10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

 

 

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 for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

The number of shares outstanding of the registrant’s Class B Stock, par value $100, as of July 31, 2011, was 67,644,008.

 

 

 


Table of Contents

Table of Contents

 

PART I.   FINANCIAL INFORMATION      1   
Item 1.   Financial Statements (Unaudited)      1   
  STATEMENTS OF CONDITION (Unaudited)      1   
  STATEMENTS OF INCOME (Unaudited)      2   
  STATEMENTS OF CAPITAL (Unaudited)      3   
  STATEMENTS OF CASH FLOWS (Unaudited)      4   
  NOTES TO FINANCIAL STATEMENTS (Unaudited)      6   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      33   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      69   
Item 4.   Controls and Procedures      72   
PART II.   OTHER INFORMATION      73   
Item 1.   Legal Proceedings      73   
Item 1A.   Risk Factors      73   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      73   
Item 3.   Defaults Upon Senior Securities      74   
Item 4.   (Removed and Reserved)      74   
Item 5.   Other Information      74   
Item 6.   Exhibits      74   
SIGNATURES      75   


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF CONDITION

(Unaudited)

(In millions, except par value)

 

00000000000000000 00000000000000000
     As of  
             June 30, 2011                     December 31, 2010        

ASSETS

     

Cash and due from banks

     $ 25           $ 5     

Deposits with other FHLBank

     2           2     

Federal funds sold

     14,110           15,701     

Trading securities (includes $0 and $37 pledged as collateral as of June 30, 2011 and December 31, 2010, respectively, that may be repledged and includes other FHLBank’s bond of $74 as of June 30, 2011 and December 31, 2010)

     3,100           3,383     

Available-for-sale securities

     3,308           3,319     

Held-to-maturity securities, net (fair value of $16,547 and $17,511 as of June 30, 2011 and December 31, 2010, respectively)

     16,459           17,474     

Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans of $1 as of June 30, 2011 and December 31, 2010

     1,827           2,039     

Advances, net

     77,427           89,258     

Accrued interest receivable

     338           388     

Premises and equipment, net

     33           35     

Derivative assets

     17           5     

Other assets

     171           189     
  

 

 

    

 

 

 

TOTAL ASSETS

     $ 116,817           $ 131,798     
  

 

 

    

 

 

 

LIABILITIES

     

Interest-bearing deposits

     $ 3,008             $ 3,093     

Consolidated obligations, net:

     

Discount notes

     20,573           23,915     

Bonds

     84,640           95,198     
  

 

 

    

 

 

 

Total consolidated obligations, net

     105,213           119,113     
  

 

 

    

 

 

 

Mandatorily redeemable capital stock

     385           529     

Accrued interest payable

     337           357     

Affordable Housing Program payable

     121           126     

Payable to REFCORP

     10           20     

Derivative liabilities

     240           455     

Other liabilities

     282           159     
  

 

 

    

 

 

 

Total liabilities

     109,596           123,852     
  

 

 

    

 

 

 

Commitments and contingencies (Note 13)

     

CAPITAL

     

Capital stock Class B putable ($100 par value) issued and outstanding shares:

     

Subclass B1 issued and outstanding shares: 14 and 15 as of June 30, 2011 and December 31, 2010, respectively

     1,379           1,466     

Subclass B2 issued and outstanding shares: 49 and 57 as of June 30, 2011 and December 31, 2010, respectively

     4,954           5,758     
  

 

 

    

 

 

 

Total capital stock Class B putable

     6,333           7,224     

Retained earnings

     1,184           1,124     

Accumulated other comprehensive loss

     (296)           (402)     
  

 

 

    

 

 

 

Total capital

     7,221           7,946     
  

 

 

    

 

 

 

TOTAL LIABILITIES AND CAPITAL

     $ 116,817           $ 131,798     
  

 

 

    

 

 

 

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

 

1


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF INCOME

(Unaudited)

(In millions)

 

             Three Months Ended June 30,                       Six Months Ended June 30,           
     2011      2010      2011      2010  

INTEREST INCOME

           

Advances

     $ 65             $ 79           $ 138             $ 148     

Prepayment fees on advances, net

     3           2           5           5     

Interest-bearing deposits

     1           2           2           3     

Federal funds sold

     4           8           12           13     

Trading securities

     40           41           81           83     

Available-for-sale securities

     44           45           89           84     

Held-to-maturity securities

     101           148           214           320     

Mortgage loans held for portfolio

     25           31           51           63     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     283           356           592           719     
  

 

 

    

 

 

    

 

 

    

 

 

 

INTEREST EXPENSE

           

Consolidated obligations:

           

Discount notes

     4           6           11           9     

Bonds

     159           213           328           420     

Deposits

     —           1           1           1     

Mandatorily redeemable capital stock

     1           —           2           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     164           220           342           430     
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME

     119           136           250           289     
  

 

 

    

 

 

    

 

 

    

 

 

 

OTHER INCOME (LOSS)

           

Total other-than-temporary impairment losses

     (12)           (131)           (37)           (195)     

Portion of impairment losses recognized in other comprehensive loss

     (25)           59           (52)           77     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net impairment losses recognized in earnings

     (37)           (72)           (89)           (118)     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net gains (losses) on trading securities

     20           76           (14)           80     

Net (losses) gains on derivatives and hedging activities

     (20)           (58)           26           (75)     

Other

     1           1           2           1     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other loss

     (36)           (53)           (75)           (112)     
  

 

 

    

 

 

    

 

 

    

 

 

 

OTHER EXPENSE

           

Compensation and benefits

     18           15           35           29     

Other operating expenses

     10           12           19           23     

Finance Agency

     3           2           6           4     

Office of Finance

     1           1           3           3     

Reversal of provision for credit losses on receivable

     —           (49)           —           (49)     

Other

     —           —           (9)           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other expense

     32           (19)           54           10     
  

 

 

    

 

 

    

 

 

    

 

 

 

INCOME BEFORE ASSESSMENTS

     51           102           121           167     
  

 

 

    

 

 

    

 

 

    

 

 

 

Affordable Housing Program

     4           8           10           13     

REFCORP

     9           19           22           31     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assessments

     13           27           32           44     
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME

       $ 38             $ 75               $ 89             $ 123     
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

2


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF CAPITAL

FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(Unaudited)

(In millions)

 

     Capital Stock Class B Putable      Retained
       Earnings      
     Accumulated
Other
     Comprehensive    

Loss
         Total Capital      
             Shares                  Par Value               

BALANCE, DECEMBER 31, 2009

     81             $ 8,124             $ 873             $ (744)             $ 8,253     

Issuance of capital stock

     1           56           —           —           56     

Repurchase/redemption of capital stock

     —           (4)           —           —           (4)     

Net shares reclassified to mandatorily redeemable capital stock

     (3)           (320)           —           —           (320)     

Comprehensive income:

              

Net income

     —           —           123           —           123     

Other comprehensive income

     —           —           —           132           132     
              

 

 

 

Total comprehensive income

     —           —           —           —           255     
              

 

 

 

Cash dividends on capital stock

     —           —           (11)           —           (11)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

BALANCE, JUNE 30, 2010

     79             $ 7,856             $ 985             $ (612)             $ 8,229     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

BALANCE, DECEMBER 31, 2010

     72             $ 7,224             $ 1,124             $ (402)             $ 7,946     

Issuance of capital stock

     1           64           —           —           64     

Repurchase/redemption of capital stock

     (10)           (927)           —           —           (927)     

Net shares reclassified to mandatorily redeemable capital stock

     —           (28)           —           —           (28)     

Comprehensive income:

              

Net income

     —           —           89           —           89     

Other comprehensive income

     —           —           —           106           106     
              

 

 

 

Total comprehensive income

     —           —           —           —           195     
              

 

 

 

Cash dividends on capital stock

     —           —           (29)           —           (29)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

BALANCE, JUNE 30, 2011

     63             $ 6,333             $ 1,184           $ (296)             $ 7,221     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

3


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)

 

     Six Months Ended June 30,  
                 2011                               2010               

OPERATING ACTIVITIES

     

Net income

       $ 89             $ 123     

Adjustments to reconcile net income to net cash provided by operating activities:

     

Depreciation and amortization

     (9)           (46)     

Loss due to change in net fair value adjustment on derivative and hedging activities

     199           584     

Net change in fair value adjustment on trading securities

     14           (80)     

Net impairment losses recognized in earnings

     89           118     

Reversal of provision for credit losses on receivable

     —           (49)     

Net change in:

     

Accrued interest receivable

     50           80     

Other assets

     21           (6)     

Affordable Housing Program payable

     (6)           1     

Accrued interest payable

     (20)           (147)     

Payable to REFCORP

     (11)           (2)     

Other liabilities

     (22)           4     
  

 

 

    

 

 

 

Total adjustments

     305           457     
  

 

 

    

 

 

 

Net cash provided by operating activities

     394           580     
  

 

 

    

 

 

 

INVESTING ACTIVITIES

     

Net change in:

     

Interest-bearing deposits

     231           (369)     

Federal funds sold

     1,591           (4,797)     

Trading securities:

     

Proceeds from maturities

     272           200     

Available-for-sale securities:

     

Proceeds from maturities

     404           214     

Held-to-maturity securities:

     

Net change in short-term

     155           (1,150)     

Proceeds from maturities of long-term

     2,555           2,700     

Purchases of long-term

     (1,929)           (1,530)     

Advances:

     

Proceeds from principal collected

     34,047           35,436     

Made

     (22,598)           (20,418)     

Mortgage loans held for portfolio:

     

Proceeds from principal collected

     204           210     

Proceeds from sale of foreclosed assets

     6           —     

Purchase of premise, equipment and software

     (2)           (6)     
  

 

 

    

 

 

 

Net cash provided by investing activities

     14,936           10,490     
  

 

 

    

 

 

 

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

 

4


Table of Contents
     Six Months Ended June 30,  
                 2011                               2010               

FINANCING ACTIVITIES

     

Net change in:

     

Deposits

     (102)           162     

Borrowings from other FHLBanks

     —           15     

Net payments on derivatives containing a financing element

     (268)           (400)     

Proceeds from issuance of consolidated obligations:

     

Discount notes

     533,302           500,664     

Bonds

     27,852           49,917     

Payments for debt issuance costs

     (9)           (10)     

Payments for maturing and retiring consolidated obligations:

     

Discount notes

     (536,641)           (501,221)     

Bonds

     (38,380)           (60,662)     

Proceeds from issuance of capital stock

     64           56     

Payments for repurchase/redemption of capital stock

     (927)           (4)     

Payment for repurchase/redemption of mandatorily redeemable capital stock

     (172)           —     

Cash dividends paid

     (29)           (11)     
  

 

 

    

 

 

 

Net cash used in financing activities

     (15,310)           (11,494)     
  

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

     20           (424)     

Cash and cash equivalents at beginning of the period

     5           465     
  

 

 

    

 

 

 

Cash and cash equivalents at end of the period

         $ 25               $ 41     
  

 

 

    

 

 

 

Supplemental disclosures of cash flow information:

     

Cash paid for:

     

Interest

         $ 379               $ 589     
  

 

 

    

 

 

 

AHP assessments, net

         $ 15               $ 11     
  

 

 

    

 

 

 

REFCORP assessments

         $ 33               $ 33     
  

 

 

    

 

 

 

Noncash investing and financing activities:

     

Net shares reclassified to mandatorily redeemable capital stock

         $ 28               $ 320     
  

 

 

    

 

 

 

Held-to-maturity securities acquired with accrued liabilities

         $ 146               $ —     
  

 

 

    

 

 

 

Transfer of held-to-maturity securities to available-for-sale securities

         $ 348               $ 1,220     
  

 

 

    

 

 

 

Transfers of mortgage loans to real estate owned

         $ 9               $ 12     
  

 

 

    

 

 

 

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

 

5


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

Note 1—Basis of Presentation

The accompanying unaudited interim financial statements of the Federal Home Loan Bank of Atlanta (Bank) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). To prepare the financial statements in conformity with GAAP, management must make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could be different from these estimates. The foregoing interim financial statements are unaudited; however, in the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the results for the interim periods, have been included. The results of operations for interim periods are not necessarily indicative of results to be expected for the year ending December 31, 2011, or for other interim periods. The unaudited interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2010, which are contained in the Bank’s 2010 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 25, 2011 (Form 10-K).

A description of the Bank’s significant accounting policies is included in Note 1 to the 2010 audited financial statements contained in the Bank’s Form 10-K. There have been no material changes to these policies as of June 30, 2011.

Note 2—Recently Issued and Adopted Accounting Guidance

Recently Issued Accounting Guidance

Presentation of Comprehensive Income. In June 2011, the Financial Accounting Standards Board (FASB) issued amended guidance that eliminates the current option to report other comprehensive income and its components in the statement of change in equity. The main provisions of this amended guidance provide that an entity that reports items of other comprehensive income present comprehensive income in either: (1) a single financial statement that presents the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and total comprehensive income; or (2) a two-statement approach, where the components of net income and total net income are presented in the first statement, immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and total comprehensive income. For public entities, this amended guidance is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011 (January 1, 2012 for the Bank). Early adoption is permitted. The adoption of this guidance will have no effect on the Bank’s financial condition or results of operations.

 

6


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. In May 2011, the FASB issued amended guidance to converge fair value measurement and disclosure guidance in GAAP with the fair value measurement guidance concurrently issued by the International Accounting Standards Board for International Financial Reporting Standards (IFRS). The amended guidance does not extend the use of fair value but, rather, provides guidance about how fair value should be applied where it already is required or permitted under GAAP. While many of the changes are clarifications of existing guidance or wording changes to align with IFRS, the amended guidance changes some fair value measurement principles and disclosure requirements. For public entities, this guidance is effective prospectively for interim and annual periods beginning on or after December 15, 2011 (January 1, 2012 for the Bank). Early adoption is not permitted. Bank management does not believe that the adoption of this guidance will have a material effect on the Bank’s financial condition or results of operations.

Reconsideration of Effective Control for Repurchase Agreements. In April 2011, the FASB issued guidance to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The new guidance removes certain criteria from the assessment of effective control. This guidance is effective for the Bank for interim and annual periods beginning on January 1, 2012. This guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. Bank management does not believe that the adoption of this guidance will have a material effect on the Bank’s financial condition or results of operations.

A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. In April 2011, the FASB issued amended guidance to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring. The amended guidance clarifies whether (1) the creditor has granted a concession and (2) whether the debtor is experiencing financial difficulties, which are the two criteria used to determine whether a modification or restructuring is a troubled debt restructuring. For public entities, this guidance is effective for the first interim or annual period beginning on or after June 15, 2011 (July 1, 2011 for the Bank), and should be applied retrospectively to the beginning of the annual period of adoption. Bank management does not believe that the adoption of this guidance will have a material effect on the Bank’s financial condition or results of operations.

Recently Adopted Accounting Guidance

Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. In July 2010, the FASB issued amended guidance to enhance disclosures about an entity’s allowance for credit losses and the credit quality of its financing receivables. The amended guidance requires entities with financing receivables, including loans, lease receivables and other long-term receivables, to provide additional disclosure related to the nature of credit risk inherent in financing receivables and how that risk is analyzed and assessed in arriving at the allowance for credit losses. The Bank fully adopted this guidance effective January 1, 2011, which resulted in enhanced disclosure, but had no effect on the Bank’s financial condition or results of operations.

 

7


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Fair Value Measurements and Disclosures. In January 2010, the FASB issued guidance that requires new disclosures related to transfers in and out of Level 1 and 2 fair value hierarchy, and activity in Level 3 fair value hierarchy, and clarifies some existing disclosure requirements about fair value measurement. The Bank fully adopted this guidance effective January 1, 2011, which resulted in enhanced fair value disclosures, but had no effect on the Bank’s financial condition or results of operation.

Note 3—Trading Securities

Major Security Types. Trading securities were as follows:

 

           As of June 30, 2011               As of December 31, 2010    

Government-sponsored enterprises debt obligations

         $ 3,023             $ 3,306     

Other FHLBank’s bond*

     74           74     

State or local housing agency debt obligations

     3           3     
  

 

 

    

 

 

 

Total

         $ 3,100             $ 3,383     
  

 

 

    

 

 

 

 

* The Federal Home Loan Bank of Chicago is the primary obligor of this consolidated obligation bond.

Net unrealized and realized gains (losses) on trading securities were as follows:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
    

 

2011

     2010      2011      2010  

Net unrealized gains (losses) on trading securities held at period end

         $ 22               $ 76               $ (8)               $ 81   

Net unrealized/realized losses on trading securities sold/matured during the period

     (2)           —           (6)           (1)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net gains (losses) on trading securities

         $ 20               $ 76               $ (14)               $ 80   
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2011 and December 31, 2010, 99.9 percent of the Bank’s fixed-rate trading securities were swapped and all of the Bank’s variable-rate trading securities were swapped.

Note 4—Available-for-sale Securities

During the six-month periods ended June 30, 2011 and 2010, the Bank transferred certain private-label mortgage-backed securities (MBS) from its held-to-maturity portfolio to its available-for-sale portfolio. These securities represent private-label MBS in the Bank’s held-to-maturity portfolio for which the Bank has recorded an other-than-temporary impairment loss. The Bank believes the other-than-temporary impairment losses constitute evidence of a significant deterioration in the issuers’ creditworthiness. The Bank has no current plans to sell these securities nor is the Bank under any requirement to sell these securities.

 

8


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

The following table presents information on private-label MBS transferred. The amounts below represent the values as of the transfer dates.

