accrued interest receivable of $36 million as of December 31, 2017.

Securities Purchased Under Agreements to Resell

Securities purchased under agreements to resell are considered collateralized financing arrangements and effectively represent short-term loans transacted with counterparties that the Bank considers to be of investment quality. The terms of these loans are structured such that if the fair value of the underlying securities decreases below the fair value required as collateral, the counterparty must place an equivalent amount of additional securities as collateral or remit an equivalent amount of cash. If an agreement to resell is deemed to be impaired, the difference between the fair value of the collateral and the amortized cost of the agreement is recognized in earnings. Based upon the collateral held as security, the Bank determined that no allowance for credit losses was needed for the securities purchased under agreements to resell as of December 31, 2018 and 2017.
Non-Private-label MBS
The unrealized losses related to U.S. agency and GSE MBS are caused by interest rate changes. Because these securities are guaranteed by government agencies or GSEs, it is expected that these securities would not be settled at a price less than the amortized cost basis. The Bank does not consider these investments to be other-than-temporarily impaired as of December 31, 2018 because the decline in fair value is attributable to changes in interest rates and not credit quality, the Bank does not intend to sell the investments, and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity.



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Private-label MBS

For disclosure purposes, the Bank classifies private-label MBS as either prime or Alt-A based upon the overall credit quality of the underlying loans as determined by the originator at the time of origination, unless otherwise noted. Although there is no universally accepted definition of Alt-A, generally, loans with credit characteristics that range between prime and subprime are classified as Alt-A. Participants in the mortgage market have used the Alt-A classification principally to describe loans for which the underwriting process has been streamlined in order to reduce the documentation requirements of the borrower or allow for alternative documentation.

The following table presents information, based on investment ratings, on the Bank’s private-label MBS as of December 31, 2018 (dollars in millions).
 
Prime
 
Alt-A
 
Total
Investment Ratings:
 
 
 
 
 
AA
$
77

 
$
—

 
$
77

A
92

 
—

 
92

BBB
107

 
6

 
113

BB
110

 
9

 
119

B
24

 
26

 
50

CCC
153

 
130

 
283

CC
29

 
23

 
52

D
72

 
—

 
72

Unrated
526

 
1

 
527

Total unpaid principal balance
$
1,190

 
$
195

 
$
1,385

Amortized cost
$
1,052

 
$
157

 
$
1,209

Gross unrealized losses
$
(2
)
 
$
(1
)
 
$
(3
)
Fair value
$
1,117

 
$
166

 
$
1,283

Other-than-temporary impairment (Year-to-date):
 
 
 
 
 
Total other-than-temporary impairment losses
$
—

 
$
—

 
$
—

Net amount of impairment losses reclassified from accumulated other comprehensive income
(3
)
 
—

 
(3
)
Net impairment losses recognized in earnings
$
(3
)
 
$
—

 
$
(3
)
 
 
 
 
 
 
Weighted average percentage of fair value to unpaid principal balance
93.90
%
 
85.46
%
 
92.71
%
Original weighted average credit support
9.51
%
 
24.83
%
 
11.67
%
Weighted average credit support
5.90
%
 
9.51
%
 
6.40
%
Weighted average collateral delinquency
10.93
%
 
15.37
%
 
11.56
%

The following table presents a summary of the significant inputs used to evaluate each of the Bank’s private-label MBS for other-than-temporary impairment as of December 31, 2018.

 
 
Significant Inputs  - Weighted Average (%)
 
Classification of Securities (1)
 
Prepayment Rate
 
Default Rates
 
Loss Severities
 
Current Credit Enhancement (%)
Prime
 
16.02
 
7.63
 
24.50
 
8.93
Alt-A
 
14.10
 
18.74
 
35.23
 
3.89
Total
 
15.05
 
13.24
 
29.91
 
6.39
____________
(1) The classification of securities is based on current characteristics and performance, which may be different from the securities’ classification as determined
by the originator at the time of origination.

For those securities for which an other-than-temporary impairment was determined to have occurred during 2018, a summary of the significant inputs used to measure the amount of the credit loss recognized in earnings is contained in Note 8—Other-than-temporary Impairment to the Bank’s 2018 audited financial statements.
In addition to the cash flow analysis of the Bank’s private-label MBS under a base case (best estimate) housing price scenario

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as described in Note 8—Other-than-temporary Impairment to the Bank’s 2018 audited financial statements, a cash flow analysis was also performed based on a housing price scenario that is more adverse than the base case (adverse case housing price scenario). This more stressful scenario was primarily based on a short-term housing price forecast, which was five percentage points lower than the base case, followed by a path with annual rates of housing price growth that were 33.0 percent lower than the base case. The results of the adverse case housing price scenario were immaterial additional other-than-temporary impairment losses.

The adverse case housing price scenario and associated results do not represent the Bank’s current expectations and therefore, should not be construed as a prediction of the Bank’s future results, market conditions, or the actual performance of these securities. Rather, the results from this hypothetical adverse case housing price scenario provide a measure of the credit losses that the Bank might incur if home price declines (and subsequent recoveries) are more adverse than those projected in the Bank’s base case assessment.
The Bank continues to actively monitor the credit quality of its private-label MBS investments. It is not possible to predict the magnitude of additional other-than-temporary impairment losses in future periods because that prediction depends on the actual performance of the underlying loan collateral, as well as the Bank’s future modeling assumptions. Many factors could influence the Bank’s future modeling assumptions, including economic, financial market, and housing market conditions. If performance of the underlying loan collateral deteriorates and/or the Bank’s modeling assumptions become more pessimistic, the Bank could experience further losses on its investment portfolio.

Derivatives

The Bank is subject to credit risk due to the risk of nonperformance by counterparties to its derivative transactions. The amount of credit risk on derivatives depends on the extent to which netting procedures, collateral requirements, and other credit enhancements are used and are effective in mitigating the risk. The Bank manages credit risk through credit analysis, collateral management, and other credit enhancements. The Bank is also required to follow the requirements set forth by applicable regulations.

The Bank’s over-the-counter derivative transactions may either be (1) uncleared derivatives, which are executed bilaterally with a counterparty; or (2) cleared derivatives, which are cleared through a Futures Commission Merchant (clearing agent) with a Derivative Clearing Organization (Clearinghouse). Once a derivative transaction has been accepted for clearing by a Clearinghouse, the executing counterparty is replaced with the Clearinghouse as the counterparty.

For uncleared derivatives, the Bank is subject to nonperformance by counterparties. The Bank generally is required to post or collect collateral on uncleared derivative transactions. The amount of net unsecured credit exposure that is permissible with respect to each counterparty depends on the credit rating of that counterparty. A counterparty must deliver collateral to the Bank if the total market value of the Bank’s exposure to that counterparty rises above a specific trigger point. As a result of these risk mitigation initiatives, the Bank does not anticipate any credit losses on its uncleared derivatives as of December 31, 2018.
Certain of the Bank’s uncleared derivative instruments contain provisions that require the Bank to post additional collateral with its counterparties if there is a deterioration in the Bank’s credit rating. If the Bank’s credit rating had been lowered from its current rating to the next lower rating, the Bank would have been required to deliver $1 million of collateral at fair value to its uncleared derivative counterparties as of December 31, 2018.
If the counterparty has an NRSRO rating, the net exposure after collateral is treated as unsecured credit, consistent with the Bank’s RMP and Finance Agency regulations. If the counterparty does not have an NRSRO rating, the Bank requires collateral for the full amount of the exposure.

For cleared derivatives, the Bank is subject to credit risk due to nonperformance by the Clearinghouse and clearing agent. The requirement that the Bank post initial and variation margin through the clearing agent, to the Clearinghouse, exposes the Bank to institutional credit risk in the event that the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives mitigates credit risk exposure because a central counterparty is substituted for individual counterparties, and collateral is posted daily for changes in the value of cleared derivatives through a clearing agent. The Bank currently has the following two approved Clearinghouses: CME Group, Inc. and LCH.Clearnet Limited. Variation margin is characterized as daily settlement payments and is netted directly against the derivative’s gross recognized amount. Initial margin is considered cash collateral. Because of the limited number of Clearinghouses and clearing agents, a risk of concentration is introduced. The Bank actively monitors Clearinghouses and clearing agents. An annual review of the Bank’s Clearinghouses is performed, and the Bank also monitors its exposure to Clearinghouses on a monthly basis. The Bank also monitors the clearing agents through its unsecured credit system, and the Bank subjects these clearing agents to the same limits as other bilateral derivative

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counterparties. The parent companies of the clearing agents are monitored through annual reviews, as well as through the Bank’s daily monitoring tools, which include reviewing equity triggers, debt triggers, and credit default swap spread triggers. In addition, exposures to the clearing agents are monitored daily on a swap counterparty report. The Bank currently has the following three approved clearing agents: Credit Suisse Securities (USA) LLC, Morgan Stanley & Co. LLC, and Goldman Sachs & Co. The Bank does not anticipate any credit losses on its cleared derivatives as of December 31, 2018.

The contractual or notional amount of derivative transactions reflects the involvement of the Bank in the various classes of financial instruments; however, the Bank’s maximum credit risk with respect to derivative transactions is the estimated cost of replacing the derivative transactions if there is default, less the value of any related collateral, including initial and variation margin. In determining the maximum credit risk, the Bank considers accrued interest receivables and payables, as well as the netting requirements to net assets and liabilities.
The following tables present information on the credit ratings of, and the Bank’s credit exposure to, its derivative counterparties (in millions). The credit ratings reflect the lowest long-term credit rating by an NRSRO.
 
 
As of December 31, 2018
 
 
Notional Amount
 
Net Derivatives Fair Value Before Collateral
 
Cash Collateral Pledged To (From) Counterparty
 
Net Credit Exposure to Counterparties
Non-member counterparties:
 
 
 
 
 
 
 
 
  Asset positions with credit exposure:
 
 
 
 
 
 
 
 
    Double-A
 
$
698

 
$
—

 
$
—

 
$
—

    Single-A
 
5,425

 
6

 
(6
)
 
—

    Triple-B
 
4,471

 
2

 
(2
)
 
—

    Cleared derivatives
 
969

 
—

 
3

 
3

  Liability positions with credit exposure:
 
 
 
 
 
 
 
 
    Double-A
 
615

 
(1
)
 
1

 
—

     Single-A
 
4,816

 
(28
)
 
29

 
1

    Triple-B
 
4,608

 
(41
)
 
41

 
—

    Cleared derivatives
 
32,523

 
(33
)
 
343

 
310

Total derivative positions with non-member counterparties to which the Bank had credit exposure
 
54,125

 
(95
)
 
409

 
314

Member institutions (1)
 
3

 
—

 
—

 
—

Total
 
$
54,128

 
$
(95
)
 
$
409

 
$
314

____________
(1) Collateral held with respect to derivatives with member institutions when the Bank is acting as an intermediary represents the amount of eligible collateral physically held by or on behalf of the Bank or collateral assigned to the Bank, as evidenced by a written security agreement, and held by the member institution for the benefit of the Bank.

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As of December 31, 2017
 
 
Notional Amount
 
Net Derivatives Fair Value Before Collateral
 
Cash Collateral Pledged To (From) Counterparty
 
Net Credit Exposure to Counterparties
Non-member counterparties:
 
 
 
 
 
 
 
 
  Asset positions with credit exposure:
 
 
 
 
 
 
 
 
    Cleared derivatives
 
$
3,625

 
$
33

 
$
(9
)
 
$
24

  Liability positions with credit exposure:
 
 
 
 
 
 
 
 
    Double-A
 
500

 
—

 
—

 
—

     Single-A
 
5,689

 
(21
)
 
22

 
1

    Triple-B
 
6,699

 
(4
)
 
4

 
—

Cleared derivatives
 
28,843

 
(106
)
 
415

 
309

Total derivative positions with non-member counterparties to which the Bank had credit exposure
 
45,356

 
(98
)
 
432

 
334

Member institutions (1)
 
3

 
—

 
—

 
—

Total
 
$
45,359

 
$
(98
)
 
$
432

 
$
334

____________
(1) Collateral held with respect to derivatives with member institutions when the Bank is acting as an intermediary represents the amount of eligible collateral physically held by or on behalf of the Bank or collateral assigned to the Bank, as evidenced by a written security agreement, and held by the member institution for the benefit of the Bank.


Mortgage Loan Programs

The Bank seeks to manage the credit risk associated with the MPP and the MPF Program by maintaining underwriting and eligibility standards and structuring possible losses into several layers to be shared with the PFIs.
MPF Program

Mortgage loans purchased under the MPF Program must comply with the underwriting and eligibility standards established and maintained by FHLBank Chicago. The Bank manages MPF Program credit risk through underwriting and eligibility guidelines and sharing of potential losses with the PFIs. The Bank and PFIs share the risk of losses on MPF loans by structuring potential losses on conventional MPF loans into layers with respect to each master commitment. The general allocation of losses under the MPF Program is divided into the following loss layers:

Homeowner Equity. The homeowner’s equity in the real property securing the MPF loan.

Private Mortgage Insurance (PMI). PMI is required for any MPF loan with a loan-to-value (LTV) ratio greater than 80 percent at the time of origination.

First Loss Account (FLA). The FLA functions as a tracking mechanism for determining the Bank’s potential loss exposure under each master commitment prior to the PFI’s credit enhancement obligation. If the Bank experiences losses in a master commitment, these losses will be: (1) absorbed by the Bank's FLA; and (2) recovered through the withholding of future performance-based credit enhancement fees from the PFI, if applicable.

Credit Enhancement Obligation. PFIs have a credit enhancement obligation to absorb losses in excess of the FLA in order to limit the Bank’s loss exposure to approximately that of an investor in an investment grade MBS. PFIs must either fully collateralize their credit enhancement obligation with assets considered acceptable by the Bank’s credit and collateral policy or purchase supplemental mortgage insurance (SMI) from mortgage insurers, as applicable. The credit enhancement obligation may be periodically reset lower for each master commitment after a required period of seasoning.

The Bank. The Bank absorbs any remaining unallocated losses.

The unpaid principal balance of MPF Program mortgage loans was $251 million and $312 million as of December 31, 2018 and 2017, respectively. The allowance for credit losses on MPF loans was $1 million as of December 31, 2018 and 2017.
    

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MPP

Mortgage loans purchased under the MPP must comply with the underwriting and eligibility standards set forth in applicable MPP guidelines. The Bank manages MPP credit risk by sharing potential losses with the PFI. The general allocation of losses under the MPP is divided into the following loss layers:

Homeowner Equity. The homeowner’s equity in the real property securing the MPP loan.

Private Mortgage Insurance. PMI is required for any MPP loan with a LTV ratio greater than 80 percent at the time of origination.

Lender Risk Account (LRA). The Bank establishes a LRA for each master commitment to cover losses that are not paid by PMI or homeowner’s equity. The Bank can establish the amount of the LRA balance either up front as a portion of the purchase proceeds (Fixed LRA) or as a portion of the monthly interest paid by the borrower (Spread LRA).

The PFI’s recourse is limited to this predetermined LRA amount so that the PFI has no further obligation to make additional contributions to the LRA, regardless of any losses or deterioration of the mortgage pool exceeding such amount in the LRA. Once the LRA has reached the required amount, but not before five years for the Fixed LRA, the Bank will pay the PFI any unused amounts of the LRA that are no longer required to cover expected losses on an annual basis in accordance with a step-down schedule that is established at the time of a master commitment.

SMI. Losses for each master commitment in excess of the LRA, up to a specified LTV ratio, are covered by SMI obtained by the PFI.

The Bank. The Bank absorbs any remaining unallocated losses.

Total credit enhancement is sized to provide the equivalent of at least a BBB rating under an approved NRSRO rating model.

The unpaid principal balance of MPP mortgage loans was $110 million and $124 million as of December 31, 2018 and 2017, respectively. The allowance for credit losses on MPP loans was less than $1 million as of December 31, 2018 and 2017.

                                                             
Operational Risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people or systems, or from external events. Operational risk for the Bank also includes reputation and legal risks associated with business practices or market conduct that the Bank may undertake. Operational risk inherently is greatest where transaction processes include numerous processing steps, require greater subjectivity, or are non-routine. The Bank operates in a complex business environment and is subject to numerous regulatory requirements.

The Bank identifies risk through daily operational monitoring, independent reviews, and the strategic planning and risk assessment programs that both consider the operational risk ramifications of the Bank’s business strategies and environment. The Bank has established comprehensive financial and operating policies and procedures to mitigate the likelihood of loss resulting from the identified operational risks. In addition, the Bank’s operational risk committee is responsible for overseeing the Bank’s risk management policies, procedures, strategies, and activities related to operational risks, including overseeing the monitoring process and review of risk assessments. This oversight also includes compliance risk and reputational risk. The Bank effects related changes in processes, information systems, lines of communication, and other internal controls as deemed appropriate in response to identified or anticipated increases in operational risk.

The board of directors has an Enterprise Risk and Operations Committee (EROC) to advise and assist the board with respect to enterprise risk management, operations, information technology, and other related matters. In addition, the Bank’s internal Enterprise Risk Committee (ERC) is responsible for the management and oversight of the Bank’s risk management programs and practices. Additionally, the Bank’s Internal Audit department, which reports directly to the Audit Committee of the Bank’s board of directors, regularly tests compliance with the policies and procedures related to managing operational risks.

Cyber-Related Risks. The efficiencies offered by information technology (IT) are necessary components of Bank operations. The IT architecture supports multiple operating systems, database structures, and virtualized servers to support business applications that are a mixture of vendor-licensed and in-house developed. Cyber-attacks are increasing globally across all

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business sectors and cyber attackers are finding more ways to penetrate organizations’ systems. Cybersecurity threats can result in damage to the Bank’s physical facilities, technology systems, and/or the Bank’s intangible assets. Successful attacks can have a financial, legal, and reputational impact on the Bank as well as disrupt the Bank’s ability to serve its shareholders.
The Bank’s board of directors, through EROC, oversees the major dimensions of the Bank’s information technology program including management information systems to ensure alignment with the Bank’s strategic plan, risk management activities, and operational performance standards. In that role, EROC oversees the development, implementation and maintenance of the Bank’s information security program including recommending action to the board with respect to the Bank’s information security policy on an annual basis and reviewing reports on the effectiveness of the Bank’s information security program. The Bank’s internal ERC reviews and reports to the board on the risk exposures and risk appetites of the Bank, including those related to information technology. In addition, the Bank’s internal Information Technology Governance Committee oversees IT governance, including: IT risk management and IT operational performance, and the Bank’s internal Security Governance Committee provides independent and integrated oversight of the information security program. Each of these committees provide information and make recommendations to the board, through the Bank’s executive management committee, regarding their respective oversight authority.

Business Risk

Business risk is the risk of an adverse effect on the Bank’s profitability resulting from external factors that may occur in both the short- and the long-term. Business risk includes political, strategic, reputation, and regulatory events that are beyond the Bank’s control. In particular, during 2018 and continuing into 2019, the Bank faces business risk, which may include changes in:

•
the overall economy;

•
the financial services industry or the Bank’s competitive environment; and

•
legislation, regulation, or congressional scrutiny affecting the Bank or its members.

For discussion of the Bank’s competition for advances, see Item 1, Business—Competition above. For discussion of recent regulatory activity that may have a material impact on the Bank’s operations, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Legislative and Regulatory Developments. The Bank attempts to mitigate these risks through long-term strategic planning and through continually monitoring economic indicators and the external environment.

Cyclicality and Seasonality

The Bank’s business and the demand for advances from the Bank are generally not subject to the effects of cyclical or seasonal variations, although the Bank’s advance demand may vary based upon fluctuations of its members’ consumer credit liquidity needs.

Effects of Inflation

The majority of the Bank’s assets and liabilities are, and will continue to be, monetary in nature. Although interest rates do not necessarily move in the same direction, or to the same extent, as the prices of goods and services, higher rates of inflation generally result in corresponding increases in interest rates. Inflation, coupled with increasing interest rates, generally has the following effects on the Bank:

•
the cost of the Bank’s funds and operating overhead increases;

•
the yield on variable-rate assets held by the Bank increases;

•
the fair value of fixed-rate investments and mortgage loans held in portfolio decreases; and

•
mortgage loan prepayment rates decrease and result in lower levels of mortgage loan refinance activity, which may result in the reduction of Bank advances to members as increased rates tend to slow home sales.

Conversely, lower rates of inflation or deflation have the opposite effects of the above on the Bank and its holdings.


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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

A discussion of the Bank’s market risk is contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Market Risk.


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Item 8. Financial Statements and Supplementary Data.



Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders
of the Federal Home Loan Bank of Atlanta

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying statements of condition of the Federal Home Loan Bank of Atlanta (the “Bank”) as of December 31, 2018 and 2017, and the related statements of income, comprehensive income, capital and cash flows for each of the three years in the period ended December 31, 2018, including the related notes (collectively referred to as the “financial statements”). We also have audited the Bank’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Bank as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Bank maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.


Basis for Opinions

The Bank's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Bank’s financial statements and on the Bank's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Bank in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.


Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the

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company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
March 7, 2019

We have served as the Bank’s auditor since 1990.  





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FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CONDITION
(In millions, except par value)
 
As of December 31,
 
2018
 
2017
Assets
 
 
 
Cash and due from banks
$
35

 
$
2,357

Interest-bearing deposits (including deposits with another FHLBank of $20 and $22 as of December 31, 2018 and 2017, respectively)
6,782

 
2,176

Securities purchased under agreements to resell
3,750

 
2,500

Federal funds sold
8,978

 
9,380

Investment securities:
 
 
 
     Trading securities
55

 
56

Available-for-sale securities
865

 
1,104

Held-to-maturity securities (fair value of $23,846 and $25,219 as of December 31, 2018 and 2017, respectively)
23,879

 
25,162

Total investment securities
24,799

 
26,322

Advances
108,462

 
102,440

Mortgage loans held for portfolio, net:
 
 
 
Mortgage loans held for portfolio
361

 
436

Allowance for credit losses on mortgage loans
(1
)
 
(1
)
Total mortgage loans held for portfolio, net
360

 
435

Loan to another FHLBank
500

 
200

Accrued interest receivable
295

 
208

Derivative assets
314

 
334

Other assets
201

 
214

Total assets
$
154,476


$
146,566

Liabilities
 
 
 
Interest-bearing deposits
$
1,176

 
$
1,177

Consolidated obligations, net:
 
 
 
Discount notes
66,025

 
50,139

Bonds
79,114

 
87,523

Total consolidated obligations, net
145,139

 
137,662

Mandatorily redeemable capital stock
1

 
1

Accrued interest payable
204

 
142

Affordable Housing Program payable
85

 
77

Derivative liabilities
17

 
21

Other liabilities
207

 
219

Total liabilities
146,829

 
139,299

Commitments and contingencies (Note 19)

 

Capital
 
 
 
Capital stock Class B putable ($100 par value) issued and outstanding shares:
 
 
 
Subclass B1 issued and outstanding shares: 9 and 8 as of December 31, 2018 and 2017, respectively
891

 
819

Subclass B2 issued and outstanding shares: 46 and 44 as of December 31, 2018 and 2017, respectively
4,595

 
4,335

Total capital stock Class B putable
5,486

 
5,154

Retained earnings:
 
 
 
Restricted
463

 
380

Unrestricted
1,647

 
1,623

Total retained earnings
2,110

 
2,003

Accumulated other comprehensive income
51

 
110

Total capital
7,647

 
7,267

Total liabilities and capital
$
154,476

 
$
146,566


The accompanying notes are an integral part of these financial statements.

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FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF INCOME
(In millions)
 
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
Interest income
 
 
 
 
 
Advances
$
2,226

 
$
814

 
$
583

Prepayment fees, net
1

 
3

 
3

Interest-bearing deposits
101

 
29

 
17

Securities purchased under agreements to resell
46

 
10

 
4

Federal funds sold
223

 
128

 
36

Trading securities
1

 
9

 
38

Available-for-sale securities
101

 
106

 
105

Held-to-maturity securities
603

 
395

 
289

Mortgage loans
21

 
25

 
31

Total interest income
3,323

 
1,519

 
1,106

Interest expense
 
 
 
 
 
Consolidated obligations:
 
 
 
 
 
 Discount notes
1,139

 
436

 
249

 Bonds
1,604

 
915

 
519

Interest-bearing deposits
19

 
11

 
4

Total interest expense
2,762

 
1,362

 
772

Net interest income
561

 
157

 
334

Reversal of provision for credit losses
—

 
—

 
(1
)
Net interest income after reversal of provision for credit losses
561

 
157

 
335

Noninterest income (loss)
 
 
 
 
 
Total other-than-temporary impairment losses
—

 
—

 
(2
)
Net amount of impairment losses reclassified from accumulated other comprehensive income
(3
)
 
(2
)
 
(1
)
Net impairment losses recognized in earnings
(3
)
 
(2
)
 
(3
)
Net losses on trading securities
(1
)
 
(5
)
 
(30
)
Net gains on derivatives and hedging activities
29

 
341

 
119

Standby letters of credit fees
25

 
26

 
28

Loss on litigation settlements, net
—

 
—

 
(6
)
Other
1

 
7

 
3

Total noninterest income
51

 
367

 
111

Noninterest expense
 
 
 
 
 
Compensation and benefits
93

 
78

 
75

Other operating expenses
38

 
36

 
37

Finance Agency
8

 
9

 
9

Office of Finance
7

 
6

 
6

Other
4

 
7

 
10

Total noninterest expense
150

 
136

 
137

Income before assessment
462

 
388

 
309

Affordable Housing Program assessment
46

 
39

 
31

Net income
$
416

 
$
349

 
$
278


The accompanying notes are an integral part of these financial statements.

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Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
 

 
For the Years Ended December 31,
 
2018
 
2017
 
2016
Net income
$
416

 
$
349

 
$
278

Other comprehensive income (loss):
 
 
 
 
 
Net noncredit portion of other-than-temporary impairment losses on available-for-sale securities:
 
 
 
 
 
Noncredit losses on available-for-sale securities
—

 
—

 
(1
)
Net change in fair value on other-than-temporarily impaired available-for-sale securities
(65
)
 
8

 
27

Reclassification of noncredit portion of impairment losses included in net income
3

 
2

 
3

Total net noncredit portion of other-than-temporary impairment losses on available-for-sale securities
(62
)
 
10

 
29

   Pension and postretirement benefit plans
3

 
(4
)
 
—

Total other comprehensive (loss) income
(59
)
 
6

 
29

Total comprehensive income
$
357

 
$
355

 
$
307


The accompanying notes are an integral part of these financial statements.

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Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CAPITAL
(In millions)
 
 
Capital Stock Class B Putable
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total Capital    
 
Shares        
 
Par Value
 
Restricted    
 
Unrestricted    
 
Total        
 
Balance, December 31, 2015
51

 
$
5,101

 
$
255

 
$
1,585

 
$
1,840

 
$
75

 
$
7,016

Issuance of capital stock
54

 
5,405

 
—

 
—

 
—

 
—

 
5,405

Repurchase/redemption of capital stock
(55
)
 
(5,544
)
 
—

 
—

 
—

 
—

 
(5,544
)
Net shares reclassified to mandatorily redeemable capital stock
—

 
(7
)
 
—

 
—

 
—

 
—

 
(7
)
Comprehensive income
—

 
—

 
55

 
223

 
278

 
29

 
307

Cash dividends on capital stock
—

 
—

 
—

 
(226
)
 
(226
)
 
—

 
(226
)
Balance, December 31, 2016
50

 
4,955

 
310

 
1,582

 
1,892

 
104

 
6,951

Issuance of capital stock
97

 
9,726

 
—

 
—

 
—

 
—

 
9,726

Repurchase/redemption of capital stock
(95
)
 
(9,493
)
 
—

 
—

 
—

 
—

 
(9,493
)
Net shares reclassified to mandatorily redeemable capital stock
—

 
(34
)
 
—

 
—

 
—

 
—

 
(34
)
Comprehensive income
—

 
—

 
70

 
279

 
349

 
6

 
355

Cash dividends on capital stock
—

 
—

 
—

 
(238
)
 
(238
)
 
—

 
(238
)
Balance, December 31, 2017
52

 
5,154

 
380

 
1,623

 
2,003

 
110

 
7,267

Issuance of capital stock
110

 
11,074

 
—

 
—

 
—

 
—

 
11,074

Repurchase/redemption of capital stock
(107
)
 
(10,705
)
 
—

 
—

 
—

 
—

 
(10,705
)
Net shares reclassified to mandatorily redeemable capital stock
—

 
(37
)
 
—

 
—

 
—

 
—

 
(37
)
Comprehensive income (loss)
—

 
—

 
83

 
333

 
416

 
(59
)
 
357

Cash dividends on capital stock
—

 
—

 
—

 
(309
)
 
(309
)
 
—

 
(309
)
Balance, December 31, 2018
55

 
$
5,486

 
$
463

 
$
1,647

 
$
2,110

 
$
51

 
$
7,647


The accompanying notes are an integral part of these financial statements.

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FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CASH FLOWS
(In millions)
 
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
Operating activities
 
 
 
 
 
Net income
$
416

 
$
349

 
$
278

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
111

 
(55
)
 
(45
)
  Reversal of provision for credit losses
—

 
—

 
(1
)
  Net change in fair value adjustment on derivative and hedging activities
66

 
55

 
43

  Net change in fair value adjustment on trading securities
1

 
5

 
30

  Net impairment losses recognized in earnings
3

 
2

 
3

Net change in:
 
 
 
 
 
  Accrued interest receivable
(87
)
 
(36
)
 
(1
)
  Other assets
11

 
4

 
(6
)
  Affordable Housing Program payable
7

 
6

 
4

  Accrued interest payable
62

 
14

 
1

  Other liabilities
(11
)
 
(9
)
 
(76
)
  Total adjustments
163

 
(14
)
 
(48
)
Net cash provided by operating activities
579

 
335

 
230

Investing activities
 
 
 
 
 
Net change in:
 
 
 
 
 
  Interest-bearing deposits
(4,531
)
 
(663
)
 
214

  Securities purchased under agreements to resell
(1,250
)
 
(1,114
)
 
1,114

  Federal funds sold
402

 
(1,610
)
 
(2,349
)
  Loan to another FHLBank
(300
)
 
(200
)
 
—

Trading securities:
 
 
 
 
 
  Proceeds from principal collected
—

 
200

 
973

Available-for-sale securities:
 
 
 
 
 
  Proceeds from principal collected
236

 
311

 
396

Held-to-maturity securities:
 
 
 
 
 
  Proceeds from principal collected
6,760

 
6,540

 
5,641

  Purchases of long-term
(5,479
)
 
(7,200
)
 
(7,044
)
Advances:
 
 
 
 
 
  Proceeds from principal collected
415,626

 
376,476

 
265,686

  Made
(421,793
)
 
(380,435
)
 
(261,105
)
Mortgage loans:
 
 
 
 
 
  Proceeds from principal collected
73

 
103

 
127

  Purchases from another FHLBank
—

 
(18
)
 
(72
)
Proceeds from sale of foreclosed assets
3

 
4

 
13

Purchases of premises, equipment, and software
(5
)
 
(5
)
 
(4
)
Net cash (used in) provided by investing activities
(10,258
)
 
(7,611
)
 
3,590

 
 
 
 
 
 

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FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CASH FLOWS—(Continued)
(In millions)

 
For the Years Ended December 31,
 
2018
 
2017
 
2016
Financing activities
 
 
 
 
 
Net change in interest-bearing deposits
(26
)
 
70

 
29

Net payments on derivatives containing a financing element
(5
)
 
(30
)
 
(72
)
Proceeds from issuance of consolidated obligations:
 
 
 
 
 
 Discount notes
1,022,569

 
847,617

 
517,242

 Bonds
68,281

 
70,703

 
75,617

Payments for debt issuance costs
(12
)
 
(8
)
 
(9
)
Payments for maturing and retiring consolidated obligations:
 
 
 
 
 
 Discount notes
(1,006,848
)
 
(838,777
)
 
(545,415
)
 Bonds
(76,625
)
 
(71,718
)
 
(50,763
)
Proceeds from issuance of capital stock
11,074

 
9,726

 
5,405

Payments for repurchase/redemption of capital stock
(10,705
)
 
(9,493
)
 
(5,544
)
Payments for repurchase/redemption of mandatorily redeemable capital stock
(37
)
 
(34
)
 
(20
)
Cash dividends paid
(309
)
 
(238
)
 
(226
)
Net cash provided by (used in) financing activities
7,357

 
7,818

 
(3,756
)
Net (decrease) increase in cash and due from banks
(2,322
)
 
542

 
64

Cash and due from banks at beginning of the year
2,357

 
1,815

 
1,751

Cash and due from banks at end of the year
$
35

 
$
2,357

 
$
1,815

Supplemental disclosures of cash flow information:
 
 
 
 
 
 Cash paid for:
 
 
 
 
 
Interest
$
2,529

 
$
1,346

 
$
750

Affordable Housing Program assessments, net
$
38

 
$
31

 
$
25

 Noncash investing and financing activities:
 
 
 
 
 
Net shares reclassified to mandatorily redeemable capital stock
$
37

 
$
34

 
$
7

Held-to-maturity securities acquired with accrued liabilities
$
—

 
$
—

 
$
135

Transfers of mortgage loans to real estate owned
$
2

 
$
3

 
$
5


The accompanying notes are an integral part of these financial statements.

 


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Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

Note 1—Nature of Operations

The Federal Home Loan Bank of Atlanta (Bank) is a federally chartered corporation and is one of 11 district Federal Home Loan Banks (FHLBanks). Each FHLBank operates as a separate entity within a defined geographic district and has its own management, employees, and board of directors. The Bank’s defined geographic district includes Alabama, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, and the District of Columbia. The FHLBanks are government-sponsored enterprises that were organized under the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act), to serve the public by enhancing the availability of credit for residential mortgages and targeted community developments. The primary function of the Bank is to provide readily available, competitively priced funding to its member institutions.

The Bank is a cooperative whose member institutions own substantially all of the capital stock of the Bank. Former members and certain non-members, which own the Bank’s capital stock as a result of a merger or acquisition of a member of the Bank, own the remaining capital stock to support business transactions still carried on the Bank’s Statements of Condition. All holders of the Bank’s capital stock are entitled to receive dividends on their capital stock, to the extent declared by the Bank’s board of directors.

Federally-insured depository institutions, insurance companies, privately-insured state-chartered credit unions, and community development financial institutions that are located in the Bank’s defined geographic district and engaged in residential housing finance are eligible to apply for membership. All members must purchase and hold capital stock of the Bank. A member’s stock requirement is based on the amount of its total assets, as well as the amount of certain of its business activities with the Bank. Housing associates (including state and local housing authorities) that meet certain statutory criteria may also borrow from the Bank. While they are eligible to borrow, housing associates are not members of the Bank and are not allowed to hold capital stock.