 

     2011      2010  
         Amortized    
Cost
         Other-Than-Temporary    
Impairment

Recognized in
Accumulated Other
Comprehensive Loss
         Estimated    
Fair Value
         Amortized    
Cost
     Other-Than-Temporary
Impairment

Recognized in
Accumulated Other

Comprehensive Loss
       Estimated  
Fair Value
 

Transferred at March 31,

     $ 321                 $ 19           $ 302           $ 467               $ 58           $ 409   

Transferred at June 30,

     53           7           46           908           97           811   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $ 374                 $ 26           $ 348           $ 1,375               $ 155           $ 1,220   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Major Security Types. Available-for-sale securities were as follows:

 

     As of June 30, 2011  
           Amortized      
Cost
         Other-Than-Temporary    
Impairment

Recognized in
Accumulated Other
Comprehensive Loss
     Gross
      Unrealized      
Gains
     Gross
      Unrealized      
Losses
     Estimated
        Fair Value         
 

Mortgage-backed securities:

              

Private label

         $ 3,594                 $ 298                 $ 12                 $ —                 $ 3,308     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

         $ 3,594                 $ 298                 $ 12                 $ —                 $ 3,308     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     As of December 31, 2010  
     Amortized
Cost
         Other-Than-Temporary    
Impairment

Recognized in
Accumulated Other
Comprehensive Loss
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 

Mortgage-backed securities:

              

Private label

           $ 3,711                 $ 396                 $ 5             $ 1                 $ 3,319     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

           $ 3,711                 $ 396                 $ 5             $ 1                 $ 3,319     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following tables summarize the available-for-sale securities with unrealized losses. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

 

00000000 00000000 00000000 00000000 00000000 00000000 00000000 00000000 00000000
     As of June 30, 2011  
     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
 

Mortgage-backed securities:

                          

Private label

     2               $ 63                 $ —           40             $ 2,286             $ 298           42           $ 2,349                 $ 298     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2               $ 63                 $ —           40             $ 2,286             $ 298           42           $ 2,349                 $ 298     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

9


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

    As of December 31, 2010  
    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
 

Mortgage-backed securities:

                 

Private label

    1                $ 17                $ 1          43            $ 2,976                $ 396          44            $ 2,993                $ 397     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    1                $ 17                $ 1          43            $ 2,976                $ 396          44            $ 2,993                $ 397     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The amortized cost of the Bank’s MBS classified as available-for-sale includes net discounts of $13 and $11 as of June 30, 2011 and December 31, 2010, respectively.

The Bank did not swap any of its available-for-sale securities as of June 30, 2011 and December 31, 2010.

A summary of available-for-sale MBS issued by members or affiliates of members follows:

 

     As of June 30, 2011  
         Amortized    
Cost
       Other-Than-Temporary  
Impairment
Recognized in
Other Accumulated
Comprehensive Loss
     Gross
     Unrealized    
Gains
     Gross
     Unrealized    
Losses
     Estimated
     Fair Value    
 

Bank of America Corporation, Charlotte, NC

     $ 2,167           $ 223             $ 5             $ —           $ 1,949     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $ 2,167           $ 223             $ 5             $ —           $ 1,949     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     As of December 31, 2010  
     Amortized
Cost
     Other-Than-Temporary
Impairment
Recognized in
Other Accumulated
Comprehensive Loss
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 

Bank of America Corporation, Charlotte, NC

     $ 2,128           $ 294             $ 1             $ 1           $ 1,834     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $ 2,128           $ 294             $ 1             $ 1           $ 1,834     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

10


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Note 5—Held-to-maturity Securities

Major Security Types. Held-to-maturity securities were as follows:

 

    As of June 30, 2011     As of December 31, 2010  
    Amortized
Cost
    Gross
  Unrealized  
Gains
    Gross
  Unrealized  
Losses
    Estimated
  Fair  Value  
    Amortized
Cost
    Gross
  Unrealized  
Gains
    Gross
  Unrealized  
Losses
    Estimated
  Fair  Value  
 

Certificates of deposit

      $ 1,135            $ —            $ —            $ 1,135            $ 1,190            $ —            $ —            $ 1,190     

State or local housing agency debt obligations

    113          2          —          115          108          3          —          111     

Government-sponsored enterprises debt obligations

    500          1          —          501          873          —          3          870     

Mortgage-backed securities:

               

U.S. agency obligations-guaranteed

    879          8          —          887          960          9          —          969     

Government-sponsored enterprises

    9,393          206          9          9,590          8,716          210          14          8,912     

Private label

    4,439          43          163          4,319          5,627          49          217          5,459     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ 16,459            $ 260            $ 172            $ 16,547            $ 17,474            $ 271            $ 234            $ 17,511     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following tables summarize the held-to-maturity securities with unrealized losses. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

 

    As of June 30, 2011  
    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
 

Certificates of deposit

    2      $ 500      $ —          —        $ —        $ —          2      $ 500      $ —     

Mortgage-backed securities:

                 

Government-sponsored enterprises

    22        2,383        9        —          —          —          22        2,383        9   

Private label

    12        256        2        65        2,068        161        77        2,324        163   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    36      $ 3,139      $ 11        65      $ 2,068      $ 161        101      $ 5,207      $ 172   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    As of December 31, 2010  
    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
 

Certificates of deposit

    1      $ 125      $ —          —        $ —        $ —          1      $ 125      $ —     

State or local housing agency debt obligations

    1        7        —          —          —          —          1        7        —     

Government-sponsored enterprises debt obligations

    6        870        3        —          —          —          6        870        3   

Mortgage-backed securities:

                 

U.S. agency obligations-guaranteed

    1        173        —          —          —          —          1        173        —     

Government-sponsored enterprises

    25        2,833        14        —          —          —          25        2,833        14   

Private label

    16        475        4        80        2,883        213        96        3,358        217   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    50      $ 4,483      $ 21        80      $ 2,883      $ 213        130      $ 7,366      $ 234   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

11


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Redemption Terms. The amortized cost and estimated fair value of held-to-maturity securities by contractual maturity are shown below. Expected maturities of some securities 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 June 30, 2011     As of December 31, 2010  
      Amortized  
Cost
    Estimated
  Fair  Value  
      Amortized  
Cost
    Estimated
  Fair  Value  
 

Year of maturity:

       

Non-mortgage-backed securities:

       

Due in one year or less

    $ 1,189          $ 1,190          $ 1,191          $ 1,191     

Due after one year through five years

    558          560          978          978     

Due after 10 years

    1          1          2          2     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total non-mortgage-backed securities

    1,748          1,751          2,171          2,171     

Mortgage-backed securities

    14,711          14,796          15,303          15,340     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ 16,459          $ 16,547          $ 17,474          $ 17,511     
 

 

 

   

 

 

   

 

 

   

 

 

 

The amortized cost of the Bank’s MBS classified as held-to-maturity includes net discounts of $18 and $24 as of June 30, 2011 and December 31, 2010, respectively.

A summary of held-to-maturity MBS issued by members or affiliates of members follows:

 

    As of June 30, 2011     As of December 31, 2010  
      Amortized  
Cost
    Gross
  Unrealized  
Gains
    Gross
  Unrealized  
Losses
    Estimated
  Fair  Value  
      Amortized  
Cost
    Gross
  Unrealized  
Gains
    Gross
  Unrealized  
Losses
    Estimated
  Fair  Value  
 

Bank of America Corporation, Charlotte, NC

      $ 1,472            $ 14            $ 41            $ 1,445            $ 2,035            $ 17            $ 75            $ 1,977     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ 1,472            $ 14            $ 41            $ 1,445            $ 2,035            $ 17            $ 75            $ 1,977     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Note 6—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. The Bank regularly requires high levels of credit enhancements from the structure of the collateralized mortgage obligation to reduce its risk of loss on such securities. 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 the Bank purchased will take a loss. The Bank does not purchase credit enhancements for its MBS from monoline insurance companies.

The Bank’s investments in private-label MBS were rated triple-A (or its equivalent) by a nationally recognized statistical rating organization (NRSRO), such as Moody’s Investors Service (Moody’s) and Standard and Poor’s Ratings Services (S&P), at purchase date. The triple-A-rated securities achieved their ratings through credit enhancement, over-collateralization and senior-subordinated shifting interest features; the latter results in subordination of payments by junior classes to ensure cash flows to the senior classes. The ratings on a significant number of the Bank’s private-label MBS have changed since their purchase date.

 

12


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Non-private-label MBS. The unrealized losses related to U.S. agency MBS and government-sponsored enterprises MBS are caused by interest rate changes and not credit quality. These securities are guaranteed by government agencies or government-sponsored enterprises and Bank management does not expect these securities to be settled at a price less than the amortized cost basis. In addition, 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. The Bank does not consider these investments to be other-than-temporarily impaired as of June 30, 2011.

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. In performing the cash flow analysis for each of these securities, the Bank uses two third-party models. The first model considers borrower characteristics and the particular attributes of the loans underlying the Bank’s securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas (CBSAs), which are based upon an assessment of the individual housing markets. The term CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the United States Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area of 10,000 or more people. The Bank’s housing price forecast assumed current-to-trough home price declines ranging from zero percent (for those housing markets that are believed to have reached their trough) to 8.00 percent. For those markets for which further home price declines are anticipated, such declines were projected to occur over the next three to nine months beginning April 1, 2011 followed in each case by a three-month period of flat prices. From the trough, home prices were projected to recover using one of five different recovery paths that vary by housing market. Under those recovery paths, home prices were projected to increase within a range of zero percent to 2.80 percent in the first year, zero percent to 3.00 percent in the second year, 1.50 percent to 4.00 percent in the third year, 2.00 percent to 5.00 percent in the fourth year, 2.00 percent to 6.00 percent in each of the fifth and sixth years, and 2.30 percent to 5.60 percent in each subsequent year.

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 that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. The model classifies securities, as noted in the below table, based on current characteristics and performance, which may be different from the securities’ classification as determined by the originator at the time of origination.

At each quarter end, the Bank compares the present value of the cash flows 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.

 

13


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

The following table represents 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 three-month period ended June 30, 2011:

 

    Significant Inputs  
    Prepayment Rate     Default Rates     Loss Severities     Current Credit Enhancement  
        Weighted    
Average
(%)
        Range (%)             Weighted    
Average
(%)
        Range (%)             Weighted    
Average
(%)
        Range (%)             Weighted    
Average
(%)
        Range (%)      

Year of Securitization

               

Prime:

               

2007

    8.83          8.83 to 8.83          22.14          22.14 to 22.14          46.35          46.35 to 46.35          8.91          8.91 to 8.91     

2006

    9.06          7.88 to 9.72          31.78          19.88 to 38.45          47.48          44.37 to 49.22          5.03          4.45 to 6.06     

2005

    7.73          6.94 to 8.97          19.60          15.45 to 25.54          39.42          33.80 to 45.11          6.48          4.59 to 8.71     

2004

    10.32          10.32 to 10.32          27.40          27.40 to 27.40          33.42          33.42 to 33.42          8.85          8.85 to 8.85     

Total Prime

    8.97          6.94 to 10.32          25.16          15.45 to 38.45          41.71          33.42 to 49.22          7.33          4.45 to 8.91     

Alt-A:

               

2007

    9.92          5.90 to 12.69          60.81          52.00 to 68.70          53.25          51.72 to 53.79          10.18          4.19 to 15.20     

2006

    10.24          9.05 to 12.52          59.48          51.29 to 62.85          53.25          50.55 to 58.01          6.46          4.50 to 7.42     

2005

    9.01          6.17 to 11.49          55.07          26.44 to 81.15          53.87          48.46 to 59.20          15.72          2.76 to 42.03     

2004

    13.48          12.37 to 16.09          36.50          26.81 to 40.60          43.16          34.34 to 46.89          15.18          14.04 to 15.66     

Total Alt-A

    9.69          5.90 to 16.09          57.29          26.44 to 81.15          53.19          34.34 to 59.20          12.20          2.76 to 42.03     

Total

    9.53          5.90 to 16.09          50.14          15.45 to 81.15          50.63          33.42 to 59.20          11.12          2.76 to 42.03     

The following table presents a roll-forward of the amount of credit losses on the Bank’s investment securities recognized in earnings for which a portion of the other-than-temporary loss was recognized in accumulated other comprehensive loss:

 

            Three Months Ended June 30,                      Six Months Ended June 30,           
    2011     2010     2011     2010  

Balance of credit losses previously recognized in earnings, beginning of period

      $ 516            $ 367            $ 464            $ 321     

Amount related to credit loss for which an other-than-temporary impairment was not previously recognized

    1          21          7          38     

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

    36          51          82          80     
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance of cumulative credit losses recognized in earnings, end of period

      $ 553            $ 439            $ 553            $ 439     
 

 

 

   

 

 

   

 

 

   

 

 

 

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, illiquidity in the marketplace, and general disruption in the U.S. mortgage markets. 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 the securities and it is not more likely than not that the Bank will be required to sell the securities before the anticipated recovery of the securities’ remaining amortized cost basis, which may be at maturity. The 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.

 

14


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Note 7—Advances

Redemption Terms. The Bank had advances outstanding, as summarized below.

 

        As of June 30, 2011             As of December 31, 2010      

Year of contractual maturity:

   

Overdrawn demand deposit accounts

      $ 1          $ 1   

Due in one year or less

    21,841        26,628   

Due after one year through two years

    12,987        16,186   

Due after two years through three years

    9,648        10,938   

Due after three years through four years

    6,154        6,369   

Due after four years through five years

    4,105        3,678   

Due after five years

    18,868        21,251   
 

 

 

   

 

 

 

Total par value

    73,604        85,051   

Discount on AHP* advances

    (13     (13

Discount on EDGE** advances

    (10     (11

Hedging adjustments

    3,852        4,238   

Deferred commitment fees

    (6     (7
 

 

 

   

 

 

 

Total

      $ 77,427          $ 89,258   
 

 

 

   

 

 

 

 

* The Affordable Housing Program
** The Economic Development and Growth Enhancement program

The following table summarizes advances by year of contractual maturity or, for convertible advances, next conversion date:

 

        As of June 30, 2011             As of December 31, 2010      

Year of contractual maturity or next conversion date:

   

Overdrawn demand deposit accounts

      $ 1            $ 1     

Due or convertible in one year or less

    29,168          36,487     

Due or convertible after one year through two years

    12,835          14,302     

Due or convertible after two years through three years

    9,851          11,374     

Due or convertible after three years through four years

    5,826          6,065     

Due or convertible after four years through five years

    3,386          3,023     

Due or convertible after five years

    12,537          13,799     
 

 

 

   

 

 

 

Total par value

      $ 73,604            $ 85,051     
 

 

 

   

 

 

 

 

15


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Interest-rate Payment Terms. The following table details interest-rate payment terms for advances:

 

            As of June 30, 2011                  As of December 31, 2010      

Fixed-rate:

   

Due in one year or less

          $ 18,547                $ 24,033     

Due after one year

    45,213          50,907     
 

 

 

   

 

 

 

Total fixed-rate

    63,760          74,940     
 

 

 

   

 

 

 

Variable-rate:

   

Due in one year or less

    3,295          2,596     

Due after one year

    6,549          7,515     
 

 

 

   

 

 

 

Total variable-rate

    9,844          10,111     
 

 

 

   

 

 

 

Total par value

          $ 73,604                $ 85,051     
 

 

 

   

 

 

 

At June 30, 2011 and December 31, 2010, 86.3 percent and 87.4 percent, respectively, of the Bank’s fixed-rate advances were swapped and 6.94 percent and 9.42 percent, respectively, of the Bank’s variable-rate advances were swapped.

Based on the collateral pledged as security for advances, management’s credit analysis of members’ financial condition, and prior repayment history, no allowance for credit losses on advances was deemed necessary by management as of June 30, 2011 and December 31, 2010. No advance was past due as of June 30, 2011 and December 31, 2010.

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. As of June 30, 2011 and December 31, 2010, the concentration of the Bank’s advances was $47,845 and $58,043, respectively, to 10 member institutions, and this represented 65.0 percent and 68.3 percent, respectively, of total advances outstanding.

Note 8—Consolidated Obligations

Consolidated obligations, consisting of consolidated obligation bonds and discount notes, are the joint and several obligations of the Federal Home Loan Banks (FHLBanks) and are backed only by the financial resources of the FHLBanks. The FHLBanks Office of Finance (Office of Finance) tracks the amount of debt issued on behalf of each FHLBank. In addition, the Bank separately tracks and records as a liability its specific portion of consolidated obligations for which it is the primary obligor.

Interest-rate Payment Terms. The following table details the Bank’s consolidated obligation bonds by interest-rate payment type:

 

            As of June 30, 2011                      As of December 31, 2010           

Fixed-rate

          $ 65,643            $ 73,779     

Simple variable-rate

    10,382          12,432     

Step up/down

    7,333          7,686     

Variable-rate capped floater

    30          30     
 

 

 

   

 

 

 

Total par value

          $ 83,388            $ 93,927     
 

 

 

   

 

 

 

 

16


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

At June 30, 2011 and December 31, 2010, 77.6 percent and 77.3 percent, respectively, of the Bank’s fixed-rate consolidated obligation bonds were swapped and 1.25 percent and 0.24 percent, respectively, of the Bank’s variable-rate consolidated obligation bonds were swapped.

Redemption Terms. The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding, by year of contractual maturity:

 

     As of June 30, 2011      As of December 31, 2010  
            Weighted-             Weighted-  
             Amount               average
Interest
  Rate (%)  
             Amount               average
Interest
    Rate (%)    
 
           

Year of contractual maturity:

     

Due in one year or less

           $ 38,060           0.66             $ 46,987           0.76     

Due after one year through two years

     14,915           1.91           13,751           1.50     

Due after two years through three years

     11,080           2.55           14,097           2.63     

Due after three years through four years

     4,577           3.29           4,378           3.70     

Due after four years through five years

     5,775           2.80           4,660           1.89     

Due after five years

     8,981           3.83           10,054           4.19     
  

 

 

       

 

 

    

Total par value

     83,388           1.76           93,927           1.70     

Premiums

     115              127        

Discounts

     (42)              (48)        

Hedging adjustments

     1,179              1,192        
  

 

 

       

 

 

    

Total

           $ 84,640                $ 95,198        
  

 

 

       

 

 

    

The Bank’s consolidated obligation bonds outstanding by type:

 

             As of June 30, 2011                       As of December 31, 2010           

Noncallable

           $ 64,045                 $ 69,248     

Callable

     19,343           24,679     
  

 

 

    

 

 

 

Total par value

           $ 83,388                 $ 93,927     
  

 

 

    

 

 

 

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

 

             As of June 30, 2011                   As of December 31, 2010      

Year of contractual maturity or next call date:

     

Due or callable in one year or less

           $ 56,281           $ 61,505     

Due or callable after one year through two years

     11,186           11,329     

Due or callable after two years through three years

     6,073           10,477     

Due or callable after three years through four years

     2,250           2,685     

Due or callable after four years through five years

     2,387           1,062     

Due or callable after five years

     5,211           6,869     
  

 

 

    

 

 

 

Total par value

           $ 83,388           $ 93,927     
  

 

 

    

 

 

 

 

17


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Consolidated Obligation Discount Notes. Consolidated obligation discount notes are issued to raise short-term funds. Consolidated obligation discount notes are consolidated obligations with 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 Bank’s participation in consolidated obligation discount notes, all of which are due within one year, was as follows:

 

0000000000000000000 0000000000000000000 0000000000000000000
     Book Value      Par Value      Weighted-average
Interest Rate (%)
 

As of June 30, 2011

         $ 20,573               $ 20,574           0.07     
  

 

 

    

 

 

    

 

 

 

As of December 31, 2010

         $ 23,915               $ 23,919           0.14     
  

 

 

    

 

 

    

 

 

 

At June 30, 2011 and December 31, 2010, 5.34 percent and 5.41 percent, respectively, of the Bank’s fixed-rate consolidated obligation discount notes were swapped.