The Federal Housing Finance Agency (Finance Agency) is the independent federal regulator of the FHLBanks and is responsible for ensuring that the FHLBanks (1) operate in a safe and sound manner, including that they maintain adequate capital and internal controls; (2) foster liquid, efficient, competitive, and resilient national housing finance markets through their operations and activities; (3) comply with applicable laws and regulations; and (4) carry out their housing finance mission through authorized activities that are consistent with the public interest. The Finance Agency also establishes policies and regulations covering the operations of the FHLBanks. The Bank does not have any special purpose entities or any other types of off-balance sheet conduits.

The Federal Home Loan Banks Office of Finance (Office of Finance), a joint office of the FHLBanks, facilitates the issuance and servicing of the FHLBanks’ debt instruments, known as consolidated obligations, and prepares the combined quarterly and annual financial reports of the FHLBanks. As provided by the FHLBank Act and applicable regulations, the Bank’s consolidated obligations are backed only by the financial resources of the FHLBanks. Consolidated obligations are the primary source of funds for the Bank in addition to deposits, other borrowings, and capital stock issued to members. The Bank primarily uses these funds to provide advances to members. The Bank also provides members and non-members with correspondent banking services, such as safekeeping, wire transfer, and cash management services.

Note 2—Summary of Significant Accounting Policies

Use of Estimates. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP) requires the Bank’s management to make subjective assumptions and estimates, which are based upon the information then available to the Bank and are inherently uncertain and subject to change. These assumptions and estimates may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Actual results could differ significantly from these estimates.

Estimated Fair Values. The estimated fair value amounts, recorded on the Statements of Condition and in the note disclosures for the periods presented, have been determined by the Bank using available market and other pertinent information and reflect the Bank’s best judgment of appropriate valuation methods. Although the Bank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any valuation technique. Therefore, these fair values may not be indicative of the amounts that would have been realized in market transactions at the reporting dates.


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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

Financial Instruments Meeting Netting Requirements. The Bank has certain financial instruments, including derivative instruments and securities purchased under agreements to resell, that are subject to offset under master netting agreements or by operation of law. The Bank has elected to offset its derivative asset and liability positions, as well as cash collateral received or pledged, when it has the legal right of offset under these master agreements. The Bank does not have any offsetting liabilities related to its securities purchased under agreements to resell for the periods presented.

The net exposure for these financial instruments can change on a daily basis; therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested, and the time when this collateral is received or pledged. There may be a delay for excess collateral to be returned. For derivative instruments, any excess cash collateral received or pledged is recognized as a derivative liability or derivative asset based on the terms of the individual master agreement between the Bank and its derivative counterparty. Additional information regarding these agreements is provided in Note 17—Derivatives and Hedging Activities. Based on the fair value of the related securities held as collateral, the securities purchased under agreements to resell were fully collateralized for the periods presented.

Interest-bearing Deposits, Securities Purchased under Agreements to Resell, and Federal Funds Sold. Interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold provide short-term liquidity and are carried at cost. The Bank treats securities purchased under agreements to resell as short-term collateralized loans, which are classified as assets on the Statements of Condition. Securities purchased under agreements to resell are held in safekeeping in the name of the Bank by third-party custodians approved by the Bank. Should the fair value of the underlying securities decrease below the fair value required as collateral, the counterparty has the option to (1) place an equivalent amount of additional securities in safekeeping in the name of the Bank, or (2) remit an equivalent amount of cash; otherwise, the dollar value of the resale agreement will be decreased accordingly. Federal funds sold consist of short-term, unsecured loans transacted with counterparties that are considered by the Bank to be of investment quality. Interest on interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold is accrued as earned and recorded in interest income on the Statements of Income.

Investment Securities. Investment securities that the Bank has both the ability and intent to hold to maturity are classified as held-to-maturity and are carried at amortized cost, adjusted for periodic principal repayments, amortization of premiums, and accretion of discounts. Amortization of premiums and accretion of discounts are computed using the contractual level-yield method (contractual interest method), adjusted for actual prepayments. The contractual interest method recognizes the income effects of premiums and discounts over the contractual life of the securities based on the actual behavior of the underlying assets, including adjustments for actual prepayment activities, and reflects the contractual terms of the securities without regard to changes in estimated prepayments based on assumptions about future borrower behavior.

The Bank classifies certain investment securities acquired for purposes of liquidity and asset-liability management as trading investments and carries these securities at their estimated fair value. The Bank does not participate in speculative trading practices in these investments and generally holds them until maturity, except to the extent management deems necessary to manage the Bank’s liquidity position. The Bank records changes in the fair value of these investments in noninterest income (loss) as “Net losses on trading securities” on the Statements of Income, along with gains and losses on sales of investment securities using the specific identification method. Amortization of premiums and accretion of discounts are computed using the contractual level-yield method.

The Bank classifies certain securities that are not held-to-maturity or trading as available-for-sale and carries these securities at their estimated fair value. The Bank records changes in the fair value of these investments in other comprehensive income. The Bank intends to hold its available-for-sale securities for an indefinite period of time but may sell them prior to maturity in response to changes in interest rates, prepayment risk, or other factors.

Other-than-temporary Impairment of Investment Securities. The Bank evaluates its individual available-for-sale and held-to-maturity securities in unrealized loss positions for other-than-temporary impairment on a quarterly basis. A security is considered impaired when its fair value is less than its amortized cost. The Bank considers an other-than-temporary impairment to have occurred under any of the following circumstances:

•
the Bank has an intent to sell the impaired debt security;

•
if, based on available evidence, the Bank believes it is more likely than not that it will be required to sell the impaired debt security before the recovery of its amortized cost basis; or


75
Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

•
the Bank does not expect to recover the entire amortized cost basis of the impaired debt security.

If either of the first two conditions above is met, the Bank recognizes an other-than-temporary impairment loss in earnings equal to the entire difference between the security’s amortized cost basis and its fair value as of the Statements of Condition date.

For securities in an unrealized loss position that meet neither of the first two conditions, the Bank performs a cash flow analysis to determine if it will recover the entire amortized cost basis of each of these securities. The present value of the cash flows expected to be collected is compared to the amortized cost basis of the debt security to determine whether a credit loss exists. If there is a credit loss (the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security), the carrying value of the debt security is adjusted to its fair value. However, rather than recognizing the entire difference between the amortized cost basis and fair value in earnings, only the amount of the impairment representing the credit loss (i.e., the credit component) is recognized in earnings, while the amount related to all other factors (i.e., the non-credit component) is recognized in other comprehensive income. The credit loss on a debt security is limited to the amount of that security’s unrealized losses. The total other-than-temporary impairment is presented on the Statements of Income with an offset for the amount of the non-credit component of other-than-temporary impairment that is recognized in other comprehensive income. The remaining amount on the Statements of Income represents the credit loss for the period.

For subsequent accounting of an other-than-temporarily impaired security, the Bank records an additional other-than-temporary impairment if the present value of cash flows expected to be collected is less than the amortized cost of the security. The total amount of this additional other-than-temporary impairment (both credit and non-credit component, if any) is determined as the difference between the security’s amortized cost, less the amount of other-than-temporary impairment recognized in other comprehensive income prior to the determination of this additional other-than-temporary impairment, and its fair value. Any additional credit loss is limited to that security’s unrealized losses or the difference between the security’s amortized cost and its fair value as of the Statements of Condition date. This additional credit loss, up to the amount in accumulated other comprehensive income related to the security, is reclassified out of accumulated other comprehensive income and recognized in earnings. Any credit loss in excess of the related other comprehensive income is recorded as additional total other-than-temporary impairment loss and recognized in earnings.

For debt securities classified as available-for-sale, the Bank does not accrete the other-than-temporary impairment recognized in accumulated other comprehensive income to the carrying value. Rather, subsequent related increases and decreases (if not an other-than-temporary impairment) in the fair value of available-for-sale securities are netted against the non-credit component of other-than-temporary impairment recognized previously in accumulated other comprehensive income.

Upon subsequent evaluation of a debt security where there is no additional other-than-temporary impairment, the Bank adjusts the accretable yield on a prospective basis if there is a significant increase in the security’s expected cash flows. As of the impairment measurement date, a new accretable yield is calculated for the impaired investment security. This adjusted yield is then used to calculate the interest income recognized over the remaining life of the security so as to match the amount and timing of future cash flows expected to be collected. Subsequent significant increases in estimated cash flows change the accretable yield on a prospective basis.

Advances. The Bank reports advances (secured loans to members, former members, or housing associates), net of discounts on advances related to the Affordable Housing Program (AHP) and the Economic Development and Growth Enhancement Program (EDGE), unearned commitment fees, and hedging basis adjustments. The Bank accretes the discounts on advances and amortizes the recognized unearned commitment fees and hedging adjustments to interest income using the contractual interest method. The Bank records interest on advances to interest income as earned.

Prepayment Fees. The Bank charges a borrower a prepayment fee when the borrower prepays certain advances before the original maturity date. The Bank records prepayment fees, net of basis adjustments related to hedging activities included in the carrying value of the advance as “Prepayment fees on advances, net” in the interest income section of the Statements of Income. In cases in which there is a prepayment of an existing advance and a contemporaneous funding of a new advance, the Bank evaluates whether the new advance meets the accounting criteria to qualify as a modification of an existing advance or whether it constitutes a new advance. If the new advance qualifies as a modification of the existing advance, the hedging basis adjustments and the net prepayment fee on the prepaid advance are recorded in the carrying value of the modified advance and amortized over the life of the modified advance using the contractual interest method. This amortization is recorded in advance interest income. If the Bank determines that the transaction does not qualify as a modification of an existing advance, it is

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Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

treated as an advance termination with subsequent funding of a new advance, and the Bank records the net fees as “Prepayment fees, net” in the interest income section of the Statements of Income.

Mortgage Loans Held for Portfolio. The Bank classifies mortgage loans that it has the intent and ability to hold for the foreseeable future, or until maturity or payoff, as held for portfolio. Accordingly, these mortgage loans are reported net of unamortized premiums, unaccreted discounts, mark-to-market basis adjustments on loans initially classified as mortgage loan commitments, and any allowance for credit losses.

The Bank defers and amortizes premiums and accretes discounts (1) paid to and received by the participating financial institutions (PFIs), and (2) mark-to-market basis adjustments on loans initially classified as mortgage loan commitments, as interest income using the contractual interest method.

A mortgage loan is considered past due when the principal or interest payment is not received in accordance with the contractual terms of the loan. The Bank places a conventional mortgage loan on nonaccrual status when the collection of the contractual principal or interest from the borrower is 90 days or more past due. When a mortgage loan is placed on nonaccrual status, accrued but uncollected interest is reversed against interest income. The Bank records cash payments received on nonaccrual loans as interest income and as a reduction of principal as specified in the contractual agreement. A loan on nonaccrual status may be restored to accrual status when the contractual principal and interest are less than 90 days past due. A government-guaranteed or -insured loan is not placed on nonaccrual status when the collection of the contractual principal or interest is 90 days or more past due because of (1) the U.S. government guarantee or insurance on the loan, and (2) the contractual obligation of the loan servicer to repurchase the loan when certain criteria are met.

A mortgage loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the mortgage loan agreement. Interest income is recognized in the same manner as nonaccrual loans.

Finance Agency regulations require that mortgage loans held in the Bank’s portfolios be credit enhanced so that the Bank’s risk of loss is limited to the losses of an investor in at least an investment-grade category, such as “BBB.” For conventional mortgage loans, PFIs retain a portion of the credit risk on the loans they sell to the Bank by providing credit enhancement either through a direct liability to pay credit losses up to a specified amount or through a contractual obligation to provide supplemental mortgage insurance. PFIs are paid a credit enhancement fee (CE Fee) for assuming credit risk, and in some instances, all or a portion of the CE Fee may be performance based. CE Fees are paid monthly based on the remaining unpaid principal balance of the loans in a master commitment. CE Fees are recorded as an offset to mortgage loan interest income. To the extent that the Bank experiences losses in a master commitment, it may be able to recapture CE Fees paid to the PFI to offset these losses.

Allowance for Credit Losses. The allowance for credit losses is a valuation allowance separately established for each identified portfolio segment of financing receivables, if necessary, to provide for probable incurred losses in the Bank’s portfolio as of the Statements of Condition date. A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology for determining its allowance for credit losses. The Bank has developed and documented a systematic methodology for determining an allowance for credit losses for the following portfolio segments of financing receivables: advances and standby letters of credit, government-guaranteed or -insured residential mortgage loans held for portfolio, conventional residential mortgage loans held for portfolio, term federal funds sold, and term securities purchased under agreements to resell.

A portfolio segment may be further disaggregated into classes of financing receivables to the extent that it is needed to understand the exposure to credit risk arising from these financing receivables; however, the Bank determined that no further disaggregation of the portfolio segments identified above is needed.

The Bank manages its credit exposure to advances and standby letters of credit through an integrated approach that includes (1) establishing a credit limit for each borrower; (2) an ongoing review of each borrower’s financial condition; and (3) collateral and lending policies to limit risk of loss, while balancing each borrower’s needs for a reliable source of funding. In addition, the Bank lends to financial institutions within its district and housing associates in accordance with federal statutes and Finance Agency regulations. Specifically, the Bank complies with the FHLBank Act, which requires the Bank to obtain sufficient collateral to fully secure advances. The estimated value of the collateral required to secure each borrower’s advances is calculated by applying discounts to the fair value or unpaid principal balance of the collateral, as applicable. The Bank accepts

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Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

certain investment securities, residential mortgage loans, deposits, and other real estate related assets as collateral. The Bank’s capital stock owned by its member borrower is also pledged as additional collateral. Collateral arrangements may vary depending upon borrower credit quality, financial condition and performance, borrowing capacity, and the Bank’s overall credit exposure to the borrower. The Bank can call for additional or substitute collateral to protect its security interest. The Bank believes that these policies effectively manage credit risk from advances and standby letters of credit.

Based upon the financial condition of the borrower, the Bank either allows a borrower to retain physical possession of the collateral pledged to it or requires the borrower to specifically assign the collateral to or place the collateral in physical possession of the Bank or its safekeeping agent. The Bank requires its borrowers to execute an advances and security agreement that establishes the Bank’s security interest in all collateral pledged by the borrower to the Bank. The Bank perfects its security interest in all pledged collateral. The FHLBank Act affords any security interest granted to the Bank by a borrower priority over the claims or rights of any other party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor), except for claims or rights of a third party that (1) would be entitled to priority under otherwise applicable law, and (2) is an actual bona fide purchaser for value or is an actual secured party whose security interest is perfected in accordance with state law.

Using a risk-based approach and taking into consideration each borrower’s financial strength, the Bank considers the types and amounts of pledged collateral to be the primary indicator of credit quality on its advances. The Bank had rights to collateral on a borrower-by-borrower basis with an estimated value equal to or greater than its outstanding extensions of credit as of December 31, 2018 and 2017.

The Bank continues to evaluate and make changes to its collateral policies, as necessary, based on current market conditions. No advance was past due, on nonaccrual status, or considered impaired as of December 31, 2018 and 2017. In addition, there were no troubled debt restructurings related to advances as of December 31, 2018 and 2017.

Based upon the collateral held as security, the Bank’s collateral policies, credit analysis, and the repayment history on advances, the Bank did not anticipate any credit losses on advances or standby letters of credit as of December 31, 2018 and 2017. Accordingly, the Bank has not recorded any allowance for credit losses on advances, nor has the Bank recorded any liability to reflect an allowance for credit losses for off-balance sheet credit exposure as of December 31, 2018 and 2017.

The Bank invested in government-guaranteed or -insured fixed-rate mortgage loans secured by one-to-four family residential properties. Government-guaranteed or -insured mortgage loans are mortgage loans guaranteed or insured by the Department of Veterans Affairs or the Federal Housing Administration. The servicer provides and maintains insurance or a guarantee from the applicable government agency. The servicer is responsible for compliance with all government agency requirements and for obtaining the benefit of the applicable insurance or guarantee with respect to defaulted government-guaranteed or -insured mortgage loans. Any losses incurred on these loans that are not recovered from the issuer or the guarantor are absorbed by the servicers. Therefore, the Bank only has credit risk for these loans if the servicer fails to pay for losses not covered by insurance or guarantees. Based on the Bank’s assessment of its servicers, the Bank did not establish an allowance for credit losses for its government-guaranteed or -insured mortgage loan portfolio as of December 31, 2018 and 2017.

Modified loans that are considered a troubled debt restructuring are evaluated individually for impairment. All other conventional residential mortgage loans are evaluated collectively for impairment. The allowance for conventional residential mortgage loans is determined by an analysis (performed at least quarterly) that includes segregating the portfolio into various aging groups. For loans that are 60 days or less past due, the Bank calculates a loss severity, default rate, and the expected loss based on individual loan characteristics. For loans that are more than 60 days past due, the allowance is determined using an automated valuation model.

Modified loans that are considered a troubled debt restructuring are individually evaluated for impairment when determining the related allowance for credit losses. Credit loss is measured by factoring in expected cash shortfalls (i.e., loss severity rate) incurred as of the reporting date, as well as the economic loss attributable to delaying the original contractual principal and interest due dates.

A charge-off is recorded if the recorded investment in the loan will not be recovered. The Bank evaluates whether to record a charge-off on a conventional residential mortgage loan upon the occurrence of a confirming event. Once a loan is 180 days delinquent, the Bank classifies as a loss and charges off the portion of outstanding conventional residential mortgage loan

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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

balances in excess of the fair value of the underlying property, less costs to sell and adjusted for any available credit enhancements.
Term federal funds sold are generally short-term, their recorded balance approximates fair value, and they are transacted with counterparties that the Bank considers to be of investment quality. The Bank’s investment in federal funds sold are evaluated for purposes of an allowance for credit losses only if the investment is not paid when due. All investments in federal funds sold are unsecured and were repaid or expected to be repaid according to the contracted terms as of December 31, 2018 and 2017.

Securities purchased under agreements to resell are considered collateralized financing arrangements and effectively represent short-term loans transacted with counterparties that the Bank considers to be of investment quality. The terms of these loans are structured such that if the fair value of the underlying securities decreases below the fair value required as collateral, the counterparty must place an equivalent amount of additional securities as collateral or remit an equivalent amount of cash. If an agreement to resell is deemed to be impaired, the difference between the fair value of the collateral and the amortized cost of the agreement is recognized in earnings. Based upon the collateral held as security, the Bank determined that no allowance for credit losses was needed for the securities purchased under agreements to resell as of December 31, 2018 and 2017.

Real estate owned (REO) includes assets that have been received in satisfaction of debt through foreclosures. REO is initially recorded at fair value, less estimated selling costs and is subsequently carried at the lower of that amount or current fair value, less estimated selling costs. The Bank recognizes a charge-off to the allowance for credit losses if the fair value of the REO, less estimated selling costs is less than the recorded investment in the loan at the date of transfer from loans to REO. Any subsequent realized gains, realized or unrealized losses, and carrying costs are included in noninterest income (loss) on the Statements of Income. REO is recorded in “Other assets” on the Statements of Condition and was $1 and $2 as of December 31, 2018 and 2017, respectively.

Derivatives. All derivatives are recognized on the Statements of Condition at their fair values and are reported as either derivative assets or derivative liabilities, net of cash collateral and accrued interest received from or pledged to clearing agents and/or counterparties. The fair values of derivatives are netted by the clearing agent and/or counterparty when the netting requirements have been met. If these netted amounts are positive, they are classified as an asset and, if negative, they are classified as a liability. Cash flows associated with derivatives are reflected as cash flows from operating activities on the Statements of Cash Flows unless the derivative meets the criteria to be a financing derivative.

Derivatives not used for intermediary purposes are designated as either (1) a hedge of the fair value of (a) a recognized asset or liability or (b) an unrecognized firm commitment (a fair-value hedge); or (2) a non-qualifying hedge of an asset or liability for asset-liability management purposes. Changes in the fair value of a derivative that are effective as, and that are designated and qualify as, a fair-value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (including changes that reflect losses or gains on firm commitments), are recorded in noninterest income (loss) as “Net gains on derivatives and hedging activities” on the Statements of Income. Any hedge ineffectiveness (which represents the amount by which the change in the fair value of the derivative differs from the change in the fair value of the hedged item) is recorded in noninterest income (loss) as “Net gains on derivatives and hedging activities” on the Statements of Income. A non-qualifying hedge is a derivative hedging specific or non-specific underlying assets, liabilities, or firm commitments that is an acceptable hedging strategy under the Bank’s risk management program and Finance Agency regulatory requirements, but it does not qualify or was not designated for fair value or cash flow hedge accounting. A non-qualifying hedge introduces the potential for earnings variability because only the change in fair value of the derivative is recorded and is not offset by corresponding changes in the fair value of the non-qualifying hedged asset, liability, or firm commitment, unless such asset, liability, or firm commitment is required to be accounted for at fair value through earnings. Both the net interest on the derivative and the fair value adjustments of a non-qualifying hedge are recorded in noninterest income (loss) as “Net gains on derivatives and hedging activities” on the Statements of Income.

The derivatives used in intermediary activities do not qualify for hedge accounting treatment and are separately marked-to-market through earnings. These amounts are recorded in noninterest income (loss) as “Net gains on derivatives and hedging activities” on the Statements of Income. The net result of the accounting for these derivatives does not significantly impact the Bank’s results of operations.

The net settlement of interest receivables and payables related to derivatives designated as fair-value hedges are recognized as adjustments to the interest income or interest expense of the designated hedged item. The net settlement of interest receivables and payables related to intermediated derivatives for members and other non-qualifying hedges are recognized in noninterest income (loss) as “Net gains on derivatives and hedging activities” on the Statements of Income.

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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)


The Bank discontinues hedge accounting prospectively when (1) it determines that the derivative is no longer expected to be effective in offsetting changes in the fair value of a hedged risk, including hedged items such as firm commitments; (2) the derivative and/or the hedged item expires or is sold, terminated, or exercised; (3) a hedged firm commitment no longer meets the definition of a firm commitment; or (4) the bank determines that designating the derivative as a hedging instrument is no longer appropriate.

When hedge accounting is discontinued due to the Bank’s determination that a derivative no longer qualifies as an effective fair-value hedge of an existing hedged item, or when the bank decides to cease the specific hedging activity, the Bank will either (1) terminate the derivative, or (2) continue to carry the derivative on the Statements of Condition at its fair value, cease to adjust the hedged asset or liability for changes in fair value, and amortize the cumulative basis adjustment on the hedged item into earnings over the remaining life of the hedged item using the level-yield method. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Bank will carry the derivative at its fair value on the Statements of Condition, recognizing changes in the fair value of the derivative in current-period earnings.

The Bank may issue debt, make advances, or purchase financial instruments in which a derivative instrument may be “embedded.” Upon execution of these transactions, the Bank assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the advance, debt, or purchased financial instruments (i.e., the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract; and (2) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as a stand-alone derivative instrument pursuant to a non-qualifying hedge. However, if the entire contract (the host contract and the embedded derivative) is to be measured at fair value, with changes in fair value reported in current-period earnings (e.g., an investment security classified as “trading”), or if the Bank could not identify and measure reliably the embedded derivative for purposes of separating that derivative from its host contract, the entire contract would be carried on the Statements of Condition at fair value, and no portion of the contract could be designated as a hedging instrument.

Premises, Equipment, and Software. Premises, equipment, and the cost of purchased software and certain costs incurred in developing computer software for internal use are recorded in “Other assets” on the Statements of Condition. The Bank records these items at cost less accumulated depreciation or amortization. The Bank computes depreciation and amortization using the straight-line method over the estimated useful lives of assets. The estimated useful lives in years are generally as follows: automobiles and computer hardware—three; capitalized computer software cost—three; office equipment—eight; office furniture and building improvements—10; and building—40. The Bank amortizes leasehold improvements using the straight-line method over the shorter of the estimated useful life of the improvement or the remaining term of the lease. The Bank capitalizes improvements and expenses ordinary maintenance and repairs when incurred.

The following tables present information on premises, equipment, and capitalized computer software cost.
 
As of December 31,
 
2018
 
2017
 
2018
 
2017
 
Premises and Equipment
 
Computer Software Cost
Gross carrying amount
$
91

 
$
90

 
$
62

 
$
58

Accumulated depreciation or amortization
72

 
68

 
53

 
50

Net carrying amount
$
19

 
$
22

 
$
9

 
$
8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Years Ended December 31,
 
 
 
2018
 
2017
 
2016
Premises and equipment depreciation expense
 
 
$
4

 
$
4

 
$
4

Software amortization expense
 
 
2

 
2

 
3

 
 
 
 
 
 
 
 



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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

Deposits. The Bank offers demand and overnight deposits for members and qualifying non-members. A member that services mortgage loans may deposit funds in the Bank that were collected in connection with the mortgage loans, pending disbursement of such funds to the owners of the mortgage loans. The Bank records these items in “Interest-bearing deposits” on the Statements of Condition. The Bank pays interest on demand and overnight deposits based on a daily interest rate.

Consolidated Obligations. The Bank records consolidated obligations at amortized cost. Additionally, the Bank pays concessions to dealers in connection with the issuance of certain consolidated obligations. The Office of Finance prorates the concessions to the Bank based upon the percentage of the debt issued that is assumed by the Bank. The Bank records concessions paid on consolidated obligations as a direct deduction from their carrying amounts, consistent with the presentation of discounts on consolidated obligations. The Bank accretes discounts and amortizes premiums, as well as concessions and hedging basis adjustments on consolidated obligations, to interest expense using the contractual interest method over the contractual term of the corresponding consolidated obligation.

Mandatorily Redeemable Capital Stock. The Bank reclassifies stock that is subject to redemption from capital to a liability after a member submits a written redemption request, gives notice of intent to withdraw from membership, or attains non-member status through a merger or acquisition, charter termination, or involuntary termination from membership since the member shares will then meet the definition of a mandatorily redeemable financial instrument. Member shares meeting this definition are reclassified to a liability at fair value. Dividends declared on shares classified as a liability are accrued at the expected dividend rate and recorded as interest expense on the Statements of Income. The repurchase or redemption of these mandatorily redeemable financial instruments is recorded as cash outflows in the financing activities section of the Statements of Cash Flows.

If a member cancels its written notice of redemption or notice of withdrawal, the Bank will reclassify mandatorily redeemable capital stock from a liability to capital. After the reclassification, dividends on the capital stock no longer will be classified as interest expense.

Restricted Retained Earnings. The FHLBanks have entered into a Joint Capital Enhancement Agreement, as amended (Capital Agreement), which is intended to enhance the capital position of each FHLBank. Under the Capital Agreement, each FHLBank allocates 20 percent of its net income each quarter to a separate retained earnings account until the account balance equals at least one percent of the FHLBank’s average balance of outstanding consolidated obligations for the previous quarter. Restricted retained earnings are not available to pay dividends and are presented separately on the Statements of Condition.

Finance Agency and Office of Finance Expenses. The Finance Agency allocates the FHLBanks’ portion of its expenses and working capital fund among the FHLBanks based on the ratio between each FHLBank’s minimum required regulatory capital and the aggregate minimum required regulatory capital of every FHLBank. Each FHLBank’s proportionate share of the Office of Finance’s operating and capital expenditures is calculated using a formula that is (1) two-thirds based upon each FHLBank’s share of total consolidated obligations outstanding, and (2) one-third based upon an equal pro rata allocation.

Affordable Housing Program. The FHLBank Act requires each FHLBank to establish and fund an AHP that provides subsidies to members to assist in the purchase, construction, or rehabilitation of housing for very low-to-moderate-income households. The Bank charges the required funding for AHP against earnings and establishes a corresponding liability. The Bank issues AHP advances at interest rates below the customary interest rate for non-subsidized advances. A discount on the AHP advance and charge against the AHP liability is recorded for the present value of the variation in the cash flow caused by the difference in the interest rate between the AHP advance rate and the Bank’s related cost of funds for comparable maturity funding. As an alternative, the Bank has the authority to make the AHP subsidy available to members as a grant. The discount on AHP advances is accreted to interest income on advances using the contractual interest method over the life of the advance.


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Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)


Note 3—Recently Issued and Adopted Accounting Guidance

The following tables provide a summary of accounting guidance issued by the Financial Accounting Standards Board that was adopted and recently issued guidance not yet adopted, which may impact the Bank’s financial statements.

Recently Adopted Accounting Guidance
Accounting Standard Update (ASU)
 
Description
 
Effective Date
 
Effect on Financial Statements or Other Significant Matters
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
(ASU 2017-07)
 
This guidance requires entities to report the service cost component in the same line items as compensation cost on the income statement, while the other components of net benefit cost are required to be presented separately from the service cost component. Additionally, this guidance only allows the service cost component to be eligible for capitalization, when applicable.
 
January 1, 2018

 
The adoption of this guidance did not have a material impact on the Bank's financial condition or results of operations.
Classification of Certain Cash Receipts and Cash Payments
(ASU 2016-15)
 
This guidance is intended to reduce diversity in practice in how cash receipts and cash payments are presented and classified in the statement of cash flows for certain transactions.
 
January 1, 2018



 
Upon adoption, interest paid as reported in the supplemental disclosures of cash flow information increased by $422 and $214 for the years ended December 31, 2017 and 2016, respectively, relating to accreted interest on zero-interest debt instruments. However, the adoption of this guidance did not have any other effect on the Bank's financial condition, results of operations, or cash flows.
Recognition and Measurement of Financial Assets and Financial Liabilities
(ASU 2016-01)
 
This guidance amends certain requirements for accounting for the recognition and measurement of financial instruments. Most notably, this guidance revises the accounting for equity securities, financial instruments measured under the fair value option, and certain disclosure requirements for fair value of financial instruments.
 
January 1, 2018


 
The adoption of this guidance did not have an impact on the Bank's financial condition or results of operations.
Revenue From Contracts with Customers
(ASU 2014-09)
 
This guidance requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
 
January 1, 2018


 
Given that the majority of the Bank's financial instruments and other contractual rights that generate revenue are covered by other GAAP, the adoption of this guidance did not have an impact on the Bank’s financial condition or results of operations.

Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedging Purposes
(ASU 2018-16)
 
This guidance permits the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes.
 
January 1, 2019
 
The adoption of this guidance did not have an impact on the Bank’s financial condition or results of operations.

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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

Accounting Standard Update (ASU)
 
Description
 
Effective Date
 
Effect on Financial Statements or Other Significant Matters
Targeted Improvements to Accounting for Hedging Activities
(ASU 2017-12)
 
This guidance amends the accounting for derivatives and hedging activities to better portray the economics of the transactions.
 
January 1, 2019
 
The adoption of this guidance did not have an impact on the Bank’s financial condition or results of operations.
Premium Amortization on Purchased Callable Debt Securities
(ASU 2017-08)
 
This guidance shortens the amortization period for certain callable debt securities held at a premium by requiring that the premium be amortized to the earliest call date, rather than contractual maturity.
 
January 1, 2019
 
The adoption of this guidance did not have an impact on the Bank’s financial condition or results of operations.
Leases
(ASU 2016-02)
 
This guidance amends the accounting for leases. It will require lessees to recognize a right-of-use asset and lease liability for virtually all leases.
 
January 1, 2019
 
The adoption of this guidance did not have a material impact on the Bank’s financial condition or results of operations.

Recently Issued Accounting Guidance Not Yet Adopted
Accounting Standard Update (ASU)
 
Description
 
Effective Date
 
Effect on Financial Statements or Other Significant Matters
Disclosure Framework–Changes to the Disclosure Requirements for Defined Benefit Plans
(ASU 2018-14)
 
This guidance amends the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.
 
December 31, 2020

Early adoption is permitted
 
The Bank does not intend to adopt this guidance early. This guidance is not expected to have any impact on the Bank’s financial condition or results of operations.

Disclosure Framework–Changes to the Disclosure Requirements for Fair Value Measurement
(ASU 2018-13)
 
This guidance amends the disclosure requirements on fair value measurements.
 
January 1, 2020

Early adoption is permitted
 
The Bank does not intend to adopt this guidance early. This guidance is not expected to have any impact on the Bank’s financial condition or results of operations.

Measurement of Credit Losses on Financial Instruments
(ASU 2016-13)
 
This guidance replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects lifetime expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
 
January 1, 2020

Early adoption is permitted

 
The Bank does not intend to adopt this guidance early. The Bank has completed its preliminary assessment of the impact of this guidance on all its financial assets, including advances, investments, and other financial assets, and does not expect the adoption of this guidance to have a material impact on its financial condition and results of operations. However, the Bank will continue to evaluate this guidance, as well as the economic conditions and forecasts at the time of adoption. The ultimate impact on the Bank’s financial condition and results of operations will depend upon the composition of the financial assets held by the Bank at the adoption date, as well as the economic conditions and forecasts at that time.



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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

Note 4—Cash and Due from Banks

The Bank maintains a collected cash balance with a commercial bank, which is a member, in return for certain services, and the average collected cash balance was $8 and $7 for the years ended December 31, 2018 and 2017, respectively. There are no legal restrictions regarding the withdrawal of these funds.

Note 5—Trading Securities
Major Security Types. The following table presents trading securities.
 
 
As of December 31,
 
2018
 
2017
Government-sponsored enterprises debt obligations
$
55

 
$
56


The following table presents net losses on trading securities.
 
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
Net (losses) gains on trading securities held at year end
$
(1
)
 
$
1

 
$
(8
)
Net losses on trading securities that matured during the year
—

 
(6
)
 
(22
)
Net losses on trading securities
$
(1
)
 
$
(5
)
 
$
(30
)


Note 6—Available-for-sale Securities

Major Security Type. The following table presents information on private-label residential mortgage-backed securities (MBS) that are classified as available-for-sale.
 
Amortized  
Cost
 
Other-than-temporary  
Impairment
Recognized in
Accumulated Other
Comprehensive Income (1)
 
Gross
  Unrealized  
Gains
 
Gross
  Unrealized  
Losses
 
Estimated
  Fair Value  
As of December 31, 2018
$
793

 
$
(1
)
 
$
73

 
$
—

 
$
865

As of December 31, 2017
$
970

 
$
(1
)
 
$
135

 
$
—

 
$
1,104


____________ 
(1) Amounts represent the non-credit portion of an other-than-temporary impairment during the life of the security.

The following table presents private-label residential MBS that are classified as available-for-sale with unrealized losses. The unrealized losses are aggregated by the length of time that the individual securities have been in a continuous unrealized loss position.
 
Less than 12 Months
 
12 Months or More
 
Total
 
  Number of  
Positions
 
Estimated
  Fair  Value  
 
Gross
  Unrealized  
Losses
 
  Number of  
Positions
 
Estimated
  Fair  Value  
 
Gross
  Unrealized  
Losses
 
  Number of  
Positions
 
Estimated
  Fair  Value  
 
Gross
  Unrealized  
Losses
As of December 31, 2018
1

 
$
3

 
$
—

 
2

 
$
4

 
$
(1
)
 
3

 
$
7

 
$
(1
)
As of December 31, 2017
1

 
$
7

 
$
(1
)
 
1

 
$
4

 
$
—

 
2

 
$
11

 
$
(1
)



84
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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

Interest-rate Payment Terms. The following table presents interest-rate payment terms for investment securities classified as available-for-sale.
 