Note 9—Capital and Mandatorily Redeemable Capital Stock

Capital. The Bank was in compliance with the Federal Housing Finance Agency (Finance Agency) regulatory capital rules and requirements, as shown in the following table:

 

00000000000000 00000000000000 00000000000000 00000000000000
     As of June 30, 2011      As of December 31, 2010  
     Required      Actual      Required      Actual  

Regulatory capital requirements:

           

Risk based capital

     $ 2,160           $ 7,902           $ 2,377           $ 8,877     

Total capital-to-assets ratio

     4.00%           6.76%           4.00%           6.74%     

Total regulatory capital*

     $ 4,673           $ 7,902           $ 5,272           $ 8,877     

Leverage ratio

     5.00%           10.15%           5.00%           10.10%     

Leverage capital

     $ 5,841           $ 11,853           $ 6,590           $ 13,316     

 

* Mandatorily redeemable capital stock is considered capital for regulatory purposes, and “total regulatory capital” includes the Bank’s $385 and $529 in mandatorily redeemable capital stock at June 30, 2011 and December 31, 2010, respectively.

Mandatorily Redeemable Capital Stock. The following table provides the activity in mandatorily redeemable capital stock:

 

       Three Months Ended June 30,          Six Months Ended June 30,    
     2011      2010      2011      2010  

Balance, beginning of period

       $ 531               $ 481               $ 529               $ 188     

Capital stock subject to mandatory redemption reclassified from equity during the period due to:

           

Attainment of nonmember status

     33            42           37           335     

Withdrawal

     1           —           1           —     

Repurchase/redemption of mandatorily redeemable capital stock

     (172)           —           (172)           —     

Capital stock no longer subject to redemption due to the transfer of stock from a nonmember to a member

     (8)           (15)           (10)           (15)     
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

     $ 385               $ 508             $ 385               $ 508     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

The following table shows the amount of mandatorily redeemable capital stock by year of redemption:

 

                 As of June 30,  2011                          As of December 31, 2010           

Contractual year of redemption:

     

Due in one year or less

           $ 6                 $ —     

Due after one year through two years

     2           8     

Due after two years through three years

     41           12     

Due after three years through four years

     227           137     

Due after four years through five years

     105           366     

Due after five years

     4           6     
  

 

 

    

 

 

 

Total

           $ 385                 $ 529     
  

 

 

    

 

 

 

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.

Each FHLBank has been required to contribute 20 percent of its earnings toward payment of the interest on Resolution Funding Corporation (REFCORP) bonds until the REFCORP obligation has been satisfied. On August 5, 2011, the Finance Agency certified that the FHLBanks have fully satisfied their REFCORP obligation. In accordance with the Joint Capital Enhancement Agreement among the 12 FHLBanks, effective February 28, 2011 (as amended August 5, 2011, the Amended Joint Capital Agreement), starting in the third quarter of 2011, each FHLBank is required to allocate 20 percent of its net income each quarter to a separate restricted retained earnings account. The Amended Joint Capital Agreement is intended to enhance the capital position of each FHLBank and to allocate that portion of each FHLBank’s earnings historically paid to satisfy its REFCORP obligation to its restricted retained earnings.

Note 10—Accumulated Other Comprehensive Loss

Components comprising other comprehensive income were as follows:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2011      2010      2011      2010  

Noncredit portion of other-than-temporary impairment losses on available-for-sale securities:

           

Change in unrealized losses on available-for-sale securities

       $ (3)             $ 116                 $ 46                 $ 209     

Reclassification adjustment of noncredit portion of impairment losses included in net income related to available-for-sale securities

     31           39           78           79     
  

 

 

    

 

 

    

 

 

    

 

 

 

Noncredit portion of other-than-temporary impairment losses on available-for-sale securities, net

     28           155           124           288     
  

 

 

    

 

 

    

 

 

    

 

 

 

Change in unrealized gains on available-for-sale securities

     6           —           8           —     

Noncredit portion of other-than-temporary impairment losses on held-to-maturity securities

     (7)           (98)           (26)           (156)     
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income

       $ 27             $ 57                 $       106                 $       132     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Components comprising accumulated other comprehensive loss were as follows:

 

     Benefit
        Plans         
     Available-for-
sale  Securities
Unrealized
Gains
     Available-for-sale
Securities
Noncredit Other-
Than-Temporary-
Impairment
Losses
     Held-to-maturity
Securities
Noncredit  Other-
Than-Temporary-
Impairment
Losses
                 Total               

Balance, December 31, 2010

       $ (10)             $ 4             $ (396)             $ —                           $ (402)     

Other comprehensive income during the period

     —           8           124           (26)           106     

Reclassification of noncredit portion of other-than-temporary impairment losses on held-to-maturity securities to available-for-sale securities

     —           —           (26)           26           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, June 30, 2011

       $ (10)             $ 12             $ (298)             $ —                           $ (296)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The amount shown in the above table as the noncredit portion of other-than-temporary impairment losses does not correspond directly to the amount reported on the Statements of Income as “Portion of impairment losses recognized in other comprehensive loss.” The balance shown in the above table reflects all fair value changes related to available-for-sale securities for which an other-than-temporary impairment loss has been recorded, including fair value changes for available-for-sale securities impaired in previous reporting periods. The above noncredit portion of other-than-temporary impairment losses includes subsequent increases in fair value in previously impaired available-for-sale securities, which are not reflected in the amounts reported on the Statements of Income.

Note 11—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 funding sources which finance these assets.

The Bank enters into derivatives to manage the interest-rate risk exposures inherent in its 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. Finance Agency regulations and the Bank’s risk management policy prohibit trading in or the 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.

 

20


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

   

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

 

   

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

 

   

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);

 

   

mitigate the adverse earnings effects of the shortening or extension of certain assets (e.g., mortgage assets);

 

   

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 may use derivatives to, in effect, adjust the term, repricing frequency, or option characteristics of financial instruments to achieve its risk management and funding objectives. The Bank uses derivatives in 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/liability management. In addition to using derivatives to manage mismatches of interest rates between assets and liabilities, the Bank also uses derivatives to manage embedded options in assets and liabilities, to hedge the market value of existing assets and liabilities, to hedge the duration risk of prepayable instruments, to offset exactly other derivatives executed with members (when the Bank serves as an intermediary) and to reduce funding costs.

The Bank reevaluates its hedging strategies from time to time and may change the hedging techniques it uses or adopt new strategies.

Bank management uses derivatives when they are considered to be the most cost-effective alternative to achieve the Bank’s 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 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 paid 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

 

21


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

variable rate received by the Bank in most interest-rate swap agreements is London Interbank Offered Rate (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 when it is planning to lend or borrow funds in the future against future interest rate changes. The Bank purchases both payer swaptions and receiver swaptions. A payer 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 as protection against the interest rate on a variable-rate asset or liability rising above or falling below a certain level.

Types of Hedged Items

The Bank documents at inception 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 risk being hedged 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 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 in timing and amount the cash outflows the Bank pays on the consolidated obligation. 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

 

22


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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-rate advance 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 where 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 result in extensions or contractions in 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 noncallable 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 of which 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 mortgage purchase commitment derivative settles, the current market 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 will function as the hedging instrument for both the firm commitment and the subsequent advance. The basis movement associated with the firm commitment will be rolled into the basis of the advance at the time the commitment is terminated and the advance is issued. The basis adjustment will then be 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 risks 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, or 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.

 

23


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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 the securities.

Managing Credit Risk on Derivatives

The Bank is subject to credit risk due to nonperformance by counterparties to the derivative agreements. The amount of counterparty risk depends on the extent to which master netting arrangements are included in such contracts to mitigate the risk. The Bank manages counterparty credit risk through credit analysis, collateral requirements and adherence to the requirements set forth in Bank policies and Finance Agency regulations. Based on credit analyses and collateral requirements, Bank management presently does not anticipate any credit losses on its existing derivative agreements with counterparties as of June 30, 2011.

The following table presents credit risk exposure on derivative instruments, excluding circumstances where a counterparty’s pledged collateral to the Bank exceeds the Bank’s net position.

 

         As of June 30, 2011            As of December 31, 2010    

Total net exposure at fair value *

           $ 67                 $ 71     

Cash collateral held

     50           66     
  

 

 

    

 

 

 

Net positive exposure after cash collateral

     17           5     

Other collateral

     4           5     
  

 

 

    

 

 

 

Net exposure after collateral

           $ 13                 $ —     
  

 

 

    

 

 

 

 

 

* Includes net accrued interest receivable of $22 as of June 30, 2011 and December 31, 2010.

Certain of the Bank’s 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 a major credit rating agency, the Bank would be required to deliver additional collateral on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position (before cash collateral and related accrued interest) at June 30, 2011 was $3,095 for which the Bank has posted collateral of $2,865 in the normal course of business. If the Bank’s credit ratings had been lowered from its current rating to the next lower rating that would have triggered additional collateral to be delivered, the Bank would have been required to deliver up to an additional $220 of collateral (at fair value) to its derivative counterparties at June 30, 2011. However, the Bank’s credit rating did not change during the six-month period ended June 30, 2011. On August 5, 2011, S&P lowered the long-term rating of the Bank from AAA to AA+ with a negative outlook and affirmed the Bank’s short-term A-1+ rating.

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 is not a derivatives dealer and thus does not trade derivatives for short-term profit.

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

 

24


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

represents neither the actual amounts exchanged nor the overall exposure of the Bank to credit and market risk. The risks of derivatives can be measured meaningfully on a portfolio basis that takes into account the derivatives, the item being hedged and any offsets between the two.

The following table summarizes the fair value of derivative instruments. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest.

 

     As of June 30, 2011      As of December 31, 2010  
     Notional
Amount of
Derivatives
     Derivative
Assets
     Derivative
Liabilities
     Notional
Amount of
Derivatives
     Derivative
Assets
     Derivative
Liabilities
 

Derivatives in hedging relationships:

                 

Interest rate swaps

     $   114,685           $   1,379           $ (3,957)           $   126,484           $ 1,466           $ (4,460)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives in hedging relationships

     114,685           1,379           (3,957)           126,484           1,466           (4,460)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives not designated as hedging instruments:

                 

Interest rate swaps

     5,103           19           (509)           7,725           26           (526)     

Interest rate caps or floors

     11,000           88           (58)           8,000           53           (38)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives not designated as hedging instruments

     16,103           107           (567)           15,725           79           (564)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives before netting and collateral adjustments

     $ 130,788           1,486           (4,524)           $ 142,209           1,545           (5,024)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Netting adjustments

        (1,419)           1,419              (1,473)           1,473     

Cash collateral and related accrued interest

        (50)           2,865              (67)           3,096     
     

 

 

    

 

 

       

 

 

    

 

 

 

Total collateral and netting adjustments *

        (1,469)           4,284              (1,540)           4,569     
     

 

 

    

 

 

       

 

 

    

 

 

 

Derivative assets and derivative liabilities

        $ 17           $ (240)              $ 5           $ (455)     
     

 

 

    

 

 

       

 

 

    

 

 

 

 

* Amounts represent the effect of legally enforceable master netting agreements that allow the Bank to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same counterparties.

The following tables present the components of net (losses) gains on derivatives and hedging activities as presented in the Statements of Income:

 

     Three Months Ended June 30,  
     2011      2010  
     Amount of Gain (Loss)
Recognized in Net

(Losses) Gains on
Derivatives and

Hedging Activities
     Amount of Gain (Loss)
Recognized in Net

(Losses) Gains on
Derivatives and

Hedging Activities
 

Derivatives and hedged items in fair value hedging relationships:

     

Interest rate swaps

           $ 35                 $ 48     
  

 

 

    

 

 

 

Total net gain related to fair value hedge ineffectiveness

     35           48     
  

 

 

    

 

 

 

Derivatives not designated as hedging instruments:

     

Non-qualifying hedges:

     

Interest rate swaps

     (17)           (57)     

Interest rate caps or floors

     (2)           (12)     

Net interest settlements

     (36)           (37)     
  

 

 

    

 

 

 

Total net loss related to derivatives not designated as hedging instruments

     (55)           (106)     
  

 

 

    

 

 

 

Net losses on derivatives and hedging activities

           $ (20)                 $ (58)     
  

 

 

    

 

 

 

 

25


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

     Six Months Ended June 30,  
     2011      2010  
     Amount of Gain (Loss)
Recognized in Net

(Losses) Gains on
Derivatives and
Hedging  Activities
     Amount of Gain (Loss)
Recognized in Net

(Losses) Gains on
Derivatives and
Hedging  Activities
 

Derivatives and hedged items in fair value hedging relationships:

     

Interest rate swaps

           $ 73                 $ 94     
  

 

 

    

 

 

 

Total net gain related to fair value hedge ineffectiveness

     73           94     
  

 

 

    

 

 

 

Derivatives not designated as hedging instruments:

     

Non-qualifying hedges:

     

Interest rate swaps

     25           (78)     

Interest rate caps or floors

     1           (14)     

Net interest settlements

     (73)           (77)     
  

 

 

    

 

 

 

Total net loss related to derivatives not designated as hedging instruments

     (47)           (169)     
  

 

 

    

 

 

 

Net gains (losses) on derivatives and hedging activities

           $ 26                 $ (75)     
  

 

 

    

 

 

 

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:

 

    Three Months Ended June 30, 2011  
      Gain (Loss) on  
Derivative
      Gain (Loss) on  
Hedged Item
      Net Fair Value  
Hedge
Ineffectiveness
    Effect of
Derivatives on  Net Interest
Income *
 

Hedged item type:

       

Advances

      $ (271)          $ 311                $ 40              $ (541)   

Consolidated obligations:

       

Bonds

    193        (198)          (5)        218   

Discount notes

    (1)        1          —          1   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ (79)          $ 114                $ 35              $ (322)   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

* 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.

 

    Three Months Ended June 30, 2010  
      Gain (Loss) on  
Derivative
      Gain (Loss) on  
Hedged Item
      Net Fair Value  
Hedge
Ineffectiveness
    Effect of
Derivatives on Net Interest
Income *
 

Hedged item type:

       

Advances

      $ (538)          $ 581          $ 43              $ (811)   

Consolidated obligations:

       

Bonds

    202        (197)        5        319   

Discount notes

    (1)        1        —          1   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ (337)          $ 385          $ 48              $ (491)   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

* 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.

 

26


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

    Six Months Ended June 30, 2011  
      Gain (Loss) on  
Derivative
      Gain (Loss) on  
Hedged Item
      Net Fair Value  
Hedge
Ineffectiveness
    Effect of
Derivatives on Net Interest
Income *
 

Hedged item type:

       

Advances

      $ 381          $ (294)              $ 87              $ (1,131)   

Consolidated obligations:

       

Bonds

    (7)        (7)        (14)        434   

Discount notes

    (2)        2        —          2   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ 372          $ (299)              $ 73              $ (695)   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

* 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.

 

    Six Months Ended June 30, 2010  
      Gain (Loss) on  
Derivative
      Gain (Loss) on  
Hedged Item
      Net Fair Value  
Hedge
Ineffectiveness
    Effect of
Derivatives on Net Interest
Income *
 

Hedged item type:

       

Advances

      $ (498)      $ 604              $ 106              $ (1,702)   

Consolidated obligations:

       

Bonds

    284        (293)        (9)        695   

Discount notes

    (8)        5        (3)        8   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ (222)      $ 316              $ 94              $ (999)   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

* 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.

Note 12—Estimated Fair Values

The Bank records trading securities, available-for-sale securities and derivative assets and liabilities at fair value. A fair value hierarchy is used to prioritize the inputs of valuation techniques used to measure fair value. A description of the application of the fair value hierarchy, valuation techniques, and significant inputs is disclosed in Note 18 to the 2010 audited financial statements contained in the Bank’s Form 10-K. There have been no changes in the fair value hierarchy classification of financial assets and liabilities, valuation techniques or significant inputs during the six-month period ended June 30, 2011.

Fair Value 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:

 

27


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

     As of June 30, 2011  
     Fair Value Measurements Using      Netting
   Adjustment*  
        
         Level 1              Level 2              Level 3                   Total        

Assets

              

Trading securities:

              

Government-sponsored enterprises debt obligations

       $   —             $ 3,023             $ —             $ —             $ 3,023     

Other FHLBank’s bond

     —           74           —           —           74     

State or local housing agency debt obligations

     —           3           —           —           3     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total trading securities

     —           3,100           —           —           3,100     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities:

              

Private-label MBS

     —           —           3,308           —           3,308     

Derivative assets:

              

Interest-rate related

     —           1,486           —           (1,469)           17     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

       $ —             $ 4,586             $ 3,308             $ (1,469)             $ 6,425     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

              

Derivative liabilities:

              

Interest-rate related

       $ —             $ (4,524)             $ —             $ 4,284             $ (240)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

       $ —             $ (4,524)             $ —             $ 4,284             $ (240)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Amounts represent the effect of legally enforceable master netting agreements that allow the Bank to settle positive and negative and also cash collateral held or placed with the same counterparties.

 

     As of December 31, 2010  
     Fair Value Measurements Using      Netting
   Adjustment*  
        
         Level 1              Level 2              Level 3                   Total        

Assets

              

Trading securities:

              

Government-sponsored enterprises debt obligations

       $   —             $ 3,306             $ —             $ —             $ 3,306     

Other FHLBank’s bond

     —           74           —           —           74     

State or local housing agency debt obligations

     —           3           —           —           3     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total trading securities

     —           3,383           —           —           3,383     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities:

              

Private-label MBS

     —           —           3,319           —           3,319     

Derivative assets:

              

Interest-rate related

     —           1,545           —           (1,540)           5     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

       $ —             $ 4,928             $ 3,319             $ (1,540)             $ 6,707     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

              

Derivative liabilities:

              

Interest-rate related

       $ —             $ (5,024)             $ —             $ 4,569             $ (455)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

       $ —             $ (5,024)             $ —             $ 4,569             $ (455)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Amounts represent the effect of legally enforceable master netting agreements that allow the Bank to settle positive and negative and also cash collateral held or placed with the same counterparties.