 
As of December 31,
 
 
2018
 
2017
Variable-rate
 
$
779

 
$
955

Fixed-rate
 
14

 
15

Total amortized cost
 
$
793

 
$
970


The following table presents private-label residential MBS that are classified as available-for-sale and issued by members or affiliates of members, all of which have been issued by Bank of America Corporation, Charlotte, NC.
 
 
Amortized
Cost
 
Other-than-temporary
Impairment
Recognized in
 Accumulated Other
Comprehensive Income (1)
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
As of December 31, 2018
$
539

 
$
—

 
$
54

 
$
—

 
$
593

As of December 31, 2017
$
638

 
$
(1
)
 
$
104

 
$
—

 
$
741


____________ 
(1) Amounts represent the non-credit portion of an other-than-temporary impairment during the life of the security.

Note 7—Held-to-maturity Securities
Major Security Types. The following table presents held-to-maturity securities.
 
 
As of December 31,
 
2018
 
2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
State or local housing agency debt obligations
$
1

 
$
—

 
$
—

 
$
1

 
$
1

 
$
—

 
$
—

 
$
1

Government-sponsored enterprises debt obligations
2,672

 
5

 
(2
)
 
2,675

 
5,350

 
8

 
(6
)
 
5,352

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency obligations-guaranteed residential
118

 
2

 
—

 
120

 
157

 
2

 
—

 
159

Government-sponsored enterprises residential
9,304

 
40

 
(43
)
 
9,301

 
9,357

 
65

 
(24
)
 
9,398

Government-sponsored enterprises commercial
11,368

 
4

 
(41
)
 
11,331

 
9,729

 
16

 
(12
)
 
9,733

Private-label residential
416

 
4

 
(2
)
 
418

 
568

 
8

 
—

 
576

Total
$
23,879

 
$
55

 
$
(88
)
 
$
23,846

 
$
25,162

 
$
99

 
$
(42
)
 
$
25,219




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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

The following tables present held-to-maturity securities with unrealized losses. The unrealized losses are aggregated by major security type and by the length of time that the individual securities have been in a continuous unrealized loss position.
 
 
As of December 31, 2018
 
Less than 12 Months
 
12 Months or More
 
Total
 
Number of
Positions
 
Estimated
Fair  Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair  Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair  Value
 
Gross
Unrealized
Losses
State or local housing agency debt obligations
—

 
$
—

 
$
—

 
1

 
$
1

 
$
—

 
1

 
$
1

 
$
—

Government-sponsored enterprises debt obligations
12

 
1,235

 
(1
)
 
1

 
99

 
(1
)
 
13

 
1,334

 
(2
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises residential
54

 
2,704

 
(13
)
 
22

 
1,382

 
(30
)
 
76

 
4,086

 
(43
)
Government-sponsored enterprises commercial
58

 
7,406

 
(34
)
 
18

 
1,015

 
(7
)
 
76

 
8,421

 
(41
)
Private-label residential
26

 
139

 
(1
)
 
11

 
25

 
(1
)
 
37

 
164

 
(2
)
Total
150

 
$
11,484

 
$
(49
)
 
53

 
$
2,522

 
$
(39
)
 
203

 
$
14,006

 
$
(88
)
 
 
As of December 31, 2017
 
Less than 12 Months
 
12 Months or More
 
Total
 
Number of
Positions
 
Estimated
Fair  Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair  Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair  Value
 
Gross
Unrealized
Losses
State or local housing agency debt obligations
1

 
$
1

 
$
—

 
—

 
$
—

 
$
—

 
1

 
$
1

 
$
—

Government-sponsored enterprises debt obligations
6

 
996

 
(1
)
 
5

 
1,495

 
(5
)
 
11

 
2,491

 
(6
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises residential
12

 
1,466

 
(11
)
 
40

 
1,154

 
(13
)
 
52

 
2,620

 
(24
)
Government-sponsored enterprises commercial
16

 
1,209

 
(5
)
 
7

 
1,029

 
(7
)
 
23

 
2,238

 
(12
)
Private-label residential
7

 
19

 
—

 
16

 
70

 
—

 
23

 
89

 
—

Total
42

 
$
3,691

 
$
(17
)
 
68

 
$
3,748

 
$
(25
)
 
110

 
$
7,439

 
$
(42
)



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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

Redemption Terms. The following table presents the amortized cost and estimated fair value of held-to-maturity securities by contractual maturity. MBS are not presented by contractual maturity because their actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

 
As of December 31,
 
2018
 
2017
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Non-mortgage-backed securities:
 
 
 
 
 
 
 
Due in one year or less
$
225

 
$
225

 
$
2,913

 
$
2,909

Due after one year through five years
2,057

 
2,058

 
1,972

 
1,975

Due after five years through 10 years
331

 
333

 
406

 
409

Due after 10 years
60


60


60


60

Total non-mortgage-backed securities
2,673

 
2,676

 
5,351

 
5,353

Mortgage-backed securities
21,206

 
21,170

 
19,811

 
19,866

Total
$
23,879

 
$
23,846

 
$
25,162

 
$
25,219



Interest-rate Payment Terms. The following table presents interest-rate payment terms for investment securities classified as held-to-maturity.
 
 
As of December 31,
 
 
2018
 
2017
Non-mortgage-backed securities:
 
 
 
 
   Fixed-rate
 
$
101

 
$
2,088

   Variable-rate
 
2,572

 
3,263

Total non-mortgage-backed securities
 
2,673

 
5,351

 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
   Fixed-rate
 
1,914

 
2,321

   Variable-rate
 
19,292

 
17,490

Total mortgage-backed securities
 
21,206

 
19,811

Total amortized cost
 
$
23,879

 
$
25,162


The following table presents private-label residential MBS that are classified as held-to-maturity and issued by members or affiliates of members, all of which have been issued by Bank of America Corporation, Charlotte, NC.

 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
As of December 31, 2018
$
91

 
$
1

 
$
(1
)
 
$
91

As of December 31, 2017
$
125

 
$
1

 
$
—

 
$
126



Note 8—Other-than-temporary Impairment
Mortgage-backed Securities. The Bank’s investments in MBS consist of U.S. agency guaranteed securities and senior tranches of private-label MBS. The Bank has increased exposure to the risk of loss on its investments in MBS when the loans backing the MBS exhibit high rates of delinquency and foreclosures, as well as losses on the sale of foreclosed properties. To reduce its risk of loss on such securities, the Bank regularly requires high levels of credit enhancements from the structure of the collateralized mortgage obligation. Credit enhancements are defined as the percentage of subordinate tranches, overcollateralization, or excess spread, or the support of monoline insurance, if any, in a security structure that will absorb the losses before the security that the Bank purchased will take a loss. The Bank does not purchase credit enhancements for its MBS from monoline insurance companies.

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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

Non-private-label MBS. The unrealized losses related to U.S. agency MBS are caused by interest rate changes, not credit quality. These securities are guaranteed by government agencies or government-sponsored enterprises and the Bank does not expect these securities to be settled at a price less than their amortized cost basis. In addition, the Bank does not intend to sell these investments and it is not more likely than not that the Bank will be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. The Bank does not consider these investments to be other-than-temporarily impaired as of December 31, 2018.
Private-label MBS. To assess whether the entire amortized cost basis of its private-label MBS will be recovered, the Bank performs a cash flow analysis for each of its private-label MBS using two third-party models.
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, which are based upon an assessment of the individual housing markets. The Bank’s housing price forecast as of December 31, 2018 included a short-term housing price forecast with geographically projected changes ranging from a decrease of seven percent to an increase of 14 percent over the 12 month period beginning October 1, 2018. For the vast majority of markets, the projected short-term housing price changes range from an increase of three percent to an increase of seven percent. 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, were then input into a second model. The second model 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.
At each quarter end, the Bank compares the present value of the cash flows (discounted at the securities’ effective yield) expected to be collected with respect to its private-label MBS to the amortized cost basis of the security to determine whether a credit loss exists. For the Bank’s variable rate and hybrid private-label MBS, the Bank uses a forward interest rate curve to project the future estimated cash flows. The Bank then uses the effective interest rate for the security prior to impairment for determining the present value of the future estimated cash flows. For securities previously identified as other-than-temporarily impaired, the Bank updates its estimate of future estimated cash flows on a quarterly basis.
The following table presents a summary of the significant inputs used to measure the amount of the credit loss recognized in earnings for those securities for which an other-than-temporary impairment was determined to have occurred during the year ended December 31, 2018, as well as the related current credit enhancement.
 
 
 
Significant Inputs - Weighted Average (%) (1)
 
Classification of Securities
 
Prepayment Rates
 
Default Rates
 
Loss Severities
 
Current Credit Enhancement (%)
Prime
 
13.05
 
17.50
 
27.58
 
1.35
Alt-A
 
17.03
 
14.56
 
33.93
 
0.01
Total
 
14.61
 
16.35
 
30.06
 
0.83

____________
(1) The classification of securities is based on current characteristics and performance, which may be different from the securities’ classification as determined by the originator at the time of origination.


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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

The following table presents a roll-forward of the amount of credit losses on the Bank’s investment securities recognized in earnings during the life of the securities for which a portion of the other-than-temporary loss was recognized in accumulated other comprehensive income.
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
Balance, beginning of year
$
394

 
$
455

 
$
505

Amount related to credit loss for which an other-than-temporary impairment was previously recognized
3

 
2

 
3

Increase in cash flows expected to be collected, (accreted as interest income over the remaining lives of the applicable securities)
(62
)
 
(63
)
 
(53
)
Balance, end of year
$
335

 
$
394

 
$
455



Certain other private-label MBS that have not been designated as other-than-temporarily impaired have experienced unrealized losses and decreases in fair value due to interest rate volatility and illiquidity in the marketplace. These declines in fair value are considered temporary as the Bank expects to recover the amortized cost basis of the securities, the Bank does not intend to sell these securities, and it is not more likely than not that the Bank will be required to sell these securities before the anticipated recovery of the securities’ remaining amortized cost basis, which may be at maturity. This assessment is based on the fact that the Bank has sufficient capital and liquidity to operate its business and has no need to sell these securities, nor has the Bank entered into any contractual constraints that would require the Bank to sell these securities.

Non-MBS Held-to-Maturity Securities. The unrealized losses related to non-MBS held-to-maturity securities are caused by interest rate changes and not due to a significant deterioration in the fundamental credit quality of the obligations. The creditworthiness of the issuers and the strength of the underlying collateral were sufficient to protect the Bank from losses based on current expectations. The Bank does not intend to sell these investments, and it is not more likely than not that the Bank will be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. The Bank does not consider these investments to be other-than temporarily impaired as of December 31, 2018.


Note 9—Advances

Redemption Terms. The Bank had advances outstanding at interest rates ranging from zero percent to 7.54 percent as of December 31, 2018. Advances with interest rates of zero percent are AHP and EDGE subsidized advances and certain structured advances. The following table presents the Bank’s advances outstanding.
 
 
As of December 31,
 
2018
 
2017
Overdrawn demand deposit accounts
$
33

 
$
—

Due in one year or less
72,300

 
60,794

Due after one year through two years
13,298

 
10,780

Due after two years through three years
5,403

 
14,210

Due after three years through four years
4,678

 
4,162

Due after four years through five years
3,997

 
3,729

Due after five years
8,705

 
8,574

Total par value
108,414

 
102,249

Discount on AHP advances
(4
)
 
(4
)
Discount on EDGE advances
(2
)
 
(3
)
Hedging adjustments
54

 
198

Total
$
108,462

 
$
102,440



The Bank offers callable advances to members that may be prepaid on prescribed dates (call dates) without incurring prepayment or termination fees. The Bank also offers prepayable advances, which are variable-rate advances that may be contractually prepaid by the borrower on specified dates without incurring prepayment or termination fees. Other advances may

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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

be prepaid only by paying a fee to the Bank, so the Bank is financially indifferent to the prepayment of the advance. The Bank had callable and prepayable advances outstanding of $13,868 and $17,920 as of December 31, 2018 and 2017, respectively.

The following table presents advances by year of contractual maturity or next call date for callable advances.
 
As of December 31,
 
2018
 
2017
Overdrawn demand deposit accounts
$
33

 
$
—

Due or callable in one year or less
80,307

 
74,706

Due or callable after one year through two years
8,866

 
10,191

Due or callable after two years through three years
4,382

 
4,300

Due or callable after three years through four years
3,871

 
3,191

Due or callable after four years through five years
3,683

 
2,842

Due or callable after five years
7,272

 
7,019

Total par value
$
108,414

 
$
102,249



Convertible advances offered by the Bank allow the Bank to convert the fixed-rate advance to a variable-rate advance at the current market rate on certain specified dates. The Bank had convertible advances outstanding of $987 and $693 as of December 31, 2018 and 2017, respectively. The following table presents advances by year of contractual maturity or, for convertible advances, next conversion date.
 
 
As of December 31,
 
2018
 
2017
Overdrawn demand deposit accounts
$
33

 
$
—

Due or convertible in one year or less
73,009

 
60,984

Due or convertible after one year through two years
13,484

 
10,846

Due or convertible after two years through three years
5,437

 
14,326

Due or convertible after three years through four years
4,642

 
4,184

Due or convertible after four years through five years
3,951

 
3,695

Due or convertible after five years
7,858

 
8,214

Total par value
$
108,414

 
$
102,249



Interest-rate Payment Terms. The following table presents interest-rate payment terms for advances.
 
 
As of December 31,
 
2018
 
2017
Fixed-rate:
 
 
 
 Due in one year or less
$
40,578

 
$
37,107

 Due after one year
24,043

 
22,044

Total fixed-rate
64,621

 
59,151

Variable-rate:
 
 
 
 Due in one year or less
31,755

 
23,687

 Due after one year
12,038

 
19,411

Total variable-rate
43,793

 
43,098

Total par value
$
108,414

 
$
102,249



Credit Risk. The Bank’s potential credit risk from advances is concentrated in commercial banks, savings institutions, and credit unions and further is concentrated in certain larger borrowing relationships. The concentration of the Bank’s advances to its 10

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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

largest borrowers was $80,211 and $71,440 as of December 31, 2018 and 2017, respectively. This concentration represented 74.0 percent and 69.9 percent of total advances outstanding as of December 31, 2018 and 2017, respectively.
Based on the collateral pledged as security for advances, the Bank’s credit analysis of members’ financial condition, and prior repayment history, no allowance for credit losses on advances was deemed necessary by the Bank as of December 31, 2018 and 2017. No advance was past due as of December 31, 2018 and 2017.

For additional information related to the Bank’s credit risk on advances and allowance for credit losses, see Note 2—Summary of Significant Accounting Policies.

Note 10—Mortgage Loans Held for Portfolio

The Bank purchased fixed-rate residential mortgage loans directly from PFIs, who service and credit enhance the residential mortgage loans that they sold to the Bank. The Bank ceased purchasing these loans directly from PFIs in 2008. The Bank may also acquire fixed-rate residential mortgage loans through participations in eligible mortgage loans purchased from other FHLBanks.

The following table presents information on mortgage loans held for portfolio by contractual maturity at the time of purchase.
 
 
As of December 31,
 
 
2018
 
2017
Medium-term (15 years or less)
 
$
8

 
$
19

Long-term (greater than 15 years)
 
353

 
417

Total unpaid principal balance
 
361

 
436

Premiums
 
1

 
2

Discounts
 
(1
)
 
(2
)
Total
 
$
361

 
$
436



The following table presents the unpaid principal balance of mortgage loans held for portfolio by collateral or guarantee type.
 
 
As of December 31,
 
 
2018
 
2017
Conventional mortgage loans
 
$
338

 
$
409

Government-guaranteed or insured mortgage loans
 
23

 
27

Total unpaid principal balance
 
$
361

 
$
436



The Bank records credit enhancement fees related to residential mortgage loans as a reduction to mortgage loan interest income.

For information related to the Bank’s credit risk on mortgage loans and allowance for credit losses, see Note 11—Allowance for Credit Losses.

Note 11—Allowance for Credit Losses

The following table presents the activity in the allowance for credit losses related to conventional residential mortgage loans.

 
 
For the Years Ended December 31,
 
 
2018
 
2017
 
2016
Balance, beginning of year
 
$
1

 
$
1

 
$
2

Reversal of provision for credit losses
 
—

 
—

 
(1
)
Balance, end of year
 
$
1

 
$
1

 
$
1




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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

The following table presents the recorded investment in conventional residential mortgage loans by impairment methodology.
 
 
As of December 31,
 
 
2018
 
2017
Allowance for credit losses:
 
 
 
 
   Collectively evaluated for impairment
 
$
1

 
$
1

Recorded investment:
 
 
 
 
   Individually evaluated for impairment
 
$
9

 
$
11

   Collectively evaluated for impairment
 
330

 
400

Total recorded investment
 
$
339

 
$
411




Key credit quality indicators for mortgage loans include the migration of past due mortgage loans, nonaccrual mortgage loans, and mortgage loans in process of foreclosure. The following tables present the Bank’s recorded investment in mortgage loans by these key credit quality indicators.
 
As of December 31, 2018
 
Conventional Residential Mortgage Loans
 
Government-guaranteed or Insured Residential Mortgage Loans
 
Total
Past due 30-59 days
$
8

 
$
2

 
$
10

Past due 60-89 days
3

 
—

 
3

Past due 90 days or more
6

 
—

 
6

Total past due mortgage loans
17

 
2

 
19

Total current mortgage loans
322

 
21

 
343

Total mortgage loans (1)
$
339

 
$
23

 
$
362

Other delinquency statistics:
 
 
 
 
 
  In process of foreclosure (2)
$
2

 
$
—

 
$
2

  Seriously delinquent rate (3)
1.93
%
 
1.23
%
 
1.89
%
  Past due 90 days or more and still accruing interest (4)
$
—

 
$
—

 
$
—

  Mortgage loans on nonaccrual status (5)
$
6

 
$
—

 
$
6

____________
(1) The difference between the recorded investment and the carrying value of total mortgage loans of $1 relates to accrued interest.
(2) Includes mortgage loans where the decision of foreclosure or similar alternative, such as a pursuit of deed-in-lieu, has been reported. Mortgage loans in the process of foreclosure are included in past due categories depending on their delinquency status.
(3) Mortgage loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total mortgage loan portfolio segment.
(4) Mortgage loans insured or guaranteed by the Federal Housing Administration or the Department of Veterans Affairs.
(5) Represents mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest.


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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

 
As of December 31, 2017
 
Conventional Residential Mortgage Loans
 
Government-guaranteed or Insured Residential Mortgage Loans
 
Total
Past due 30-59 days
$
14

 
$
3

 
$
17

Past due 60-89 days
7

 
1

 
8

Past due 90 days or more
12

 
—

 
12

Total past due mortgage loans
33

 
4

 
37

Total current mortgage loans
378

 
23

 
401

Total mortgage loans (1)
$
411

 
$
27

 
$
438

Other delinquency statistics:
 
 
 
 
 
  In process of foreclosure (2)
$
6

 
$
—

 
$
6

  Seriously delinquent rate (3)
3.51
%
 
1.33
%
 
3.37
%
Past due 90 days or more and still accruing interest (4)
$
—

 
$
—

 
$
—

  Mortgage loans on nonaccrual status (5)
$
12

 
$
—

 
$
12

____________
(1) The difference between the recorded investment and the carrying value of total mortgage loans of $2 relates to accrued interest.
(2) Includes mortgage loans where the decision of foreclosure or similar alternative, such as a pursuit of deed-in-lieu, has been reported. Mortgage loans in the process of foreclosure are included in past due categories depending on their delinquency status.
(3) Mortgage loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total mortgage loan portfolio segment.
(4) Mortgage loans insured or guaranteed by the Federal Housing Administration or the Department of Veterans Affairs.
(5) Represents mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest.

A troubled debt restructuring is considered to have occurred when a concession that would not have been considered otherwise is granted to a borrower for economic or legal reasons related to the borrower’s financial difficulties. The Bank has granted a concession when it does not expect to collect all amounts due under the original contract as a result of the restructuring. In the event the Bank grants a concession, the borrower’s monthly payment is restructured for a period of up to 36 months to try to achieve a target housing expense ratio of not more than 31.0 percent of their qualifying income. To restructure the loan, the outstanding principal balance is first re-amortized to reflect a principal and interest payment for a term not to exceed 40 years. This results in a balloon payment at the original maturity date of the loan as the maturity date and number of remaining monthly payments are not adjusted. If the 31.0 percent housing expense ratio is not achieved through re-amortization, the interest rate is reduced below the original note rate in 0.125 percent increments to a floor rate of 3.00 percent until the target 31.0 percent housing expense ratio is met. These reductions in principal and interest payments are for the temporary payment modification period of up to 36 months. Additionally, a conventional residential mortgage loan in which the borrower filed for Chapter 7 bankruptcy and the bankruptcy court discharged the borrower’s obligation to the Bank, is considered a troubled debt restructuring. Troubled debt restructurings are evaluated individually for impairment.

The following table presents the Bank’s recorded investment balance in mortgage loans classified as troubled debt restructurings.
 
 
As of December 31,
 
 
2018
 
2017
 
 
Performing
 
Non-performing
 
Total
 
Performing
 
Non-performing
 
Total
Conventional residential mortgage loans
 
$
8

 
$
1

 
$
9

 
$
9

 
$
2

 
$
11



Due to the minimal change in terms of modified loans (i.e., no write-offs of principal), the Bank’s pre-modification recorded investment was not materially different than the post-modification recorded investment in troubled debt restructurings during the years ended December 31, 2018, 2017, and 2016.

The financial amounts related to the Bank’s troubled debt restructurings and impaired loans are not material to the Bank’s financial condition or results of operations for the periods presented.

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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)


Note 12—Consolidated Obligations
Consolidated obligations, consisting of consolidated obligation bonds and discount notes, are the joint and several obligations of the FHLBanks and are backed only by the financial resources of the FHLBanks.

The Bank is primarily liable for its portion of consolidated obligations (i.e., those issued on its behalf) and also is jointly and severally liable with the other 10 FHLBanks for the payment of principal and interest on all consolidated obligations of each of the FHLBanks. The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligation, whether or not the consolidated obligation represents a primary liability of such FHLBank. Although it has never occurred, to the extent that an FHLBank makes any payment on a consolidated obligation on behalf of another FHLBank that is primarily liable for such consolidated obligation, Finance Agency regulations provide that the paying FHLBank is entitled to reimbursement from the noncomplying FHLBank for any payments made on its behalf and any other associated costs (including interest to be determined by the Finance Agency). However, if the Finance Agency determines that the noncomplying FHLBank is unable to satisfy its repayment obligations, the Finance Agency may allocate the outstanding liabilities of the noncomplying FHLBank among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding. The Finance Agency reserves the right to allocate the outstanding liabilities for the consolidated obligations among the FHLBanks in any other manner it may determine to ensure that the FHLBanks operate in a safe and sound manner. The par value of the FHLBanks’ outstanding consolidated obligations, including consolidated obligations issued by the Bank, was $1,031,617 and $1,034,260 as of December 31, 2018 and 2017, respectively.

Regulations require each FHLBank to maintain, in the aggregate, unpledged qualifying assets equal to that FHLBank’s consolidated obligations outstanding. Qualifying assets are defined as cash; secured advances; obligations of or fully guaranteed by the United States; mortgages guaranteed or insured by the United States or its agencies; participations, mortgages, or other securities of or issued by certain government-sponsored enterprises; and such securities as fiduciary and trust funds may invest in under the laws of the state in which the FHLBank is located. The Bank held unpledged qualifying assets of $153,960 and $146,018 as of December 31, 2018 and 2017, respectively, compared to a book value of $145,139 and $137,662 in consolidated obligations as of December 31, 2018 and 2017, respectively.

General Terms. Consolidated obligations are issued with either fixed- or variable-rate coupon payment terms that use a variety of indices for interest-rate resets including the London Interbank Offered Rate (LIBOR), Constant Maturity Treasury, and others. To meet the expected specific needs of certain investors in consolidated obligations, both fixed- and variable-rate consolidated obligation bonds may contain certain features, which may result in complex coupon payment terms and call options. When such consolidated obligations are issued, the Bank generally enters into derivatives containing offsetting features that, in effect, convert the terms of the consolidated obligation bond to those of a simple variable-rate consolidated obligation bond.

These consolidated obligations, beyond having fixed-rate or simple variable-rate coupon payment terms, may also have the following broad term regarding either principal repayment or coupon payment terms:

Optional Principal Redemption Consolidated Obligation Bonds (callable bonds) that the Bank may redeem in whole or in part at its discretion on predetermined call dates according to the terms of the consolidated obligation bond offerings.

With respect to interest payments, consolidated obligation bonds may have the following term in addition to fixed-rate and simple variable-rate payment terms:

Step-up/down Consolidated Obligation Bonds have coupons at fixed rates for specified intervals over the lives of the consolidated obligation bonds. At the end of each specified interval, the coupon rate increases (or decreases) or steps up (or steps down). These consolidated obligation bond issues generally contain call provisions enabling the bonds to be called at the Bank’s discretion.

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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

Interest-rate Payment Terms. The following table presents the Bank’s consolidated obligation bonds by interest-rate payment type. 
 
As of December 31,
 
2018
 
2017
Fixed-rate
$
21,217

 
$
19,978

Step up/down
4,379

 
1,864

Simple variable-rate
53,670

 
65,760

Total par value
$
79,266

 
$
87,602



Redemption Terms. The following table presents the Bank’s participation in consolidated obligation bonds outstanding by year of contractual maturity.
 
 
As of December 31,
 
2018
 
2017
 
Amount
 
Weighted-
average
Interest Rate (%)    
 
Amount
 
Weighted-
average
Interest Rate (%)    
Due in one year or less
$
55,386

 
2.26
 
$
60,410

 
1.34
Due after one year through two years
13,292

 
2.30
 
17,826

 
1.41
Due after two years through three years
3,387

 
2.44
 
3,351

 
1.67
Due after three years through four years
3,884

 
2.27
 
1,287

 
1.72
Due after four years through five years
1,429

 
2.87
 
3,503

 
2.21
Due after five years
1,888

 
3.23
 
1,225

 
3.03
Total par value
79,266

 
2.31
 
87,602

 
1.43
Premiums
7

 
 
 
14

 
 
Discounts
(18
)
 
 
 
(10
)
 
 
Hedging adjustments
(141
)
 
 
 
(83
)
 
 
Total
$
79,114

 
 
 
$
87,523

 
 


The following table presents the Bank’s consolidated obligation bonds outstanding by call feature.
 
 
As of December 31,
 
2018
 
2017
Noncallable
$
65,237

 
$
79,847

Callable
14,029

 
7,755

Total par value
$
79,266

 
$
87,602




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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

The following table presents the Bank’s consolidated obligation bonds outstanding, by year of contractual maturity, or for callable consolidated obligation bonds, by next call date.

 
As of December 31,
 
2018
 
2017
Due or callable in one year or less
$
65,560

 
$
66,715

Due or callable after one year through two years
10,874

 
17,071

Due or callable after two years through three years
982

 
2,362

Due or callable after three years through four years
429

 
612

Due or callable after four years through five years
168

 
308

Due or callable after five years
1,253

 
534

Total par value
$
79,266

 
$
87,602



Consolidated Obligation Discount Notes. Consolidated obligation discount notes are issued to raise short-term funds and have original contractual maturities of up to one year. These consolidated obligation discount notes are issued at less than their face amounts and redeemed at par value when they mature.
The following table presents the Bank’s participation in consolidated obligation discount notes.
 
Book Value
 
Par Value
 
Weighted-average
Interest Rate (%)
As of December 31, 2018
$
66,025

 
$
66,270

 
2.33
As of December 31, 2017
$
50,139

 
$
50,217

 
1.21


Note 13—Affordable Housing Program
Affordable Housing Program. Annually, each FHLBank must set aside 10 percent of its income subject to assessment for the AHP, or such additional prorated sums as may be required so that the aggregate annual contribution of the FHLBanks is not less than $100. For purposes of the AHP calculation, each FHLBank’s income subject to assessment is defined as the individual FHLBank’s net income before assessments, plus interest expense related to mandatorily redeemable capital stock. The Bank accrues this expense monthly based on its income subject to assessment. The Bank reduces the AHP liability as members use subsidies.

If the Bank experienced a net loss during a quarter but had income subject to assessment in subsequent quarters, it would be required to contribute additional amounts to meet its calculated annual obligation based on the Bank’s year-to-date income subject to assessment. If the Bank experienced a net loss for a full year, the Bank would have no obligation to the AHP for the year since each FHLBank’s required annual AHP contribution is limited to its annual income subject to assessment. If the aggregate of 10 percent of income subject to assessment for all FHLBanks was less than $100, each FHLBank would be required to contribute additional amounts so that the aggregate contribution of the FHLBanks equals the required $100. Each FHLBanks’ prorated contribution would be determined based on its income in relation to the income of all FHLBanks for the previous year. There was no shortfall in the years ended December 31, 2018, 2017, or 2016. If an FHLBank finds that its required contributions are contributing to the financial instability of that FHLBank, it may apply to the Finance Agency for a temporary suspension of its contributions. No FHLBank made such an application in the years ended December 31, 2018, 2017, or 2016. The Bank had outstanding principal in AHP-related advances of $22 and $24 as of December 31, 2018 and 2017, respectively.


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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

The following table presents a rollforward of the Bank’s AHP liability.
 
 
For the Years Ended December 31,
 
 
2018
 
2017
 
2016
Balance, beginning of year
 
$
77

 
$
69

 
$
63

AHP assessments
 
46

 
39

 
31

Subsidy usage, net
 
(38
)
 
(31
)
 
(25
)
Balance, end of year
 
$
85

 
$
77

 
$
69



Note 14—Capital and Mandatorily Redeemable Capital Stock
Capital. The Bank is subject to the following three regulatory capital requirements under its capital plan, the FHLBank Act, and Finance Agency regulations.

Risk-Based Capital. The Bank must maintain, at all times, permanent capital in an amount at least equal to the sum of its credit risk capital requirement, its market risk capital requirement, and its operations risk capital requirement, calculated in accordance with the rules and regulations of the Finance Agency. Permanent capital is defined by the FHLBank Act and regulations as the sum of retained earnings and the amounts paid-in for Class B stock. Only permanent capital satisfies the risk-based capital requirement. The Finance Agency may require the Bank to maintain a greater amount of permanent capital than is required by the risk-based capital requirement as defined.

Total Regulatory Capital. The FHLBank Act requires the Bank to maintain total regulatory capital in an amount equal to at least four percent of total assets at all times. Total regulatory capital is defined as the sum of permanent capital, the amount paid-in for Class A stock (if any), the amount of the Bank’s general allowance for losses (if any), and the amount of any other instruments identified in the capital plan and approved by the Finance Agency. The Bank has not issued any Class A stock, has no general allowance for losses, and has no other instruments identified in the capital plan and approved by the Finance Agency; therefore, the Bank’s total regulatory capital is equal to its permanent capital as of December 31, 2018 and 2017. Total regulatory capital does not include accumulated other comprehensive income but does include mandatorily redeemable capital stock.

Leverage Capital. The FHLBank Act requires the Bank to maintain leverage capital in an amount equal to at least five percent of total assets at all times. Leverage capital is defined as the sum of permanent capital weighted 1.5 times and all other capital weighted 1.0 times. Although mandatorily redeemable capital stock is not included in capital for financial reporting purposes, such outstanding stock is considered capital for determining compliance with these regulatory capital requirements.

The following table presents the Bank’s compliance with the Finance Agency’s regulatory capital rules and requirements.
 
 
As of December 31,
 
2018
 
2017
 
Required    
 
Actual        
 
Required    
 
Actual        
Risk-based capital
$
1,654

 
$
7,597

 
$
1,581

 
$
7,157

Total regulatory capital ratio
4.00
%
 
4.92
%
 
4.00
%
 
4.88
%
Total regulatory capital
$
6,179

 
$
7,597

 
$
5,863

 
$
7,157

Leverage capital ratio
5.00
%
 
7.38
%
 
5.00
%
 
7.33
%
Leverage capital
$
7,724

 
$
11,396

 
$
7,328

 
$
10,736



The Bank offers two subclasses of Class B stock, each of which is issued, redeemed, and repurchased at a par value of $100 per share. Member shares cannot be purchased or sold except between the Bank and its members at $100 per share par value. Shares of subclass B1 capital stock are issued to meet the membership stock requirement under the capital plan and shares of subclass B2 capital stock are issued to meet the activity-based stock requirement under the capital plan. Activity-based stock held by a member is that amount of subclass B2 capital stock that the member is required to own for as long as certain transactions between the Bank and the member remain outstanding. The manner in which the activity-based stock requirement is determined under the capital plan is set forth below.


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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

The minimum stock requirement for each member is the sum of the membership stock requirement and the activity-based stock requirement. The capital plan permits the Bank’s board of directors to set the membership and activity-based stock requirements within a range as set forth in the capital plan. As of December 31, 2018, the membership stock requirement was an amount of subclass B1 capital stock equal to 0.09 percent (nine basis points) of the member’s total assets as of December 31, 2017, subject to a cap of $15. The membership stock requirement is recalculated using the member’s total assets as of the preceding calendar year-end at least annually by March 31. As of December 31, 2018, the activity-based stock requirement was an amount of subclass B2 capital stock equal to the sum of the following:
•
4.25 percent of the member’s outstanding par value of advances and

•
8.00 percent of targeted debt or equity investments (such as multifamily residential mortgage loan assets) sold by the member to the Bank on or after December 17, 2004.

The activity-based stock requirement also may include a percentage of any outstanding balance of acquired member assets (such as residential mortgage loan assets) although this percentage was set at zero as of December 31, 2018 and 2017.

The FHLBank Act and Finance Agency regulations require that the minimum stock requirement for members must be sufficient to enable the Bank to meet its minimum regulatory capital requirement. Therefore, from time to time, the Bank’s board of directors may adjust the membership stock requirement and the activity-based stock requirement within specified ranges set forth in the capital plan. Any adjustment outside the ranges would require an amendment to the capital plan and Finance Agency approval. Each member is required to comply promptly with any adjustment to the minimum stock requirement. The FHLBank Act provides that the Bank may repurchase, at its sole discretion, any member’s capital stock investment that exceeds the required minimum amount (excess capital stock). Under certain circumstances, Finance Agency regulations limit the ability of the Bank to create member excess stock. The Bank may not pay dividends in the form of capital stock or issue excess capital stock to any member if the Bank’s excess capital stock exceeds one percent of its total assets or if the issuance of excess capital stock would cause the Bank’s excess capital stock to exceed one percent of its total assets. As of December 31, 2018 and 2017, the Bank’s excess capital stock did not exceed one percent of its total assets.

A member may redeem its excess Class B capital stock at par value payable in cash five years after providing written notice to the Bank. The Bank, at its option, may repurchase a member’s excess capital stock before expiration of the five-year notice period. The Bank’s authority to redeem or repurchase capital stock is subject to a number of limitations.

Under Finance Agency regulations, the Bank’s board of directors may, but is not required to, declare and pay non-cumulative dividends in cash or capital stock from unrestricted retained earnings and current earnings. All shares of capital stock share in any dividend without preference. Dividends are computed on the average daily balance of capital stock outstanding during the relevant time period. The Bank may not pay a dividend if the Bank is not in compliance with any of its regulatory capital requirements or if a payment would cause the Bank to fail to meet any of its regulatory capital requirements.

The Bank declares and pays any dividends only after net income is calculated for the preceding quarter. The following table presents the Bank’s declared and paid quarterly cash dividends in 2018, 2017, and 2016.
 
 
2018
 
2017
 
2016
 
 
Amount
 
Annualized Rate (%)
 
Amount
 
Annualized Rate (%)
 
Amount
 
Annualized Rate (%)
First quarter
 
$
65

 
5.16
 
$
57

 
4.77
 
$
52

 
4.66
Second quarter
 
80

 
5.78
 
61

 
4.77
 
59

 
4.87
Third quarter
 
82

 
6.19
 
58

 
4.91
 
55

 
4.64
Fourth quarter
 
82

 
6.19
 
62

 
5.01
 
60

 
4.64
Total
 
$
309

 
5.77
 
$
238

 
4.82
 
$
226

 
4.62


The concentration of the Bank’s regulatory capital stock to its 10 largest shareholders was $3,559, or 64.9 percent, and $3,183, or 61.8 percent, as of December 31, 2018 and 2017, respectively.

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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

The following table presents the activity in mandatorily redeemable capital stock.
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
Balance, beginning of year
$
1

 
$
1

 
$
14

Net reclassification from capital during the year
37

 
34

 
7

Repurchase/redemption of mandatorily redeemable capital stock
(37
)
 
(34
)
 
(20
)
Balance, end of year
$
1


$
1


$
1



As of December 31, 2018, the Bank’s outstanding mandatorily redeemable capital stock consisted of B1 membership stock and B2 activity-based stock. The Bank is not required to redeem activity-based stock until the later of the expiration of the redemption period, which is five years after notification is received, or until the activity no longer remains outstanding.

The following table presents the amount of mandatorily redeemable capital stock by year of redemption. The year of redemption in the table is the end of the five-year redemption period, or with respect to activity-based stock, the later of the expiration of the five-year redemption period or the activity’s maturity date.
 
 
As of December 31,
 
2018
 
2017
Due in one year or less
$
—

 
$
1

Due after four years through five years
1

 
—

Total
$
1

 
$
1



A member may cancel or revoke its written notice of redemption or its notice of withdrawal from membership at any time prior to the end of the five-year redemption period, subject to payment of a cancellation fee as set forth in the capital plan. If a member cancels its written notice of redemption or notice of withdrawal, the Bank will reclassify mandatorily redeemable capital stock from a liability to capital.


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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

Note 15—Accumulated Other Comprehensive Income
The following table presents the components comprising accumulated other comprehensive income.
 
 
Pension and
Postretirement
Benefits
 
Noncredit Portion
of Other-than-
temporary
Impairment  Losses
on Available-for-
sale Securities
 
Total  Accumulated
Other
Comprehensive Income
Balance, December 31, 2015
$
(20
)
 
$
95

 
$
75

Other comprehensive income before reclassifications:
 
 
 
 
 
   Noncredit other-than-temporary impairment losses
—

 
(1
)
 
(1
)
   Net change in fair value
—

 
27

 
27

   Actuarial loss
(1
)
 
—

 
(1
)
Reclassification from accumulated other comprehensive income to net income:
 
 
 
 
 
   Noncredit other-than-temporary impairment losses
—

 
3

 
3

   Amortization of pension and postretirement (1)
1

 
—

 
1

Net current period other comprehensive income
—

 
29

 
29

Balance, December 31, 2016
(20
)
 
124

 
104

Other comprehensive income before reclassifications:
 
 
 
 
 
   Net change in fair value
—

 
8

 
8

   Actuarial loss
(5
)
 
—

 
(5
)
   Prior service cost
(1
)
 
—

 
(1
)
Reclassification from accumulated other comprehensive income to net income:
 
 
 
 
 
   Noncredit other-than-temporary impairment losses
—

 
2

 
2

   Amortization of pension and postretirement (1)
2

 
—

 
2

Net current period other comprehensive (loss) income
(4
)
 
10

 
6

Balance, December 31, 2017
(24
)
 
134

 
110

Other comprehensive income before reclassifications:
 
 
 
 
 
   Net change in fair value
—

 
(65
)
 
(65
)
   Actuarial gain
3

 
—

 
3

Reclassification from accumulated other comprehensive income to net income:
 
 
 
 
 
   Noncredit other-than-temporary impairment losses
—

 
3

 
3

Net current period other comprehensive income (loss)
3

 
(62
)
 
(59
)
Balance, December 31, 2018
$
(21
)
 
$
72

 
$
51


____________ 
(1) Included in Noninterest expense - Other on the Statements of Income.


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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

                                                                                                                                                                        
Note 16—Pension and Postretirement Benefit Plans

The Bank participates in the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra Plan), a tax-qualified defined-benefit pension plan. The Pentegra Plan is treated as a multiemployer plan for accounting purposes but operates as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. As a result, certain multiemployer plan disclosures are not applicable to the Pentegra Plan. Under the Pentegra Plan, contributions made by a participating employer may be used to provide benefits to employees of other participating employers because assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer.  Also, in the event a participating employer is unable to meet its contribution requirements, the required contributions for the other participating employers could increase proportionately. The Pentegra Plan covers substantially all officers and employees of the Bank hired before March 1, 2011.

The Pentegra Plan operates on a fiscal year from July 1 through June 30. The Pentegra Plan files one Form 5500 on behalf of all employers who participate in the plan. The Employer Identification Number is 13-5645888, and the three-digit plan number is 333. There are no collective bargaining agreements in place at the Bank.

The Pentegra Plan’s annual valuation process includes separately calculating the plan’s funded status and the funded status of each participating employer. The funded status is defined as the fair value of assets divided by the funding target (100 percent of the present value of all benefit liabilities accrued at that date). As permitted by ERISA, the Pentegra Plan accepts contributions for the prior plan year up to eight and a half months after the asset valuation date. As a result, the fair value of assets at the valuation date (July 1) will increase by any subsequent contributions designated for the immediately preceding plan year ended June 30.

The most recent Form 5500 available for the Pentegra Plan is for the year ended June 30, 2017. The contributions made by the Bank during 2018 and 2017 were more than five percent of the total contributions for each of the Pentegra Plan years ended June 30, 2017 and 2016.

The following table presents information on the net pension costs and funded status of the Pentegra Plan.
 
 
2018
 
2017
 
2016
Net pension cost charged to compensation and benefit expense for the year ended December 31
 
$
24

 
$
12

 
$
12

Pentegra Plan funded status as of July 1(1)
 
109.86
%
 
111.75
%
 
104.72
%
Bank’s funded status as of the plan year end
 
110.86
%
 
117.96
%
 
105.51
%
____________
(1) The Pentegra Plan’s funded status as of July 1 is preliminary and may increase because the plan’s participants are permitted to make contributions through March 15 of the following year (i.e. through March 15, 2019 for the plan year ended June 30, 2018 and through March 15, 2018 for the plan year ended June 30, 2017). Contributions made before the March 15th deadline may be credited to the plan for the plan year ended June 30 of the previous year and included in the final valuation as of July 1 of the year the plan ended. The final funded status as of July 1 will not be available until the Form 5500 for the plan year July 1 through June 30 is filed. Form 5500 is due to be filed no later than April 2020 for the plan year July 1, 2018 through June 30, 2019 and April 2019 for the plan year July 1, 2017 through June 30, 2018. Form 5500 was filed in April 2018 for the plan year July 1, 2016 through June 30, 2017.

The Bank also participates in a qualified defined contribution plan. The Bank’s contribution to this plan is equal to a percentage of voluntary contributions, subject to certain limitations, plus contributions for all employees hired on or after March 1, 2011. The Bank contributed $3 to this plan during each of the years ended December 31, 2018 and 2017, and $2 during the year ended December 31, 2016.

The Bank offers a supplemental nonqualified defined contribution retirement plan to eligible executives. The Bank’s contribution to this plan is equal to a percentage of voluntary contributions. The Bank contributions to this plan were not material during each of the years ended December 31, 2018, 2017, and 2016.

In addition, the Bank maintains a nonqualified deferred compensation plan, available to Bank directors and officers at the senior vice president level and above, which is, in substance, an unfunded supplemental savings plan. The plan’s liability consists of the accumulated compensation deferrals and accrued earnings on those deferrals. The Bank’s minimum obligation from this plan was $4 and $3 as of December 31, 2018 and 2017, respectively. Operating expense includes deferred compensation and accrued earnings of $1 during each of the years ended December 31, 2018, 2017, and 2016.

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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)


The Bank offers a supplemental nonqualified defined benefit pension plan to eligible executives and a postretirement health benefit plan to eligible retirees. There are no funded plan assets that have been designated to provide supplemental retirement plan or postretirement health benefits.

Amounts recognized in other liabilities (funded status) on the Statements of Condition for the Bank’s supplemental defined benefit pension plan and postretirement health benefit plan was $65 as of December 31, 2018 and 2017. The net periodic benefit costs recognized in “Compensation and benefits” on the Statements of Income for the Bank’s supplemental defined benefit pension plan and postretirement health benefit plan was $1 for the year ended December 31, 2018, and $2 for each of the years ended December 31, 2017, and 2016. The amount recognized in other comprehensive income (loss) related to pension and postretirement benefit plans on the Statements of Comprehensive Income for the Bank’s supplemental defined benefit pension plan and postretirement health benefit plan was income of $3, a loss of $4, and income of less than $1 for the years ended December 31, 2018, 2017, and 2016, respectively.

The financial amounts related to the Bank’s supplemental nonqualified defined benefit pension plan and postretirement health benefit plan are not material to the Bank’s financial condition or results of operations.

Note 17—Derivatives and Hedging Activities
Nature of Business Activity
The Bank is exposed to interest-rate risk primarily from the effect of interest rate changes on its interest-earning assets and on its interest-bearing liabilities that finance these assets. To mitigate the risk of loss, the Bank has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes that it is willing to accept. In addition, the Bank monitors the risk to its interest income, net interest margin, and average maturity of its interest-earning assets and funding sources. The goal of the Bank’s interest-rate risk management strategies is not to eliminate interest-rate risk, but to manage it within appropriate limits.
The Bank enters into derivatives to manage the interest-rate risk exposure that is inherent in its otherwise unhedged assets and funding sources, to achieve the Bank’s risk management objectives, and to act as an intermediary between its members and counterparties. Finance Agency regulations and the Bank’s risk management policy prohibit the trading or speculative use of these derivative instruments and limit credit risk arising from these instruments. The use of derivatives is an integral part of the Bank’s financial management strategy.


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Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

The most common ways in which the Bank uses derivatives are to:

•
preserve a favorable interest-rate spread between the yield of an asset (e.g., an advance) and the cost of the related liability (e.g., the consolidated obligation bond used to fund the advance) by converting both fixed-rate instruments to a variable rate using interest-rate swaps;

•
reduce funding costs by combining a derivative with a consolidated obligation because the cost of a combined funding structure can be lower than the cost of a comparable consolidated obligation bond;

•
reduce the interest-rate sensitivity and repricing gaps of assets and liabilities;

•
mitigate the adverse earnings effects from the shortening or lengthening of certain assets (e.g., mortgage assets) and liabilities;

•
protect the value of existing asset or liability positions;

•
manage embedded options in assets and liabilities; and

•
achieve overall asset/liability management objectives.
Application of Derivatives
General. The Bank designates derivative instruments in the following three ways: (1) as a fair value hedge of an underlying financial instrument or a firm commitment; (2) as an intermediary transaction; or (3) as a non-qualifying hedge for purposes of asset or liability management.
The Bank reevaluates its hedging strategies from time to time and may change the hedging techniques it uses or adopt new strategies.
The Bank transacts most of its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute consolidated obligations. The Bank’s over-the-counter derivatives transactions may either be (1) uncleared derivatives, which are executed bilaterally with a counterparty; or (2) cleared derivatives, which are cleared through a Futures Commission Merchant (clearing agent) with a Derivatives Clearing Organization (Clearinghouse).

Once a derivatives transaction has been accepted for clearing by a Clearinghouse, the executing counterparty is replaced with the Clearinghouse as the counterparty. The Bank is not a derivatives dealer and does not trade derivatives for short-term profit.
The Bank uses derivatives when they are considered to be the most cost-effective alternative to achieve the Bank’s long-term financial and risk management objectives. Accordingly, the Bank may enter into derivatives that do not qualify for hedge accounting (non-qualifying hedges).

Types of Derivatives
The Bank may use the following types of derivatives to reduce funding costs and to manage its exposure to interest-rate risks inherent in the normal course of business.
Interest-Rate Swaps. An interest-rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be exchanged and the manner in which the cash flows will be calculated. One of the simplest forms of an interest-rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional principal amount at a predetermined fixed rate for a given period of time. In return for this promise, this party receives cash flows equivalent to the interest on the same notional principal amount at a variable rate for the same period of time. The variable rate received or paid by the Bank in most derivative transaction agreements is LIBOR.
Swaptions. A swaption is an option on a swap that gives the buyer the right to enter into a specified interest-rate swap at a certain time in the future. When used as a hedge, a swaption can protect the Bank against future interest rate changes when it is planning to lend or borrow funds in the future. The Bank may enter into both payer swaptions and receiver swaptions. A payer

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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

swaption is the option to make fixed interest payments at a later date, and a receiver swaption is the option to receive fixed interest payments at a later date.

Interest-Rate Cap and Floor Agreements. In an interest-rate cap agreement, a cash flow is generated if the price or rate of an underlying variable rises above a certain threshold (or cap) price. In an interest-rate floor agreement, a cash flow is generated if the price or rate of an underlying variable falls below a certain threshold (or floor) price. Caps may be used in conjunction with liabilities, and floors may be used in conjunction with assets. Caps and floors are designed to protect against the interest rate on a variable-rate asset or liability rising above or falling below a certain level.
Types of Hedged Items
At inception, the Bank documents all relationships between derivatives designated as hedging instruments and hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing effectiveness. This process includes linking all derivatives that are designated as fair value hedges to (1) assets and liabilities on the Statements of Condition; or (2) firm commitments. The Bank also formally assesses (both at the hedge’s inception and at least quarterly on an ongoing basis) whether the derivatives that it uses in hedging relationships have been effective in offsetting changes in the fair value of hedged items attributable to the hedged risk and whether those derivatives may be expected to remain effective in future periods. The Bank uses regression analyses to assess the effectiveness of its hedges.

Consolidated Obligations. While consolidated obligations are the joint and several obligations of the FHLBanks, each FHLBank has consolidated obligations for which it is the primary obligor. The Bank enters into derivatives to hedge the interest-rate risk associated with its specific debt issuances in conjunction with the associated interest-rate risk on advances. The Bank manages the risk arising from changing market prices and volatility of a consolidated obligation by matching the cash inflow on the derivative with the cash outflow on the consolidated obligation. For instance, in a typical transaction, fixed-rate consolidated obligations are issued for the Bank, and the Bank simultaneously enters into a matching derivative in which the counterparty pays fixed cash flows to the Bank designed to mirror cash outflows that the Bank pays on the consolidated obligation in timing and amount. The Bank pays a variable cash flow that closely matches the interest payments it receives on short-term or variable-rate advances (typically one- or three-month LIBOR). These transactions are typically treated as fair-value hedges. This intermediation between the capital and swap markets permits the Bank to raise funds at lower costs than otherwise would be available through the issuance of simple fixed-rate consolidated obligations in the capital markets.
Advances. The Bank offers a variety of advance structures to meet members’ funding needs. These advances may have maturities of up to 30 years with variable or fixed rates and may include early termination features or options. The Bank may use derivatives to adjust the repricing and/or options characteristics of advances in order to more closely match the characteristics of the Bank’s funding liabilities. In general, whenever a member executes a fixed- or a variable-rate advance with embedded options, the Bank simultaneously will execute a derivative with terms that offset the terms and embedded options in the advance. For example, the Bank may hedge a fixed-rate advance with an interest-rate swap in which the Bank pays a fixed-rate coupon and receives a variable-rate coupon, effectively converting the fixed-rate advance to a variable-rate advance. This type of hedge is typically treated as a fair-value hedge.
Mortgage Assets. The Bank has invested in mortgage assets. The prepayment options embedded in mortgage assets may shorten or lengthen the expected repayment of these investments, depending on changes in estimated prepayment speeds. The Bank manages the interest-rate and prepayment risk associated with mortgages through a combination of debt issuance and derivatives. The Bank issues both callable and non-callable debt to achieve cash flow patterns and liability durations similar to those expected on the mortgage loans. The Bank may use derivatives to match the expected prepayment characteristics of the mortgages.
Options (interest-rate caps, interest-rate floors and/or options) also may be used to hedge prepayment risk on the mortgages. Many options are not identified to specific mortgages and therefore, do not receive fair-value or cash-flow hedge accounting treatment. The Bank also may purchase interest-rate caps and floors, swaptions, callable swaps, calls, and puts to minimize the prepayment risk embedded in the mortgage loans. Although these derivatives are valid non-qualifying hedges against the prepayment risk of the loans, they do not receive either fair-value or cash-flow hedge accounting. These derivatives are marked-to-market through earnings.
Firm Commitments. Certain mortgage purchase commitments are considered derivatives. Mortgage purchase commitments are recorded on the balance sheet at fair value, with changes in fair value recognized in current-period earnings. When the

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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

mortgage purchase commitment derivative settles, the current fair value of the commitment is included with the basis of the mortgage loan and amortized accordingly.
The Bank also may enter into a fair value hedge of a firm commitment for a forward starting advance through the use of an interest-rate swap. In this case, the swap functions as the hedging instrument for both the firm commitment and the subsequent advance. The basis movement associated with the firm commitment is recorded as a basis adjustment of the advance at the time the commitment is terminated and the advance is issued. The basis adjustment is then amortized into interest income over the life of the advance using the level-yield method.
Investments. The Bank invests in MBS, U.S. agency obligations, certificates of deposit, and the taxable portion of state or local housing finance agency obligations. The interest-rate and prepayment risk associated with these investment securities are managed through a combination of debt issuance and derivatives. The Bank may manage the prepayment and interest-rate risks by funding investment securities with consolidated obligations that have call features, by hedging the prepayment risk with caps or floors, or by adjusting the duration of the securities by using derivatives to modify the cash flows of the securities. Investment securities may be classified as trading, available-for-sale, or held-to-maturity.
The Bank also may manage the risk arising from changing market prices and volatility of investment securities classified as trading by entering into derivatives (non-qualifying hedges) that offset the changes in fair value of these securities.
Financial Statement Effect and Additional Financial Information
Derivative Notional Amounts. The notional amount of derivatives serves as a factor in determining periodic interest payments or cash flows received and paid. However, the notional amount of derivatives represents neither the actual amounts exchanged nor the overall exposure of the Bank to credit and market risk; the overall risk is much smaller. The risks of derivatives can be measured meaningfully on a portfolio basis that takes into account the counterparties, the types of derivatives, the items being hedged, and any offsets between the derivatives and the items being hedged.
The following table presents the notional amount, fair value of derivative instruments, and total derivative assets and liabilities. Total derivative assets and liabilities include the effect of netting adjustments and cash collateral. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest.
 
 
As of December 31,
 
2018
 
2017
 
Notional
Amount of Derivatives    
 
Derivative Assets    
 
Derivative Liabilities    
 
Notional
Amount of Derivatives    
 
Derivative Assets    
 
Derivative Liabilities    
Derivatives in hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
  Interest-rate swaps (1)
$
50,427

 
$
32

 
$
151

 
$
45,057

 
$
198

 
$
359

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
  Interest-rate swaps (1)
1,008

 
3

 
11

 
876

 
9

 
9

  Interest-rate caps or floors
8,083

 
1

 
1

 
13,000

 
2

 
1

Total derivatives not designated as hedging instruments
9,091

 
4

 
12

 
13,876

 
11

 
10

Total derivatives before netting and collateral adjustments
$
59,518

 
36

 
163

 
$
58,933

 
209

 
369

Netting adjustments and cash collateral (2)
 
 
278

 
(146
)
 
 
 
125

 
(348
)
Derivative assets and derivative liabilities
 
 
$
314

 
$
17

 
 
 
$
334

 
$
21

___________
(1) 
Includes variation margin for daily settled contracts of $21 and $107 as of December 31, 2018 and 2017, respectively.
(2) 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 with the same clearing agents and/or counterparty. Cash collateral posted and related accrued interest was $433 and $507 as of December 31, 2018 and 2017, respectively. Cash collateral received and related accrued interest was $9 and $34 as of December 31, 2018 and 2017, respectively.

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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

The following table presents the components of net gains on derivatives and hedging activities as presented on the Statements of Income.
 
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
Derivatives and hedged items in fair value hedging relationships:
 
 
 
 
 
  Interest-rate swaps
$
32

 
$
343

 
$
120

Derivatives not designated as hedging instruments:
 
 
 
 
 
  Interest-rate swaps
1

 
6

 
30

  Interest-rate caps or floors
—

 
(3
)
 
(1
)
  Net interest settlements
—

 
(6
)
 
(30
)
Total net losses related to derivatives not designated as hedging instruments
1

 
(3
)
 
(1
)
Price alignment amount (1)
(4
)
 
1

 
—

Net gains on derivatives and hedging activities
$
29

 
$
341

 
$
119


___________
(1) This amount is for derivatives for which variation margin is characterized as daily settled contract.


The following tables present, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Bank’s net interest income.
 
 
 
For the Year Ended December 31, 2018
Hedged
Item Type
 
Gains (Losses) on Derivative       
 
Gains (Losses) on Hedged Item  
 
Net Fair Value
Hedge Ineffectiveness
 
Effect of Derivatives on Net Interest Income (1)
Advances
 
$
156

 
$
(124
)
 
$
32

 
$
(20
)
Consolidated obligations:
 
 
 
 
 
 
 
 
  Bonds
 
(58
)
 
59

 
1

 
(40
)
  Discount notes
 
1

 
(2
)
 
(1
)
 
(2
)
Total
 
$
99

 
$
(67
)
 
$
32

 
$
(62
)
____________
(1) 
The net interest on derivatives in fair value hedge relationships is presented in the interest income or expense line item of the respective hedged item.

 
 
For the Year Ended December 31, 2017
Hedged
Item Type
 
Gains (Losses) on Derivative       
 
Gains (Losses) on Hedged Item  
 
Net Fair Value
Hedge Ineffectiveness
 
Effect of Derivatives on Net Interest Income (1)
Advances
 
$
580

 
$
(240
)
 
$
340

 
$
(254
)
Consolidated obligations:
 


 


 


 


  Bonds
 
(97
)
 
99

 
2

 
75

  Discount notes
 
3

 
(2
)
 
1

 
(3
)
Total
 
$
486

 
$
(143
)
 
$
343

 
$
(182
)
____________
(1) 
The net interest on derivatives in fair value hedge relationships is presented in the interest income or expense line item of the respective hedged item.


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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

 
 
For the Year Ended December 31, 2016
Hedged
Item Type
 
Gains (Losses) on Derivative       
 
Gains (Losses) on Hedged Item  
 
Net Fair Value
Hedge Ineffectiveness
 
Effect of Derivatives on Net Interest Income (1)
Advances
 
$
524

 
$
(393
)
 
$
131

 
$
(529
)
Consolidated obligations:
 


 


 


 


  Bonds
 
(154
)
 
146

 
(8
)
 
230

  Discount notes
 
2

 
(5
)
 
(3
)
 
(3
)
Total
 
$
372

 
$
(252
)
 
$
120

 
$
(302
)
____________
(1) 
The net interest on derivatives in fair value hedge relationships is presented in the interest income or expense line item of the respective hedged item.

Managing Credit Risk on Derivatives

The Bank is subject to credit risk to its derivative transactions due to the risk of nonperformance by counterparties and manages this risk through credit analysis, collateral requirements, and adherence to the requirements set forth in its policies, U.S. Commodity Futures Trading Commission regulations, and Finance Agency regulations.

For uncleared derivatives, the degree of credit risk depends on the extent to which master netting arrangements are included in such contracts to mitigate the risk. The Bank requires collateral agreements with collateral delivery thresholds on all uncleared derivatives. Additionally, collateral related to derivatives with member institutions includes collateral assigned to the Bank, as evidenced by a written security agreement, and held by the member institution for the benefit of the Bank.

Certain of the Bank’s uncleared derivative instruments contain provisions that require the Bank to post additional collateral with its counterparties if there is deterioration in the Bank’s credit rating. If the Bank’s credit rating is lowered by an NRSRO, the Bank may be required to deliver additional collateral on uncleared derivative instruments in net liability positions. The aggregate fair value of all uncleared derivative instruments with credit-risk-related contingent features that were in a net liability position (before cash collateral and related accrued interest) as of December 31, 2018 was $6, for which the Bank was not required to post collateral as of December 31, 2018. If the Bank’s credit ratings had been lowered from its current rating to the next lower rating, the Bank would have been required to deliver $1 of collateral at fair value to its uncleared derivative counterparties as of December 31, 2018.

For cleared derivatives, the Clearinghouse is the Bank’s counterparty. The Clearinghouse notifies the clearing agent of the required initial and variation margin, and the clearing agent notifies the Bank. The Bank currently utilizes the following two
Clearinghouses for all cleared derivative transactions: LCH Ltd. and CME Clearing. Effective January 16, 2018, LCH Ltd. made certain amendments to its rulebook, changing the legal characterization of variation margin payments to be daily settlement payments, rather than collateral. CME Clearing made the same change to its rulebook on January 3, 2017. As a result, at both Clearinghouses, variation margin is characterized as daily settlement payments, rather than cash collateral. At both Clearinghouses, initial margin continues to be considered cash collateral. Because the Bank is required to post initial and variation margin through the clearing agent to the Clearinghouse, it exposes the Bank to institutional credit risk if the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties, and collateral/payments is posted daily through a clearing agent for changes in the fair value of cleared derivatives. The Bank has analyzed the enforceability of offsetting rights incorporated in its cleared derivative transactions and determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable law upon an event of default, including a bankruptcy, insolvency, or similar proceeding involving the Clearinghouse or the Bank’s clearing agent, or both. Based on this analysis, the Bank presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular Clearinghouse.

The Bank presents derivative instruments and the related cash collateral that is received or pledged, plus the associated accrued interest, on a net basis by clearing agent and/or by counterparty when it has met the netting requirements.


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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

The following table presents the fair value of derivative instruments meeting or not meeting netting requirements, including the related collateral received from or pledged to counterparties.

 
As of December 31,
 
2018
 
2017
 
Derivative Assets
 
Derivative Liabilities
 
Derivative Assets
 
Derivative Liabilities
Gross recognized amount:
 
 
 
 
 
 
 
     Uncleared derivatives
$
35

 
$
128

 
$
19

 
$
106

     Cleared derivatives
1

 
35

 
190

 
263

Total gross recognized amount
36

 
163

 
209

 
369

Gross amounts of netting adjustments and cash collateral:
 
 
 
 
 
 
 
     Uncleared derivatives
(33
)
 
(111
)
 
(17
)
 
(85
)
     Cleared derivatives
311

 
(35
)
 
142

 
(263
)
Total gross amounts of netting adjustments and cash collateral:
278

 
(146
)
 
125

 
(348
)
Net amounts after netting adjustments and cash collateral:
 
 
 
 
 
 
 
     Uncleared derivatives
2

 
17

 
2

 
21

     Cleared derivatives
312

 
—

 
332

 
—

Total net amounts after netting adjustments and cash collateral
314

 
17

 
334

 
21

Non-cash collateral received or pledged not offset- cannot be sold or repledged: (1)
 
 
 
 
 
 
 
     Uncleared derivatives
—

 
—

 
—

 
—

     Cleared derivatives
—

 
—

 
—

 
—

Total cannot be sold or repledged (1)
—

 
—

 
—

 
—

Net unsecured amounts: (1)
 
 
 
 
 
 
 
 Uncleared derivatives
2

 
17

 
2

 
21

 Cleared derivatives
312

 
—

 
332

 
—

Total net unsecured amount (1)
$
314

 
$
17

 
$
334

 
$
21

____________ 
(1) 
The Bank had net credit exposure of $2 and $226 as of December 31, 2018 and 2017, respectively, due to instances where the Bank’s pledged collateral to a counterparty exceeded the Bank’s net derivative liability position.

Note 18—Estimated Fair Values

The Bank records trading securities, available-for-sale securities, derivative assets and liabilities, and grantor trust assets (publicly-traded mutual funds) at estimated fair value on a recurring basis. Fair value is defined under GAAP 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. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. In general, the transaction price will equal the exit price and therefore, represents the fair value of the asset or liability at initial recognition. In determining whether a transaction price represents the fair value of the asset or liability at initial recognition, each reporting entity is required to consider factors specific to the transaction, the asset or liability, the principal or most advantageous market for the asset or liability, and market participants with whom the entity would transact in the market.

A fair value hierarchy is used to prioritize the inputs of valuation techniques used to measure fair value. The inputs are evaluated, and an overall level for the fair value measurement is determined. This overall level is an indication of how market-observable the fair value measurement is and defines the level of disclosure. In order to determine the fair value or the exit price, entities must determine the unit of account, highest and best use, principal market, and market participants. These determinations allow the reporting entity to define the inputs for fair value and level of hierarchy.

Outlined below is the application of the “fair value hierarchy” to the Bank’s financial assets and liabilities that are carried at fair value or disclosed in the notes to the financial statements.


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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. 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. The Bank carried grantor trust assets at fair value hierarchy Level 1 as of December 31, 2018 and 2017.

Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. The Bank carried trading securities and derivatives at fair value hierarchy Level 2 as of December 31, 2018 and 2017.

Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are supported by limited market activity and reflect the entity’s own assumptions. The Bank carried available-for-sale securities at fair value hierarchy Level 3 as of December 31, 2018 and 2017.

The Bank utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

For financial instruments carried at fair value, the Bank reviews the fair value hierarchy classification of financial assets and liabilities on a quarterly basis. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities within the fair value hierarchy. Such reclassifications are reported as transfers in/out at fair value as of the beginning of the quarter in which the changes occur. There were no such transfers during the periods presented.


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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

Estimated Fair Value Measurements on a Recurring Basis. The following tables present, for each fair value hierarchy level, the Bank’s financial assets and liabilities that are measured at fair value on a recurring basis on its Statements of Condition.

 
As of December 31, 2018
 
Fair Value Measurements Using
 
Netting Adjustments and Cash Collateral (1)
 
 
 
Level 1        
 
Level 2        
 
Level 3        
 
Total
Assets
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
  Government-sponsored enterprises debt obligations
$
—

 
$
55

 
$
—

 
$
—

 
$
55

Available-for-sale securities:
 
 
 
 
 
 
 
 
 
  Private-label residential MBS
—

 
—

 
865

 
—

 
865

Derivative assets:
 
 
 
 
 
 
 
 
 
  Interest-rate related
—

 
36

 
—

 
278

 
314

Grantor trust (included in Other assets)
52

 
—

 
—

 
—

 
52

Total assets at fair value
$
52

 
$
91

 
$
865

 
$
278

 
$
1,286

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
Interest-rate related
$
—

 
$
163

 
$
—

 
$
(146
)
 
$
17

Total liabilities at fair value
$
—

 
$
163

 
$
—

 
$
(146
)
 
$
17

____________ 
(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 with the same clearing agents and/or counterparty.

 
As of December 31, 2017
 
Fair Value Measurements Using
 
Netting Adjustments and Cash Collateral (1)
 
 
 
Level 1        
 
Level 2        
 
Level 3        
 
Total
Assets
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
  Government-sponsored enterprises debt obligations
$
—

 
$
56

 
$
—

 
$
—

 
$
56

Available-for-sale securities:
 
 
 
 
 
 
 
 
 
  Private-label residential MBS
—

 
—

 
1,104

 
—

 
1,104

Derivative assets:
 
 
 
 
 
 
 
 
 
  Interest-rate related
—

 
209

 
—

 
125

 
334

Grantor trust (included in Other assets)
48

 
—

 
—

 
—

 
48

Total assets at fair value
$
48

 
$
265

 
$
1,104

 
$
125

 
$
1,542

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
Interest-rate related
$
—

 
$
369

 
$
—

 
$
(348
)
 
$
21

Total liabilities at fair value
$
—

 
$
369

 
$
—

 
$
(348
)
 
$
21

____________ 
(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 with the same clearing agents and/or counterparty.





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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

The following table presents a reconciliation of available-for-sale securities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
 
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
Balance, beginning of year
$
1,104

 
$
1,345

 
$
1,662

Total (losses) gains realized and unrealized: (1)
 
 
 
 
 
  Included in net impairment losses recognized in earnings
(3
)
 
(2
)
 
(3
)
 Included in other comprehensive income
(62
)
 
10

 
29

     Accretion of credit losses in net interest income
62

 
62

 
53

Settlements
(236
)
 
(311
)
 
(396
)
Balance, end of year
$
865

 
$
1,104

 
$
1,345

____________ 
(1) 
Related to available-for-sale securities held at year end.

Described below are the Bank’s fair value measurement methodologies for financial assets and liabilities that are measured at fair value on a recurring or nonrecurring basis on the Statements of Condition and categorized within Level 2 and Level 3 of the fair value hierarchy.

Investment securities. The Bank obtains prices from multiple designated third-party pricing vendors, when available, to estimate the fair value of its investment securities. The pricing vendors use various proprietary models to price investment securities. The inputs to those models are derived from various sources including, but not limited to, the following: benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers, and other market-related data. Since many investment securities do not trade on a daily basis, the pricing vendors use available information as applicable, such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing to determine the prices for individual securities. Each pricing vendor has an established challenge process in place for all investment securities valuations, which facilitates resolution of potentially erroneous prices identified by the Bank.

The Bank periodically conducts reviews of its pricing vendors to confirm and further augment its understanding of the vendors’ pricing processes, methodologies, and control procedures for U.S. agency and private-label MBS.

The Bank’s valuation technique for estimating the fair value of its investment securities 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 “resultant” price. All 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 final price rather than the resultant price. Alternatively, if the analysis does not provide evidence that an outlier is more representative of the fair value, and the resultant price is the best estimate, then the resultant 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 resultant price, and the final price is determined by an evaluation of all outlier prices as described above.

Multiple third-party vendor prices were received for a majority of the Bank’s investment securities holdings, and the final prices for those securities were computed by averaging the prices received as of December 31, 2018 and 2017. Based on the Bank’s review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or the Bank’s additional analysis in those instances in which there were outliers or significant yield variances), the Bank believes that its 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. Based on the lack of significant market activity for private-label MBS, the fair value measurement for those securities were classified as Level 3 within the fair value hierarchy as of December 31, 2018 and 2017.