 

28


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

The following tables present a reconciliation of available-for-sale securities that are measured at fair value using significant unobservable inputs (Level 3):

 

         Three Months Ended June 30,      
     2011      2010  

Balance, beginning of period

           $ 3,466                 $ 2,660     

Transfer of private-label MBS from held-to-maturity to available-for-sale

     46           811     

Total (losses) gains realized and unrealized:*

     

Included in net impairment losses recognized in earnings

     (35)           (51)     

Included in other comprehensive loss

     31           151     

Settlements

     (200)           (119)     
  

 

 

    

 

 

 

Balance, end of period

           $ 3,308                 $ 3,452     
  

 

 

    

 

 

 

 

* Related to available-for-sale securities held at period end.

 

         Six Months Ended June 30,      
     2011      2010  

Balance, beginning of period

           $   3,319                 $   2,256     

Transfer of private-label MBS from held-to-maturity to available-for-sale

     348           1,220     

Total (losses) gains realized and unrealized:*

     

Included in net impairment losses recognized in earnings

     (82)           (94)     

Included in other comprehensive loss

     127           284     

Settlements

     (404)           (214)     
  

 

 

    

 

 

 

Balance, end of period

           $ 3,308                 $ 3,452     
  

 

 

    

 

 

 

 

* Related to available-for-sale securities held at period end.

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 at June 30, 2011 and December 31, 2010. 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. 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 table presented below does not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.

 

29


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

The carrying values and estimated fair values of the Bank’s financial instruments were as follows:

 

         As of June 30, 2011             As of December 31, 2010      
         Carrying    
Value
    Estimated
     Fair Value    
        Carrying    
Value
        Estimated    
Fair Value
 

Financial Instruments

        

Assets:

        

Cash and due from banks

   $ 25      $ 25      $ 5      $ 5   

Deposits with other FHLBank

     2        2        2        2   

Federal funds sold

     14,110        14,110        15,701        15,701   

Trading securities

     3,100        3,100        3,383        3,383   

Available-for-sale securities

     3,308        3,308        3,319        3,319   

Held-to-maturity securities

     16,459        16,547        17,474        17,511   

Mortgage loans held for portfolio, net

     1,827        1,973        2,039        2,189   

Advances, net

     77,427        77,669        89,258        89,330   

Accrued interest receivable

     338        338        388        388   

Derivative assets

     17        17        5        5   

Liabilities:

        

Interest-bearing deposits

     (3,008     (3,008     (3,093     (3,093

Consolidated obligations, net:

        

Discount notes

     (20,573     (20,573     (23,915     (23,916

Bonds

     (84,640     (85,533     (95,198     (95,993

Mandatorily redeemable capital stock

     (385     (385     (529     (529

Accrued interest payable

     (337     (337     (357     (357

Derivative liabilities

     (240     (240     (455     (455

Note 13—Commitments and Contingencies

As described in Note 8, consolidated obligations are backed only by the financial resources of the 12 FHLBanks. The Finance Agency may at any time require any FHLBank to make principal or interest payments due on any consolidated obligations, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation. No FHLBank has had to assume or pay the consolidated obligation of another FHLBank.

The par value of the FHLBanks’ outstanding consolidated obligations for which the Bank is jointly and severally liable was $623,513 and $678,528 at June 30, 2011 and December 31, 2010, respectively, exclusive of the Bank’s own outstanding consolidated obligations.

The Bank’s outstanding standby letters of credit were as follows:

 

     As of June 30, 2011     As of December 31, 2010  

Outstanding notional

     $            24,627        $                22,333   

Original terms

     Less than twelve months to 20 years     Less than two months to 20 years

Final expiration year

     2030        2030   

 

* The Bank issued a standby letter of credit for less than $1 as of June 30, 2011 and December 31, 2010, that has no stated maturity date and is subject to renewal on an annual basis.

 

30


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

The carrying value of the guarantees related to standby letters of credit is recorded in other liabilities and amounted to $89 and $92 as of June 30, 2011 and December 31, 2010, respectively. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to record any additional liability on these commitments.

The Bank monitors the creditworthiness of its standby letters of credit based on an evaluation of the guaranteed entity. The Bank has established parameters for the measurement, review, classification, and monitoring of credit risk related to these standby letters of credit that results in an internal credit rating, which focuses primarily on an institution’s overall financial health and takes into account 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 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 Bank did not have any commitments that unconditionally obligate the Bank to purchase closed mortgage loans as of June 30, 2011 and December 31, 2010. Such commitments would be recorded as derivatives at their fair values.

The Bank executes derivatives with major banks and broker-dealers and generally enters into bilateral collateral agreements. As of June 30, 2011 and December 31, 2010, the Bank had pledged, as collateral to broker-dealers who have market risk exposure from the Bank related to derivatives, securities with a carrying value of $0 and $37, respectively, which can be sold or repledged by those counterparties.

At June 30, 2011, the Bank had committed to the issuance of $3,246 (par value) in consolidated obligation bonds, of which $3,240 were hedged with associated interest rate swaps, and $400 (par value) in consolidated obligation discount notes, none of which were hedged with associated interest rate swaps, that had traded but not yet settled. At December 31, 2010, the Bank had committed to the issuance of $118 (par value) in consolidated obligation bonds, of which $115 were hedged with associated interest rate swaps that had traded but not yet settled.

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.

Note 14—Transactions with Members and their Affiliates and with Housing Associates

The Bank is a cooperative whose member institutions own almost all of the capital stock of the Bank. Former members 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 able to 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 Federal Home Loan Bank Act of 1932, as amended (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. All transactions with members are entered into in the ordinary

 

31


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

course of the Bank’s business. Transactions with any member that has an officer or director who also is a director of the Bank are subject to the same Bank policies as transactions with other members.

The Bank defines related parties as each of the other FHLBanks and those members with regulatory capital stock outstanding in excess of 10 percent of total regulatory capital stock. Based on this definition, one member institution, Bank of America, N.A., which held 21.4 percent of the Bank’s total regulatory capital stock as of June 30, 2011, was considered a related party. Total advances outstanding to Bank of America, N.A. were $16,790 and $25,040 as of June 30, 2011 and December 31, 2010, respectively. Total deposits held in the name of Bank of America, N.A. were less than $1 at June 30, 2011 and December 31, 2010. No mortgage loans or mortgage-backed securities were acquired from Bank of America, N.A. during the six-month periods ended June 30, 2011 and 2010.

Note 15—Subsequent Events

On July 28, 2011, the Bank’s board of directors approved a cash dividend for the second quarter of 2011 in the amount of $13. The Bank will pay the second quarter 2011 dividend on August 16, 2011.

On August 3, 2011, the Bank sent a notice to each current shareholder of the Bank announcing that it will repurchase up to $600 of excess capital stock on August 31, 2011. The amount of excess stock to be repurchased from any individual shareholder will be based on the shareholder’s total capital stock as of August 24, 2011.

 

32


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

Some of the statements made in this quarterly report on Form 10-Q may be “forward-looking statements,” which include statements with respect to the plans, objectives, expectations, estimates and future performance of the Bank and involve known and unknown risks, uncertainties, and other factors, many of which may be beyond the Bank’s control and which may cause the Bank’s actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by the forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. The reader can identify these forward-looking statements through the Bank’s use of words such as “may,” “will,” “anticipate,” “hope,” “project,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “point to,” “could,” “intend,” “seek,” “target,” and other similar words and expressions of the future. Such forward-looking statements include statements regarding any one or more of the following topics:

 

   

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

 

   

future performance, including profitability, developments, or market forecasts;

 

   

forward-looking accounting and financial statement effects; and

 

   

those other factors identified and discussed in the Bank’s public filings with the SEC.

The forward-looking statements may not be realized due to a variety of factors, including, without limitation, those risk factors provided under Item 1A of the Bank’s Form 10-K and those risk factors presented under Item 1A in Part II of this quarterly report on Form 10-Q.

All written or oral statements that are made by or are attributable to the Bank are expressly qualified in their entirety by this cautionary notice. The reader should not place undue reliance on forward-looking statements, since the statements speak only as of the date that they are made. The Bank has no obligation and does not undertake publicly to update, revise, or correct any of the forward-looking statements after the date of this quarterly report, or after the respective dates on which these statements otherwise are made, whether as a result of new information, future events, or otherwise, except as otherwise may be required by law.

The discussion presented below provides an analysis of the Bank’s results of operations and financial condition for the second quarter and the first six months ended June 30, 2011 and 2010. Management’s discussion and analysis should be read in conjunction with the financial statements and accompanying notes presented elsewhere in this report, as well as the Bank’s audited financial statements for the year ended December 31, 2010.

 

33


Table of Contents

Executive Summary

General Overview

The Bank is a cooperative whose primary business activity is providing competitively-priced loans, which the Bank refers to as “advances,” to its members and eligible housing associates to help them meet the credit needs of their communities. The Bank also makes grants and subsidized advances under the Affordable Housing Program, and provides certain cash management services to members and eligible nonmembers. The consolidated obligations (COs) issued by the Office of Finance on behalf of the FHLBanks are the principal funding source for Bank assets. The Bank is primarily liable for repayment of COs issued on its behalf and is jointly and severally liable for the COs issued on behalf of the other FHLBanks. Deposits, other borrowings, and the issuance of capital stock provide additional funding to the Bank. The Bank also maintains a portfolio of investments for liquidity purposes, to provide available funds to meet member credit needs and to provide additional earnings.

Financial Condition

As of June 30, 2011, total assets were $116.8 billion, a decrease of $15.0 billion, or 11.4 percent, from December 31, 2010. This decrease was due primarily to an $11.8 billion, or 13.3 percent, decrease in advances. Advances, the largest asset on the Bank’s balance sheet, decreased during the period due primarily to maturing advances and decreased demand for new advances resulting from members’ significant deposit balances and slow loan growth.

As of June 30, 2011, total liabilities were $109.6 billion, a decrease of $14.3 billion, or 11.5 percent, from December 31, 2010. This decrease was due primarily to a $13.9 billion, or 11.7 percent, decrease in COs. The decrease in COs corresponds to the decrease in demand for advances by the Bank’s members during the period.

As of June 30, 2011, total capital was $7.2 billion, a decrease of $725 million, or 9.12 percent, from December 31, 2010. This decrease was due primarily to the repurchase of $927 million of excess capital stock during the second quarter of 2011, and the payment of $29 million in dividends during the first six months of 2011, partially offset by a $106 million decrease in accumulated other comprehensive loss and the recording of $89 million in net income during the first six months of 2011. The decrease in accumulated other comprehensive loss was due primarily to improvements in the fair value of the Bank’s securities classified as available-for-sale.

Results of Operations

The Bank recorded net income of $38 million for the second quarter of 2011, a decrease of $37 million, or 48.7 percent, from net income of $75 million for the second quarter of 2010. This decrease was primarily due to the Bank’s reduction in its provision for credit losses on a receivable due from Lehman Brothers Special Financing Inc. (Lehman) by $49 million during the second quarter of 2010, which resulted in an increase in income for that period. The receivable was subsequently sold by the Bank during the third quarter of 2010; the receivable and related provision were reduced to zero.

 

34


Table of Contents

The Bank recorded net income of $89 million for the first six months of 2011, a decrease of $34 million, or 27.7 percent, from net income of $123 million for the same period in 2010. This decrease was due primarily to the Bank’s reduction in its provision for credit losses on a receivable due from Lehman by $49 million as discussed above.

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’s ROE was 2.01 percent for the second quarter of 2011, compared to 3.64 percent for the second quarter of 2010. This decrease in ROE was due primarily to a decrease in net income during the period as discussed above. ROE spread to three-month average LIBOR decreased to 1.75 percent for the second quarter of 2011 compared to 3.20 percent for the second quarter of 2010. This decrease was due primarily to a 163 basis point decrease in ROE and an 18 basis point decrease in LIBOR during the period.

The Bank’s annualized ROE was 2.29 percent for the first six months of 2011, compared to 3.00 percent for the first six months of 2010. This decrease in ROE was due primarily to a decrease in net income during the period as discussed above. ROE spread to three-month average LIBOR decreased to 2.00 percent for the first six months of 2011 compared to 2.65 percent for the same period in 2010. This decrease was due primarily to a 71 basis point decrease in ROE and a six basis point decrease in LIBOR during the period.

The Bank’s interest rate spread was 34 basis points and 32 basis points for the second quarter of 2011 and 2010, respectively, and 35 basis points and 34 basis points for the first six months of 2011 and 2010, respectively. The Bank’s interest rate spread has remained relatively stable during the reported periods.

Business Outlook

Advances continued to decrease during the second quarter of 2011 as a result of scheduled repayments, prepayments by large borrowers and as a result of member closures, and members’ significant deposit holdings and slow loan growth. The Bank expects this trend to continue for the near future. Standby letters of credit balances have been and are expected to continue to be relatively stable for the near future.

Other continuing challenges for the Bank include low short-term yields in the Bank’s investment portfolio as a result of the prolonged low interest rate environment, uncertainty with respect to the Bank’s private-label MBS portfolio and limited investment opportunities. Without notable improvements in home prices, unemployment and the interest rate environment, the Bank will continue to experience these challenges.

In the face of these challenges, the Bank continues to focus on protecting members’ investment in the Bank and positioning the Bank for future growth. The board of directors remains focused on supporting repurchases of excess capital stock and payments of dividends.

 

35


Table of Contents

Selected Financial Data

The following table presents a summary of certain financial information for the Bank for the periods indicated (dollars in millions):

 

     As of and for the Three Months Ended  
         June 30,    
2011
        March 31,    
2011
        December 31,    
2010
        September 30,    
2010
        June 30,    
2010
 

Statements of Condition (at period end)

          

Total assets

   $ 116,817      $ 123,633      $ 131,798      $ 141,492      $ 140,591   

Investments (1)

     36,979        39,876        39,879        39,126        37,399   

Mortgage loans held for portfolio

     1,828        1,916        2,040        2,195        2,314   

Allowance for credit losses on mortgage loans

     (1     (1     (1     (1     (1

Advances, net

     77,427        81,257        89,258        99,425        100,087   

Interest-bearing deposits

     3,008        2,955        3,093        6,201        3,171   

Consolidated obligations, net:

          

Discount notes

     20,573        15,700        23,915        27,599        16,519   

Bonds

     84,640        94,854        95,198        97,942        110,949   

Total consolidated obligations, net (2)

     105,213        110,554        119,113        125,541        127,468   

Mandatorily redeemable capital stock

     385        531        529        492        508   

Affordable Housing Program payable

     121        127        126        127        127   

Payable to REFCORP

     10        13        20        19        19   

Capital stock - putable

     6,333        7,263        7,224        7,480        7,856   

Retained earnings

     1,184        1,160        1,124        1,051        985   

Accumulated other comprehensive loss

     (296     (323     (402     (451     (612

Total capital

     7,221        8,100        7,946        8,080        8,229   

Statements of Income (for the period ended)

          

Net interest income

     119        131        131        138        136   

Net impairment losses recognized in earnings

     (37     (52     (11     (14     (72

Net gains (losses) on trading securities

     20        (34     (87     38        76   

Net (losses) gains on derivatives and hedging activities

     (20     46        113        (30     (58

Other income (3)

     1        1        1        1        1   

Other expenses (4)

     32        22        37        32        (19

Income before assessments

     51        70        110        101        102   

Assessments

     13        19        29        27        27   

Net income

     38        51        81        74        75   

Performance Ratios (%)

          

Return on equity (5)

     2.01        2.56        3.99        3.71        3.64   

Return on assets (6)

     0.13        0.16        0.23        0.21        0.20   

Net interest margin (7)

     0.40        0.41        0.38        0.39        0.38   

Regulatory capital ratio (at period end) (8)

     6.76        7.24        6.74        6.38        6.65   

Equity to assets ratio (9)

     6.27        6.21        5.84        5.65        5.63   

Dividend payout ratio (10)

     37.89        28.74        9.23        11.51        6.97   

 

36


Table of Contents

 

(1) Investments consist of deposits with another FHLBank, federal funds sold, and securities classified as trading, available-for-sale and held-to-maturity.
(2) The amounts presented are the Bank’s primary obligations on consolidated obligations outstanding. The par value of the FHLBanks’ outstanding consolidated obligations for which the Bank is jointly and severally liable were as follows (in millions):

 

June 30, 2011

   $ 623,513      

March 31, 2011

     656,491      

December 31, 2010

     678,528      

September 30, 2010

     682,238      

June 30, 2010

     720,545      

 

(3) Other income includes service fees and other.
(4) For the three months ended September 30, 2010 and June 30, 2010, amount includes $2 million and $49 million, respectively, which represents the reversal of a portion of the provision for credit losses established on a receivable due from Lehman.
(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 stock plus retained earnings as a percentage of total assets at period end.
(9) Calculated as average equity divided by average total assets.
(10) Calculated as dividends declared during the period divided by net income during the period.

Financial Condition

The Bank’s principal assets consist of advances, short- and long-term investments and mortgage loans held for portfolio. The Bank obtains funding to support its business primarily through the issuance of debt securities in the form of consolidated obligations by the Office of Finance on the Bank’s behalf.