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Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)


Derivative assets and liabilities. The Bank calculates the fair values of interest-rate related derivatives using a discounted cash flow analysis which utilizes market-observable inputs. The inputs for interest-rate related derivatives uses the Overnight Index Swap curve for collateralized derivatives.

Derivative instruments are transacted primarily in the institutional dealer market and priced with observable market assumptions at a mid-market valuation point. The Bank does not provide a credit valuation adjustment based on aggregate exposure by derivative counterparty when measuring the fair value of its derivatives. This is because the collateral provisions pertaining to the Bank’s derivatives obviate the need to provide such a credit valuation adjustment. The fair values of the Bank’s derivatives take into consideration the effects of legally enforceable master netting agreements, where applicable, that allow the Bank to settle positive and negative positions and offset cash collateral with the same counterparty on a net basis. The Bank and each uncleared derivative counterparty have collateral thresholds that take into account both the Bank’s and the counterparty’s credit ratings. As a result of these practices and agreements, the Bank has concluded that the impact of the credit differential between the Bank and its derivative counterparties was mitigated to an immaterial level, and no further adjustments were deemed necessary to the recorded fair values of derivative assets and liabilities on the Statements of Condition as of December 31, 2018 and 2017.

The following estimated fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank as of December 31, 2018 and 2017. Although the Bank uses its best judgment in estimating the fair values 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 the Bank’s 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 estimated fair values are not necessarily indicative of 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 value. The fair value tables presented below do not represent an estimate of the overall fair value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.


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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

 
 
As of December 31, 2018
 
 
 
Estimated Fair Value
 
Carrying Value
 
Total        
 
Level 1        
 
Level 2        
 
Level 3        
 
Netting Adjustments and Cash Collateral (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 Cash and due from banks
$
35

 
$
35

 
$
35

 
$
—

 
$
—

 
$
—

 Interest-bearing deposits
6,782

 
6,782

 
—

 
6,782

 
—

 
—

 Securities purchased under agreements to resell
3,750

 
3,750

 
—

 
3,750

 
—

 
—

 Federal funds sold
8,978

 
8,978

 
—

 
8,978

 
—

 
—

 Trading securities
55

 
55

 
—

 
55

 
—

 
—

 Available-for-sale securities
865

 
865

 
—

 
—

 
865

 
—

 Held-to-maturity securities
23,879

 
23,846

 
—

 
23,428

 
418

 
—

 Advances
108,462

 
108,448

 
—

 
108,448

 
—

 
—

 Mortgage loans held for portfolio, net
360

 
374

 
—

 
374

 
—

 
—

  Loan to another FHLBank
500

 
500

 
—

 
500

 
—

 
—

 Accrued interest receivable
295

 
295

 
—

 
295

 
—

 
—

 Derivative assets
314

 
314

 
—

 
36

 
—

 
278

    Grantor trust assets (included in Other assets)
52

 
52

 
52

 
—

 
—

 
—

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 Interest-bearing deposits
1,176

 
1,176

 
—

 
1,176

 
—

 
—

 Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
Discount notes
66,025

 
66,014

 
—

 
66,014

 
—

 
—

Bonds
79,114

 
79,086

 
—

 
79,086

 
—

 
—

 Mandatorily redeemable capital stock
1

 
1

 
1

 
—

 
—

 
—

 Accrued interest payable
204

 
204

 
—

 
204

 
—

 
—

 Derivative liabilities
17

 
17

 
—

 
163

 
—

 
(146
)
____________ 
(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 with the same clearing agents and/or counterparty.

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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)


 
As of December 31, 2017
 
 
 
Estimated Fair Value
 
Carrying Value
 
Total        
 
Level 1        
 
Level 2        
 
Level 3        
 
Netting Adjustments and Cash Collateral (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 Cash and due from banks
$
2,357

 
$
2,357

 
$
2,357

 
$
—

 
$
—

 
$
—

 Interest-bearing deposits
2,176

 
2,176

 
—

 
2,176

 
—

 
—

 Securities purchased under agreements to resell
2,500

 
2,500

 
—

 
2,500

 
—

 
—

 Federal funds sold
9,380

 
9,380

 
—

 
9,380

 
—

 
—

 Trading securities
56

 
56

 
—

 
56

 
—

 
—

 Available-for-sale securities
1,104

 
1,104

 
—

 
—

 
1,104

 
—

 Held-to-maturity securities
25,162

 
25,219

 
—

 
24,643

 
576

 
—

 Advances
102,440

 
102,446

 
—

 
102,446

 
—

 
—

 Mortgage loans held for portfolio, net
435

 
467

 
—

 
467

 
—

 
—

  Loan to another FHLBank
200

 
200

 
—

 
200

 
—

 
—

 Accrued interest receivable
208

 
208

 
—

 
208

 
—

 
—

 Derivative assets
334

 
334

 
—

 
209

 
—

 
125

    Grantor trust assets (included in Other assets)
48

 
48

 
48

 
—

 
—

 
—

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 Interest-bearing deposits
1,177

 
1,177

 
—

 
1,177

 
—

 
—

 Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
Discount notes
50,139

 
50,132

 
—

 
50,132

 
—

 
—

Bonds 
87,523

 
87,501

 
—

 
87,501

 
—

 
—

 Mandatorily redeemable capital stock
1

 
1

 
1

 
—

 
—

 
—

 Accrued interest payable
142

 
142

 
—

 
142

 
—

 
—

 Derivative liabilities
21

 
21

 
—

 
369

 
—

 
(348
)

____________ 
(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 with the same clearing agents and/or counterparty.

Note 19—Commitments and Contingencies
Consolidated obligations are backed only by the financial resources of the FHLBanks. At any time, the Finance Agency may require any FHLBank to make principal or interest payments due on any consolidated obligation, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation. No FHLBank has ever had to assume or pay the consolidated obligation of another FHLBank.

The par value of the other FHLBanks’ outstanding consolidated obligations for which the Bank is jointly and severally liable was $886,081 and $896,441 as of December 31, 2018 and 2017, respectively, exclusive of the Bank’s own outstanding consolidated obligations. None of the other FHLBanks defaulted on their consolidated obligations, the Finance Agency was not required to allocate any obligation among the FHLBanks, and no amount of the joint and several obligation was fixed as of December 31, 2018 and 2017. Accordingly, the Bank has not recognized a liability for its joint and several obligation related to the other FHLBanks’ consolidated obligations as of December 31, 2018 and 2017.

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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

The following table presents the Bank’s outstanding commitments, which represent off-balance sheet obligations.
 
 
As of December 31,
 
 
2018
 
2017
 
 
Expire Within One Year
 
Expire After One Year
 
Total
 
Expire Within One Year
 
Expire After One Year
 
Total
Standby letters of credit (1)
 
$
12,334

 
$
17,974

 
$
30,308

 
$
9,520

 
$
20,669

 
$
30,189

Commitments to fund additional advances
 
48

 
—

 
48

 
—

 
—

 
—

Unsettled consolidated obligation bonds, at par (2)
 
640

 
—

 
640

 
3

 
—

 
3

Unsettled consolidated obligation discount notes, at par (2)
 
750

 
—

 
750

 
—

 
—

 
—

____________
(1) 
“Expire Within One Year” includes 14 standby letters of credit for a total of $37 and 16 standby letters of credit for a total of $59 as of December 31, 2018 and 2017, respectively, which have no stated maturity date and are subject to renewal on an annual basis.
(2) 
Expiration is based on settlement period rather than underlying contractual maturity of consolidated obligations.

The Bank issues standby letters of credit on behalf of its members to support certain obligations of the members to third-party beneficiaries. Standby letters of credit may be offered to assist members in facilitating residential housing finance, community lending, and asset-liability management, and to provide liquidity. In particular, members often use standby letters of credit as collateral for deposits from federal and state government agencies. Standby letters of credit are executed for members for a fee. If the Bank is required to make a payment for a beneficiary's draw, the member either reimburses the Bank for the amount drawn or, subject to the Bank's discretion, the amount drawn may be converted into a collateralized advance to the member and will require a corresponding activity-based capital stock purchase. However, standby letters of credit usually expire without being drawn upon.

The Bank monitors the creditworthiness of its standby letters of credit based on an evaluation of the member. In addition, standby letters of credit are fully collateralized from the time of issuance. The Bank has established parameters for the measurement, review, classification, and monitoring of credit risk related to these standby letters of credit that result in an internal credit rating, which focuses primarily on an institution’s overall financial health and takes into account the quality of assets, earnings, and capital position. In general, borrowers categorized into the highest risk rating category have more restrictions on the types of collateral that they may use to secure standby letters of credit, may be required to maintain higher collateral maintenance levels and deliver loan collateral, and may face more stringent collateral reporting requirements.

The carrying value of the guarantees related to standby letters of credit is recorded in “Other liabilities” on the Statements of Condition and amounted to $102 and $119 as of December 31, 2018 and 2017, respectively. Based on the Bank’s credit analyses and collateral requirements, the Bank does not deem it necessary to record any additional liability on the Statements of Condition for these commitments.

The Bank’s operating expenses include net rental costs of $1 for each of the years ended December 31, 2018 and 2017, and $2 for the year ended December 31, 2016. Lease agreements for Bank premises generally provide for increases in the basic rentals resulting from increases in property taxes and maintenance expenses. Such increases are not expected to have a material effect on the Bank’s results of operations.
The Bank is subject to legal proceedings arising in the normal course of business. After consultation with legal counsel, management does not anticipate, as of the date of the financial statements, that the ultimate liability, if any, arising out of these matters will have a material effect on the Bank’s financial condition or results of operations.


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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

Note 20—Transactions with Shareholders
The Bank is a cooperative whose member institutions own substantially all of the capital stock of the Bank. Former members and certain non-members, which own the Bank’s capital stock as a result of a merger or acquisition of a member of the Bank, own the remaining capital stock to support business transactions still carried on the Bank’s Statements of Condition. All holders of the Bank’s capital stock receive dividends on their investments, to the extent declared by the Bank’s board of directors. All advances are issued to members and eligible housing associates under the FHLBank Act, and mortgage loans held for portfolio are purchased from members. The Bank also maintains demand deposit accounts primarily to facilitate settlement activities that are related directly to advances and mortgage loan purchases. Transactions with any member that has an officer or director who is also a director of the Bank are subject to the same Bank policies as transactions with other members.

Related Parties. In accordance with GAAP, financial statements are required to disclose material related-party transactions other than compensation arrangements, expense allowances, or other similar items that occur in the ordinary course of business. Under GAAP, related parties include owners of more than 10 percent of the voting interests of the Bank. Due to limits on member voting rights under the FHLBank Act and Finance Agency regulations, no member owned more than 10 percent of the total voting interests. Therefore, the Bank had no such related party transactions required to be disclosed for the periods presented.

Shareholder Concentrations. The Bank considers shareholder concentration as members or non-members with regulatory capital stock outstanding in excess of 10 percent of the Bank’s total regulatory capital stock. The following tables present transactions with shareholders whose holdings of regulatory capital stock exceed 10 percent of total regulatory capital stock outstanding.
 
As of December 31, 2018
 
Regulatory Capital Stock Outstanding
 
Percent of Total Regulatory Capital Stock Outstanding
 
Par Value of Advances
 
Percent of Total Par Value of Advances
 
Interest-bearing Deposits
 
Percent of Total Interest-bearing Deposits
Bank of America, National Association
$
855

 
15.58
 
$
19,759

 
18.23
 
$
—

 
0.01
Navy Federal Credit Union
570

 
10.39
 
13,058

 
12.04
 
—

 
0.04

 
As of December 31, 2017
 
Regulatory Capital Stock Outstanding
 
Percent of Total Regulatory Capital Stock Outstanding
 
Par Value of Advances
 
Percent of Total Par Value of Advances
 
Interest-bearing Deposits
 
Percent of Total Interest-bearing Deposits
Bank of America, National Association
$
908

 
17.61
 
$
21,010

 
20.55
 
$
—

 
0.01
Navy Federal Credit Union
675

 
13.09
 
15,530

 
15.19
 
195

 
16.58


Note 21—Transactions with Other FHLBanks

The Bank’s activities with other FHLBanks are summarized below.

Loans to and Borrowings from Other FHLBanks. Occasionally, the Bank loans short-term funds to or borrows short-term funds from the other FHLBanks. There was a $500 and a $200 loan outstanding to FHLBank Des Moines as of December 31, 2018 and 2017, respectively. There were no outstanding borrowings from other FHLBanks as of December 31, 2018 and 2017. Interest income on loans to and interest expense on borrowings from the other FHLBanks were not material during each of the years ended December 31, 2018, 2017, and 2016.

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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)


The following table presents the cash flow activities for loans to and borrowings from other FHLBanks.
 
 
For the Years Ended December 31,
 
 
2018
 
2017
 
2016
Investing activities:
 
 
 
 
 
 
Loans made to other FHLBanks
 
$
(1,000
)
 
$
(950
)
 
$
(1,010
)
Principal collected on loans made to other FHLBanks
 
700

 
750

 
1,010

Net change in loans made to other FHLBanks
 
$
(300
)
 
$
(200
)
 
$
—

 
 
 
 
 
 
 
Financing activities:
 
 
 
 
 
 
Proceeds from short-term borrowings from other FHLBanks
 
$
660

 
$
500

 
$
—

Payments of short-term borrowings from other FHLBanks
 
(660
)
 
(500
)
 
—

Net change in borrowings from other FHLBanks
 
$
—

 
$
—

 
$
—


 
Mortgage Loan Purchases of Participation Interests from Other FHLBanks. In December 2016, the Bank agreed to purchase a 90 percent participating interest in a $100 master commitment of certain newly acquired mortgage loans from the FHLBank Indianapolis. The Bank’s outstanding balance related to these loan assets was $78 and $84 as of December 31, 2018 and 2017, respectively.


Note 22— Subsequent Events

On January 24, 2019, the Bank’s board of directors approved a cash dividend for the fourth quarter of 2018. The Bank paid the fourth quarter 2018 dividend on January 30, 2019, in the amount of $86.





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Supplementary Financial Information (Unaudited)

Selected Quarterly Financial Data

The following tables present supplementary financial information for each quarter in the years ended December 31, 2018 and 2017 (in millions).

 
For the Year Ended December 31, 2018
 
Fourth Quarter
 
Third Quarter
 
Second Quarter
 
First Quarter
 
Total
Interest income
$
958

 
$
873

 
$
809

 
$
683

 
$
3,323

Interest expense
806

 
730

 
678

 
548

 
2,762

Net interest income
152

 
143

 
131

 
135

 
561

Noninterest income
(16
)
 
19

 
21

 
27

 
51

Noninterest expense
38

 
44

 
33

 
35

 
150

Affordable Housing Program assessments
10

 
11

 
12

 
13

 
46

Net income
$
88

 
$
107

 
$
107

 
$
114


$
416

 
 
 
 
 
 
 
 
 
 
 
For the Year Ended December 31, 2017
 
Fourth Quarter
 
Third Quarter
 
Second Quarter
 
First Quarter
 
Total
Interest income
$
534

 
$
497

 
$
421

 
$
67

 
$
1,519

Interest expense
412

 
374

 
307

 
269

 
1,362

Net interest income (expense)
122

 
123

 
114

 
(202
)

157

Noninterest income
18

 
18

 
12

 
319

 
367

Noninterest expense
36

 
36

 
30

 
34

 
136

Affordable Housing Program assessments
11

 
10

 
10

 
8

 
39

Net income
$
93

 
$
95

 
$
86

 
$
75


$
349



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Table of Contents


Investment Portfolio

The following table presents supplementary financial information on the Bank’s investments (dollars in millions).
 
 
As of December 31,
 
 
2018
 
2017
 
2016
 
 
Due in one year or less
 
Due after one year through five years
 
Due after five through 10 years
 
Due after 10 years
 
Total
Interest-bearing deposits
 
$
6,782

 
$
—

 
$
—

 
$
—

 
$
6,782

 
$
2,176

 
$
1,106

Securities purchased under agreements to resell
 
3,750

 
—

 
—

 
—

 
3,750

 
2,500

 
1,386

Federal funds sold
 
8,978

 
—

 
—

 
—

 
8,978

 
9,380

 
7,770

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Government-sponsored enterprises debt obligations
 
—

 
—

 
55

 
—

 
55

 
56

 
261

 State and local housing agency debt obligations
 
—

 
—

 
—

 
—

 
—

 
—

 
1

Total trading securities
 
—

 
—

 
55

 
—

 
55

 
56

 
262

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Private-label residential MBS
 
—

 
1

 
—

 
864

 
865

 
1,104

 
1,345

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and local housing agency debt obligations
 
—

 
—

 
1

 
—

 
1

 
1

 
76

Government-sponsored enterprises debt obligations
 
225

 
2,057

 
330

 
60

 
2,672

 
5,350

 
6,041

   Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency obligations- guaranteed residential
 
—

 
—

 
5

 
113

 
118

 
157

 
209

Government-sponsored enterprises residential
 
—

 
46

 
116

 
9,142

 
9,304

 
9,357

 
10,752

Government-sponsored enterprises commercial
 
282

 
1,497

 
9,394

 
195

 
11,368

 
9,729

 
6,773

      Private-label residential
 
3

 
—

 
—

 
413

 
416

 
568

 
790

Total held-to-maturity securities
 
510

 
3,600

 
9,846

 
9,923

 
23,879

 
25,162

 
24,641

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investment securities
 
510

 
3,601

 
9,901

 
10,787

 
24,799

 
26,322

 
26,248

Total investments
 
$
20,020

 
$
3,601

 
$
9,901

 
$
10,787

 
$
44,309


$
40,378

 
$
36,510

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Yield on trading securities
 
—

 
—

 
2.64
%
 
—

 
 
 
 
 
 
Yield on available-for-sale securities
 
5.00
%
 
5.95
%
 
—

 
5.44
%
 
 
 
 
 
 
Yield on held-to-maturity securities
 
1.75
%
 
2.62
%
 
2.17
%
 
2.90
%
 
 
 
 
 
 
Yield on total investment securities
 
1.75
%
 
2.62
%
 
2.18
%
 
3.08
%
 
 
 
 
 
 

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The U.S. government and GSEs were the only issuers whose securities exceeded 10 percent of the Bank’s total capital at December 31, 2018.
 
 
 
 

Loan Portfolio

The following table presents the Bank’s outstanding domestic loans, nonaccrual loans, loans 90 days or more past due and accruing interest, and restructured loans (in millions).
 
As of December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
Advances
$
108,462

 
$
102,440

 
$
99,077

 
$
104,168

 
$
99,644

Real estate mortgages
$
361

 
$
436

 
$
524

 
$
586

 
$
749

Nonaccrual real estate mortgages, unpaid principal balance
$
6

 
$
11

 
$
11

 
$
18

 
$
33

Real estate mortgages past due 90 days or more and still accruing interest, unpaid principal balance (1)
$
—

 
$
—

 
$
1

 
$
3

 
$
5

Troubled debt restructurings, unpaid principal balance (not included above) (2)
$
8

 
$
9

 
$
10

 
$
13

 
$
11

Interest contractually due during the year
$
—

 
 
 
 
 
 
 
 
Interest actually received during the year
$
—

 
 
 
 
 
 
 
 
___________ 
(1) Only government loans (e.g., FHA, VA) continue to accrue interest after 90 days or more delinquent.
(2) Represents troubled debt restructured loans that are still performing as of year end.

The Bank places a conventional mortgage loan on nonaccrual status when the collection of the contractual principal or interest from the borrower is 90 days or more past due.

Summary of Loan Loss Experience

The following table presents the allowance for credit losses on domestic conventional residential mortgage loans (dollars in millions).
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
Balance, beginning of year
$
1

 
$
1

 
$
2

 
$
3

 
$
11

Reversal of provision for credit losses
—

 
—

 
(1
)
 
(1
)
 
(5
)
Charge-offs
—

 
—

 
—

 
—

 
(3
)
Balance, end of year
$
1

 
$
1

 
$
1

 
$
2

 
$
3

Ratio of net charge-offs during the year to average loans outstanding during the year (in basis points)
3

 
4

 
2

 
4

 
39



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Short-term Borrowings

Borrowings with original maturities of one year or less are classified as short-term. The following table presents information regarding the Bank’s short-term borrowings (dollars in millions).

 
As of and for the Years Ended December 31,
 
2018
 
2017
 
2016
Consolidated obligation discount notes:
 
 
 
 
 
Amount outstanding at the end of the year
$
66,025

 
$
50,139

 
$
41,292

Weighted average interest rate at the end of the year
2.33
%
 
1.21
%
 
0.48
%
Daily average outstanding for the year
$
60,847

 
$
48,676

 
$
58,774

Weighted average interest rate for the year
1.87
%
 
0.90
%
 
0.42
%
Maximum amount outstanding at any month-end during the year
$
70,108

 
$
56,059

 
$
69,375

 
 
 
 
 
 
Consolidated obligation bonds:
 
 
 
 
 
Amount outstanding at the end of the year
$
30,618

 
$
33,392

 
$
41,705

Weighted average interest rate at the end of the year
2.33
%
 
1.31
%
 
0.68
%
Daily average outstanding for the year
$
33,428

 
$
32,213

 
$
27,227

Weighted average interest rate for the year
2.31
%
 
0.90
%
 
0.65
%
Maximum amount outstanding at any month-end during the year
$
37,806

 
$
43,230

 
$
41,705


Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.
Disclosure Controls and Procedures

The Bank’s President and Chief Executive Officer and the Bank’s Executive Vice President and Chief Financial Officer (Certifying Officers) are responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its Certifying Officers, as appropriate, to allow timely decisions regarding required disclosure.

As of December 31, 2018, the Bank’s management, with the participation of the Certifying Officers, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures. Based on that evaluation, the Certifying Officers have concluded that the Bank’s disclosure controls and procedures (as defined in Rules 13a-15(a) and 15d-15(e) under the Exchange Act) were effective to provide reasonable assurance that information required to be disclosed by the Bank in the reports that it files or submits under the Exchange Act (1) is accumulated and communicated to the Bank’s management, including the Certifying Officers, as appropriate, to allow timely decisions regarding required disclosure; and (2) is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms.

In designing and evaluating the Bank’s disclosure controls and procedures, the Bank’s Certifying Officers recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Management’s Report on Internal Control Over Financial Reporting

The Bank’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Bank, as defined in Rule 13a-15(f) under the Exchange Act. The Bank’s management assessed the effectiveness of the Bank’s internal control over financial reporting as of December 31, 2018. In making this assessment, the Bank’s management utilized the criteria set forth by COSO in Internal Control-Integrated Framework (2013). Based upon that evaluation, management has concluded that the Bank’s internal control over financial reporting was effective as of December 31, 2018.


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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. The effectiveness of the Bank’s internal control over financial reporting as of December 31, 2018, has been audited by PricewaterhouseCoopers LLP (PwC), an independent registered public accounting firm, as stated in their report which appears within.

Changes in Internal Control Over Financial Reporting

During the fourth quarter of 2018, there were no changes in the Bank’s internal control over financial reporting that have affected materially, or are reasonably likely to affect materially, the Bank’s internal control over financial reporting.

Item 9B. Other Information.

PwC serves as the independent registered public accounting firm for the Bank. Rule 201(c)(1)(ii)(A) of Regulation S-X (the Loan Rule) prohibits an accounting firm, such as PwC, from having certain financial relationships with its audit clients and affiliated entities. Specifically, the Loan Rule provides, in relevant part, that an accounting firm generally would not be independent if it or a covered person in the firm receives a loan from a lender that is a “record or beneficial owner of more than 10 percent of the audit client’s equity securities.” A covered person in the firm includes personnel on the audit engagement team, personnel in the chain of command, partners and managers who provide 10 or more hours of non-audit services to the audit client, and partners in the office where the lead engagement partner practices in connection with the client.

PwC has advised the Bank that for the year ended December 31, 2018, certain covered persons had borrowing relationships with one Bank member (referred below as the “Lender”) who owns more than 10 percent of the Bank’s capital stock, which could call into question PwC’s independence with respect to the Bank. The Bank is providing this disclosure to explain the facts and circumstances, as well as PwC’s and the Audit Committee’s conclusions, concerning PwC’s objectivity and impartiality with respect to the audit of the Bank.
PwC advised the Audit Committee of the Bank that it believes that, in light of the facts of this borrowing relationship, its ability to exercise objective and impartial judgment on all matters encompassed within PwC’s audit engagement has not been impaired and that a reasonable investor with knowledge of all relevant facts and circumstances would reach the same conclusion. PwC has advised the Audit Committee that this conclusion is based in part on the following considerations:
•
the PwC professionals are required to disclose any relationships that may raise issues about objectivity, confidentiality, independence conflicts, or favoritism; and
•
the Lender has not made any attempt to influence the conduct of the Bank’s audit or the objectivity and impartiality of any member of PwC’s audit engagement team.

Additionally, the Audit Committee of the Bank assessed PwC’s ability to perform an objective and impartial audit, including consideration of the ownership structure of the Bank, the limited voting rights of the Bank’s members and the composition of the board of directors. In addition to the above listed considerations, the Audit Committee considered the following:
•
although the Lender owned more than 10 percent of the Bank’s capital stock, the Lender’s voting rights are less than 10 percent;
•
as of December 31, 2018 and as of the date of the filing of this Form 10-K, no officer or director of the Lender served on the board of directors of the Bank; and
•
the Lender is subject to the same terms and conditions for conducting business with the Bank as any other member.

Based on the Audit Committee’s evaluation, the Audit Committee has concluded that PwC’s ability to exercise objective and impartial judgment on all issues encompassed within PwC’s audit engagement has not been impaired.


PART III


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Item 10. Directors, Executive Officers and Corporate Governance.

Directors

The FHLBank Act provides that an FHLBank’s board of directors is to comprise 13 directors, or such other number as the Director determines appropriate. For 2019, the Director has designated 14 directorships for the Bank, eight of which are member directorships and six of which are independent directorships.

All individuals serving as Bank directors must be United States citizens. At least a majority of the directors must be member directors and not less than two-fifths must be independent directors. Under the FHLBank Act, as amended by the Housing Act, and Finance Agency regulations, the term of office of each director is four years, subject to certain adjustments to achieve a staggered board. Any director that has been elected to three consecutive full terms is not eligible for election to directorship for any term that begins within two years of the expiration of the third term.

The board of directors does not solicit proxies, nor are member institutions permitted to solicit or use proxies in order to cast their votes in an election.

Member Directors

Candidates for member directorships in a particular state are nominated by members in that state. FHLBank Boards are not permitted to nominate or elect member directors, except for vacant member directorships. Finance Agency regulations require that:

•
a member directorship be held only by an officer or director of a member institution located within the Bank’s district;
•
the member institution meet all minimum capital requirements established by its regulator(s); and
•
the member institution be a member as of the record date established for the election of the member director.

The Bank is not permitted to establish additional eligibility criteria or qualifications for member directorships. With respect to member directors, under Finance Agency regulations, no director, officer, employee, attorney, or agent of the Bank (except in his/her personal capacity) may, directly or indirectly, support the nomination or election of a particular individual for a member directorship.

For each member director position to be filled, an eligible member in that state may cast one vote for each share of capital stock it was required to hold as of the record date, except that an eligible member’s votes for each member director position to be filled may not exceed the average number of shares of capital stock required to be held by all of the members in that state as of the record date.

The regulations permit, but do not require, the board of directors to conduct an annual assessment of the skills and experience possessed by the members of its board of directors as a whole and to determine whether the capabilities of the board would be enhanced through the addition of individuals with particular skills and experience. The Bank may identify those qualifications and so inform the members as part of its election notification process, but the Bank may not exclude a member director candidate from the election ballot on the basis of such qualifications. In 2018, the board of directors conducted an assessment of its directors, but did not identify any particular qualifications as part of its 2018 election notification process.

Independent Directors

Candidates for independent directorships are nominated by the Bank’s board of directors. Finance Agency regulations require that an independent directorship be held only by an individual:

•
who is a bona fide resident of the Bank’s district;
•
who is not a director, officer, or employee of a member institution or of any recipient of advances from the Bank; and
•
who is not an officer of any FHLBank.

At least two of the independent directors must be public interest directors. Finance Agency regulations define a public interest independent director as someone having more than four years of experience representing consumer or community interests in banking services, credit needs, housing or consumer financial protection. The other independent directors must have experience in, or knowledge of, one or more of the following areas: auditing and

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accounting, derivatives, financial management, organizational management, project development, risk management practices, and the law.

Any individual may submit an application form and request to be considered by the Bank to be an independent director candidate. Before nominating any individual for an independent directorship, other than for a public interest directorship, the Board must determine that the candidate’s knowledge or experience is commensurate with that needed to oversee a financial institution with a size and complexity that is comparable to the Bank’s. Finance Agency regulations require the board to consult with the Bank’s Affordable Housing Advisory Council with respect to the independent directorship candidates. Further, the Bank must submit information about independent directorship candidates to the Finance Agency for its review prior to their nomination. After the independent director candidates are nominated by the board, the candidates are then presented to the Bank’s membership for a district-wide vote. Finance Agency regulations permit the Bank’s directors, officers, attorneys, employees, agents, and Advisory Council members to support the candidacy of the board’s candidates for independent directorships.

For independent directorships, candidates are elected on a district-wide basis, with the candidate receiving the most votes being declared the winner. Candidates running unopposed must receive at least 20 percent of the number of votes eligible to be cast. If an unopposed candidate receives less than 20 percent of eligible votes, a new election must be conducted.

Board Vacancies

When the board has a vacancy, Finance Agency regulations require the board to elect a director to fill the vacancy by a majority vote of the remaining directors.

The Bank has determined that all directors meet the regulatory eligibility requirements for directors. Because of the laws and regulations governing member directorship elections that are described above, the Bank is not in a position to know what specific factors the Bank’s member institutions may consider in selecting member director candidates or electing member directors. For the Bank’s independent directors and the directors who hold their current directorship due to vacancy and appointment by the board, the board considered the experience, qualifications, attributes or skills described in the biographical paragraphs provided below in determining to nominate or appoint that person as a director for the Bank. In addition the board has at times considered the importance of maintaining a continuity of relevant knowledge, leadership and experience on the board and diversity the candidate would bring to the board when nominating or appointing a candidate.


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The following table presents information regarding each of the Bank’s directors, and all persons nominated or chosen to become directors, as of the date of this Report. Except as otherwise indicated, each director has been engaged in the principal occupation described below for at least five years. No director has any family relationship with any other director or executive officer of the Bank.

Name
 
 
Age
 
Director Since
 
Expiration of Current Term
as Director
 
Board Committees
Brian E. Argrett(1)
 
 
55
 
2016
 
12/31/2021
 
(5)(7)(8)(9)
Travis Cosby, III(1)
 
 
60
 
2014
 
12/31/2021
 
(5)(7)(8)(9)
Suzanne S. DeFerie(1)
 
 
62
 
2015
 
12/31/2020
 
(5)(7)(8)(9)
R. Thornwell Dunlap, III(1)
 
 
61
 
2016
 
12/31/2019
 
(5)(7)(8)(10)
F. Gary Garczynski(2)(3)
 
 
72
 
2007
 
12/31/2020
 
(6)(8)(10)(11)
William C. Handorf(2)
 
 
74
 
2007
 
12/31/2019
 
(5)(6)(8)(9)
Scott C. Harvard(1)(4)
 
 
64
 
2017
 
12/31/2020
 
(6)(8)(10)(11)
Jonathan Kislak(2)
 
 
70
 
2008
 
12/31/2022
 
(7)(8)(9)(11)
LaSalle D. Leffall, III(2)
 
 
56
 
2007
 
12/31/2020
 
(5)(7)(8)(10)
Kim C. Liddell(1)
 
 
58
 
2015
 
12/31/2022
 
(6)(8)(9)(11)
Garrett S. Richter(1)
 
 
68
 
2019
 
12/31/2022
 
(6)(8)(10)(11)
John B. Rucker(2)
 
 
67
 
2017
 
12/31/2019
 
(6)(8)(10)(11)
Robert L. Strickland, Jr.(2)(3)(4)
 
 
67
 
2007
 
12/31/2021
 
(12)
Richard A. Whaley(1)
 
 
59
 
2013
 
12/31/2022
 
(13)
____________
(1) 
Member Director
(2) 
Independent Director
(3) 
Public Interest Director
(4) 
Mr. Harvard previously served as a director from 2003-2012. Mr. Strickland previously served as a director from 2002-2004.
(5) 
Member of Audit Committee
(6) 
Member of Credit and Member Services Committee
(7) 
Member of Enterprise Risk and Operations Committee
(8) 
Member of Executive Committee
(9) 
Member of Finance Committee
(10) 
Member of Governance and Compensation Committee
(11) 
Member of Housing and Community Investment Committee
(12) 
Vice chairman of Executive Committee and ex officio member of all board committees
(13) 
Chairman of Executive Committee and ex officio member of all board committees


Chairman of the board, Richard A. Whaley, has served as president, chief executive officer, and director of Citizens Bank of Americus in Americus, Georgia, since 2001. From 1989 to 2001, he served as market manager and commercial lender for Wachovia Bank. Mr. Whaley served as chairman of the Georgia Bankers Association from October 2010 to June 2012. Mr. Whaley also served as chairman of the South Georgia Technical College Foundation from 2008 to 2010. He currently serves as chairman of the Georgia Bankers Association Insurance Trust, Inc. and is a veteran of the U.S. Army. He currently serves as chairman of the Executive Committee and ex officio member of the other committees of the Bank’s board.

Vice chairman of the board, Robert L. Strickland, Jr. is executive director of the Alabama Housing Finance Authority, an independent public corporation dedicated to serving the housing needs of low- and moderate-income Alabamians, a position he has held since 1987. Mr. Strickland served as president of the National Council of State Housing Agencies for two terms. He has also served on the National Association of Home Builders Mortgage Finance Roundtable and as a member of Fannie Mae’s National Advisory Council. He currently serves as a director of the Alabama MultiFamily Loan Consortium. He currently serves as vice chairman of the Executive Committee and ex officio member of the other committees of the Bank’s board. Mr. Strickland’s experience in affordable housing finance supported his nomination as a public interest director.



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Brian E. Argrett has served as president, chief executive officer, and director of City First Bank of DC since 2011. Previously, Mr. Argrett was founder and managing partner of both Fulcrum Capital Group and Fulcrum Capital Partners, L.P. from 1992 to 2011. He served as president, chief executive officer, and director of Fulcrum Venture Capital Corporation, a federally licensed and regulated Small Business Investment Company, from 1992 to 2011. He currently serves as chairman of the boards of directors of City First Enterprises, a nonprofit bank holding company, and City First Foundation. Mr. Argrett also served as presidential appointee to the Community Development Advisory Board, former chairman of the Community Development Bankers Association, and director of the Washington DC Economic Partnership. From 2006-2009, Mr. Argrett served on the audit committee of First Federal Financial Corp. (NYSE- FED). He currently serves as chairman of the Enterprise Risk and Operations Committee of the Bank’s board.
Travis Cosby, III has served as chairman of the board of First Community Bank of Central Alabama in Wetumpka, Alabama, since January 1, 2013, having previously served as president from 2001 to 2011 as well as chief executive officer from 2004 to 2012. He has over 30 years of banking experience and served in operations, lending, investment portfolio management, and funds management positions. He worked at Union Planters Bank from 1998 to 2001, achieving the title of city president, after rising to executive vice president during his tenure at First National Bank of Wetumpka from 1982 to 1998. From 1980 to 1982, Mr. Cosby worked at Jackson Thornton and Co., CPAs. He earned a B.S. in accounting from Auburn University, and became a certified public accountant in June 1982. Mr. Cosby is a past chairman and current Chairman’s Council member of the Alabama Bankers Association, Inc. He currently serves as chairman of the Audit Committee of the Bank’s board.

Suzanne S. DeFerie has served as executive vice president and regional president, western region, of First Bank, a subsidiary of First Bancorp in Southern Pines, North Carolina (NASDAQ-FBNC) since October 1, 2017. She served as president and chief executive officer of Asheville Savings Bank, S.S.B. in Asheville, North Carolina, from 2008 and its holding company, ASB Bancorp, Inc., from 2011 until October 1, 2017, when the bank and holding company were acquired by First Bancorp. Ms. DeFerie also serves a member of the board of directors for First Bancorp. Prior to becoming president and chief executive officer of Asheville Savings Bank and ASB Bancorp, Inc., Ms. DeFerie was executive vice president and chief financial officer of Asheville Savings Bank for 16 years. She currently serves as chairman of the Finance Committee of the Bank’s board.

R. Thornwell Dunlap, III has served as president and chief executive officer of Countybank since 1995 and chairman of its holding company, TCB Corporation, since 2001. He has served on the South Carolina Bankers Association Board of Directors since 2016 and is a past chairman of the Independent Banks of South Carolina Board of Directors. Mr. Dunlap also serves on the Greenwood Partnership Alliance Board of Directors and Executive Committee and is a past chairman. Mr. Dunlap served on the Piedmont Technical College Foundation Board of Directors from 1995 to 2004, and returned to serve in 2010 to present. He has served on the Ten at the Top Board of Directors since 2009 and is a founding director. Mr. Dunlap is a member and past chairman of the Greenwood Rotary Club. He currently serves as chairman of the Governance and Compensation Committee of the Bank’s board.

F. Gary Garczynski, has served as the president of National Capital Land and Development, Inc., a construction and real estate development company in Woodbridge, Virginia, since 1997. Mr. Garczynski served as chairman of the National Housing Endowment from 2004 to 2010 and continues to serve on its executive committee. He previously served as the 2002 President of the National Association of Home Builders (NAHB). Mr. Garczynski serves as a Senior Life Director of NAHB, a Life Director of the Home Builders Association of Virginia, and a Senior Life Director of the Northern Virginia Building Industry Association. He also is a member of the Prince William County, Virginia, Affordable Housing Task Force and a three-term appointee to the Virginia Housing Commission. Mr. Garczynski serves a gubernatorial appointment through 2018 as vice chairman of the Commonwealth Transportation Board and has previously served as a director on the Northern Virginia Transportation Authority. He currently serves as vice chairman of the Housing and Community Investment Committee of the Bank’s board. Mr. Garczynski’s public interest experience in housing, affordable housing and housing policy supported his nomination as a public interest director.

William C. Handorf, Ph.D. has served as a professor of finance and real estate at The George Washington University’s School of Business in Washington, D.C. since 1975. From 2001 to 2006, Mr. Handorf served as a director of the Federal Reserve Bank of Richmond’s Baltimore branch, including two years as chair. From 1992 to 1995, Mr. Handorf served as a private citizen director of the FHLBanks Office of Finance. He currently serves as vice chairman of the Finance Committee of the Bank’s board. Mr. Handorf’s experience in financial markets, banking, real estate investment, accounting, and derivatives supported his nomination as an independent director.


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Scott C. Harvard has served as president, chief executive officer and director of First National Corporation (OTC - FXNC) since 2011. He served as president, chief executive officer and director of First Bank from 2011 to 2015 and has served as chief executive officer and director of First Bank since 2015. He previously served as a director of the Bank from 2003 to 2012, serving as chairman from 2007-2012. Mr. Harvard served as president, chief executive officer and as a director of Shore Bank from 1985 to 2008 and as president, chief executive officer and director of its parent, Shore Financial Corporation, from 1997 to 2008. He served as executive vice president and director of Hampton Roads Bankshares from 2008 to 2009 and as a Vice President of Virginia Savings Bank from 2009 to 2011. He served on the board of the Virginia Association of Community Banks from 2012 to 2014 and he currently serves chairman and as a member of the executive committee of the Virginia Bankers Association. He is a director of the Community Bankers Bank in Richmond, Virginia. He also served on the Council of Federal Home Loan Banks. Mr. Harvard has a served on numerous non-profit boards over his career and currently serves on the boards of the Top of Virginia Chamber of Commerce and the Shenandoah Valley Westminster Canterbury. Mr. Harvard currently serves as vice chairman of the Credit and Member Services Committee and vice chairman of the Governance and Compensation Committee of the Bank’s board.
Jonathan Kislak has served as principal and chairman of the board of Antares Capital Corporation, a venture capital firm investing equity capital in expansion stage companies and management buyout opportunities, since 1999. From 1993 to 2005, Mr. Kislak served as president and chairman of the board of Kislak Financial Corporation, a community bank holding company in Miami, Florida. From 2013-2016, Mr. Kislak served on the board of directors and chair of the audit committee of Cherry Hill Mortgage Investment Corp. (NYSE - CHMI). He currently serves as vice chairman of the Enterprise Risk and Operations Committee of the Bank’s board. Mr. Kislak’s experience in banking, audit, capital markets, mortgage markets and affordable housing supported his nomination as an independent director.

LaSalle D. Leffall, III is president of LDL Financial, a corporate advisory and investment firm he founded in 2006. From 2002 to 2006, he was a senior executive of The NHP Foundation, one of the nation’s largest nonprofit owners of affordable multifamily housing, and served as president and chief operating officer. In October and November 2008, he served as acting chief executive officer. From 1996 to 2002, Mr. Leffall was an investment banker in the mergers and acquisitions divisions of UBS and Credit Suisse in New York, New York. In 1992, Mr. Leffall began his career as an attorney in the corporate department of Cravath, Swaine & Moore in New York, New York. Mr. Leffall has served on the board of directors for Mutual of America Investment Corporation and Mutual of America Institutional Funds, Inc., registered investment companies, from 2011 through the present. He is a member of the New York State Bar, District of Columbia Bar, Council on Foreign Relations, The Federal City Council, and The Economic Club of Washington, D.C. Mr. Leffall earned a B.A., magna cum laude, in History from Harvard College followed by the simultaneous completion of a J.D., cum laude, from Harvard Law School and M.B.A. from Harvard Business School. He currently serves as vice chairman of the Audit Committee of the Bank’s board. Mr. Leffall’s experience in finance, law, and affordable multifamily housing, and derivatives knowledge supported his nomination as an independent director.

Kim C. Liddell has served as president and chief executive officer of 1880 Bank, formerly known as the National Bank of Cambridge, in Cambridge, Maryland, since 2010. He was elected chairman of the board of directors in April 2011. From 2004 to 2009, Mr. Liddell served as chief operating officer and executive vice president of Cardinal Financial Corporation (CFNL) and Cardinal Bank. Mr. Liddell has served as a board member of the Virginia Bankers Association’s Member Services, Inc., Junior Achievement of the National Capital Area, Business in Education Partnership with the Falls Church City Public Schools, Arlington County Chamber of Commerce, Celebrate Fairfax, and Leadership Fairfax. Mr. Liddell currently serves on the boards of the Maryland Bankers Association and Dorchester General Hospital Foundation. He previously served on the board of the Dorchester County Chamber of Commerce. Mr. Liddell currently serves as chairman of the Credit and Member Services Committee of the Bank’s board.

Garrett S. Richter serves as president and chief executive officer of First Florida Integrity Bank (FFIB), the successor to First National Bank of the Gulf Coast, which was founded in 2009.  He also serves as a director and president of TGR Financial, Inc., FFIB’s holding company. Prior to that, he served for one term in the Florida House of Representatives and two terms as a Florida State Senator, chairing the Senate Banking and Insurance Committee for four years. He was the President Pro Tempore of the Florida Senate from 2012-2016.  From 1994 to 2005 he was President and CEO of First National Bank of Naples, a bank which he co-founded in 1989. Mr Richter also serves as a commissioner on the Florida Ethics Commission. He is on the board of directors for the Greater Naples Chamber of Commerce, chairing the Public Policy Committee. He is a veteran of the U.S. Army, having served with the 75th Ranger Company in Vietnam in 1971.


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John B. Rucker has served as managing director of Stifel, Nicolaus & Company, Incorporated (Stifel), an investment banking firm, since 2015, and manages Stifel’s affordable housing business. Mr. Rucker was a founding partner and managing director of Merchant Capital, L.L.C., a public finance investment banking firm, from 1987 to 2015, which was acquired by Stifel in 2015. He is also a registered municipal advisor. He was a member of Fannie Mae’s Southeast Regional Housing Advisory Council and Fannie Mae’s National Housing Impact Advisory Council in 2004 and 2005. He has also served on the board of directors of the National Housing & Rehabilitation Association since 2003. Mr. Rucker served on the Bank’s Affordable Housing Advisory Council from 2012 to 2016, serving as its vice chairman from 2014 to 2015 and as its chairman in 2016. He currently serves as chairman of the Housing and Community Investment Committee of the Bank’s board. Mr. Rucker’s experience as a lawyer and in affordable housing finance supported his appointment to fill the independent directorship vacancy.

Code of Conduct

The board has adopted a Code of Conduct that applies to the Bank’s principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions, in each case, who are employees of the Bank. The Code of Conduct is posted on the Who We Are - Investor Relations -Governance section of the Bank’s Internet website at http://corp.fhlbatl.com/who-we-are/investor-relations/. Any amendments to, or waivers under, the Bank’s Code of Conduct that are required to be disclosed pursuant to the SEC’s rules will be disclosed on the Bank’s website.

Director Independence, Compensation Committee, Audit Committee, and Audit Committee Financial Expert

General

The board of directors of the Bank is required to evaluate the independence of the directors of the Bank under two distinct director independence standards. First, Finance Agency regulations establish independence criteria for directors who serve as members of the Bank’s Audit Committee. Second, SEC rules require that the Bank’s board of directors apply the independence criteria of a national securities exchange or automated quotation system in assessing the independence of its directors.

As of the date of this Report, the Bank has 14 directors, eight of whom are member directors and six of whom are independent directors. None of the Bank’s directors is an “inside” director. That is, none of the Bank’s directors is a Bank employee or officer. Further, as the Bank’s capital stock may only be owned by members, former members, and certain non-members, the Bank’s directors cannot personally own stock or stock options in the Bank. However, each of the member directors is an officer or director of an institution that is a member of the Bank and that is encouraged to, and does, engage in transactions with the Bank on a regular basis.

Finance Agency Regulations Regarding Independence

The Finance Agency’s director independence standards prohibit an individual from serving as a member of the Bank’s Audit Committee if he or she has one or more disqualifying relationships with the Bank or its management that would interfere with the exercise of that individual’s independent judgment. Disqualifying relationships considered by the board are: employment with the Bank at any time during the last five years; acceptance of compensation from the Bank other than for service as a director; being a consultant, advisor, promoter, underwriter, or legal counsel for the Bank at any time within the last five years; and being an immediate family member of an individual who is or who has been within the past five years, a Bank executive officer. The board assesses the independence of each director under the Finance Agency’s independence standards, regardless of whether he or she serves on the Audit Committee. As of March 7, 2019, each of the Bank’s directors was independent under these criteria.

SEC Rules Regarding Independence

SEC rules require the Bank’s board of directors to adopt a standard of independence to evaluate its directors. The board has adopted the independence standards of the New York Stock Exchange (NYSE) to determine which of its directors are independent, including members of its Governance and Compensation Committee and Audit Committee, and whether the Bank’s Audit Committee’s financial experts are independent.


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After applying the NYSE independence standards, the board determined that, as of March 7, 2019, directors Garczynski, Handorf, Kislak, Leffall, Rucker, and Strickland, each an independent director, were independent. Based upon the fact that each member director is a senior official of an institution that is a member of the Bank (and thus is an equity holder in the Bank), that each such institution routinely engages in transactions with the Bank, and that such transactions occur frequently and are encouraged, the board determined that none of the member directors presently meets the independence criteria under the NYSE independence standards.

It is possible that under the NYSE objective criteria for independence (particularly the criterion regarding the amount of business conducted with the Bank by the director’s institution), a member director could meet the independence standard on a particular day. However, because the amount of business conducted by a member director’s institution may change frequently, and because the Bank generally desires to increase the amount of business it conducts with each member, the directors deemed it inappropriate to draw distinctions among the member directors based upon the amount of business conducted with the Bank by any director’s institution at a specific time.

Compensation Committee

The board has a Governance and Compensation Committee, composed of directors Dunlap, Garczynski, Harvard, Leffall, Richter, Rucker, Strickland, and Whaley. As the Bank’s Governance and Compensation Committee may only recommend actions to the full board regarding governance practices and compensation and benefits programs, which the full board may approve or disapprove, the board assesses the independence of the full board under the NYSE’s standards for compensation committees. The board determined that, as of March 7, 2019, each of directors Garczynski, Handorf, Kislak, Leffall, Rucker, and Strickland was independent under the NYSE independence standards for compensation committee members, but for the reasons noted above, none of the member directors was independent under such standards.

Audit Committee

The board has a standing Audit Committee, composed of directors Argrett, Cosby, DeFerie, Dunlap, Handorf, Leffall, Strickland, and Whaley. The board determined that, as of March 7, 2019, each of directors Handorf, Leffall and Strickland was independent under the NYSE independence standards for audit committee members, but, for the reasons noted above, none of the member directors serving on the Audit Committee was independent under such standards. The board also determined that each of directors Argrett, Cosby, Dunlap, DeFerie, Handorf, Leffall, and Whaley is an “audit committee financial expert” within the meaning of the SEC rules.

The board also assesses the independence of the Audit Committee members under Section 10A (m)(3) of the Exchange Act. As of March 7, 2019, each of the Bank’s directors was independent under these criteria. As stated above, the board determined that each member of the Audit Committee was independent under the Finance Agency’s standards applicable to the Bank’s Audit Committee.

Board Leadership Structure and Risk Oversight

The directors are nominated and elected in accordance with applicable law and Finance Agency regulations. As required by applicable law, the chairman and vice chairman of the board are elected by a majority of all the directors of the Bank from among the directors of the Bank for two year terms, and since Bank officers may not serve as directors of the Bank, neither the board chairman or vice chairman position can be filled by the president and chief executive officer of the Bank.

The board of directors establishes the Bank’s risk management culture, including risk tolerances and risk management philosophies, by establishing its risk management system, overseeing its risk management activities, and adopting its risk appetite and RMP. The board reviews the risk appetite report on a quarterly basis and approves any changes as appropriate. The board receives regular updates on the Bank’s key risks including an independent risk assessment. The board reviews the RMP at least annually and approves any amendments to it as appropriate. For further discussion of the risk appetite and the RMP, please see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations-Risk Management. The board works with management to align the Bank’s strategic activities and objectives within the parameters of the risk appetite framework and the RMP. The board utilizes committees as an integral part of overseeing risk management, including an audit committee, a credit and member services committee, an enterprise risk and operations committee, an executive committee, a finance committee, a governance and

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compensation committee, and a housing and community investment committee, with the following oversight responsibilities:

•
Audit Committee oversees the Bank’s financial reporting process, system of internal control, audit process, policies and procedures for assessing and monitoring implementation of the strategic plan, and the Bank’s process for monitoring compliance with laws and regulations.

•
Credit and Member Services Committee oversees the Bank’s credit and collateral policies and related programs, services, products and documentation, and the Bank’s credit and collateral risk management program, strategies, and activities.

•
Enterprise Risk and Operations Committee oversees the Bank’s enterprise risk management functions, operations, information technology, and other related matters.

•
Executive Committee exercises most of the powers of the board in the management and direction of the affairs of the Bank during the intervals between board meetings.
 
•
Finance Committee oversees matters affecting the Bank’s financial performance, capital management and other related matters, including the Bank’s market and liquidity risk management program, strategies, and activities.
 
•
Governance and Compensation Committee oversees the Bank’s governance practices, compensation and benefits programs, and other related matters.

•
Housing and Community Investment Committee oversees the Bank’s housing and community investment policies, programs, and other relevant matters, including any other Bank products, services, and programs that may provide grants, subsidies, or other forms of assistance to support affordable housing and community economic development for low- and moderate-income individuals and communities.

The Bank’s internal management is overseen by the president and chief executive officer and delegated to other senior managers and internal management committees. The Bank has determined that this leadership structure is the most effective means of actively engaging the board of directors in risk management oversight while utilizing Bank management to implement and maintain sound risk management practices.

Compensation Committee Interlocks and Insider Participation

The board has a Governance and Compensation Committee that recommends actions to the full board regarding governance practices and compensation and benefits programs, which the full board of directors may approve or disapprove. None of the directors serving on the board in 2018 has at any time been an officer or employee with the Bank. None of the Bank’s executive officers served during 2018 or is serving on the board of directors or the compensation committee of any entity whose executive officers served on the Bank’s board of directors.

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Executive Officers

The following table presents the names, ages, and titles of the executive officers of the Bank and all persons chosen to become executive officers as of the date of this Report. No executive officer has any family relationship with any other executive officer or director of the Bank.
Executive Officer
 
Age
 
Title
W. Wesley McMullan
 
55
 
President and Chief Executive Officer
Kirk R. Malmberg
 
58
 
Executive Vice President and Chief Financial Officer
Robert F. Dozier, Jr.
 
50
 
Executive Vice President and Chief Business Officer
Scott M. Brennan
 
42
 
Senior Vice President, Director of Sales
Julia S. Brown
 
54
 
Senior Vice President, Corporate Secretary
Alp E. Can
 
43
 
Senior Vice President, Chief Risk Officer
Sharon B. Cook
 
40
 
First Vice President, Chief Marketing Officer
Bryan Delong
 
55
 
Senior Vice President, Chief Human Resources Officer
Arthur L. Fleming
 
60
 
Senior Vice President, Director of Community Investment Services
Melissa V. Hoggatt
 
59
 
First Vice President, Interim Chief Information Officer
Annette Hunter
 
54
 
Senior Vice President, Director of Accounting Operations
Haig H. Kazazian, III
 
53
 
Senior Vice President, Treasurer
Robert S. Kovach
 
55
 
Senior Vice President, Chief Credit Officer
Eric M. Mondres
 
64
 
Senior Vice President, Director of Government and Industry Relations
Reginald T. O'Shields
 
48
 
Senior Vice President, General Counsel and Chief Compliance and Ethics Officer
Richard A. Patrick
 
63
 
Senior Vice President, Chief Audit Officer
Leslie H. Schreiner
 
55
 
First Vice President, Director of Diversity and Inclusion
William T. Shaw
 
47
 
Senior Vice President, Controller

W. Wesley McMullan was appointed president and chief executive officer in December 2010. Previously, he served as executive vice president and director of financial management since 2004, with responsibility for sales, MPP sales, asset-liability management, liquidity management, other mission-related investments, customer systems and operations, and member education. Mr. McMullan joined the Bank as a credit analyst in 1988 and later earned promotions to assistant vice president in 1993, vice president in 1995, group vice president in 1998, and senior vice president in 2001. He currently serves as vice chairman of the board of directors of the FHLBanks’ Office of Finance. Mr. McMullan is a chartered financial analyst and earned a B.S. in finance from Clemson University.

Kirk R. Malmberg was appointed executive vice president and chief financial officer effective April 1, 2011. He oversees accounting, financial reporting, investment and derivatives operations, and treasury as well as the Bank’s credit and collateral services. From 2007 through March 2011, he served as executive vice president and chief credit officer, overseeing collateral services, credit services, community investment services and mortgage program operations. Prior to that, Mr. Malmberg served as senior vice president responsible for the Bank’s mortgage programs. He joined the Bank in 2001 as senior vice president, asset-liability management, after having served for five years as senior vice president, treasury, at FHLBank Chicago. Mr. Malmberg earned an M.B.A. from Rice University and a B.A. from Trinity University.

Robert F. Dozier, Jr. was appointed executive vice president and chief business officer in 2011. Mr. Dozier oversees the Bank’s member sales and outreach, community investment services, corporate communications, government and industry relations, and financial operations management. Prior to joining the Bank, Mr. Dozier was president and chief operating officer for Homeowners Mortgage Enterprises, a subsidiary of CoastalStates Bank, where he began as a loan officer in 1992. Mr. Dozier also served on the board of directors for CoastalSouth Bancshares, the holding company of CoastalStates Bank. From 2002 to 2004, Mr. Dozier served as a director of the Bank. He earned a B.A. in political science from the University of South Carolina.


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Scott M. Brennan has served as Director of Sales since 2014, being promoted from first vice president to senior vice president effective January 1, 2019. He joined the Bank in 2001 in the Bank’s member sales and trading department as a relationship manager, serving as senior relationship manager from 2006 to 2013, having been promoted from vice president to first vice president in 2014. Mr. Brennan earned a B.S. from Franklin and Marshall College.

Julia S. Brown serves as senior vice president and corporate secretary. The board of directors appointed Ms. Brown to serve as corporate secretary in 2011. Prior to her appointment as corporate secretary, she served as associate general counsel, assistant corporate secretary beginning in 2005, deputy general counsel, assistant corporate secretary beginning in 2007, and first vice president, deputy general counsel for governance beginning in 2009. Before joining the Bank in 2001 as a senior attorney, Ms. Brown practiced commercial real estate law with Sutherland Asbill & Brennan, LLP, in Atlanta, Georgia. She earned a B.S. in Spanish and anthropology from Wellesley College, summa cum laude, and her J.D., cum laude, from Harvard Law School.

Alp E. Can has served as chief risk officer since 2017, directing the Bank's enterprise risk management function, having been promoted from first vice president to senior vice president in 2018. He is responsible for overseeing enterprise-wide risk assessment and reporting functions, financial risk modeling, as well as model validation efforts for the Bank. Mr. Can joined the Bank in 2005 as an asset liability analyst in the financial risk management and modeling department. He was promoted to first vice president and manager of financial risk modeling in 2013 and to director of enterprise risk management in 2014. Mr. Can earned a bachelor’s degree in economics from the University of Istanbul, and an M.S. in mathematical risk management and M.B.A.- Finance, each from Georgia State University. 

Sharon B. Cook has served as first vice president, chief marketing officer since 2015. Ms. Cook oversees the Bank’s corporate communications, marketing, and government and industry relations. Ms. Cook joined the bank in 2008 as a senior marketing communications manager. She was promoted to vice president, director of corporate communications in 2011. Ms. Cook earned an M.B.A. from Brenau University and a B.A. in Journalism and Mass Communications from Georgia State University.

Bryan Delong has served as senior vice president, chief human resources officer, since 2016, having previously served as director of human resources since 2008. Mr. Delong is responsible for executing the Bank’s human resources strategies to include: talent acquisition, total rewards, employee development, workforce diversity and inclusion, and human resources compliance. Mr. Delong also leads the Bank’s staff services and property management functions, which include facilities operations, tenant leasing, security, print and mail services, and procurement. A 26-year veteran of the Bank, Mr. Delong previously served as the assistant director of human resources with responsibility for managing the Bank’s compensation, benefits, human resources information systems, and employee development programs. Prior to joining the Bank in 1993, Mr. Delong worked at LOMA as a compensation consultant and AT&T as a training specialist. Mr. Delong holds an M.S. in industrial and organizational psychology from Radford University, an M.A. in human resources development from Georgia State University, and a B.A. in English from Earlham College. He holds a certification as a Professional in Human Resources.

Arthur L. Fleming has served as senior vice president, director of community investment services, directing the Bank’s community investment, economic development, and affordable housing products and services, since 2007. Mr. Fleming has experience in a variety of financial services, legal, housing development, and academic roles. Before joining the Bank, Mr. Fleming was chief lending and investment officer for the Opportunity Finance Network, Inc., a national community development financial institution. He also served as the senior director for the southeast region and director of housing finance for the Fannie Mae Foundation; the senior vice president, managing director of housing initiatives at GMAC; founder and executive director of the Community Financing Consortium, Inc; and an attorney/senior associate for the FAU/FIU Joint Center for Environmental and Urban Problems. Mr. Fleming earned his undergraduate degree from Florida State University, and a master’s degree in Urban and Regional Planning and a J.D. from the University of Florida.

Melissa V. Hoggatt has served as first vice president and interim chief information officer since December of 2018. Prior to that she was Director of Financial Operations Management from 2014. Ms. Hoggatt joined the Bank in 2012 as the Director of Community Investment Services Production and Compliance Operations. Ms. Hoggatt received a B.S. in Psychology from the University of Alabama and is currently completing her Executive MBA at Georgia State University.

Annette Hunter has served as director of accounting operations since 2006, having been promoted from first vice president to senior vice president in 2015. In that role, Ms. Hunter is responsible for the daily accounting operations of the derivatives,

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investments, consolidated obligations, advances and purchased mortgage portfolios. Ms. Hunter joined the Bank in 2002 as manager of derivative and investment operations. Prior to joining the Bank, she served in various managerial accounting roles at Mirant Corporation, Louis Dreyfus Energy Corporation and Continental Hydraulic Hose. Ms. Hunter earned a B.S. in Business Administration from The Ohio State University and an M.B.A. from Kennesaw State University. She is a certified public accountant.

Haig H. Kazazian, III has served as treasurer since 2013, and was promoted to senior vice president, treasurer in 2014. Mr. Kazazian joined the Bank as a credit analyst in 1992 and earned promotions to manager of national accounts and product development in 2001, first vice president in 2005, manager of national accounts and capital markets trading in 2009, and manager of treasury analysis and national accounts sales and trading in 2011. He is a chartered financial analyst and earned an M.B.A. and a B.A. in economics, each from Emory University. Mr. Kazazian was an M.B.A. Fellowship Recipient.

Robert S. Kovach has served as senior vice president, chief credit officer since 2012, directing the Bank’s credit and collateral services and collateral risk management operations. Prior to joining the Bank in 2010 as director of collateral services, Mr. Kovach served a variety of roles with FHLBank Pittsburgh from 1996 to 2010, including director of collateral services, chief investment officer, and director of internal audit. He also served as a field manager and a senior examiner for the Office of Thrift Supervision. Mr. Kovach holds a chartered financial analyst designation and earned a B.S. in chemistry from Dickinson College.

Eric M. Mondres has served as senior vice president, director of government and industry relations since 2009. Mr. Mondres oversees the Bank’s efforts related to public policy development and strategy, as well as its relationships with industry members and groups as it relates to the Bank’s business and mission. He joined the Bank in 2003 as vice president and director of government relations. Before joining the Bank, he worked for America’s Community Bankers, the Thrift Depositor Protection Oversight Board, the Environmental Protection Agency as a consultant, the U.S. Department of Agriculture, and the U.S. House of Representatives’ House Administration Committee as assistant minority counsel. Mr. Mondres earned a B.A. degree in history and political science from Bridgewater College and a J.D. from Cumberland School of Law.

Reginald T. O’Shields has served as senior vice president and general counsel since 2011 and was named Chief Compliance and Ethics Officer in 2018. Mr. O’Shields manages the delivery of legal services by the Bank’s legal department covering a wide variety of corporate, securities, finance, compliance and regulatory matters. In addition, he is responsible for overseeing all Bank programs related to human resources and administrative services. Mr. O’Shields joined the Bank in 2003 as a senior attorney and earned promotions to assistant general counsel in 2005, associate general counsel in 2006 and deputy general counsel in 2007. He was named senior vice president, deputy general counsel and director of legal services January 1, 2011. Before joining the Bank, Mr. O’Shields was in private legal practice with Sutherland Asbill & Brennan, LLP in Atlanta, Georgia, Haynsworth Sinkler Boyd in Greenville, South Carolina, and Simpson, Thacher & Bartlett in New York, New York. Mr. O’Shields earned a J.D. from Vanderbilt University and a B.A. in economics from Furman University.

Richard A. Patrick has served as senior vice president and chief audit officer since 2002. He is responsible for providing an independent audit of the Bank by evaluating the internal control system and testing for compliance with internal policies and procedures as well as with applicable laws and directives from the Finance Agency. Mr. Patrick reports directly to the audit committee of the board of directors. Mr. Patrick joined the Bank in 1991 as the vice president and director of internal audit and was promoted to his senior position in 2002. Prior to joining the Bank, Mr. Patrick was a vice president and audit manager for C&S/Sovran Corporation, which is now known as Bank of America. Previously, he was a branch and operations audit officer for National Bank of Georgia. A certified public accountant, certified fraud examiner, certified financial services auditor, and certified bank auditor, Mr. Patrick earned a B.A. in business administration from Appalachian State University. He is also an honors graduate of the Bank Administration Institute’s School for Bank Administration.

Leslie H. Schreiner has served as first vice president, director of diversity and inclusion, since July 2018. She is responsible for the oversight and implementation of the Bank’s Diversity and Inclusion Program. From 2016 to 2018, she served as Director of Strategic Planning and Accounting Services, responsible for the Bank’s strategic planning and budgeting process, business intelligence initiatives, as well as accounts payable, fixed assets and expense reimbursement. Ms. Schreiner joined the Bank in 2007 as Director of Accounting Automation and Technical Compliance. Prior to joining the Bank, she held various senior accounting roles with Resources Global, Primis and

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Information America. Leslie earned a B.A. in Accounting from University of Georgia and M.B.A in Finance from Georgia State University. She is a certified public accountant.

William T. Shaw has served as controller of the Bank since 2014, being promoted from first vice president to senior vice president effective January 1, 2019. Mr. Shaw oversees financial reporting, accounting policy, and derivatives hedge accounting. From 2009 to 2013 he served as vice president, director of accounting policy. Mr. Shaw was promoted to director of accounting policy and financial reporting in 2013 and to first vice president in 2014. Before joining the Bank as assistant vice president, manager of accounting policy in 2008, Mr. Shaw served as vice president of accounting and assistant controller for First Charter Corporation, director of SEC reporting for Novelis Inc., manager of inspections with the Public Company Accounting Oversight Board, and various manager roles with PricewaterhouseCoopers LLP. He received his B.S. in accounting and master’s degree in accountancy from Brigham Young University. He is also a certified public accountant.

Item 11. Executive Compensation.

Compensation Discussion and Analysis

Introduction

This section describes and analyzes the Bank’s 2018 compensation program for:
•
the chief executive officer,
•
the chief financial officer,
•
the three other most highly-compensated executive officers who were serving as executive officers on December 31, 2018, and
•
two additional individuals who served as executive officers during 2018 but who were not serving as executive officers on December 31, 2018.
These executive officers are collectively referred to as the Bank’s “named executive officers.”

The Bank’s named executive officers during 2018 are identified in the following table.

Name
 
Title
W. Wesley McMullan
 
President and Chief Executive Officer
Kirk R. Malmberg
 
Executive Vice President and Chief Financial Officer
Robert F. Dozier, Jr.
 
Executive Vice President and Chief Business Officer
Robert S. Kovach
 
Senior Vice President, Chief Credit Officer
Reginald T. O'Shields
 
Senior Vice President, General Counsel and Chief Compliance and Ethics Officer
Cathy C. Adams (1)
 
Former Executive Vice President and Chief Operations Officer
Robert Bennett (2)
 
Former Senior Vice President, Chief Information Officer
____________
(1) Ms. Adams retired from the Bank effective November 30, 2018.
(2) Mr. Bennett retired from the Bank effective November 23, 2018.


Philosophy and Objectives

The Bank’s compensation philosophy and objectives are to attract, motivate, and retain high caliber financial services executives capable of achieving strategic business initiatives, enhancing business performance and increasing shareholder value. The Bank’s compensation program is designed to reward this performance and enhanced value and to offer competitive compensation elements that align its executives’ incentives with the interests of its members. To mitigate unnecessary or excessive risk-taking by executive management, the Bank’s incentive compensation plan contains overall Bank performance goals that are dependent on an aggregation of transactions throughout the Bank and that cannot be individually altered by executive management. The incentive compensation plan contains quantitative components that are evaluated by the board of directors. Additionally, the board of directors maintains discretionary authority over all incentive compensation awards, giving the board of directors the flexibility to review Bank performance throughout the year and to adjust incentive compensation accordingly.

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Elements of Compensation

The Bank compensates its executive officers with a combination of base salary, incentive compensation, and benefits. The Bank is unable to offer equity-related compensation because it is a cooperative, and only member financial institutions may own its capital stock. Accordingly, the Bank offers other compensation elements, such as qualified and non-qualified defined benefit and defined contribution pension plans, to motivate long-term performance and encourage retention. Because the Bank is exempt from federal taxes, the deductibility of compensation is not relevant to compensation plan design. The elements of the Bank’s compensation program for executive officers, and the objective of each compensation element, are described below.

Base salary. Base salary is established on the basis of the ongoing duties associated with managing a particular set of functions at the Bank and provides an amount of fixed compensation. Each executive’s base salary also is used as a basis in calculating the executive’s annual incentive award opportunity, as described below.

Incentive compensation. The Bank provides an annual cash award opportunity under its Incentive Compensation Plan (ICP) to executive officers based on the achievement of quantitative goals set and evaluated by the board of directors. To promote consistently high corporate performance on a long-term basis and enhance the retention of key senior executive officers, payment of fifty percent of any ICP granted to a named executive officer is deferred and distributed over a three-year period, together with positive or negative returns (Deferred Incentive). The named executive officers’ ICP awards and Deferred Incentive are subject to adjustment or forfeiture in certain events as described below under “2018 Weights and Awards-Incentive Compensation Plan Award Adjustment or Forfeiture.”

Benefits. The Bank provides retirement benefits to promote executive retention, and the executive officers are eligible to participate in the same benefit plans that are made available to other employees of the Bank, such as medical, group term life and long-term disability coverage. The Bank also provides limited perquisites to executive officers.

Executive Compensation Process

Board and committee consideration of executive compensation. The Bank’s board of directors establishes the Bank’s executive compensation philosophy and objectives and has final approval of any compensation decisions related to the Bank’s chief executive officer (CEO), all officers reporting directly to the CEO who are senior vice presidents or higher, and any officer determined to be a named executive officer in the prior year. The governance and compensation committee of the board of directors advises and assists the board and makes recommendations to the board relating to compensation of such officers.

The CEO reviews and recommends to the board the base salary of the officers who report directly to him and who are senior vice president and higher level officers. The CEO also determines the base salary of all other senior vice president officers (other than the chief audit officer and, as noted above, any officer determined to be a named executive officer the prior year) within an overall budget approved by the board of directors.