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 June 30, 2011      As of December 31, 2010      Increase (Decrease)  
         Amount          Percent
     of Total    
         Amount          Percent
    of Total    
         Amount            Percent    

Advances, net

       $ 77,427           66.29             $ 89,258           67.72             $ (11,831)           (13.26)   

Long-term investments

     21,732           18.60           22,986           17.44           (1,254)           (5.45)   

Short-term investments

     15,247           13.05           16,893           12.82           (1,646)           (9.74)   

Mortgage loans, net

     1,827           1.56           2,039           1.55           (212)           (10.41)   

Other assets

     584           0.50           622           0.47           (38)           (6.08)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total assets

       $   116,817               100.00             $   131,798               100.00             $ (14,981)           (11.37)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Consolidated obligations, net:

                 

Discount notes

       $ 20,573           18.77             $ 23,915           19.31             $ (3,342)           (13.98)   

Bonds

     84,640           77.23           95,198           76.86           (10,558)           (11.09)   

Deposits

     3,008           2.74           3,093           2.50           (85)           (2.74)   

Other liabilities

     1,375           1.26           1,646           1.33           (271)           (16.44)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total liabilities

       $ 109,596               100.00             $ 123,852               100.00             $ (14,256)           (11.51)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Capital stock

       $ 6,333           87.70             $ 7,224           90.92             $ (891)           (12.34)   

Retained earnings

     1,184           16.39           1,124           14.14           60           5.32   

Accumulated other comprehensive loss

     (296)           (4.09)           (402)           (5.06)           106           26.59   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total capital

       $ 7,221               100.00             $ 7,946               100.00             $ (725)           (9.12)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

37


Table of Contents

Advances

The decrease in advances from December 31, 2010 to June 30, 2011 was due to maturing advances, prepayments by large borrowers and as a result of member closures, and decreased demand for new advances resulting from members’ significant deposit balances and slow loan growth. At June 30, 2011, 86.6 percent of the Bank’s advances were fixed-rate. However, the Bank often simultaneously enters into derivatives with the issuance of advances to convert the interest rates on them, in effect, into a short-term variable interest rate, usually based on LIBOR. As of June 30, 2011 and December 31, 2010, 86.3 percent and 87.4 percent, respectively, of the Bank’s fixed-rate advances were swapped and 6.94 percent and 9.42 percent, respectively, of the Bank’s variable-rate advances were swapped. The majority of the Bank’s variable-rate advances were indexed to LIBOR. The Bank also offers variable-rate advances tied to the federal funds rate, prime rate and constant maturity swap rates.

The following table sets forth the par value of outstanding advances by product characteristics (dollars in millions):

 

     As of June 30, 2011      As of December 31, 2010  
     Amount      Percent
of Total
     Amount      Percent
of Total
 

Adjustable or variable-rate indexed

       $ 9,161           12.45             $ 8,852           10.41     

Fixed-rate

     21,335           28.98           23,073           27.13     

Convertible

     10,790           14.66           12,592           14.80     

Hybrid

     31,244           42.45           39,415           46.34     

Amortizing*

     1,074           1.46           1,119           1.32     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total par value

       $     73,604               100.00             $         85,051               100.00     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* The Bank offers a fixed-rate advance that may be structured with principal amortization in either equal increments or similar to a mortgage.

The concentration of the Bank’s advances to its 10 largest borrowing institutions was as follows (dollars in millions):

 

     Advances to 10 largest
borrowing member
institutions
     Percent of total
advances
outstanding
 

June 30, 2011

     $    47,845         65.00   

December 31, 2010

     58,043         68.25   

Investments

The Bank maintains a portfolio of investments for liquidity purposes, to provide for the availability of funds to meet member credit needs and to provide additional earnings. Investment income also enhances the Bank’s capacity to meet its commitment to affordable housing and community investment, to cover operating expenses, and to satisfy the Bank’s annual REFCORP assessment.

The Bank’s short-term investments consist of overnight and term federal funds sold, certificates of deposit and interest-bearing deposits. The Bank’s long-term investments consist of MBS issued by government-sponsored mortgage agencies or private securities that, at purchase, carried the highest rating from Moody’s or S&P, securities issued by the U.S. government or U.S. government agencies, state and local housing agency obligations and consolidated obligations issued by other FHLBanks. The long-term

 

38


Table of Contents

investment portfolio generally provides the Bank with higher returns than those available in the short-term money markets.

The following table sets forth more detailed information regarding short- and long-term investments held by the Bank (dollars in millions):

 

          Increase (Decrease)  
      As of June 30, 2011         As of December 31, 2010       Amount       Percent    

Short-term investments:

       

Deposits with other FHLBank

      $ 2            $ 2            $ —          (4.46)   

Certificates of deposit

    1,135          1,190          (55)          (4.62)   

Federal funds sold

    14,110          15,701          (1,591)          (10.13)   
 

 

 

   

 

 

   

 

 

   

Total short-term investments

    15,247          16,893          (1,646)          (9.74)   
 

 

 

   

 

 

   

 

 

   

Long-term investments:

       

State or local housing agency debt obligations

    116          111          5          4.45   

U.S. government agency debt obligations

    3,597        4,253          (656)          (15.41)   

Mortgage-backed securities:

       

U.S. government agency securities

    10,272          9,676          596          6.16   

Private label

    7,747          8,946          (1,199)          (13.40)   
 

 

 

   

 

 

   

 

 

   

Total mortgage-backed securities

    18,019          18,622          (603)          (3.24)   
 

 

 

   

 

 

   

 

 

   

Total long-term investments

    21,732          22,986          (1,254)          (5.45)   
 

 

 

   

 

 

   

 

 

   

Total investments

      $ 36,979            $ 39,879            $ (2,900)          (7.27)   
 

 

 

   

 

 

   

 

 

   

The decrease in total investments was due primarily to a decrease in overnight federal funds and private-label MBS during the period. The decrease in private-label MBS was due primarily to principal repayments and maturities and no additional purchases by the Bank of private-label MBS.

Prior to June 20, 2011, the Finance Agency limited an FHLBank’s investment in MBS and asset-backed securities by requiring that the total book value of MBS owned by the FHLBank generally may not exceed 300 percent of the FHLBank’s previous month-end total capital, as defined by regulation, plus its mandatorily redeemable capital stock on the day it purchases the securities. Effective June 20, 2011, the value of securities used in the 300 percent of capital limit calculation was changed from book value to amortized historical costs for securities classified as held-to-maturity or available-for-sale, and fair value for securities classified as trading. These investments amounted to 232 percent and 210 percent of total capital plus mandatorily redeemable capital stock at June 30, 2011 and December 31, 2010, respectively. The Bank has been below its target range of 250 percent to 275 percent due to a lack of quality MBS at attractive prices during recent market conditions.

As of June 30, 2011, the Bank had a total of 42 securities classified as available-for-sale in an unrealized loss position, with total gross unrealized losses of $298 million and a total of 101 securities classified as held-to-maturity in an unrealized loss position, with total gross unrealized losses of $172 million. As of December 31, 2010, the Bank had a total of 44 securities classified as available-for-sale in an unrealized loss position, with total gross unrealized losses of $397 million and a total of 130 securities classified as held-to-maturity in an unrealized loss position, with total gross unrealized losses of $234 million.

The Bank evaluates its individual investment securities for other-than-temporary impairment on a quarterly basis, as described in detail in Note 6 to the Bank’s interim financial statements. Based on that impairment analysis, for the second quarter and first six months of 2011, the Bank recognized total other-than-temporary impairment losses of $12 million and $37 million, respectively, related to private-label MBS in its investment securities portfolio. The total amount of other-than-temporary impairment is

 

39


Table of Contents

calculated as the difference between the security’s amortized cost basis and its fair value. The credit related portion of $37 million and $89 million, respectively, of these other-than-temporary impairment losses is reported in the Statements of Income as “Net impairment losses recognized in earnings.” The noncredit related portion of $(25) million and $(52) million, respectively, of the other-than-temporary impairment losses is recorded as a component of other comprehensive loss. For the second quarter and first six months of 2010, the Bank recognized total other-than-temporary impairment losses of $131 million and $195 million, respectively, related to private-label MBS in its investment securities portfolio. The credit related portion of $72 million and $118 million, respectively, of these other-than-temporary impairment losses is reported in the Statements of Income as “Net impairment losses recognized in earnings.” The noncredit related portion of $59 million and $77 million, respectively, of the other-than-temporary impairment losses is recorded as a component of other comprehensive loss.

Certain other private-label MBS in the Bank’s investment securities portfolio that have not been designated as other-than-temporarily impaired have experienced unrealized losses and decreases in fair value due to interest-rate volatility, illiquidity in the marketplace and credit deterioration in the U.S. mortgage markets. These declines in fair value are considered temporary as the Bank presently expects to collect all contractual cash flows and the Bank does not intend to sell the securities and it is not more likely than not that the Bank will be required to sell the securities before the anticipated recovery of its remaining amortized cost basis, which may be at maturity. This assessment is based on the determination 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.

Mortgage Loans Held for Portfolio

The decrease in mortgage loans held for portfolio from December 31, 2010 to June 30, 2011 was due to the maturity of these assets during the period. In 2006, the Bank ceased purchasing multifamily residential mortgage loans, and in 2008 the Bank ceased purchasing single-family residential mortgage loans. If the Bank does not resume purchasing mortgage loans under its mortgage purchase programs, each of the existing mortgage loans held for portfolio will mature according to the terms of its note unless prepaid prior to its scheduled maturity. The Bank purchased loans with contractual maturity dates extending out to 2038.

As of June 30, 2011 and December 31, 2010, the Bank’s conventional mortgage loan portfolio was concentrated in the southeastern United States because the members that sold loans to the Bank were located primarily in that region. The following table provides the percentage of unpaid principal balance of conventional single-family residential mortgage loans held for portfolio for the five largest state concentrations.

 

000000000000000000000000000000 000000000000000000000000000000
     As of June 30, 2011      As of December 31, 2010  
     Percent of Total      Percent of Total  

South Carolina

     24.40           24.50     

Florida

     22.08           21.07     

Georgia

     14.62           14.42     

North Carolina

     13.65           14.12     

Virginia

     8.99           9.19     

All other

     16.26           16.70     
  

 

 

    

 

 

 

Total

     100.00           100.00     
  

 

 

    

 

 

 

 

40


Table of Contents

Consolidated Obligations

The Bank funds its assets primarily through the issuance of consolidated obligation bonds and, to a lesser extent, consolidated obligation discount notes. CO issuances financed 90.1 percent of the $116.8 billion in total assets at June 30, 2011, remaining relatively stable from 90.4 percent as of December 31, 2010.

The decrease in COs from December 31, 2010 to June 30, 2011 corresponds to the decrease in demand for advances by the Bank’s members and the increase in liquidity from maturing and prepaid advances during the period. COs outstanding at June 30, 2011 and December 31, 2010 were primarily fixed-rate. However, the Bank often simultaneously enters into derivatives with the issuance of CO bonds to convert the interest rates, in effect, into short-term variable interest rates, usually based on LIBOR. As of June 30, 2011 and December 31, 2010, 77.6 percent and 77.3 percent, respectively, of the Bank’s fixed-rate CO bonds were swapped and 1.25 percent and 0.24 percent, respectively, of the Bank’s variable-rate CO bonds were swapped.

As of June 30, 2011, callable CO bonds constituted 23.2 percent of the total par value of CO bonds outstanding, compared to 26.3 percent at December 31, 2010. This decrease was due to market conditions that made the issuance of callable fixed-maturity debt less attractive to the Bank. The derivatives that the Bank may employ to hedge against the interest-rate risk associated with the Bank’s callable CO bonds generally are callable by the counterparty. The Bank generally will call a hedged CO bond if the call feature of the derivative is exercised. These call features could require the Bank to refinance a substantial portion of outstanding liabilities during times of decreasing interest rates. Call options on unhedged callable CO bonds generally are exercised when the bond can be replaced at a lower economic cost.

On July 13, 2011, Moody’s placed the Aaa bond rating of the U.S., and consequently the ratings of government-sponsored enterprises, including the FHLBanks, on review for possible downgrade. The review was prompted due to the risk that the statutory debt limit may not be raised in time to prevent a default on U.S. Treasury debt obligations. On August 2, 2011, Moody’s confirmed the Aaa rating of the U.S., but revised the rating outlook to negative. Consequently, Moody’s confirmed the Aaa ratings of government-sponsored enterprises, including the FHLBanks, but revised the ratings outlook to negative.

On April 20, 2011, S&P revised its outlook on the debt issues from stable to negative for 10 of the 12 FHLBanks, including the Bank, while affirming their AAA long-term credit rating (the remaining two FHLBanks were unaffected because they were already rated AA+/stable or AA+/negative). Similarly, on July 15, 2011, S&P placed the long-term credit ratings of 10 of the 12 FHLBanks, including the Bank, whose issuer credit ratings were AAA on CreditWatch with negative implications. S&P also placed the long-term AAA rating on the senior unsecured debt issues of the FHLBank System on CreditWatch with negative implications, and affirmed the short-term A-1+ ratings of all FHLBanks and the FHLBank System’s debt issues. These rating actions reflected S&P’s concurrent placement of the long-term sovereign credit rating of the U.S. on CreditWatch negative, and S&P’s view that the issuer credit ratings of the FHLBanks are constrained by such U.S. credit rating. On August 8, 2011, S&P downgraded the long-term senior unsecured debt issues of the FHLBank System to AA+ with a negative outlook, following S&P’s downgrade on August 5, 2011 of the U.S. long-term sovereign credit rating to AA+ with a negative outlook. Additionally, S&P placed the long-term credit ratings of all 12 FHLBanks, including the Bank, at AA+ with a negative outlook, and affirmed the short-term A-1+ ratings of all FHLBanks.

These rating agency actions, and any further changes to the U.S. sovereign credit rating, could result in disruptions in the capital markets and increase the Bank’s cost of funds, which may adversely impact the Bank’s results of operations and financial condition. During the period immediately prior to August 2, 2011 (the date established by Treasury as the date the U.S. would begin defaulting on its debt obligations if the U.S. debt limit was not increased), capital markets tightened and demand for FHLBank CO bonds decreased. The Bank increased its issuance of CO discount notes during this period; in addition, the Bank previously had increased its short-term liquidity during the month of July in anticipation of possible disruption in the capital markets due to the statutory debt limit debate. Debt issuance and pricing in the capital markets generally stabilized after the debt limit was increased on August 2, 2011, and the Bank does not expect the temporary market disruption from the debt limit debate to have a material impact on the Bank’s financial condition or results of operations for the third quarter of 2011. As of the date of this report, the full impact of S&P’s recent decision to downgrade the U.S. sovereign credit rating is uncertain. However, it is possible that this downgrade, and any additional downgrade, could have an adverse impact on the Bank’s ability to issue COs.

 

41


Table of Contents

Deposits

The Bank offers demand and overnight deposit programs to members primarily as a liquidity management service. In addition, a member that services mortgage loans may deposit in the Bank funds collected in connection with the mortgage loans, pending disbursement of those funds to the owners of the mortgage loan. 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 be volatile. 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. Total deposits were relatively stable at June 30, 2011 compared to December 31, 2010.

To support its member deposits, the FHLBank Act requires the Bank to have as a reserve an amount equal to or greater than the current deposits received from members. 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 was in compliance with this depository liquidity requirement as of June 30, 2011.

Capital

The decrease in total capital from December 31, 2010 to June 30, 2011 was due primarily to the repurchase of $927 million of excess capital stock during the second quarter of 2011 and the payment of $29 million in dividends during the first six months of 2011, partially offset by a $106 million decrease in accumulated other comprehensive loss and the recording of $89 million in net income during the first six months of 2011. The decrease in accumulated other comprehensive loss was due primarily to improvements in the fair value of the Bank’s securities classified as available-for-sale.

The FHLBank Act and Finance Agency regulations specify that each FHLBank must meet certain minimum regulatory capital standards. The Bank was in compliance with these regulatory capital rules and requirements as shown in detail in Note 9 to the Bank’s interim financial statements.

Finance Agency regulations establish criteria based on the amount and type of capital held by an FHLBank for four capital classifications as follows:

 

   

Adequately Capitalized - FHLBank meets both risk-based and minimum capital requirements;

 

   

Undercapitalized - FHLBank does not meet one or both of its risk-based or minimum capital requirements;

 

42


Table of Contents
   

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. The regulation delineates the types of prompt corrective actions the Director may order in the event an FHLBank is not adequately capitalized, 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 June 20, 2011, the Bank received notification from the Director that, based on March 31, 2011 data, the Bank meets the definition of “adequately capitalized.”

As of June 30, 2011, the Bank had capital stock subject to mandatory redemption from 66 members and former members, consisting of B1 membership stock and B2 activity-based stock, compared to 63 members and former members as of December 31, 2010, consisting of B1 membership stock and B2 activity-based stock. The Bank is not required to redeem or repurchase such stock until the expiration of the five-year redemption period or, with respect to activity-based stock, until the later of the expiration of the five-year redemption period or the activity no longer remains outstanding. The Bank makes its determination regarding the repurchase of excess capital stock on a quarterly basis.

As of June 30, 2011 and December 31, 2010, the Bank’s outstanding stock included $2.2 billion and $2.7 billion, respectively, of excess shares subject to repurchase by the Bank at its discretion. On August 3, 2011, the Bank sent a notice to each current shareholder of the Bank announcing that it will repurchase up to $600 million excess capital stock on August 31, 2011. The amount of excess stock to be repurchased from any individual shareholder will be based on the shareholder’s total capital stock as of August 24, 2011. The Bank expects to repurchase excess capital stock on a quarterly basis at a similar level for the near future; however, determinations of excess capital stock repurchases are subject to the Bank’s actual financial performance for each quarter.

As more fully described in the Bank’s Form 10-K, the Bank, together with the other 11 FHLBanks, executed a Joint Capital Enhancement Agreement which provides that upon satisfying the REFCORP obligation, each FHLBank will allocate a portion of its net income to a restricted retained earnings account to be established at each FHLBank.

Effective August 5, 2011, the FHLBanks amended the Joint Capital Enhancement Agreement (as amended, the Amended Joint Capital Agreement) to make certain clarifications, including changes to the definition of an automatic termination event, provisions for determining whether an automatic termination event has occurred, and modifications to the provisions regarding the release of restricted retained earnings if the Amended Joint Capital Agreement is terminated. The FHLBanks amended their respective capital plans to implement the provisions of the Amended Joint Capital, and the Finance Agency approved the capital plan amendments, including the Bank’s capital plan, on August 5, 2011.

 

43


Table of Contents

On August 5, 2011, the Finance Agency certified that the FHLBanks have fully satisfied their REFCORP obligation. In accordance with the Amended Joint Capital Agreement, beginning in the third quarter of 2011, each FHLBank is required to allocate 20 percent of its net income to a restricted retained earnings account until the balance of the account equals at least one percent of that FHLBank’s average balance of outstanding consolidated obligations for the previous quarter. These restricted retained earnings will not be available to pay dividends. For further discussion of the Amended Joint Capital Agreement and the Bank’s amended capital plan, see the Bank’s Form 8-K filed on August 5, 2011.

Results of Operations

Net Income

The following table sets forth the Bank’s significant income items for the second quarter and first six months of 2011 and 2010, and provides information regarding the changes during the periods (dollars in millions). These items are discussed in more detail below.