Use of compensation consultant. The governance and compensation committee of the board of directors selected and engaged Willis Towers Watson to provide assistance in evaluating the Bank’s executive compensation programs for 2018. Willis Towers Watson reports directly to the committee with respect to executive compensation.

Consideration of competitive compensation levels. The Bank’s executive compensation program is designed to be appropriately competitive with prevailing practices in the broader financial services industry, consistent with the Bank’s business and risk profile. As part of each compensation review process, the board considers (1) the total cash compensation (including base salary and target incentive compensation), retirement benefits, perquisites and other benefits, severance agreements, and change in control agreements, at FHLBanks of similar size and complexity based on total assets, advance activity, membership, and scope of operations, and (2) the median and 75th percentiles for base pay, bonus pay, and total cash compensation offered at certain comparable commercial banks and financial services organizations. The companies that were included in the peer groups for 2018 are listed below in “Compensation Decisions in 2018 — Overview.” The board used this data to assess competitive levels of compensation for the Bank’s executives and did not target any named executive officer’s compensation to a specific percentile of such executive officer’s comparable position in the peer groups.

The board does not evaluate specifically the multiples by which a named executive officer’s cash compensation is greater than that of non-executive employees when setting executive compensation. The Bank is exempt from SEC proxy rules and does not provide shareholder advisory “say on pay” votes regarding executive compensation.


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Finance Agency oversight of executive compensation. Pursuant to the Housing Act, the Director prohibits the FHLBanks from providing to any executive officer compensation that is not reasonable and comparable with compensation for employment in other similar businesses involving similar duties and responsibilities. Pursuant to this authority and a Finance Agency final rule on executive compensation, the FHLBanks are required to report to the Director all compensation actions relating to the president, the chief financial officer, and the three other most highly compensated officers at least 30 days in advance of any planned board decision with respect to those actions, and at least 60 days prior to entering into any written arrangement that provides incentive awards to any executive officer. At any time before an executive compensation action is taken, the Director may require an FHLBank to withhold any payment, transfer, or disbursement of compensation to an executive officer, or to place such compensation in an escrow account, or prohibit the action. The Housing Act also authorizes the Director to prohibit the Bank from making any “golden parachute” payments to its officers, employees, and directors.

In addition, Finance Agency Advisory Bulletin 2009-AB-02 establishes five principles for executive compensation by the FHLBanks and the Office of Finance:

•
executive compensation must be reasonable and comparable to that offered to executives in similar positions at other comparable financial institutions;

•
executive incentive compensation should be consistent with sound risk management and preservation of the par value of the FHLBank’s capital stock;

•
a significant percentage of an executive’s incentive-based compensation should be tied to longer-term performance and outcome indicators;

•
a significant percentage of an executive’s incentive-based compensation should be deferred and made contingent upon the FHLBank’s financial performance over several years; and

•
the FHLBank’s board of directors should promote accountability and transparency in the process of setting compensation.

Under the capital classifications rules issued by the Finance Agency, a significantly undercapitalized FHLBank is prohibited from paying any bonus to an executive officer, or giving any salary increase to an executive officer without the prior written approval of the Director. The Bank was not undercapitalized during 2018.

Compensation Decisions for 2018
Overview
The board of directors bases its compensation decisions on both objective criteria related to the Bank’s performance and subjective criteria related to each executive’s performance. Among the various criteria the board considered in evaluating the named executive officers’ performance were:
•
achievement of performance objectives for 2018 as determined by the board;
•
fulfillment of the Bank’s public policy mission;
•
demonstration of leadership and vision for the Bank;
•
implementation and maintenance of effective business strategies and operations, legal and regulatory compliance programs, risk management activities, and internal controls commensurate with the Bank’s size, scope, and complexity;
•
establishment and maintenance of strong relationships between the Bank and its customers, shareholders, employees, regulators, and other stakeholders; and
•
the Bank’s 2018 financial results.

Base Salary

In determining the base salary for Messrs. McMullan, Malmberg and Dozier, the board considered data developed by Willis Towers Watson regarding the cash compensation provided by two different groups:

(1) the following FHLBanks deemed to be of similar size and complexity based on total assets, advance activity, membership, and scope of operations (FHLB Peers):


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•
FHLBank Boston
 
•
FHLBank New York
•
FHLBank Chicago
 
•
FHLBank Pittsburgh
•
FHLBank Cincinnati
 
•
FHLBank San Francisco
•
FHLBank Des Moines
 
 

and (2) the following commercial banks with assets between $24 billion and $100 billion (Commercial Bank Peers):
• Associated Banc-Corp
 
• First Citizens Bank
• BOK Financial
 
• Huntington Bancshares
• City National Bank
 
• People’s Bank
• Commerce Bancshares
 
• Synovus Financial Corporation
• Comerica
 
• Umpqua Bank
• EverBank
 
• Webster Bank


                    
The median asset size for the Commercial Bank Peers was $31.4 billion.

According to the data provided to the board by Willis Towers Watson,
•
Mr. McMullan’s salary was below the median base salary for the presidents of the FHLB Peers as well as the Commercial Bank Peers;
•
Mr. Malmberg’s base salary was below the median base salaries for chief financial officers of the FHLB Peers as well as the Commercial Bank Peers; and
•
Mr. Dozier’s base salary approximated the median base salary for comparable positions at the FHLB Peers and was below the median base salary for comparable positions at the Commercial Bank Peers.

After reviewing the Bank’s performance and Mr. McMullan’s, Mr. Malmberg’s, and Mr. Dozier’s performance during fiscal year 2017, respectively, the board set:
•
Mr. McMullan’s base salary for 2018 at $835,000, which was an increase of 2.33 percent from 2017;
•
Mr. Malmberg’s base salary for 2018 at $520,000, which was an increase of 2.36 percent from 2017; and
•
Mr. Dozier’s base salary for 2018 at $500,000, which was an increase of 2.46 percent from 2017.
 
In order to review sufficient market data in determining the base salaries for Mr. Kovach and Ms. Adams, whose positions are not as precisely mirrored at other institutions, the board also considered compensation data supplied by Willis Towers Watson from the following financial services organizations with assets generally between $25 billion and $65 billion, plus three additional financial services organizations with assets between $73 billion and $160 billion (Financial Service Peers):

 
• Associated Banc-Corp
 
• Humana
 
• Assurant
 
• Huntington Bancshares
 
• BOK Financial
 
• Markel
 
• Chubb
 
• People’s Bank
 
• Cigna
 
• Progressive
 
• City National Bank
 
• Reinsurance Group of America (RGA)
 
• CNO Financial
 
• Synovus Financial Corporation
 
• Comerica
 
• TD Ameritrade
 
• Commerce Bancshares
 
• Umpqua Bank
 
• Cullen Frost Bankers
 
• Unum
 
• EverBank
 
• Visa
 
• First Citizens Bank
 
• Webster Bank
 
• Great American Insurance
 
• Wellpoint    
        
        
The median asset size for the Financial Service Peers was $32.9 billion.

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According to the data provided to the board by Willis Towers Watson, Mr. Kovach’s base salary was above the median base salary for comparable positions at the FHLB Peers and below the median base salary for comparable positions at the Financial Service Peers. Ms. Adams’ base salary was below the median base salaries for comparable positions at the considered FHLB Peers and Financial Services Peers. Following this review, and after consideration of their respective performance during fiscal year 2017, the board determined to increase the existing base salaries for 2018 as follows:
    
•
Mr. Kovach to $405,000 (a 1.30 percent increase)
•
Ms. Adams to $505,000 (a 2.43 percent increase)

In determining the base salary for Mr. O’Shields, the CEO considered the cash compensation for comparable positions at all of the FHLBanks. According to this data, Mr. O’Shields’ base salary was in line with the median base salary for comparable positions at the other FHLBanks. Following this review, and after consideration of his performance during fiscal year 2017 and the CEO’s recommendation, the board determined to increase Mr. O’Shield’s base salary for 2018 to $355,000, which represented a 2.01 percent increase from 2017.
As discussed above, the CEO determines the base salary of all senior vice president officers (other than those officers reporting directly to him or prior named executive officers, whose base salaries are established by the board of directors, and the chief audit officer). Mr. Bennett's base salary for 2018 was $395,000, which represented a 1.28 percent increase from 2017.

Incentive Compensation

The following table presents the 2018 award opportunities, as established by the board under the ICP, expressed as a percentage of base pay earnings during the year.

2018 Award Opportunities
 
 
Percent of Base Salary (%)
Title
 
Threshold
 
Target
 
Maximum
President and Chief Executive Officer
 
50.00
 
75.00
 
100.00
Executive Vice President
 
35.00
 
60.00
 
85.00
Senior Vice President
 
30.00
 
50.00
 
70.00

These percentages represent an increase from the award percentages established for 2017.
For 2018, the board established three incentive goals under the ICP, which correlate to the shareholder focus and risk management performance priorities reflected in the Bank’s strategic plan. Each of these goals is described in more detail below. Awards for senior vice presidents also included individual and team goals. The board of directors established threshold, target, and maximum performance levels for each quantitative incentive goal. Each goal’s “target” performance level is consistent with the assumptions set forth in the annual operating budget, forecasts, and strategic plan. The “threshold” and “maximum” performance levels are designed to reward partial attainment of the goal and performance beyond the forecasted levels, respectively. Factors considered in setting threshold and maximum performance levels include management’s projections concerning economic conditions, interest rates, demand for advances products, and balance sheet structure.


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The following tables provide the weights and awards for each performance target as a percentage of base salary that the board established for 2018. A description of each of the performance metrics, and the performance against such metrics in 2018, is provided following the tables.

2018 Weights and Awards
President and Chief Executive Officer
 
 
 
 
 
 
 
 
 
 
 
 
Percent of Base Salary
Goal
 
Weight (%)
 
Threshold (%)
 
Target (%)
 
Maximum (%)
Shareholder Focus - Shareholder Activity
 
34.00
 
17.00
 
25.50
 
34.00
Risk Management - Risk Appetite
 
33.00
 
16.50
 
24.75
 
33.00
Risk Management - ROE Spread to 3-Month LIBOR
 
33.00
 
16.50
 
24.75
 
33.00
Total
 
100.00
 
50.00
 
75.00
 
100.00
 
 
 
 
 
 
 
 
 
Executive Vice President
 
 
 
 
 
 
 
 
 
 
 
 
Percent of Base Salary
Goal
 
Weight (%)
 
Threshold (%)
 
Target (%)
 
Maximum (%)
Shareholder Focus - Shareholder Activity
 
34.00
 
11.90
 
20.40
 
28.90
Risk Management - Risk Appetite
 
33.00
 
11.55
 
19.80
 
28.05
Risk Management - ROE Spread to 3-Month LIBOR
 
33.00
 
11.55
 
19.80
 
28.05
Total
 
100.00
 
35.00
 
60.00
 
85.00
 
 
 
 
 
 
 
 
 
Senior Vice President
 
 
 
 
 
 
 
 
 
 
 
 
Percent of Base Salary
Goal
 
Weight (%)
 
Threshold (%)
 
Target (%)
 
Maximum (%)
Shareholder Focus - Shareholder Activity
 
25.00
 
7.50
 
12.50
 
17.50
Risk Management - Risk Appetite
 
25.00
 
7.50
 
12.50
 
17.50
Risk Management - ROE Spread to 3-Month LIBOR
 
25.00
 
7.50
 
12.50
 
17.50
Individual and Team Goals
 
25.00
 
7.50
 
12.50
 
17.50
Total
 
100.00
 
30.00
 
50.00
 
70.00

The Shareholder Focus - Shareholder Activity goal measures the increase in the number of products and services utilized by members during 2018. Performance under this measure was determined by calculating the percentage increase in product utilization as of December 31, 2018, over a product utilization baseline established as of December 31, 2017. The performance goals were three percent product utilization increase at threshold (1,948), six percent increase at target (2,004), and 12.00 percent increase at maximum (2,123). This goal was substantially the same for each named executive officer, and performance was determined on an overall Bank-wide basis. As of December 31, 2018, the Bank achieved a shareholder activity performance score of 2,143, representing an increase of 13.33 percent over the 2017 baseline. Based on 2018 performance, the board awarded the maximum level for this goal.

The Risk Management - Risk Appetite goal involves managing the Bank’s key risks at appropriate tolerance levels. Under this measure, the board and management defined the Bank’s key risks and the tolerance levels with respect to those risks. The Bank then scored each key risk based upon whether the Bank was satisfying the defined tolerance level. If the Bank was performing at or better than the defined tolerance level for all key risks, a risk appetite performance score of 100 was achieved. A deduction was applied to the risk appetite performance score for each key risk performing below the defined tolerance level. The amount that was deducted depended upon the extent of the underperformance. The performance goals were 85.0 percent risk appetite performance score (threshold), 95.0 percent risk appetite performance score (target), and 100 percent risk appetite performance score (maximum). This goal was substantially the same for each named executive officer, and performance was determined on an overall Bank-wide basis. As of December 31, 2018, the Bank achieved a risk appetite performance score of 98.51 percent. Based upon that score, the board awarded between the target and maximum level for this goal.


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The Risk Management - ROE Spread to 3-Month LIBOR performance goal relates to the Bank’s ROE amount in excess of average three-month LIBOR. This performance measure reflects the Bank’s ability to pay quarterly dividends to its members and was established with a sliding scale so that the spread performance metrics become smaller as LIBOR increases. The board of directors could reduce the award for this measure or increase the required ROE spread to LIBOR under certain economic scenarios. For 2018, the performance goals were 250 basis points (threshold), 275 basis points (target), and 315 basis points (maximum). This goal was substantially the same for each named executive officer, and performance was determined on an overall Bank-wide basis. In 2018, the Bank’s ROE spread to average three-month LIBOR was 323 basis points. Based upon that calculation, the board awarded the maximum level for this goal.

In 2018, the board of directors did not establish individual performance award opportunities for the Bank’s president and executive vice presidents. Individual goals for Mr. Kovach, Mr. O’Shields, and Mr. Bennett focused on information technology initiatives, diversity and inclusion, and risk management. Based upon performance in 2018, Mr. Kovach, Mr. O’Shields and Mr. Bennett were awarded the maximum level for this goal.

The following table presents the final award level associated with each performance goal and total award amounts for each named executive officer.

2018 Incentive Compensation Plan Awards
Name
 
Shareholder Activity (%)
 
Risk Appetite (%)
 
ROE Spread to 3-Month LIBOR (%)
 
Individual/Team Goals (%)
 
Total Award (%) of Base Salary
 
Overall Award Level
 
Total Calculated Award
 
Deferred Incentive
W. Wesley McMullan
 
34.00
 
30.54
 
33.00
 
N/A
 
97.54
 
Target-Max
 
$
814,470

 
$
407,235

Kirk R. Malmberg
 
28.90
 
25.59
 
28.05
 
N/A
 
82.54
 
Target-Max
 
$429,214

 
214,607

Robert F. Dozier, Jr.
 
28.90
 
25.59
 
28.05
 
N/A
 
82.54
 
Target-Max
 
$412,706

 
206,353

Robert S. Kovach
 
17.50
 
16.01
 
17.50
 
17.50
 
68.51
 
Target-Max
 
277,465

 
138,733

Reginald T. O'Shields
 
17.50
 
16.01
 
17.50
 
17.50
 
68.51
 
Target-Max
 
243,211

 
121,605

Cathy C. Adams
 
28.90
 
25.59
 
28.05
 
 N/A
 
82.54
 
Target-Max
 
392,785

 
—

Robert C. Bennett
 
17.50
 
16.01
 
17.50
 
17.50
 
68.51
 
Target-Max
 
249,798

 
—

____________
N/A Not applicable
The amount of incentive compensation earned by each of the named executive officers under the ICP, as shown in the “Total Calculated Award” column in the preceding table is reflected under the “Non-Equity Incentive Compensation Plan” column in the Summary Compensation Table below. For the Bank’s current named executive officers, the Deferred Incentive portion will be paid, together with positive or negative returns (equal to the Bank’s return on equity for the applicable year) over three years (2020-2022) on the following schedule, subject to certain adjustment and forfeiture provisions discussed below:

Deferred Incentive Payout Schedule
Payment Year
 
Payment
2020
 
1/3 of balance (± 1-year return)
2021
 
1/2 of balance (± 2-year return)
2022
 
Remaining balance (± 3-year return)

Incentive Compensation Plan Award Adjustment or Forfeiture.  The named executive officers’ ICP awards and Deferred Incentive are subject to adjustment or forfeiture in certain events. Under the terms of the ICP, the board of directors has reserved the right to amend, modify or terminate the ICP, in whole or in part, and to increase, decrease, terminate without penalty or payment, or otherwise modify any ICP award, at any time for any reason or no reason.

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The board of directors has the authority to (i) equitably adjust ICP performance measures for a particular year under the ICP to preserve the benefits or potential benefits intended to be made available to the participants for any merger, consolidation, rights offering, separation, reorganization or liquidation or any other change in the capital structure of the Bank and (ii) adjust Earned Awards (as defined in the ICP) for both current and prior years if the board determines in good faith that the amounts of any Earned Awards were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria as defined in the ICP. The board may, in its sole discretion, decline to adjust the terms of any outstanding Award, as defined, if it determines that such adjustment would violate applicable law or result in adverse tax consequences to the participant or to the Bank.

To ensure continued focus on the Bank’s Diversity and Inclusion Plan, the 2018 ICP provides that annual incentive awards to the named executive officers may be reduced by up to 10 percent to the extent that the board of directors, in its sole discretion, determines that certain Bank-wide activity goals related to workforce development, outreach to diverse vendors, and engagement with diverse shareholders have not been achieved.

If as of the time any payment of the Deferred Incentive otherwise would be due, the board of directors has made a good faith determination that the Bank has not achieved certain objective financial performance threshold measures relating to retained earnings (net of accumulated other comprehensive income (loss)), market value of equity/par value of capital stock, regulatory capital to assets ratio, and positive annual net income, the board may in its sole discretion elect to reduce or eliminate such payment of the Deferred Incentive.  

If a named executive officer’s employment with the Bank terminates for any reason prior to payment of any earned incentive compensation, all remaining payments (including the Deferred Incentive) shall be forfeited, subject to certain limited exceptions if the named executive officer dies, becomes disabled, or retires with a combination of age and years of service to the Bank totaling at least 70.
 
Retirement Benefits
The named executive officers are eligible to participate in certain tax-qualified and non-qualified defined benefit, defined contribution, and deferred compensation plans (DCP). These plans are described in more detail below in the sections entitled “Executive Compensation — Pension Benefits” and “— Deferred Compensation.”
The Bank’s retirement benefit plans are a vital component of the Bank’s retention strategy for executive officers, particularly because many other competing organizations provide executive officers with economic benefits based on equity interests in the employer, oftentimes in addition to similar retirement benefits.

Perquisites and Other Benefits
All named executive officers are eligible to participate in the benefit plans that are made available to all employees of the Bank including medical, dental, and vision insurance coverage, group term life and long-term disability insurance coverage, paid vacation, and sick leave. The named executive officers generally participate in these plans on the same basis and terms as all other employees.
The Bank offers its named executive officers a limited number of perquisites, including an annual physical examination, guest travel to certain business functions, business club memberships, and financial planning services. For Mr. McMullan, the Bank also provides an automobile allowance of up to $1,500 per month. Because perquisites generally are limited, the board does not specifically consider perquisites when reviewing total compensation for any of the named executive officers.

Employment Arrangements and Severance Benefits
Other than the specific contractual arrangements discussed below, all Bank employees are employed under an “at will” arrangement. Accordingly, an employee may resign employment at any time, and the Bank may terminate the employee’s employment at any time for any reason, with or without cause.
The board of directors may, in its discretion, provide severance benefits to an executive officer in the event of termination of his/her employment. In determining whether severance compensation is appropriate, the board of directors considers both the factors underlying the termination of employment and the employment history of the executive officer. The Bank does not provide a “gross up” benefit on taxes incurred with respect to any severance.

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Employment Agreement. The Bank entered into an Employment Agreement with Mr. McMullan, effective January 1, 2014 (Employment Agreement). Under the Employment Agreement, Mr. McMullan’s employment with the Bank may be terminated by the Bank with or without “cause,” or by Mr. McMullan with or without “good reason,” as defined in the Employment Agreement. Unless earlier terminated by either party as provided therein, the Employment Agreement had an initial three-year term and will continue to extend automatically for subsequent one-year periods unless either party elects not to renew. Pursuant to the Employment Agreement, the Bank provides Mr. McMullan with a $1,500 per month automobile allowance. Mr. McMullan is entitled to participate in all incentive, savings, and retirement plans and programs available to senior executives of the Bank. The Employment Agreement also provides for certain severance benefits for Mr. McMullan, which are discussed below under “Potential Payments upon Termination or Change in Control.” This severance arrangement was an integral and necessary component of the Bank’s strategy to recruit Mr. McMullan to the president and CEO position.
Change in Control Severance Plan. Effective January 1, 2017, the Bank adopted an Executive Change in Control Severance Plan (Severance Plan). The purpose of the Severance Plan is to facilitate the hiring and retention of senior executives capable of executing the Bank’s strategic priorities, to ensure their continued dedication to the Bank notwithstanding the possibility of a change in control, and to provide them with certain protection and benefits in the event of certain termination events following a defined change in control of the Bank. The board has designated certain of the named executive officers as eligible to participate in the Severance Plan. The Severance Plan is discussed below under “Potential Payments upon Termination or Change in Control.”

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Report of the Board of Directors

The board of directors of the Bank has reviewed and discussed the Compensation Discussion and Analysis above with management, and based on such review and discussion, the board of directors has determined that the Compensation Discussion and Analysis above should be included in the Bank’s Annual Report on Form 10-K.

The board of directors of the Bank has primary responsibility for establishing and determining the Bank’s compensation program. Therefore, this report is submitted by the full board of directors.

BOARD OF DIRECTORS

Richard A. Whaley, Chairman
 
Robert L Strickland, Jr., Vice Chairman
Brian E. Argrett
 
Scott C. Harvard
Travis Cosby, III
 
Jonathan Kislak
Suzanne S. DeFerie
 
LaSalle D. Leffall, III
R. Thornwell Dunlap, III
 
Kim C. Liddell
F. Gary Garczynski
 
John B. Rucker
William C. Handorf
 
 

Executive Compensation

Summary Compensation Tables

The following table presents a summary of cash and other compensation earned by the named executive officers for the years ended December 31, 2018, 2017, and 2016. It is important to read this table, and the other tables that follow, closely and in conjunction with the Compensation Discussion and Analysis. The narratives following the tables and the footnotes accompanying each table are important parts of each table.































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2018 Summary Compensation Table

Name and Principal
Position
(a)
 
Year
(b)
 
Salary
(c)
 
Bonus (d) (2)
 
Non-Equity
Incentive Plan
Compensation (e) (3)
 
Change in Pension
Value and
Nonqualified
Deferred
Compensation
Earnings (f) (4)
 
All Other
Compensation (g) (5)
 
Total
(h)
W. Wesley McMullan
President and Chief Executive Officer
 
2018
 
$
835,000

 
$
2,100

 
$
858,804

 
$
941,627

 
$
75,881

 
$
2,713,412

 
2017
 
816,000

 
100

 
833,345

 
2,409,977

 
74,001

 
4,133,423

 
2016
 
800,000

 
100

 
799,865

 
1,871,447

 
69,688

 
3,541,100

Kirk R. Malmberg
Executive Vice President and Chief Financial Officer
 
2018
 
520,000

 
100

 
451,668

 
548,299

 
36,343

 
1,556,410

 
2017
 
508,000

 
100

 
422,788

 
1,008,531

 
35,736

 
1,975,155

 
2016
 
495,000

 
600

 
401,882

 
775,473

 
32,682

 
1,705,637

Robert F. Dozier, Jr.
Executive Vice President and Chief Business Officer
 
2018
 
500,000

 
100

 
434,257

 
88,046

 
115,073

 
1,137,476

 
2017
 
488,000

 
100

 
406,101

 
105,000

 
108,482

 
1,107,683

 
2016
 
475,000

 
200

 
385,605

 
67,000

 
28,614

 
956,419

Robert S. Kovach Senior Vice President and Chief Credit Officer
 
2018
 
405,000

 
100

 
293,004

 
—

 
25,996

 
724,100

 
2017
 
399,800

 
100

 
291,721

 
323,000

 
24,252

 
1,038,873

 
2016
 
390,000

 
100

 
278,317

 
190,000

 
23,491

 
881,908

Reginald O'Shields Senior Vice President, General Counsel
 
2018
 
355,000

 
21,600

 
256,716

 
135,000

 
23,168

 
791,484

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cathy C. Adams
Former Executive Vice President and Chief Operations Officer (1)
 
2018
 
475,865

 
1,500

 
413,353

 
1,661,408

 
76,561

 
2,628,687

 
2017
 
493,000

 
100

 
410,273

 
1,248,856

 
34,833

 
2,187,062

 
2016
 
480,000

 
1,100

 
389,676

 
1,123,030

 
29,873

 
2,023,679

Robert C. Bennett Former Senior Vice President and Chief Information Officer (1)
 
2018
 
364,615

 
1,500

 
263,601

 
99,000

 
451,835

 
1,180,551

 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 
 
 
 
 
 
 
 
 
 
 


__________
(1) Ms. Adams retired from the Bank effective November 30, 2018. Mr. Bennett retired from the Bank effective November 23, 2018.
(2) The amounts in column (d) reflect an annual $100 employee appreciation bonus provided to all employees of the Bank. The Bank provides all employees of the Bank, including the named executive officers, a tax gross-up on this bonus, which amount is included in column (g).The 2018 bonus amounts for Mr. McMullan and Mr. O’Shields also includes an award payment of $2,000 and $1,500 respectively, under the Bank’s Service Award Program to recognize employees with five or more years of service. The 2018 bonus amounts include payments of $1,500 for Ms. Adams and Mr. Bennett to recognize retirees under the Bank’s Service Award Program. The 2016 bonus amounts for Ms. Adams and Messrs. Malmberg and Dozier also includes an award payment of $1,000, $500 and $100, respectively, under the Bank’s Service Award Program. The Service Award Program is administered by the Bank’s human resources department and is available to all employees of the Bank under the same general terms and conditions. To the extent the Bank provided a tax gross-up on such awards, those amounts are included in column (g). Also included in 2018 bonus amounts is a $20,000 performance bonus payment to Mr. O’Shields for assuming additional responsibilities.
(3) The amounts in column (e) reflect the dollar value of all earnings for services performed during the fiscal years ended December 31, 2018, 2017, and 2016 pursuant to awards under the ICP, even though fifty percent of the ICP awards for each year were subject to mandatory deferral and distribution over three years. Upon their resignation, these amounts were no longer subject to deferral for Mr. Bennett and Ms. Adams and were distributed to them in full. As discussed in the Compensation Discussion and Analysis, the 2018 non-equity incentive compensation awards were subject to a 30-day review period and receipt of non-objection by the Finance Agency. The Bank received written non-objection from the Finance Agency on January 29, 2019. The amounts in column (e) also include the dollar value of all interest during each year earned on Deferred Incentive related to ICP awards for prior fiscal years, in the following amounts for 2018: $44,334 for Mr. McMullan, $22,454 for Mr. Malmberg, $21,551 for Mr. Dozier, $15,539 for Mr. Kovach, $13,505 for Mr. O’Shields, $20,568 for Ms. Adams, and $13,803 for Mr. Bennett.
(4) The amounts in column (f) reflect the sum of (i) the aggregate change in the actuarial present value of the named executive officer’s aggregate pension benefits under the Bank’s Pension and Defined Benefit Equalization Plan (DBEP) during each fiscal year, computed as described in footnote (1) to the 2018 Pension Benefits table, and (ii) all “above market” earnings earned under the Bank’s non-qualified DCPs. The aggregate actuarial present value for Mr. Kovach’s pension benefits under the Bank’s Pension and DBEP Plans decreased by $31,000 in 2018. Pursuant to SEC rules, this negative value is not reflected in the sum reported in column (f). Under SEC rules, “above-market” earnings result when deferrals are credited with interest in excess of 120 percent of the Applicable Federal Rate. The 2018 above-market amounts for Mr. McMullan, Mr. Malmberg, Mr. Dozier, and Ms. Adams were $27,627, $4,299, $46, and $8,408, respectively. These plans are described in greater detail below under “Pension Benefits” and “Deferred Compensation.”
(5) The amounts in column (g) for 2018 consist of the following amounts:


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Name
 
Bank Contributions under the 401(k) Plan (1)
 
Matching contributions under the Bank’s non-qualified Defined Contribution Benefit Equalization Plan (2)
 
Perquisite (3)
 
Tax Gross-ups (4)
 
Other (5)
 
Total
W. Wesley McMullan
 
$
15,415

 
$
34,685

 
$
24,629

 
$
1,152

 
$
—

 
$
75,881

 
 
 
 
 
 
 
 
 
 
 
 


Kirk R. Malmberg
 
16,500

 
14,700

 
5,099

 
44

 
—

 
36,343

 
 
 
 
 
 
 
 
 
 
 
 


Robert F. Dozier, Jr.
 
27,500

 
78,249

 
9,280

 
44

 
—

 
115,073

 
 
 
 
 
 
 
 
 
 
 
 


Robert S. Kovach
 
5,608

 
18,692

 
1,652

 
44

 
—

 
25,996

 
 
 
 
 
 
 
 
 
 
 
 


Reginald O'Shields
 
5,735

 
15,565

 
1,171

 
697

 
—

 
23,168

 
 
 
 
 
 
 
 
 
 
 
 
 
Cathy C. Adams
 
16,500

 
12,052

 
13,498

 
654

 
33,857

 
76,561

 
 
 
 
 
 
 
 
 
 
 
 


Robert C. Bennett
 
14,777

 
7,100

 
1,787

 
654

 
427,517

 
451,835

____________
(1) The Bank provided Mr. Dozier with $16,500 in matching 401(k) contributions and $11,000 in automatic 401(k) contributions.
(2) The Bank provided Mr. Dozier with $78,249 in DC BEP contributions as described in the Deferred Compensation discussion.
(3) Perquisites are valued at the actual amounts paid by the Bank, and the value of each perquisite for each executive was less than $25,000. The Bank paid premiums for each named executive officer for the Bank’s Business Travel Accidental Death and Dismemberment Policy. The Bank provided Mr. McMullan reimbursement for guest travel to certain business functions, certain activities at business functions, an airline program membership, and a $1,500 per month car allowance. The Bank provided Mr. Malmberg, Ms. Adams, Mr. Dozier, Mr. Kovach, and Mr. O’Shields reimbursement for guest travel to certain business functions and certain activities at business functions. The Bank provided Mr. Dozier reimbursement for executive health benefits and financial planning, and Mr. Malmberg and Ms. Adams reimbursement for an airline program membership. The Bank provided Mr. Bennett reimbursement for certain activities at business functions. The Bank allowed Ms. Adams and Mr. Bennett to retain certain personal IT resources at the time of retirement. The Bank provided Mr. McMullan, Mr. Malmberg, Ms. Adams, and Mr. Dozier matching contributions in the Bank’s Once For All charitable giving program.
(4) The tax gross-up amount represents the Bank’s payment of withholding taxes on the $100 employee appreciation bonus provided to all employees of the Bank. The Bank also provided a tax gross-up on awards under the Bank’s Service Award Program in 2018.
(5) The amounts in this column represent a severance payment to Mr. Bennett of $398,500, equivalent to 12 months of his then current salary, and annual leave cash-out payments to Ms. Adams and Mr. Bennett at retirement.



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Awards of Incentive Compensation in 2018

The following table provides information concerning each grant of an award to a named executive officer in 2018 under the ICP.

2018 Grants of Plan-Based Awards
 
 
Estimated Future Payouts Under Non-Equity Incentive Plan Awards
Name
(a)
 
Threshold
(b) (1)
 
Target
(c) (1)
 
Maximum
(d) (1)
W. Wesley McMullan
 
$
417,500

 
$
626,250

 
$
835,000

Kirk R. Malmberg
 
182,000

 
312,000

 
442,000

Robert F. Dozier, Jr.
 
175,000

 
300,000

 
425,000

Robert S. Kovach
 
121,500

 
202,500

 
283,500

Reginald O'Shields
 
106,500

 
177,500

 
248,500

Cathy C. Adams
 
166,553

 
285,519

 
404,486

Robert C. Bennett
 
109,385

 
182,308

 
255,231

____________
(1) Columns (b-d) reflect threshold, target, and maximum payment opportunities under the Bank’s ICP for the fiscal year ended December 31, 2018. The actual amounts earned pursuant to the ICP during 2018 are reported under column (e) of the 2018 Summary Compensation Table. Fifty percent of the actual amount earned is subject to mandatory deferral. For information on these awards, see “Compensation Discussion and Analysis.”

Retirement Benefits

Pension Benefits

The 2018 Pension Benefits table below provides information with respect to the Pentegra Plan, the Bank’s tax-qualified pension plan (Pension Plan), and the Bank’s non-qualified Defined Benefit Equalization Plan (DBEP). The table shows the actuarial present value of accumulated benefits as of December 31, 2018, for each of the named executive officers and the number of years of service credited to each named executive under each plan.

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Pension Plan

The pension benefits payable under the Pension Plan are based on a pre-established defined benefit formula that provides for an annual retirement allowance and a retirement death benefit. A participant’s benefit in the plan vests upon completion of five years of service with the Bank, and the participant then may retire under the plan at the times described below.

Employees hired before July 1, 2005

For participants hired on or before July 1, 2005, the Pension Plan generally provides an annual retirement allowance equal to 2.50 percent of the participant’s highest consecutive three-year average compensation for each year of credited service under the plan (not to exceed 30 years). Average compensation is defined as base salary and annual short-term incentive compensation.
For these participants, the standard retirement age is 65, with reduced early retirement benefits available at age 45. If the participant continues to work for the Bank until the sum of the participant’s age and years of service with the Bank equals at least 70, the annual benefit payable following retirement is reduced by 1.50 percent for each year that retirement precedes normal retirement age. If the participant terminates employment before the participant’s age and years of service with the Bank total 70, the annual benefit payable following retirement is reduced by six percent for each year between age 64 and 60, by four percent for each year between age 59 and 55, and by three percent for each year between age 54 and 45, in each case, that retirement precedes normal retirement age. For these participants, lump sum payments are available beginning at age 50.
Mr. McMullan, Mr. Malmberg, and Mr. O’Shields participate in the Pension Plan on these terms because they were hired on or before July 1, 2005. Each of them has attained eligibility for immediate early retirement. Ms. Adams, retired, also participated in the Pension Plan on these terms.