 

0000000000000 0000000000000 0000000000000 0000000000000 0000000000000 0000000000000 0000000000000 0000000000000
     Three Months Ended June 30,      Increase (Decrease)      Six Months Ended June 30,      Increase (Decrease)  
     2011      2010      Amount      Percent      2011      2010      Amount      Percent  

Net interest income

     $          119           $         136           $       (17)           (12.70)           $          250           $         289           $       (39)           (13.79)     

Other loss

     (36)           (53)           17           33.97           (75)           (112)           37           33.14     

Other expense

     32           (19)           51           272.11           54           10           44           426.81     

Total assessments

     13           27           (14)           (48.41)           32           44           (12)           (27.10)     

Net income

     38           75           (37)           (48.74)           89           123           (34)           (27.66)     

Net Interest Income

A 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 earned and the amortization of debt issuance discounts, concession fees and derivative instruments and hedging activities related adjustments.

The decrease in net interest income during the second quarter and first six months of 2011, compared to the same periods in 2010, was due primarily to a decrease in interest earned on the Bank’s long-term investments during the periods resulting from a decrease in yield on these investments.

As mentioned above, net interest income includes components of derivatives and hedging activity. 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 and included in net interest income and in the calculation of interest rate spread. Also, when hedging relationships qualify for hedge accounting, the interest components of the hedging derivatives will be reflected in interest income or expense. If the derivatives do not qualify for fair-value hedge accounting under GAAP, the net interest income or expense associated with the derivatives is excluded from net interest income and the calculation of the interest rate spread. As shown in the table summarizing the net effect of derivatives and hedging activity on the Bank’s results of operations, the impact of derivatives and hedging on net interest

 

44


Table of Contents

income was a decrease of $360 million and $542 million for the second quarter of 2011 and 2010, respectively, and a decrease of $770 million and $1.1 billion for the first six months of 2011 and 2010, respectively.

The following tables present spreads between the average yield on total interest-earning assets and the average cost of total interest-bearing liabilities for the second quarter and the first six months of 2011 and 2010 (dollars in millions).

Spread and Yield Analysis

 

     Three Months Ended June 30,  
     2011      2010  
     Average
Balance
         Interest          Yield/
    Rate  (%)    
         Average    
    Balance    
             Interest              Yield/
    Rate  (%)    
 

Assets

                 

Federal funds sold

           $ 13,380                 $ 4           0.14               $ 13,708             $ 8           0.26     

Interest-bearing deposits (1)

     2,713           1           0.10           3,407           2           0.20     

Certificates of deposit

     834           —           0.22           848           1           0.41     

Long-term investments (2)

     22,082           185           3.36           21,456           233           4.34     

Advances

     79,338           68           0.34           102,961           81           0.32     

Mortgage loans held for portfolio (3)

     1,872           25           5.33           2,366           31           5.25     

Loans to other FHLBanks

     1           —           0.10           —           —           —     
  

 

 

    

 

 

       

 

 

    

 

 

    

Total interest-earning assets

     120,220           283           0.94           144,746           356           0.99     
     

 

 

          

 

 

    

Allowance for credit losses on mortgage loans

     (1)                 (1)           

Other assets

     891                 1,035           
  

 

 

          

 

 

       

Total assets

           $ 121,110                     $ 145,780           
  

 

 

          

 

 

       

Liabilities and Capital

                 

Deposits (4)

           $ 2,835           —           0.01               $ 2,958           1           0.06     

Short-term borrowings

     17,461           4           0.09           15,507           6           0.15     

Long-term debt

     88,761           159           0.72           113,521           213           0.75     

Other borrowings

     460           1           0.83           503           —           0.26     
  

 

 

    

 

 

       

 

 

    

 

 

    

Total interest-bearing liabilities

     109,517           164           0.60           132,489           220           0.67     
     

 

 

          

 

 

    

Other liabilities

     3,993                 5,085           

Total capital

     7,600                 8,206           
  

 

 

          

 

 

       

Total liabilities and capital

           $         121,110                     $         145,780           
  

 

 

          

 

 

       

Net interest income and net yield on interest-earning assets

              $       119           0.40                $         136           0.38     
     

 

 

    

 

 

       

 

 

    

 

 

 

Interest rate spread

           0.34                 0.32     
        

 

 

          

 

 

 

Average interest-earning assets to interest-bearing liabilities

           109.77                 109.25     
        

 

 

          

 

 

 

 

(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 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.

 

45


Table of Contents
    Six Months Ended June 30,  
    2011     2010  
    Average
Balance
        Interest         Yield/
    Rate  (%)    
        Average    
    Balance    
            Interest             Yield/
    Rate  (%)    
 

Assets

           

Federal funds sold

          $ 14,111                $ 12          0.18                $ 12,636              $ 13          0.21     

Interest-bearing deposits (1)

    2,749          2          0.13          3,484          3          0.17     

Certificates of deposit

    817          1          0.24          713          1          0.33     

Long-term investments (2)

    22,366          383          3.46          21,969          486          4.46     

Advances

    82,314          143          0.35          107,043          153          0.29     

Mortgage loans held for portfolio (3)

    1,921          51          5.31          2,415          63          5.27     

Loans to other FHLBanks

    3          —          0.16          1          —          0.13     
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

    124,281          592          0.96          148,261          719          0.98     
   

 

 

       

 

 

   

Allowance for credit losses on mortgage loans

    (1)              (1)         

Other assets

    921              1,058         
 

 

 

       

 

 

     

Total assets

          $ 125,201                    $ 149,318         
 

 

 

       

 

 

     

Liabilities and Capital

           

Deposits (4)

          $ 2,842          1          0.05                $ 2,931          1          0.06     

Short-term borrowings

    18,335          11          0.12          15,544          9          0.11     

Long-term debt

    91,597          328          0.72          116,964          420          0.72     

Other borrowings

    496          2          1.03          366          —          0.23     
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

    113,270          342          0.61          135,805          430          0.64     
   

 

 

       

 

 

   

Other liabilities

    4,113              5,256         

Total capital

    7,818              8,257         
 

 

 

       

 

 

     

Total liabilities and capital

          $         125,201                    $         149,318         
 

 

 

       

 

 

     

Net interest income and net yield on interest-earning assets

            $         250          0.40                $         289          0.39     
   

 

 

   

 

 

     

 

 

   

 

 

 

Interest rate spread

        0.35              0.34     
     

 

 

       

 

 

 

Average interest-earning assets to interest-bearing liabilities

        109.72              109.17     
     

 

 

       

 

 

 

 

(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 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.

The Bank’s interest rate spread has remained relatively stable during the reported periods, increasing by two basis points during the second quarter of 2011, compared to the second quarter of 2010, and increasing by one basis point during the first six months of 2011 compared to the same period in 2010.

 

46


Table of Contents

Net interest income for the periods 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 noted in the table, the overall change in net interest income during the second quarter and first six months of 2011, compared to the same periods in 2010, was primarily rate related.

Volume and Rate Table*

 

0000000000 0000000000 0000000000 0000000000 0000000000 0000000000
     Three Months Ended June 30,      Six Months Ended June 30,  
     2011 vs. 2010      2011 vs. 2010  
     Volume      Rate      Increase
(Decrease)
     Volume      Rate      Increase
    (Decrease)    
 

Increase (decrease) in interest income:

                 

Federal funds sold

         $ —                 $ (4)              $ (4)                   $ 2               $ (3)           $ (1)     

Interest-bearing deposits

     —           (1)           (1)           —           (1)           (1)     

Certificates of deposit

     —           (1)           (1)           —           —           —     

Long-term investments

     6           (54)           (48)           7           (110)           (103)     

Advances

     (19)           6           (13)           (39)           29           (10)     

Mortgage loans held for portfolio

     (7)           1           (6)           (13)           1           (12)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     (20)           (53)           (73)           (43)           (84)           (127)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Increase (decrease) in interest expense:

                 

Deposits

     —           (1)           (1)           —           —           —     

Short-term borrowings

     1           (3)           (2)           1           1           2     

Long-term debt

     (45)           (9)           (54)           (91)           (1)           (92)     

Other borrowings

     —           1           1           —           2           2     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     (44)           (12)           (56)           (90)           2           (88)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Increase (decrease) in net interest income

       $ 24             $ (41)               $ (17)                     $ 47               $ (86)           $ (39)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Volume change is calculated as the change in volume multiplied by the previous rate, while rate change is the change in rate multiplied by the previous volume. The rate/volume change, change in rate multiplied by change in volume, is allocated between volume change and rate change at the ratio each component bears to the absolute value of its total.

Other Income (Loss)

The following table presents the components of other income (loss) (dollars in millions):

 

000000000000 000000000000 000000000000 000000000000 000000000000 000000000000 000000000000 000000000000
     Three Months Ended June 30,      Increase (Decrease)      Six Months Ended June 30,      Increase (Decrease)  
     2011      2010      Amount      Percent      2011      2010      Amount      Percent  

Other Income (Loss):

                       

Net impairment losses recognized in earnings

     $      (37)           $     (72)           $      35           49.36           $         (89)           $      (118)           $        29           24.93     

Net gains (losses) on trading securities

     20           76           (56)           (73.43)           (14)           80           (94)           (117.57)     

Net (losses) gains on derivatives and hedging activities

     (20)           (58)           38           65.94           26           (75)           101           134.80     

Other

     1           1           —           31.85           2           1           1           38.06     
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

    

 

 

    

Total other loss

     $      (36)           $     (53)           $      17           33.97           $         (75)           $      (112)           $        37           33.14     
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

    

 

 

    

 

47


Table of Contents

The overall change in other income (loss) for the second quarter and first six months of 2011, compared to the same periods in 2010, was due primarily to net impairment losses recognized in earnings, adjustments required to report trading securities at fair value, and hedging related adjustments which are reported in net (losses) gains on derivatives and hedging activities (including those related to trading securities). The net gains of $20 million on trading securities during the second quarter of 2011, compared to net gains of $76 million on trading securities during the second quarter of 2010, was due primarily to a greater decrease in long-term interest rates during the second quarter of 2010 compared to the second quarter of 2011. Substantially all of the Bank’s trading securities are fixed interest-rate securities and 99.9 percent were swapped to a variable rate. The net losses of $20 million on derivatives and hedging activities during the second quarter of 2011, compared to net losses of $58 million during the second quarter of 2010, were due primarily to net losses of $18 million on non-qualifying hedges related to the Bank’s trading securities which are reported as part of net (losses) gains on derivatives and hedging activities. The Bank recorded net losses of $62 million on non-qualifying hedges related to the Bank’s trading securities during the second quarter of 2010.

The net losses of $14 million on trading securities during the first six months of 2011, compared to net gains of $80 million on trading securities during the same period in 2010, were due primarily to an increase in long-term interest rates during the first quarter of 2011. The net gains of $26 million on derivatives and hedging activities during the first six months of 2011, compared to net losses of $75 million during the same period in 2010, were due primarily to net gains of $25 million on non-qualifying hedges related to the Bank’s trading securities which are reported as part of net (losses) gains on derivatives and hedging activities. The Bank recorded net losses of $85 million on non-qualifying hedges related to the Bank’s trading securities during the first six months of 2010.

The following tables summarize the net effect of derivatives and hedging activity on the Bank’s results of operations (in millions):

 

000000000000000 000000000000000 000000000000000 000000000000000 000000000000000 000000000000000
     Three Months Ended June 30, 2011  
     Advances          Investments          Consolidated
Obligation

Bonds
     Consolidated
Obligation

Discount
Notes
     Balance
Sheet
     Total  

Net interest income:

                 

Amortization/accretion of hedging activities in net interest income (1)

     $        (47)           $           —           $         9           $              —           $              —           $         (38)     

Net interest settlements included in net interest income(2)

     (541)           —           218           1           —           (322)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net interest (expense) income

     (588)           —           227           1           —           (360)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net gains (losses) on derivatives and hedging activities:

                 

Gains (losses) on fair value hedges

     40           —           (5)           —           —           35     

Losses (gains) on derivatives not receiving hedge accounting

     —           (55)           5          —           (5)           (55)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net gains (losses) on derivatives and hedging activities

     40           (55)           —           —           (5)           (20)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net interest (expense) income and net gains (losses) on derivatives and hedging activities

     (548)           (55)           227           1           (5)           (380)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net gains on trading securities(3)

     —           20           —           —           —           20     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net effect of derivatives and hedging activities

     $      (548)           $             (35)           $        227           $            1           $          (5)           $     (360)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Represents the amortization/accretion of hedging fair value adjustments for both open and closed hedge positions.

(2)

Represents interest income/expense on derivatives included in net interest income.

(3)

Includes only those gains or losses on trading securities that have an economic derivative “assigned,” therefore, this line may not agree to the income statement.

 

48


Table of Contents
00000000000000 00000000000000 00000000000000 00000000000000 00000000000000 00000000000000
     Three Months Ended June 30, 2010  
     Advances      Investments      Consolidated
Obligation

Bonds
     Consolidated
Obligation

Discount
Notes
     Balance
Sheet
     Total  

Net interest income:

                 

Amortization/accretion of hedging activities in net interest income (1)

     $        (66)           $          —           $        15           $              —           $              —           $         (51)     

Net interest settlements included in net interest income(2)

     (811)           —           319           1           —           (491)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net interest (expense) income

     (877)           —           334           1           —           (542)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net gains (losses) on derivatives and hedging activities:

                 

Gains on fair value hedges

     43           —           5           —           —           48     

(Losses) gains on derivatives not receiving hedge accounting

     —           (100)           6           —           (12)           (106)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net gains (losses) on derivatives and hedging activities

     43           (100)           11           —           (12)           (58)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net interest (expense) income and net gains (losses) on derivatives and hedging activities

     (834)           (100)           345           1           (12)           (600)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net gains on trading securities(3)

     —           76           —           —           —           76     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net effect of derivatives and hedging activities

     $      (834)           $            (24)           $        345           $            1           $          (12)           $     (524)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Represents the amortization/accretion of hedging fair value adjustments for both open and closed hedge positions.

(2)

Represents interest income/expense on derivatives included in net interest income.

(3)

Includes only those gains or losses on trading securities that have an economic derivative “assigned,” therefore, this line may not agree to the income statement.

 

00000000000000 00000000000000 00000000000000 00000000000000 00000000000000 00000000000000
     Six Months Ended June 30, 2011  
     Advances      Investments      Consolidated
Obligation

Bonds
     Consolidated
Obligation

Discount
Notes
     Balance
Sheet
     Total  

Net interest income:

                 

Amortization/accretion of hedging activities in net interest income (1)

     $        (95)           $          —           $        20           $              —           $              —           $         (75)     

Net interest settlements included in net interest income(2)

     (1,131)           —           434           2           —           (695)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net interest (expense) income

     (1,226)           —           454           2           —           (770)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net gains (losses) on derivatives and hedging activities:

                 

Gains (losses) on fair value hedges

     87           —           (14)           —           —           73     

Gains (losses) on derivatives not receiving hedge accounting

     1           (51)           5           —           (2)           (47)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net gains (losses) on derivatives and hedging activities

     88           (51)           (9)           —           (2)           26     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net interest (expense) income and net gains (losses) on derivatives and hedging activities

     (1,138)           (51)           445           2           (2)           (744)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net losses on trading securities(3)

     —           (14)           —           —           —           (14)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net effect of derivatives and hedging activities

     $      (1,138)           $            (65)           $        445           $            2           $          (2)           $     (758)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Represents the amortization/accretion of hedging fair value adjustments for both open and closed hedge positions.

(2)

Represents interest income/expense on derivatives included in net interest income.

(3)

Includes only those gains or losses on trading securities that have an economic derivative “assigned,” therefore, this line may not agree to the income statement.

 

49


Table of Contents
000000000000 000000000000 000000000000 000000000000 000000000000 000000000000
    Six Months Ended June 30, 2010  
        Advances             Investments         Consolidated
Obligation

Bonds
    Consolidated
Obligation
Discount
Notes
    Balance
Sheet
    Total  

Net interest income:

           

Amortization/accretion of hedging activities in net interest income (1)

    $       (135)          $           —          $        31          $          —          $            —          $       (104)     

Net interest settlements included in net interest income(2)

    (1,702)          —          695          8          —          (999)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net interest (expense) income

    (1,837)          —          726          8          —          (1,103)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net gains (losses) on derivatives and hedging activities:

           

Gains (losses) on fair value hedges

    106          —          (9)          (3)          —          94     

(Losses) gains on derivatives not receiving hedge accounting

    —          (162)          7         —          (14)          (169)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net gains (losses) on derivatives and hedging activities

    106          (162)          (2)          (3)          (14)          (75)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net interest (expense) income and net gains (losses) on derivatives and hedging activities

    (1,731)          (162)          724          5          (14)          (1,178)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net gains on trading securities(3)

    —          80          —          —          —          80     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net effect of derivatives and hedging activities

    $    (1,731)          $            (82)          $        724          $         5          $     (14)          $    (1,098)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Represents the amortization/accretion of hedging fair value adjustments for both open and closed hedge positions.

(2)

Represents interest income/expense on derivatives included in net interest income.

(3)

Includes only those gains or losses on trading securities that have an economic derivative “assigned,” therefore, this line may not agree to the income statement.

Non-interest Expense

Non-interest expense was $45 million and $8 million for the second quarter of 2011 and 2010, respectively, and $86 million and $54 million for the first six months of 2011 and 2010, respectively. The increase during the second quarter and first six months of 2011, compared to the same periods in 2010, was due primarily to the Bank’s reduction in its provision for credit losses on a receivable due from Lehman by $49 million during the second quarter of 2010, which resulted in an increase in income for that period.

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, and the Bank attempts to be in a position to meet member funding needs on a timely basis.

Finance Agency regulations require the Bank to maintain 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 this regulatory liquidity requirement during the second quarter of 2011. During the recent financial crisis, the Finance Agency provided liquidity guidance to the FHLBanks generally to provide ranges of days within 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.

In addition, the Bank strives to maintain sufficient liquidity to service debt obligations for at least 45 days, assuming restricted debt market access. The Bank’s 45-day debt service goal is closely aligned with those recommended by the Finance Agency and reflects the Bank’s practice of not committing to consolidated obligation settlements beyond 30 days. The Bank met its internal liquidity goal during the first six months of 2011.