Employees hired between July 1, 2005, and February 28, 2011

For participants hired between July 1, 2005, and February 28, 2011, the Pension Plan generally provides an annual retirement allowance equal to 1.50 percent of the participant’s highest consecutive five-year average compensation for each year of credited service under the plan (not to exceed 30 years). Average compensation is defined as base salary only. For these participants, the standard retirement age is 65, with reduced early retirement benefits available at age 55. If the participant terminates employment before reaching age 65, the annual benefit payable following retirement is reduced by six percent for each year between age 65 and 60, and by four percent for each year between age 60 and 55, in each case, that retirement precedes normal retirement age. For these participants, lump sum payments are not available. Mr. Kovach, who was hired in 2010, participates in the Pension Plan under these terms and has attained eligibility for immediate early retirement. He is also eligible to receive a lump sum payment due to his prior service at FHLBank Pittsburgh. Mr. Bennett, retired, also participated in the Pension Plan under these terms.

Employees hired on or after March 1, 2011

The Pension Plan was closed to new participants effective March 1, 2011. Accordingly, Mr. Dozier does not participate in the Pension Plan.

DBEP

Payments under the Pension Plan may be limited due to federal tax code limitations. The DBEP exists to restore those benefits that executives otherwise would forfeit due to these limitations. The DBEP operates using the same benefit formula and retirement eligibility provisions as described above under the Pension Plan. Because the DBEP is a non-qualified plan, the benefits received from this plan do not receive the same tax treatment and funding protection as the Pension Plan.

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All of the named executive officers participate in the DBEP. Mr. Dozier participates solely in the DBEP because he was hired after March 1, 2011. As approved by the board of directors, Mr. Dozier participates in the DBEP to the same extent as if he were participating in the Pension Plan (as if he was an employee hired between July 1, 2005, and February 28, 2011). Mr. Dozier has satisfied the plan vesting requirements, but is not eligible for immediate early retirement.

Death Benefits
Death benefits, which do not vary based on date of hire, also are available under the Pension Plan and the DBEP. If an employee dies while in active service, his/her beneficiary is entitled to a lump sum amount equal to the commuted value of 120 monthly retirement payments. If a former employee dies while in retirement, having elected the normal form of retirement benefits, his/her beneficiary also is entitled to a lump sum amount equal to the commuted value of 120 monthly retirement payments less payments received before the former employee died.

2018 Pension Benefits
Name
(a)
 
Plan Name
(b)
 
Number of Years of
Credited Service
(c)
 
Present Value of
Accumulated Benefit (d) (1)
 
Payments during last fiscal year
(e)
W. Wesley McMullan
 
Pension Plan
 
30.00
 
$
1,912,000

 
$
—

 
 
DBEP
 
30.00
 
10,308,000

 
—

Kirk R. Malmberg (2)
 
Pension Plan
 
21.83
 
1,538,000

 
—

 
 
DBEP
 
21.83
 
3,793,000

 
—

Robert F. Dozier, Jr. (3)
 
Pension Plan
 
—
 
—

 
—

 
 
DBEP
 
6.50
 
407,000

 
—

Robert S. Kovach (2)

 
Pension Plan
 
30.00
 
1,357,000

 
—

 
 
DBEP
 
30.00
 
563,000

 
—

Reginald O'Shields
 
Pension Plan
 
15.58
 
728,000

 
—

 
 
DBEP
 
15.58
 
957,000

 
—

Cathy C. Adams
 
Pension Plan
 
30.00
 
2,291,000

 
—

 
 
DBEP
 
30.00
 
6,827,000

 
—

Robert C. Bennett
 
Pension Plan
 
9.08
 
484,000

 
—

 
 
 DBEP
 
9.08
 
231,000

 
—

____________
(1) The “Present Value of Accumulated Benefit” is the present value of the annual pension benefit that was earned as of December 31, 2018, assuming retirement at age 65. Benefits under the Pension Plan were calculated using a 4.22 percent discount rate; a 3.67 percent discount rate was used to calculate benefits under the DBEP.
(2) In accordance with plan provisions, the years of credited service for Mr. Malmberg include 4.0 years credited for prior service earned while employed by FHLBank Chicago and for Mr. Kovach include 23.8 years credited for prior service earned while employed by FHLBank Pittsburgh. The incremental value of this prior service, as valued in the Bank’s DBEP, using the methodology described in note 1, is $699,000 for Mr. Malmberg and $410,000 for Mr. Kovach.
(3) As noted above, Mr. Dozier is not eligible to participate in the Pension Plan.




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Deferred Compensation
Each named executive officer of the Bank is eligible to participate in the Bank’s non-qualified, elective DCP. Additionally, each named executive officer is also eligible to participate in the Bank’s consolidated non-qualified Benefit Equalization Plan (BEP). The BEP includes both a defined contribution component (DCBEP) described below and a DBEP described above. Directors are eligible to participate in the DCP but are not eligible to participate in the BEP.
The DCP permits a participant to defer all or a portion of his/her compensation, including base salary and awards under the ICP, and to select the method of determining the earnings on such deferred compensation, based on a range of mutual fund options designed to mirror the Bank’s 401(k) Plan. DCP participants also may select an interest crediting rate based on the Bank’s return on equity. Distributions from the DCP may be made either in a specific year, whether or not a participant’s employment has ended, or at a time that begins at or after the participant’s retirement or separation. Participants may elect to receive either a lump sum distribution or annual installment payments over periods ranging from two to five years. The Bank does not match contributions to the DCP. Mr. McMullan, Mr. Malmberg, Mr. Dozier, Ms. Adams, and Mr. Bennett participated in the DCP for the year ended December 31, 2018.
Named executive officers are permitted to defer up to 40.0 percent of salary under the Bank’s 401(k) Plan and the DCBEP. The Bank matches the amount contributed by a participant up to six percent of base salary. For employees hired on or after March 1, 2011, including Mr. Dozier, the Bank automatically contributes four percent of base salary into the 401(k) Plan on behalf of the employee, in addition to the six percent match described above.

The DCBEP, like the 401(k) Plan, is self-directed and provides participants with a range of mutual fund options through the Vanguard Group. Participants earn a market rate of return based on the mutual funds selected. Distributions from the DCBEP begin when a participant’s employment has ended. Participants may elect to receive either a lump sum distribution or annual installment payments over periods ranging from two to five years. These plans are designed to encourage additional voluntary savings and to offer a valuable financial planning tool. All Bank contributions to the DCBEP are subject to a two-year vesting period.
The board amended the DCBEP, effective January 1, 2017, to:
•
increase the amount that the Bank contributes to Mr. Dozier under the Bank’s 401(k) Plan and DCBEP by two percent;
•
permit Mr. Dozier to participate in the DCBEP outside of the 401(k) benefit limits imposed by the Internal Revenue Service; and
•
provide an additional contribution by the Bank of 12.0 percent of Mr. Dozier’s ICP awards to the DCBEP.

The board amended the Benefit Equalization Plan (BEP), effective January 1, 2018, to:

•
provide that any executive hired or promoted to the level of senior vice president or higher after January 1, 2018 (“eligible executives”), will not be eligible to receive the defined benefit feature of the BEP and will instead receive a Bank contribution of up to 10.0 percent applied to both annual base pay and ICP award amounts under the defined contribution portion of the BEP;
•
provide eligible executives with a contribution equivalent to 10.0 percent of base pay offset by contributions to the 401(k) Plan; and
•
provide eligible executives with a contribution equivalent to 10.0 percent of incentive compensation.

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The following table presents compensation earned and deferred in 2018, and earnings on, or distributions of, such amounts. In accordance with SEC rules, the amounts shown in the table do not include any amounts in respect of the 401(k) Plan.

2018 Nonqualified Deferred Compensation
Name
(a)
 
Executive Contributions in Last Fiscal Year
(b) (1)
 
Bank
Contributions in Last Fiscal Year
(c) (2)
 
Aggregate Earnings
In Last Fiscal Year
(d) (3)
 
Aggregate
Withdrawals / Distributions
(e)
 
 Aggregate Balance
at Last Fiscal Year End
(f) (4)
W. Wesley McMullan
 
$
456,982

 
$
34,685

 
$
19,395

 
$
(771,329
)
 
$
2,356,243

Kirk R. Malmberg
 
79,500

 
14,700

 
(46,355
)
 
—

 
1,374,860

Robert F. Dozier, Jr.
 
34,599

 
78,249

 
(12,017
)
 
—

 
196,271

Robert S. Kovach
 
97,000

 
18,692

 
(86,707
)
 
—

 
1,167,666

Reginald O'Shields
 
52,500

 
15,565

 
(27,520
)
 
—

 
425,769

Cathy C. Adams
 
184,881

 
12,052

 
(70,279
)
 
—

 
1,774,909

Robert C. Bennett
 
59,362

 
7,100

 
5,454

 
(184,225
)
 
48,789

____________
(1) Amounts under column (b) are included in salary reported for 2018 in column (c) of the 2018 Summary Compensation Table.
(2) Amounts under column (c) are included in all other compensation amounts reported for 2018 in column (g) of the 2018 Summary Compensation Table.
(3) Amounts under column (d) reflect actual market returns for mutual funds selected by participants and interest credit received under the Bank’s core economic income return on equity interest crediting rate.
(4) To the extent that a participant was a named executive officer in prior years, executive and Bank contributions included in the “Aggregate Balance at Last Fiscal Year End” column have been reported as compensation in the Summary Compensation Table for the applicable year.

Potential Payments upon Termination or Change in Control
McMullan Employment Agreement
Mr. McMullan’s Employment Agreement provides that upon the Bank’s termination of his employment for any reason other than “cause,” or upon Mr. McMullan’s termination of his employment for “good reason,” the Bank shall pay a total of one year’s base salary in effect at the date of termination in a lump sum within 30 days after Mr. McMullan executes and delivers a general release of claims to the Bank, plus an amount equal to the amount that would have been payable pursuant to Mr. McMullan’s incentive compensation award for the year in which the date of termination occurs, prorated based upon the number of days Mr. McMullan was employed that year. The incentive compensation award is based on the Bank’s actual performance for the year in which termination occurs and is payable at the time such incentive compensation awards are paid to other senior executives. In addition, Mr. McMullan is entitled to receive certain healthcare replacement costs and other amounts required to be paid or provided under any other Bank plan, program, policy or practice or contract or agreement.
Under Mr. McMullan’s Employment Agreement, “cause” is defined to include Mr. McMullan’s failure to perform substantially his duties; his engagement in illegal conduct or gross misconduct injurious to the Bank; a written request from the Finance Agency or any other regulatory agency or body requesting that the Bank terminate his employment; crimes involving a felony, fraud or other dishonest acts; certain other notices from or actions by the Finance Agency; his breach of fiduciary duty or breach of certain covenants in the Employment Agreement; his refusal to comply with a lawful directive from the Chairman of the board of directors or from the board of directors; or his material breach of the Employment Agreement. The Employment Agreement defines “good reason” to include a material diminution in Mr. McMullan’s base salary or in his authority; the Bank requiring Mr. McMullan to be based at any office or location other than in Atlanta, Georgia; or a material breach of the Employment Agreement by the Bank.
The following table presents information about potential payments to Mr. McMullan under his Employment Agreement in the event his employment had terminated on December 31, 2018. He is not entitled to any gross-up payments on taxes incurred with respect to any severance, whether under Section 280G of the tax code or otherwise. None of the other executive officers had a severance arrangement with the Bank in 2018.

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 Potential Payments upon Termination
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cause
 
Severance
 
Medical, Dental, and Vision Insurance Benefits
 
Pension Benefit Enhancements
 
Other Perquisites
 
Total
 
2018 ICP Award
 
Deferred Incentive for Prior Periods (1)
 
Annual Base Salary
Resignation without Good Reason
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Involuntary Termination For Cause
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Involuntary Termination Without Cause
 
814,470

 
844,578

 
835,000

 
45,540

 
—

 
—

 
2,539,588

Resignation For Good Reason
 
814,470

 
844,578

 
835,000

 
45,540

 
—

 
—

 
2,539,588

____________
(1) Mr. McMullan has reached a combination of age and years of service to the Bank totaling at least 70.

The other named executive officers are entitled to receive amounts earned during their terms of employment, regardless of the manner in which their employment terminated, on the same terms generally applicable to all employees of the Bank. These amounts include:

•
Severance, if and as determined at the sole discretion of the board.
•
Amounts accrued and vested through the Bank’s Pension Plan and the DBEP (the Bank’s qualified and non-qualified defined benefit plans). Up to three months of incremental service under the Bank’s Pension Plan may be granted, in the sole discretion of the board, if an employee is provided with severance pay.
•
Amounts accrued and vested through the 401(k) Plan and the DCBEP (the Bank’s qualified and non-qualified defined contribution plans) and amounts contributed and associated earnings under the Bank’s DCP.
•
Accrued vacation and applicable retiree medical benefits and applicable retiree life insurance.
In the event of the death or disability of an employee, including a named executive officer, in conjunction with the benefits above, the employee or his/her beneficiary may receive benefits under the Bank’s disability plan or payments under the Bank’s life insurance plan, as appropriate. Named executive officers also are entitled to receive death benefit payments under the Pension Plan and the Excess Plan, as described under “Retirement Benefits—Death Benefits.”

Ms. Adams and Mr. Bennett both retired from the Bank in November 2018.  As disclosed in the Summary Compensation Table, Mr. Bennett and Ms. Adams received cash-out payments of $33,857 and $29,017, respectively, for their accrued annual leave, and Mr. Bennett received a severance payment of $398,500, equivalent to 12 months of his then current salary.
Change in Control Severance Plan
Effective January 1, 2017, the Bank adopted an Executive Change in Control Severance Plan (Severance Plan).
Overview of the Severance Plan
The Severance Plan provides certain protection and benefits in the event of a Qualifying Termination (as defined below) following a Change in Control (as defined below). The Severance Plan applies to employees or officers who are designated by the Bank’s board of directors as participants. The Bank’s board designated Messrs. McMullan, Malmberg, and Dozier, as participants in the Severance Plan.
Qualifying Termination
“Qualifying Termination” means any separation, termination or other discontinuation of the employment relationship between the Bank and a participant, (A) by the Bank, other than for “cause” (as defined in the Severance Plan); or (B) by the participant, for “good reason” (as defined in the Severance Plan), but does not include a termination resulting from the participant’s death or disability.

The Severance Plan defines “cause” to include:

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•
the participant’s failure to perform substantially his/her duties;
•
the participant’s engagement in illegal conduct or willful misconduct injurious to the Bank;
•
the participant’s material violation of law or regulation or of the Bank’s written policies or guidelines;
•
a written request from the Finance Agency requesting that the Bank terminate the participant’s employment;
•
crimes involving a felony, fraud or other dishonest acts;
•
certain other notices from or actions by the Finance Agency;
•
the participant’s breach of fiduciary duty or breach of certain covenants in the Severance Plan; and
•
the participant’s refusal to comply with a lawful directive from the CEO or the board of directors.

The Severance Plan defines “good reason” to include:
•
a material diminution in the participant’s base salary or in his/her duties or authority;
•
the Bank requiring the participant to be based at any office or location other than in Atlanta, Georgia; or
•
or a material breach of the Severance Plan by the Bank.

Under the terms of the Severance Plan, if there is a Qualifying Termination during the period beginning on the earliest of the date a definitive agreement or order for a Change in Control has been entered, or the effective date of a Change of Control as prescribed by the Finance Agency, and ending, in all cases, twenty-four (24) months following the effective date of the Change in Control, the participant becomes entitled to certain severance payments and benefits.
These payments and benefits include the following:
•
The CEO would receive a cash payment equal to 2.5 times his/her annual base salary amount.
•
An executive vice president would receive a cash payment equal to 1.75 times his/her annual base salary amount.
•
Participants would receive a lump sum cash payment equal to the amount that would have been payable pursuant to the participant’s incentive compensation award for the year in which the date of a Qualifying Termination occurs, prorated based on the number of days the participant was employed that year.
•
Participants would receive a lump sum cash payment for outplacement assistance in the amount of $7,500.

In addition, the CEO would receive a cash payment equivalent to 24 months of health continuation coverage, and executive vice presidents would receive a cash payment equivalent to 18 months of health continuation coverage.
The Severance Plan defines a “Change in Control” as:
•
the merger, reorganization, or consolidation of the Bank with or into, or acquisition of the Bank by, another Federal Home Loan Bank or other entity;
•
the sale or transfer of all or substantially all of the business or assets of the Bank to another Federal Home Loan Bank or other entity; or
•
a change in the composition of the Bank’s board that causes the combined number of member directors from the jurisdictions of Alabama, the District of Columbia, Florida, Georgia, Maryland, North Carolina, South Carolina and Virginia to cease to constitute a majority of the Bank’s directors; or
•
the Bank’s liquidation or dissolution.

The payments described above are payable in a lump sum within sixty (60) days following the participant’s employment termination date, except the prorated incentive compensation award, which is payable at the time such incentive compensation awards are paid to other senior executives. All payments and benefits are conditioned on the executive having delivered an irrevocable general release of claims against the Bank before payment occurs. In addition, all payments and benefits remain subject to the Bank’s compliance with any applicable statutory and regulatory requirements relating to the payment of amounts under the Severance Plan. The Severance Plan requires that an individual execute a participation agreement to become a participant in the Severance Plan. Messrs. McMullan, Malmberg, and Dozier, each executed a participation agreement to become participants in the Severance Plan, effective January 1, 2017.
CEO Pay Ratio Disclosure Rule
The following is a reasonable estimate, prepared under applicable SEC rules, of the ratio of the annual total compensation of the Bank’s president and CEO, Mr. McMullan, to the median of the annual total compensation of the Bank’s other employees. The Bank identified the median employee in 2017 by examining the 2017 base pay for all 325 individuals, excluding the CEO, who were employed by the Bank on December 1, 2017 (annualized for any permanent full- or part-time employees that were not employed by the Bank for all of 2017). For 2018, the Bank determined to use the same median employee in its pay ratio calculation because there has not been a change in the Bank’s employee population or employee compensation arrangements

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that it believes would significantly impact the pay ratio disclosure. The Bank calculated the annual total compensation for such employee using the same methodology the Bank uses for its named executive officers as set forth in the 2018 Summary Compensation Table included earlier in this Executive Compensation section of the Report. For the year ended December 31, 2018, the Bank’s median employee total annual compensation was $123,140; the CEO’s total annual compensation was $2,713,412; and the ratio of CEO to median employee compensation was 22.0 to 1.
Under the SEC’s rules and guidance, there are numerous ways to determine the compensation of a company’s median employee, including the employee population sampled, the elements of pay and benefits used, any assumptions made and the use of statistical sampling. In addition, no two companies have identical employee populations or compensation programs, and pay, benefits and retirement plans differ by country even within the same company. As such, the Bank’s pay ratio may not be comparable to the pay ratio reported by other companies.

Director Compensation
The FHLBank Act provides that each FHLBank may pay its directors reasonable compensation for the time required of them, and their necessary expenses, in the performance of their duties, subject to approval by the Director. In accordance with the FHLBank Act, the Bank has adopted a policy governing the compensation and travel expense reimbursement provided to its directors. Under this policy, directors receive fees paid for attendance at each meeting of the board of directors and meeting of a committee of the board of directors, as further described below. These fees are subject to the annual caps established under the policy. Directors do not receive separate retainers.
Directors are reimbursed for reasonable Bank-related travel expenses in accordance with Bank policy. In specified instances, the Bank may reimburse a director for the transportation and other ordinary travel expenses of the director’s guest; in 2018, these expenses totaled $34,802.
During 2018, directors received fees for attendance at each board and committee meeting as described below. The following table presents the annual compensation limits applied.
2018 Annual Director Compensation Limits
Title
 
Amount
Chairman of the Board
 
$
130,000

Vice Chairman of the Board
 
120,000

Chairman of the Audit Committee
 
115,000

Other Committee Chairmen (excluding Audit and Executive)
 
110,000

All Other Directors
 
100,000

Under the 2018 Directors’ Compensation Policy, each director had an opportunity to receive a payment of approximately one-seventh of that director’s annual cap for attendance at no less than 75.0 percent of the board meeting and meetings of each committee of the board on which the director serves during each interim period. The first interim period began on December 11, 2017 and ended February 1, 2018 (the day of the first scheduled in-person board meeting for 2018). Each successive interim period began on the calendar day immediately following a scheduled board meeting through and including the day of the next scheduled board meeting, with the seventh interim period ending on December 16, 2018 after the seventh scheduled in-person board meeting. Under the policy, after the end of the seventh interim period and before the seventh payment was made, the governance and compensation committee of the board reviewed the cumulative attendance and performance of each director during 2018 and, in consultation with the chair of the board, recommended to the board a reduction, elimination or increase in the final payment opportunity for each director. No increase could exceed the applicable annual compensation cap.

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The following table presents the cash and other compensation earned or paid by the Bank to the members of the board of directors for all services in all capacities during 2018.
2018 Director Compensation
Name
(a)
 
Fees Earned or Paid in Cash (b)
 
Change in Pension Value and Nonqualified Deferred Compensation Earnings (c) (1)
 
All Other Compensation (d)
 
Total
(e)
Brian E. Argrett
 
$
100,000

 
$
—

 
*
 
$
100,000

Travis Cosby, III
 
115,000

 
—

 
*
 
115,000

Suzanne S. DeFerie
 
110,000

 
—

 
*
 
110,000

R. Thornwell Dunlap, III
 
110,000

 
—

 
*
 
110,000

F. Gary Garczynski
 
130,000

 
—

 
*
 
130,000

William C. Handorf
 
110,000

 
—

 
*
 
110,000

Scott C. Harvard
 
100,000

 
—

 
*
 
100,000

Jonathan Kislak(2)
 
100,000

 
—

 
*
 
100,000

LaSalle D. Leffall, III
 
100,000

 
—

 
*
 
100,000

Kim C. Liddell
 
110,000

 
—

 
*
 
110,000

Miriam Lopez
 
100,000

 
—

 
*
 
100,000

John B. Rucker
 
100,000

 
2,305

 
*
 
102,305

Robert L. Strickland, Jr.
 
110,000

 
—

 
*
 
110,000

Richard A. Whaley
 
120,000

 
1,588

 
*
 
121,588

____________
(1) Directors are eligible to participate in the Bank’s DCP. Directors Dunlap, Lopez, Rucker, and Whaley elected to defer compensation during 2018.
(2) At the request of the director, the amount in column (b) was paid to a charity of his choosing.
* Director perquisites include premiums paid by the Bank for each director for the Bank’s Business Travel Accidental Death and Dismemberment Policy, guest travel, certain activities at business functions, and matching contributions under the Bank’s Once For All charitable giving program. For each director, the aggregate amount of such perquisites was less than $10,000.
In September 2018, the board of directors approved the 2019 Directors’ Compensation Policy, which is similar to the 2018 policy, with the same annual compensation limits as the 2018 policy.





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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The Bank is a cooperative whose members own substantially all of the outstanding capital stock of the Bank and elect the directors of the Bank. The voting right of members is generally limited to the election of the Bank’s board of directors. A member is eligible to vote for the number of open member director seats in the state in which its principal place of business is located, and all members are eligible to vote for the number of open independent director seats. Membership is voluntary, and a member must give notice of its intent to withdraw from membership. A member that withdraws from membership may not acquire shares of any FHLBank before the end of the five-year period beginning on the date of the completion of its divestiture of Bank stock.

The Bank does not offer any compensation plan under which equity securities of the Bank are authorized for issuance. The following table presents the ownership of the Bank’s capital stock, which is concentrated within the financial services industry and is stratified across various institution types (in millions).
 
Commercial
Banks
 
Credit
Unions
 
Savings Institutions
 
Insurance
Companies
 
CDFIs
 
Mandatorily Redeemable Capital Stock
 
Total
December 31, 2018
$
3,656

 
$
1,167

 
$
469

 
$
191

 
$
3

 
$
1

 
$
5,487

December 31, 2017
3,346

 
1,233

 
445

 
128

 
2

 
1

 
5,155

December 31, 2016
3,393

 
1,100

 
366

 
94

 
2

 
1

 
4,956

December 31, 2015
3,557

 
1,094

 
368

 
81

 
1

 
14

 
5,115

December 31, 2014
3,821

 
872

 
381

 
75

 
1

 
19

 
5,169


The following table presents information about those members that are beneficial owners of more than five percent of the Bank’s outstanding capital stock, including mandatorily redeemable capital stock, as of February 28, 2019.
Name and Address
 
Number of Shares Owned
 
Percent of
Total Capital Stock
Navy Federal Credit Union
 
5,392,137

 
11.00
820 Follin Lane
 
 
 
 
Vienna, VA 22180
 
 
 
 
Bank of America, National Association
 
5,360,217

 
10.93
100 North Tryon Street
 
 
 
 
Charlotte, NC 28255
 
 
 
 
SunTrust Bank
 
4,295,153

 
8.76
25 Park Place
 
 
 
 
Atlanta, GA 30302
 
 
 
 
TIAA, FSB
 
3,907,425

 
7.97
501 Riverside Avenue
 
 
 
 
Jacksonville, FL 32202
 
 
 
 
Regions Bank
 
3,465,695

 
7.07
1900 Fifth Avenue North
 
 
 
 
Birmingham, AL 35203
 
 
 
 


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Additionally, member directors, which comprise a majority of the board of directors of the Bank, are officers or directors of member institutions that own the Bank’s capital stock. The following table presents these institutions as of February 28, 2019.

Member Name
 
City, State
 
Number of Shares Owned
 
Percent of Total Capital Stock
First Bank
 
Southern Pines, NC
 
200,358

 
0.41
First Florida Integrity Bank
 
Naples, FL
 
12,257

 
0.03
First Bank
 
Strasburg, VA
 
7,628

 
0.02
Citizens Bank of Americus
 
Americus, GA
 
6,114

 
0.01
Community Bankers' Bank
 
Midlothian, VA
 
5,799

 
0.01
City First Bank of D.C., National Association
 
Washington, DC
 
4,273

 
0.01
First Community Bank of Central Alabama
 
Wetumpka, AL
 
4,113

 
0.01
Countybank
 
Greenwood, SC
 
4,038

 
0.01
1880 Bank
 
Cambridge, MD
 
3,235

 
0.01

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Because the Bank is a cooperative, capital stock ownership is a prerequisite for a member to transact any business with the Bank. The Bank’s member directors are officers or directors of member institutions. All directors and any member that holds five percent or more of the Bank’s voting securities are classified as related parties under SEC regulations. In the ordinary course of its business, the Bank may transact business with each of the members that has an officer or director serving as a director of the Bank and members that hold five percent or more of the Bank’s voting securities. All such transactions:

•
have been made in the ordinary course of the Bank’s business;
•
have been made subject to the same Bank policies as transactions with the Bank’s members generally; and
•
in the opinion of management, do not involve more than the normal risk of collection or present other unfavorable features.

The Bank has adopted a written related person transaction policy, which requires the Governance and Compensation Committee of the board of directors to review and, if appropriate, to approve any transaction between the Bank and any related person (as defined by applicable SEC regulations). Pursuant to the policy, the committee will review any transaction the Bank would be required to disclose in filings with the SEC in which the Bank is or will be a participant and the amount involved exceeds $120,000, and in which any related person had, has, or will have a direct or indirect material interest. The Bank has exemptive relief, pursuant to an SEC no-action letter, from disclosing certain related person transactions that arise in the ordinary course of the Bank’s business. The committee may approve those transactions that are in, or are not inconsistent with, the best interests of the Bank and its shareholders.

In addition, the Bank has a written Code of Conduct applicable to all employees and a Code of Conduct and Ethics for Directors as well as other written policies and procedures that also may apply to or prohibit certain related person transactions.

Director Independence

For a discussion of director independence, refer to Item 10, Directors, Executive Officers and Corporate Governance-Director Independence, Compensation Committee, Audit Committee and Audit Committee Financial Expert.


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Item 14. Principal Accountant Fees and Services.

The following table presents the aggregate fees billed (or accrued) to the Bank by PwC (in thousands).
 
 
For the Years Ended December 31,
 
2018
 
2017
Audit fees(1)
$
802

 
$
778

Audit-related fees(2)
50

 
41

All other fees(3)
3

 
3

Total fees
$
855

 
$
822

____________
(1) Audit fees and expenses for the years ended December 31, 2018 and 2017 were for professional services rendered by PwC in connection with the Bank’s annual audits and quarterly reviews of the Bank’s financial statements.
(2) Audit-related fees and expenses for the years ended December 31, 2018 and 2017 were for certain FHLBank System assurance and related services, certain costs related to the adoption of newly issued accounting guidance, as well as fees related to PwC’s participation at conferences.
(3) All other fees for the year ended December 31, 2018 and 2017 relate to the annual license for PwC’s accounting research software and disclosure checklist.

The Bank paid additional fees to PwC in the form of assessments paid to the Office of Finance. The Bank is assessed its proportionate share of the costs of operating the Office of Finance, which includes the expenses associated with the annual audits of the combined financial statements of the FHLBanks. These assessments, which totaled $64,292 and $58,384 in 2018 and 2017, respectively, are not included in the table above.

The Bank is exempt from ordinary federal, state, and local taxation, except employment and real property taxes. No tax-related fees were paid to PwC during the years ended December 31, 2018 and 2017.

The Audit Committee of the board of directors has adopted the Audit Committee Pre-Approval Policy (Pre-Approval Policy). In accordance with the Pre-Approval Policy and applicable law, the Audit Committee pre-approves audit services, audit-related services, tax services, and non-audit services to be provided by the Bank’s independent registered public accounting firm. The term of any pre-approval is 12 months from the date of pre-approval unless the Audit Committee specifically provides otherwise. On an annual basis, the Audit Committee reviews the list of specific services and projected fees for services to be provided for the next 12 months and pre-approves services as the Audit Committee deems necessary. Under the Pre-Approval Policy, the Audit Committee has granted pre-approval authority to the Chairman and the Vice-Chairman of the Audit Committee, subject to limitation as set forth in the Pre-Approval Policy. The Chairman or the Vice-Chairman must report any pre-approval decisions to the Audit Committee at its next regularly scheduled meeting. New services that have not been pre-approved by the Audit Committee that are in excess of the pre-approval fee level established by the Audit Committee must be presented to the entire Audit Committee for pre-approval. In the years ended December 31, 2018 and 2017, 100 percent of the audit fees, audit-related fees, and all other fees were pre-approved by the Audit Committee.




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PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a)
Financial Statements. The following financial statements of the Federal Home Loan Bank of Atlanta, set forth in Item 8 above, are filed as part of this Report.

Report of Independent Registered Public Accounting Firm
Statements of Condition as of December 31, 2018 and 2017
Statements of Income for the Years Ended December 31, 2018, 2017, and 2016
Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017, and 2016
Statements of Capital Accounts for the Years Ended December 31, 2018, 2017, and 2016
Statements of Cash Flows for the Years Ended December 31, 2018, 2017, and 2016
Notes to Financial Statements


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(b)
Exhibits. The exhibits listed below are being filed with or incorporated by reference as a part of this Report:

Exhibit No.
 
Exhibit Description
 
Form
 
Exhibit
 
Dated Filed
3.1
 
 
8-K
 
3.1
 
10/26/12
3.2
 
 
8-K
 
3.1
 
2/1/16
4.1
 
 
8-K
 
99.2
 
8/5/11
10.1
 
 
10-K
 
10.1
 
3/8/18
10.2
 
 
8-K
 
10.1
 
1/9/09
10.3
 
 
10-12G
 
10.5
 
3/17/06
10.4
 
 
 
 
 
 
 
10.5
 
 
10-K
 
10.8
 
3/23/12
10.6
 
 
10-K
 
10.6
 
3/14/14
10.7
 
 
10-K
 
10.7
 
3/9/17
10.8
 
 
10-K
 
10.8
 
3/9/17
10.9
 
 
8-K
 
99.1
 
8/5/11
31.1
 
 
 
 
 
 
 
31.2
 
 
 
 
 
 
 
32.1
 
 
 
 
 
 
 
99.1
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. +
 
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.+
 
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.+
 
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.+
 
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.+
 
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.+
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* Denotes management contract or compensatory plan.
 
 
 
 
 
 
 
 
+ Furnished herewith.
 
 
 
 
 
 


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Item 16. Form 10-K Summary.

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
Federal Home Loan Bank of Atlanta
 
 
 
Date:
March 7, 2019
By /s/ W. Wesley McMullan
 
 
     Name: W. Wesley McMullan
     Title: President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date:
March 7, 2019
By /s/ W. Wesley McMullan
 
 
    Name: W. Wesley McMullan
 
 
    Title: President and Chief Executive Officer
 
 
 
Date:
March 7, 2019
By /s/ Kirk R. Malmberg
 
 
     Name: Kirk R. Malmberg
 
 
     Title: Executive Vice President
                 and Chief Financial Officer
 
 
 
Date:
March 7, 2019
By /s/ William T. Shaw
 
 
     Name: William T. Shaw
 
 
     Title: Senior Vice President
 
 
                and Controller
 
 
 
Date:
March 7, 2019
By /s/ Richard A. Whaley
 
 
      Name: Richard A. Whaley
 
 
      Title: Chair of the Board of Directors
 
 
 
Date:
March 7, 2019
By /s/ Robert L. Strickland, Jr.
 
 
      Name: Robert L. Strickland, Jr.
 
 
      Title: Vice Chair of the Board of Directors
 
 
 
Date:
March 7, 2019
By /s/ Brian E. Argrett
 
 
     Name: Brian E. Argrett
 
 
     Title: Director
 
 
 
Date:
March 7, 2019
By /s/ Travis Cosby, III
 
 
     Name: Travis Cosby, III
 
 
     Title: Director
 
 
 
Date:
March 7, 2019
By /s/ Suzanne S. DeFerie
 
 
    Name: Suzanne S. DeFerie
 
 
    Title: Director
 
 
 

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Date:
March 7, 2019
By /s/ R. Thornwell Dunlap, III
 
 
     Name: Thornwell Dunlap, III
 
 
     Title: Director
 
 
 
Date:
March 7, 2019
By /s/ F. Gary Garczynski
 
 
     Name: F. Gary Garczynski

 
 
     Title: Director
 
 
 
Date:
March 7, 2019
By /s/ William C. Handorf
 
 
     Name: William C. Handorf
 
 
     Title: Director
 
 
 
Date:
March 7, 2019
By /s/ Scott C. Harvard
 
 
     Name: Scott C. Harvard
 
 
     Title: Director
 
 
 
Date:
March 7, 2019
By /s/ Jonathan Kislak
 
 
     Name: Jonathan Kislak
 
 
     Title: Director
 
 
 
Date:
March 7, 2019
By /s/ LaSalle D. Leffall, III
 
 
     Name: LaSalle D. Leffall, III
 
 
     Title: Director
 
 
 
Date:
March 7, 2019
By /s/ Kim C. Liddell
 
 
     Name: Kim C. Liddell
 
 
     Title: Director
 
 
 
Date:
March 7, 2019
By __________________ *
 
 
     Name: Garrett S. Richter
 
 
     Title: Director
 
 
 
Date:
March 7, 2019
By /s/ John B. Rucker
 
 
     Name: John B. Rucker
 
 
     Title: Director
 
 
 
*
Mr. Richter joined the board of directors effective January 1, 2019. Given the short time period between his election and the date of this report, Mr. Richter was not asked to sign this report.


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