 

50


Table of Contents

The Bank’s principal source of liquidity is consolidated obligation debt instruments. To provide 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. These funding sources depend on the Bank’s ability to access the capital markets at competitive market rates. Although the Bank maintains secured and unsecured lines of credit with money market counterparties, the Bank’s income and liquidity would be affected adversely if it were not able to access the capital markets at competitive rates for an extended period. Historically, the FHLBanks have had excellent capital market access, although the FHLBanks experienced a decrease in investor demand for consolidated obligation bonds during part of the recent financial crisis and therefore increased its issuance of short-term discount notes as an alternative source of funding. The Bank’s funding costs and ability to issue longer-term and structured debt generally have returned to pre-2008 levels, but continue to reflect some market volatility.

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, as well as systemic Federal Reserve wire transfer system disruptions. Additionally, the FHLBank Act authorizes the Secretary of the U.S. Department of the Treasury (Treasury), at his or her discretion, to purchase COs up to an aggregate amount of $4.0 billion. No borrowings under this authority have been outstanding since 1977.

During the month of July the Bank increased its issuance of CO notes to maintain a high level of short-term liquidity in anticipation of possible disruption in the capital markets as a result of the statutory debt limit debate.

As discussed above under “Financial Condition – Consolidated Obligations,” in August, Moody’s revised its rating outlook on the Aaa bond rating of the U.S., and consequently the ratings of the FHLBanks, to negative. On August 5, 2011, S&P downgraded the long-term sovereign credit rating of the U.S. from AAA to AA+, and consequently downgraded all the FHLBanks to AA+ on August 8, 2011. These actions reflect the rating agencies’ view that the ratings of the FHLBank System and the individual FHLBanks are constrained by the sovereign rating of the U.S. These rating agency actions, and any further changes to the U.S. sovereign credit rating, may cause disruptions in the financial markets, increase the Bank’s cost of funds, or decrease the Bank’s ability to access the capital markets, which may adversely impact the Bank’s ability to maintain sufficient liquidity levels.

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 COs; 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. The Bank considers the joint and several liability to be a related-party guarantee. These related-party guarantees meet the scope exception under GAAP. Accordingly, the Bank has not recognized a liability for its joint and several obligations related to other FHLBanks’ COs at June 30, 2011 and December 31, 2010. As of June 30, 2011, the FHLBanks had $727.5 billion in aggregate par value of COs issued and outstanding, $104.0

 

51


Table of Contents

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 CO as a result of the failure of another FHLBank to meet its obligations.

As of June 30, 2011, the Bank had outstanding standby letters of credit of $24.6 billion with original terms of less than twelve months to 20 years, with the longest final expiration in 2030. As of December 31, 2010, the Bank had outstanding standby letters of credit of $22.3 billion with original terms of less than two months to 20 years, with the longest final expiration in 2030. This increase was due primarily to the issuance of a single long-term standby letter of credit during the second quarter of 2011 as a replacement for a short-term standby letter of credit that expired in accordance with its terms during the first quarter of 2011. Notwithstanding this increase during the first six months of 2011, the Bank expects its overall standby letter of credit activity to remain relatively stable for the near future. As of the date of this report, the full impact of S&P’s recent downgrade of the issuer credit ratings of the FHLBanks is unclear. However, this downgrade and any further downgrade of the Bank’s credit rating could negatively impact the Bank’s standby letter of credit activity, as beneficiaries may have certain issuer credit rating requirements. See “Financial Condition – Consolidated Obligations” and “Liquidity and Capital Resources” above for further discussion of recent actions taken by Moody’s and S&P.

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. The Bank may issue standby letters of credit for terms of longer than one year without annual renewals or for open-ended terms with annual renewals (commonly known as evergreen letters of credit) based on the creditworthiness of the member applicant.

Commitments to extend credit, including standby letters of credit, are agreements to lend. The Bank issues a standby letter of credit for the account of a member in exchange for a fee. A member may use these standby letters of credit to facilitate a financing arrangement. The Bank requires its borrowers, upon the effective date of the letter of credit through its expiration, to collateralize fully the face amount of any letter of credit issued by the Bank, as if such face amount were an advance to the borrower. Standby letters of credit are not subject to activity-based capital stock purchase requirements. If the Bank is required to make payment for a beneficiary’s draw, the Bank in its discretion may convert such paid amount to an advance to the member and will require a corresponding activity-based capital stock purchase. The Bank’s underwriting and collateral requirements for standby letters of credit are the same as those requirements for advances. 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 June 30, 2011. 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.

Contractual Obligations

As of June 30, 2011, there has been no material change outside the ordinary course of business in the Bank’s contractual obligations as reported in the Bank’s Form 10-K.

 

52


Table of Contents

Legislative and Regulatory Developments

The legislative and regulatory environment for the Bank continues to change rapidly as financial regulators issue proposed and/or final rules to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) enacted July 2010.

Dodd-Frank Act

The Dodd-Frank Act, among other things: (1) creates an interagency oversight council (the Oversight Council) that will identify and regulate systemically important financial institutions; (2) regulates the over-the-counter derivatives market; and (3) establishes new requirements, including a risk-retention requirement, for MBS. The Bank’s business operations, funding costs, rights, and obligations, and the manner in which the Bank carries out its housing finance mission may be affected by the Dodd-Frank Act. Certain regulatory actions resulting from the Dodd-Frank Act that may have a material impact on the Bank are summarized below; however, the actual effects of the Dodd-Frank Act will be known only after implementing regulations are finalized and certain determinations under the Dodd-Frank Act are made.

Derivatives Transactions. The Dodd-Frank Act provides for new statutory and regulatory requirements for derivative transactions, including those utilized by the Bank to hedge its interest rate and other risks. As a result of these requirements, certain derivative transactions will be required to be cleared through a third-party central clearinghouse and traded on regulated exchanges or new swap execution facilities. The Commodity Futures Trading Commission (CFTC) has issued a final rule regarding the process pursuant to which it will determine which types of swaps will be subject to mandatory clearing, but has not yet made any such determinations. Based on the effective date of this rule and the time periods set forth in the rule for CFTC determinations regarding mandatory clearing, it is not expected that any of the Bank’s swaps will be required to be cleared until the last week of 2011, at the earliest, and such date may be delayed until some time in 2012.

Cleared swaps will be subject to initial and variation margin requirements established by the clearinghouse and its clearing members. While clearing swaps may reduce counterparty credit risk, the margin requirements for cleared trades have the potential of making derivative transactions more costly. In addition, mandatory swap clearing will require the Bank to enter into new relationships and accompanying documentation with clearing members and additional documentation with its swap counterparties.

The Dodd-Frank Act will also change the regulatory landscape for derivative transactions that are not subject to mandatory clearing requirements (uncleared trades). While the Bank expects to continue to enter into uncleared trades on a bilateral basis, such trades will be subject to new regulatory requirements, including new mandatory reporting requirements, new documentation requirements and new minimum margin and capital requirements imposed by bank and other federal regulators. Under the proposed margin rules, the Bank will have to post both initial margin and variation margin to the Bank’s swap dealer counterparties, but may be eligible in both instances for modest unsecured thresholds as “low-risk financial end users.” Pursuant to additional Finance Agency provisions in the proposed rules, the Bank will be required to collect both initial margin and variation margin from the Bank’s swap dealer counterparties, without any unsecured thresholds. These margin requirements and any related capital requirements could adversely impact the liquidity and pricing of certain uncleared derivative transactions entered into by the Bank and thus also make uncleared trades more costly.

 

53


Table of Contents

The CFTC has issued a proposed rule requiring that collateral posted by swaps customers to a clearinghouse in connection with cleared swaps be legally segregated on a customer-by-customer basis. However, in connection with this proposed rule the CFTC has left open the possibility that customer collateral would not have to be legally segregated but could instead be commingled with all collateral posted by other customers of the Bank’s clearing member. Such commingling would put the Bank’s collateral at risk in the event of a default by another customer of the Bank’s clearing member. To the extent the CFTC’s final rule places the Bank’s posted collateral at greater risk of loss in the clearing structure than under the current over-the-counter market structure, the Bank may be adversely impacted.

The Dodd-Frank Act will require swap dealers and certain other large users of derivatives to register as “swap dealers” or “major swap participants,” as the case may be, with the CFTC and/or the SEC. Based on the definitions in the proposed rules jointly issued by the CFTC and SEC, it does not appear likely that the Bank will be required to register as a “major swap participant,” although this remains a possibility. Also, based on the definitions in the proposed rules, it does not appear likely that the Bank will be required to register as a “swap dealer” for the derivative transactions that the Bank enters into with dealer counterparties for the purpose of hedging and managing the Bank’s interest rate risk, which constitute the great majority of the Bank’s derivative transactions. However, based on the proposed rules, it is possible that the Bank could be required to register with the CFTC as a swap dealer based on the intermediated “swaps” that the Bank has historically entered into with its members.

It is also unclear how the final rule will treat the call and put optionality in certain advances to the Bank’s members. The CFTC and SEC have issued joint proposed rules further defining the term “swap” under the Dodd-Frank Act. These proposed rules and accompanying interpretive guidance attempt to clarify that certain products will and will not be regulated as “swaps.” While it is unlikely that advances transactions between the Bank and the Bank’s member customers will be treated as “swaps,” the proposed rules and accompanying interpretive guidance are not entirely clear on this issue. Depending on how the terms “swap” and “swap dealer” are finally defined in the final regulations, the Bank may be faced with the business decision of whether to continue to offer certain types of advances products and intermediated derivatives to member customers if those transactions would require the Bank to register as a swap dealer. Designation as a swap dealer would subject the Bank to significant additional regulation and cost including, without limitation, registration with the CFTC, new internal and external business conduct standards, additional reporting requirements and additional swap-based capital and margin requirements. Even if the Bank is designated as a swap dealer as a result of either its advances activities or its intermediated activities, or both, the proposed regulations would permit the Bank to apply to the CFTC to limit such designation to those specified activities for which the Bank is acting as a swap dealer. Upon such designation, the hedging activities of the Bank would not be subject to the full requirements that will generally be imposed on traditional swap dealers.

While certain provisions of the Dodd-Frank Act took effect on July 16, 2011, the CFTC has issued an order temporarily exempting persons or entities with respect to provisions of Title VII of the Dodd-Frank Act that reference “swap dealer,” “major swap participant,” “eligible contract participant” and “swap.” These exemptions will expire upon the earlier of: (1) the effective date of the applicable final rule further defining the relevant term; or (2) December 31, 2011. In addition, the provisions of the Dodd-Frank Act that will have the most effect on the Bank did not take effect on July 16, 2011, but will take effect no less than 60 days after the CFTC publishes final regulations implementing such provisions. The CFTC is expected to publish such final regulations between now and the end of 2011, but it is not expected that such final regulations will become effective until the end of 2011, and delays beyond that time are possible.

 

54


Table of Contents

The Bank, together with the other FHLBanks, is actively participating in the regulatory process regarding the Dodd-Frank Act by formally commenting to the regulators regarding a variety of rulemakings that could impact the FHLBanks. The Bank and the other FHLBanks are also working to implement the processes and documentation necessary to comply with the Dodd-Frank Act’s new requirements for derivatives.

Payment of Interest on Demand Deposit Accounts. The Dodd-Frank Act repealed the statutory prohibition against the payment of interest on demand deposits, effective July 21, 2011. To conform their regulations to this provision, the Federal Deposit Insurance Corporation (FDIC) and other applicable banking regulators have proposed to rescind their regulations prohibiting paying interest on demand deposits effective July 21, 2011. The ability of the Bank’s members to pay interest on their customers’ demand deposit accounts may increase their ability to attract or retain customer deposits, which could reduce demand for Bank advances.

Joint Regulatory Actions

Credit Risk Retention for Asset-Backed Securities. As discussed under Legislative and Regulatory Developments in the Bank’s Form 10-Q for the quarter ended March 31, 2011, the Federal banking agencies, the Finance Agency, the Department of Housing and Urban Development and the SEC jointly issued on April 29, 2011 a notice of proposed rulemaking, which proposes regulations requiring sponsors of asset-backed securities to retain a minimum of five percent economic interest in a portion of the credit risk of the assets collateralizing asset-backed securities, unless all the assets securitized satisfy specified qualifications. The comment period for this proposed rule has been extended through August 1, 2011.

Significant Finance Agency Regulatory Actions

Conservatorship and Receivership. On June 20, 2011, the Finance Agency issued a final rule to establish a framework for conservatorship and receivership operations for Fannie Mae and Freddie Mac, both of which are currently in conservatorship, and the FHLBanks, which are subject to the conservatorship and receivership authority of the Finance Agency. The final rule includes provisions that describe the basic authorities of the Finance Agency when acting as conservator or receiver, including the enforcement and repudiation of contracts and the priorities of claims for contract parties and other claimants. The final rule is effective July 20, 2011.

FHLBank Investments. On May 20, 2011, the Finance Agency issued a final rule that codifies the existing 300 percent of capital and other existing policy limitations on the FHLBanks’ MBS purchases and use of derivatives. The Finance Agency stated in the preamble to the final rule that it continues to have concerns about FHLBank investments, including MBS investments, and will likely issue a future rulemaking addressing all aspects of the FHLBanks’ investment authority. The final rule was effective June 20, 2011.

Prudential Management Standards. On June 20, 2011, the Finance Agency issued a proposed rule regarding prudential standards with respect to ten overall categories of operation and management of the FHLBanks and the government-sponsored enterprises, including internal controls, interest rate risk exposure, and market risk. The Finance Agency has proposed to adopt the standards as guidelines, which generally provide principles and leave to the regulated entities the obligation to organize and manage themselves to ensure that the standards are met, subject to agency oversight. The proposed rule also includes procedural provisions relating to the consequences for failing to meet applicable standards, such as requirements

 

55


Table of Contents

regarding submission of a corrective action plan to the Finance Agency. Comments on the proposed rule are due August 19, 2011.

Risk Management

The Bank’s lending, investment and funding activities and the use of derivative hedge instruments expose the Bank to a number of risks, including any one or more of the following:

 

   

market risk, which is the risk that the market value, or estimated fair value, of the Bank’s portfolio will decline as a result of changes in interest rates;

 

   

liquidity risk, which 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 associates in a timely and cost-efficient manner;

 

   

credit risk, which is the risk that the market value of an obligation will decline as a result of deterioration in creditworthiness, or that the amount will not be realized;

 

   

operational risk, which is the risk of loss resulting from inadequate or failed internal processes, people or systems, or from external events, as well as reputation and legal risks associated with business practices or market conduct that the Bank may undertake; and

 

   

business risk, which is the risk of an adverse effect on the Bank’s profitability resulting from external factors that may occur in both the short term and long term.

Discussion of the Bank’s management of its credit risk and market risk is provided below. Further discussion of these risks, as well as the Bank’s management of its liquidity, operational and business risks, is contained in the Bank’s Form 10-K.

Credit Risk

The Bank faces credit risk primarily with respect to its advances, investments, derivatives and mortgage loans.

Advances

Secured advances to member financial institutions account for the largest category of Bank assets; thus, advances are the Bank’s principal source of 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 members 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 quality of assets, earnings, and capital position. The Bank assigns each borrower that is an insured depository institution a credit risk rating from one to 10 according to the relative amount of credit risk 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, the Bank may

 

56


Table of Contents

place more restrictive requirements on a borrower than those generally applicable to borrowers with the same rating based upon management’s assessment of the borrower and its collateral.

The following table sets forth the number of borrowers and the par amount of advances outstanding to borrowers with the specified ratings as of the specified dates (dollars in millions):

 

     As of June 30, 2011      As of December 31, 2010  

Rating

   Number of
         Borrowers        
             Outstanding        
Advances
     Number of
         Borrowers        
             Outstanding        
Advances
 

1-9

     534           $                67,878           569           $            79,170     

10

     153           4,364           157           4,815     

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 indicating the borrower’s overall creditworthiness. The credit limit generally is expressed as a percentage equal to the ratio of the borrower’s total liabilities to the Bank (including the face amount of outstanding letters of credit, the principal amount 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. As of June 30, 2011, 11 borrowers have been approved for a credit limit higher than 30 percent.

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 outstanding principal amount of all advances and other liabilities of the borrower to 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 unpaid principal balance, market value, or other value of the qualifying collateral, to calculate the LCV. The Bank regularly reevaluates the appropriate level of discounting. The following table provides 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 June 30, 2011

    $              73,604            $ 180,436          67.50          10.16          22.34     

As of December 31, 2010

    85,051          188,212          67.43          10.19          22.38     

As of February 1, 2010, for purposes of determining each member’s LCV, the Bank estimates the current market value of all residential first mortgage loans pledged as collateral based on information provided by the member on individual loans or its loan portfolio through the regular collateral reporting process. The estimated market value is discounted to account for the price volatility of loans as well as estimated liquidation and servicing costs in the event of the member’s default. Beginning December 1, 2010, LCVs for home equity loans and lines of credit pledged as collateral are similarly based on market values. Market values, and thus LCVs change monthly. The Bank believes that this shift to a market-based valuation methodology allows the Bank to establish its collateral discounts with greater precision. These changes are part of a broader effort to provide greater transparency with respect to the valuation of collateral pledged

 

57


Table of Contents

for advances and other credit products offered by the Bank. In the future, the Bank expects to expand this market-based valuation methodology to multifamily and commercial real estate collateral.

The following table provides information on FDIC-insured institutions that were placed into receivership during the periods indicated.

 

             Three Months Ended June 30,                       Six Months Ended June 30,           
     2011      2010      2011      2010  

FHLBank Atlanta members

     15           11           25           24     

Non-FHLBank Atlanta members

     10           34           26           62     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total FDIC-insured

     25           45           51           86     
  

 

 

    

 

 

    

 

 

    

 

 

 

All outstanding advances to those member institutions placed into FDIC receivership were either paid in full or assumed by another member or non-member institution under purchase and assumption agreements between the assuming institution and the FDIC.

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 claims and rights that (1) would be entitled to priority under otherwise applicable law; and (2) are held by actual bona fide purchasers for value or by actual secured parties that are secured by actual perfected security interests.

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 June 30, 2011 and December 31, 2010.

Investments

While the Bank faces what it believes to be minimal credit risk on advances to members, it is subject to credit risk on certain unsecured investments, including certificates of deposits, federal funds sold and MBS.

The Bank follows guidelines approved by its board of directors regarding unsecured extensions of credit, in addition to Finance Agency regulations 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;

 

   

non-investment grade debt instruments, other than certain investments targeted to low-income people or communities and instruments that were downgraded to below an investment grade rating after purchase by the Bank;

 

58


Table of Contents
   

whole mortgages or other whole loans, other than (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 having at least the second highest credit rating from a NRSRO; (4) MBS or asset-backed securities backed by manufactured housing loans or home equity loans; and (5) certain foreign housing loans authorized under section 12(b) of the FHLBank Act;

 

   

interest-only or principal-only stripped MBS, collateralized mortgage obligations (CMOs), collateralized debt obligations (CDOs), 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 on the trade date are at rates equal to their contractual cap 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.

Consistent with its practice with respect to members, the Bank monitors the financial condition of investment counterparties to ensure that they are in compliance with the Bank’s Risk Management Policy (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 monthly 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.

The Bank experienced a decrease in unsecured credit exposure in its investment portfolio related to non-U.S. government or non-U.S. government agency counterparties from $17.4 billion as of December 31, 2010 to $15.6 billion as of June 30, 2011. There were five such counterparties that represented 50.0 percent, and four such counterparties that each represented greater than 10 percent, of the total unsecured credit exposure to non-U.S. government or non-U.S. government agencies counterparties. The Bank’s unsecured credit exposure is comprised primarily of federal funds sold.

The Bank’s RMP permits the Bank to invest in U.S. agency (Fannie Mae, Freddie Mac and Ginnie Mae) obligations, including CMOs and REMICS backed by such securities, and other MBS, CMOs and REMICS rated AAA by S&P or Aaa by Moody’s at the time of purchase. The MBS purchased by the Bank attain their triple-A ratings through credit enhancements, which primarily consist of the subordination of the claims of the other tranches of these securities. As of June 30, 2011, the Bank’s long-term investment portfolio included $7.7 billion of private-label MBS, which represented 35.6 percent of the carrying value of the Bank’s long-term investment portfolio.

The tables below provide information on the credit ratings of the Bank’s investments held at June 30, 2011 and December 31, 2010, based on their credit ratings as of June 30, 2011 and December 31, 2010 (in millions). The credit ratings reflect the lowest long-term credit rating as reported by an NRSRO.

 

59


Table of Contents

As of June 30, 2011

Carrying Value (1)

 

    Investment Grade     Below Investment Grade  
    AAA     AA     A     BBB     BB     B     CCC     CC     C  

Short-term investments:

                 

Deposits with other FHLBank

     $ —          $        2          $      —          $      —          $    —          $      —          $        —          $     —          $    —   

Certificates of deposit

    —          200          935          —          —          —          —          —            

Federal funds sold

    —          5,825          8,285          —          —          —          —          —            
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total short-term investments

    —          6,027          9,220          —          —          —          —          —            
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term investments:

                 

State or local housing agency debt obligations

    116          —          —          —          —          —          —          —            

U.S. government agency debt obligations

    3,597          —          —          —          —          —          —          —            

Mortgage-backed securities:

                 

U.S. government agency securities

    10,272          —          —          —          —          —          —          —            

Private label

    989          409          967          615          879          1,368          1,735          485          300   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage-backed securities

    11,261          409          967          615          879          1,368          1,735          485          300   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term investments

    14,974          409          967          615          879          1,368          1,735          485          300   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

     $   14,974           $     6,436           $   10,187           $     615           $     879           $     1,368           $     1,735           $     485           $   300   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Investment amounts noted in the above table represent the carrying value and do not include related accrued interest receivable of $89 million at June 30, 2011.

As of December 31, 2010

Carrying Value (1)

 

    Investment Grade     Below Investment Grade  
    AAA     AA     A     BBB     BB     B     CCC     CC     C  

Short-term investments:

                 

Deposits with other FHLBank

     $ —           $ 2            $ —            $     —          $    —            $ —            $ —            $ —            $     —   

Certificates of deposit

    —          —          1,190          —          —          —          —          —            

Federal funds sold

    —          7,016          8,685          —          —          —          —          —            
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total short-term investments

    —          7,018          9,875          —          —          —          —          —            
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term investments:

                 

State or local housing agency debt obligations

    111          —          —          —          —          —          —          —            

U.S. government agency debt obligations

    4,253          —          —          —          —          —          —          —            

Mortgage-backed securities:

                 

U.S. government agency securities

    9,676          —          —          —          —          —          —          —            

Private label

    2,766          455          1,084          355          712          1,049          1,708          608          209   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage-backed securities

    12,442          455          1,084          355          712          1,049          1,708          608          209   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term investments

    16,806          455          1,084          355          712          1,049          1,708          608          209   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

     $   16,806           $   7,473             $   10,959             $ 355             $ 712             $  1,049             $   1,708             $   608             $ 209   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Investment amounts noted in the above table represent the carrying value and do not include related accrued interest receivable of $104 million at December 31, 2010.

 

60


Table of Contents

Subsequent to June 30, 2011, $858 million, or 2.32 percent, of the Bank’s investments have been downgraded as of July 31, 2011 as outlined in the table below (in millions):

 

Investment Ratings

   Downgrades - Balances Based on
Carrying Values at June 30, 2011
 

    At June 30, 2011    

  

    At July 31, 2011    

  

 

Private-label MBS

 
From    To        Carrying Value                  Fair Value          

 

  

 

  

 

 

    

 

 

 
  AA      BBB        $ 62             $ 60     
     BB      52           52     
  A      B      12           12     
  BBB      BB      86           81     
  BB      B      171           163     
     CCC      22           22     
  B      CCC      329           314     
     CC      42           42     
  CCC      CC      82           82     
     

 

 

    

 

 

 
  Total           $ 858             $     828     
     

 

 

    

 

 

 

The following table presents all investments held on June 30, 2011 and on negative watch at July 31, 2011 (in millions):

 

    On Negative Watch - Balances Based on Carrying Values at June 30, 2011  
    Private-label MBS     Non-MBS Investments     U.S. Agency Securities  
Investment Ratings:        Carrying Value                 Fair Value                    Carrying Value                     Fair Value                    Carrying Value             Fair Value      

AAA

      $ 35            $ 36            $ —            $ —            $ 13,869            $ 14,075     

AA

    —          —          3,295          3,295          —          —     

BB

    40          40          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ 75            $ 76            $ 3,295            $ 3,295            $ 13,869            $ 14,075     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

In July 2011, S&P placed the AAA long-term U.S. sovereign credit rating on CreditWatch negative and Moody’s placed the Aaa U.S. bond rating on review for possible downgrade. In August 2011, Moody’s confirmed its Aaa U.S. bond rating with a negative outlook. These actions impacted the debt ratings of certain entities whose ratings are linked to those of the U.S., including government-sponsored enterprises, and are reflected within the U.S. Agency Securities category in the above table. On August 5, 2011, S&P downgraded the long-term U. S. sovereign credit rating to AA+ with a negative outlook.

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. 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 alternative documentation. At June 30, 2011, based on the classification by the originator at the time of origination, approximately 87.6 percent of the underlying mortgages collateralizing the Bank’s private-label MBS were considered prime and the remaining underlying mortgages collateralizing these securities were considered Alt-A.

 

61


Table of Contents

The tables below provide additional information, including changes in ratings since the original purchase date, on the Bank’s private-label MBS by year of securitization at June 30, 2011 (dollars in millions).

 

    Year of Securitization - Prime  
            2008                     2007                     2006                     2005                 2004 and    
Prior
            Total          

Investment Ratings:

           

AAA

      $ —            $ —            $ —            $ 29            $ 936            $ 965     

AA

    —          32          —          105          206          343     

A

    —          —          —          265          522          787     

BBB

    —          —          —          86          263          349     

BB

    —          149          126          311          307          893     

B

    —          126          58          571          599          1,354     

CCC

    207          704          462          504          37          1,914     

CC

    —          318          193          119          —          630     

C

    —          140          174          16          —          330     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total unpaid principal balance

      $ 207            $ 1,469            $ 1,013            $ 2,006            $ 2,870            $ 7,565     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amortized cost

      $ 189            $ 1,242            $ 869            $ 1,884            $ 2,850            $ 7,034     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross unrealized losses

      $ —            $ (57)            $ (43)            $ (146)            $ (114)            $ (360)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value

      $ 190            $ 1,195            $ 830            $ 1,739            $ 2,771            $ 6,725     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other-than-temporary impairment (Year-to-date):

           

Credit-related losses

      $ —            $ (20)            $ (16)            $ (28)            $ (5)            $ (69)     

Non-credit-related losses

    —          (16)          (16)          (25)          25          (32)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other-than-temporary impairment losses

      $ —            $ (4)            $ —            $ (3)            $ (30)            $ (37)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Weighted average percentage of fair value to unpaid principal balance     91.77%          81.27%          82.04%          86.75%          96.52%          88.90%     

Original weighted average credit support

    15.72%          13.07%          9.80%          6.61%          3.13%          7.22%     

Weighted average credit support

    14.04%          8.25%          5.28%          7.90%          7.73%          7.72%     

Weighted average collateral delinquency

    17.41%          22.65%          19.69%          13.01%          6.68%          13.49%     

 

62


Table of Contents
    Year of Securitization – Alt-A  
            2008                     2007                     2006                     2005                 2004 and    
Prior
            Total          

Investment Ratings:

           

AAA

        $ —                $ —                $ —                $ —                $ 32              $ 32     

AA

    —          —          —          —          69          69     

A

    —          —          —          —          186          186     

BBB

    —          —          —          —          265          265     

B

    —          —          —          —          88          88     

CCC

    —          —          —          366          —          366     

C

    —          64          —          —          —          64     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total unpaid principal balance

        $ —                $ 64                $ —                $ 366                $ 640              $ 1,070     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amortized cost

      $ —            $ 49            $ —            $ 309                $ 641            $ 999     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross unrealized losses

      $ —            $ (2)            $ —            $ (93)                $ (6)            $ (101)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value

      $ —            $ 46            $ —            $ 216                $ 640            $ 902     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other-than-temporary impairment (Year-to-date):

           

Credit-related losses

      $ —            $ (2)            $ —            $ (18)              $ —            $ (20)     

Non-credit-related losses

    —          (2)          —          (18)          —          (20)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other-than-temporary impairment losses

      $ —            $ —            $ —            $ —              $ —              $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average percentage of fair value to unpaid principal balance

    0.00%          72.31%          0.00%          59.10%          99.96%          84.33%     

Original weighted average credit support

    0.00%          12.29%          0.00%          26.58%          6.98%          14.00%     

Weighted average credit support

    0.00%          4.19%          0.00%          23.34%          11.30%          14.99%     

Weighted average collateral delinquency

    0.00%          33.82%          0.00%          39.82%          6.43%          19.49%     

The table below provides information on the interest-rate payment terms of the Bank’s private-label MBS backed by prime and Alt-A loans (in millions).

 

    As of June 30, 2011     As of December 31, 2010  
          Fixed-Rate               Variable-Rate                 Total                 Fixed-Rate           Variable-Rate               Total          

Private-label MBS:

           

Prime

    $ 1,269          $ 6,296          $ 7,565          $ 1,649          $ 7,041          $ 8,690     

Alt-A

    511          559          1,070          574          587          1,161     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total unpaid principal balance

    $ 1,780          $ 6,855          $ 8,635          $ 2,223          $ 7,628          $ 9,851     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Bank evaluates its individual investment securities for other-than-temporary impairment on a quarterly basis, as described in detail in Note 6 to the Bank’s interim financial statements. Each quarter, the Bank updates the input assumptions used in the model to reflect the most current actual loan performance information and the most current housing market assumptions. During the second quarter of 2011, the current and forecasted economic trends included continued high unemployment, ongoing pressure on housing prices, limited refinancing opportunities for borrowers whose houses are now worth less than the balance of their mortgages, a slower-than-expected recovery and an uncertain outlook.

 

63


Table of Contents

The following table represents a summary of the significant inputs used for all of the Bank’s private-label MBS:

 

    Significant Inputs  
    Prepayment Rate     Default Rates     Loss Severities     Current Credit Enhancement  
        Weighted    
Average
(%)
        Range (%)             Weighted    
Average
(%)
        Range (%)             Weighted    
Average
(%)
        Range (%)             Weighted    
Average
(%)
        Range (%)      

Year of Securitization

               

Prime:

               

2008

    7.51          7.51 to 7.51          42.26          42.26 to 42.26          45.69          45.69 to 45.69          14.04          13.96 to 14.24     

2007

    9.71          6.41 to 18.33          14.58          0.68 to 22.14          37.35          19.75 to 46.35          5.47          2.97 to 8.91     

2006

    8.70          6.49 to 14.71          20.13          12.20 to 38.45          45.23          30.40 to 49.40          5.27          2.18 to 7.74     

2005

    11.27          5.73 to 14.78          12.09          0.99 to 40.40          33.21          20.02 to 45.11          7.50          4.59 to 14.68     

2004

    22.80          3.54 to 52.01          7.37          0.00 to 32.58          24.09          0.00 to 59.20          7.39          2.22 to 74.79     

Total Prime

    16.40          3.54 to 52.01          11.93          0.00 to 42.26          30.77          0.00 to 59.20          7.28          2.18 to 74.79     

Alt-A:

               

2007

    9.50          5.90 to 12.69          59.93          48.80 to 71.94          52.61          47.94 to 53.79          9.44          0.31 to 15.20     

2006

    10.31          9.05 to 12.52          57.14          51.26 to 62.85          52.61          46.32 to 58.01          5.28          2.29 to 7.42     

2005

    9.56          6.17 to 13.96          53.62          26.44 to 81.15          52.94          46.01 to 59.20          15.23          2.76 to 42.03     

2004

    14.26          11.07 to 20.26          10.15          1.50 to 40.60          31.70          17.36 to 51.71          11.75          3.37 to 39.59     

Total Alt-A

    10.85          5.90 to 20.26          45.10          1.50 to 81.15          47.37          17.36 to 59.20          10.98          0.31 to 42.03     

Total

    14.39          3.54 to 52.01          23.94          0.00 to 81.15          36.78          0.00 to 59.20          8.62          0.31 to 74.79     

For those securities for which an other-than-temporary impairment was determined to have occurred during the second quarter of 2011, a summary of the significant inputs used to measure the amount of the credit loss recognized in earnings is contained in Note 6 to the Bank’s interim financial statements.

The tables below summarize the total other-than-temporary impairment losses by newly impaired and previously impaired securities (in millions):

 

    Three Months Ended June 30,  
    2011     2010  
        Credit Losses         Net
         Noncredit        
Losses
        Total Losses             Credit Losses         Net
         Noncredit        
Losses
        Total Losses      

Securities newly impaired during the period

            $ (1)                  $ 6              $ (7)            $ (21)                $ 97            $ (118)     
Securities previously impaired prior to current period*     (36)          (31)          (5)          (51)          (38)          (13)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

          $ (37)                $ (25)            $ (12)            $ (72)                $ 59            $ (131)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* For the three months ended June 30, 2011 and 2010, “Securities previously impaired prior to current period” represents all securities that were also previously impaired prior to April 1, 2011 and 2010.

 

64


Table of Contents
    Six Months Ended June 30,  
    2011     2010  
        Credit Losses         Net
         Noncredit        
Losses
        Total Losses             Credit Losses         Net
        Noncredit         
Losses
        Total Losses      

Securities newly impaired during the period

               $ (7)                  $ 26            $ (33)            $ (38)                $ 154            $ (192)     
Securities previously impaired prior to current period*     (82)          (78)          (4)          (80)          (77)          (3)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

              $ (89)                $ (52)            $ (37)            $ (118)                $ 77            $ (195)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* For the six months ended June 30, 2011 and 2010, “Securities previously impaired prior to current period” represents all securities that were also previously impaired prior to January 1, 2011 and 2010.

Certain other private-label MBS in the Bank’s investment portfolio that have not been designated as other-than-temporarily impaired have experienced unrealized losses and decreases in fair value due to interest rate volatility, illiquidity in the marketplace, and credit weaknesses in the U.S. mortgage markets. 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 the securities, and it is not more likely than not that the Bank will be required to sell the securities before the anticipated recovery of the securities’ remaining amortized cost basis, which may be at maturity. The 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.

In addition to the cash flow analysis of the Bank’s private-label MBS under a base case (best estimate) housing price scenario, a cash flow analysis also was performed based on a housing price scenario that is more adverse than the base case (adverse case housing price scenario). The adverse case housing price scenario was based on a housing price forecast that was five percentage points lower at the trough than the base case scenario, followed by a flatter recovery path. Under this scenario, current-to-trough home price declines were projected to range from 5.00 percent to 13.0 percent over the next three to nine months beginning April 1, 2011 followed in each case by a three month period of flat prices. Thereafter, home prices were projected to increase within a range of zero percent to 1.90 percent in the first year, zero percent to 2.00 percent in the second year, 1.00 percent to 2.70 percent in the third year, 1.30 percent to 3.40 percent in the fourth year, 1.30 percent to 4.00 percent in each of the fifth and sixth years, and 1.50 percent to 3.80 percent in each subsequent year. 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 the Bank might incur if home price declines (and subsequent recoveries) are more adverse than those projected in the Bank’s base case assessment.

 

65


Table of Contents

The following table shows the base case scenario and what the impact on other-than-temporary impairment would have been under the more stressful adverse case housing price scenario (dollars in millions):

 

    Three Months Ended June 30, 2011  
    Housing Price Scenario  
    Base Case **     Adverse Case  
        Number of    
Securities
    Unpaid
      Principal      
Balance
    Other-Than-
Temporary
     Impairment Related    

to Credit Loss
        Number of    
Securities
    Unpaid
      Principal      
Balance
    Other-Than-
Temporary
     Impairment Related    

to Credit Loss
 

Private-label MBS

           

Prime *

    22          $  1,777                $ (25)          41          $  3,047          $    (106)     

Alt-A*

    3          430          (12)          3          430          (28)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    25          $  2,207                $ (37)          44          $  3,477          $  (134)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* Based on the originator’s classification of collateral at the time of origination or based on classification of collateral by an NRSRO upon issuance of the MBS.

 

** Represents securities and related other-than-temporary impairment credit losses for the three months ended June 30, 2011.

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.

Non-Private-label MBS. The unrealized losses related to U.S. agency MBS are caused by interest rate changes. Because these securities are guaranteed by government agencies or government-sponsored enterprises, 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 June 30, 2011 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.

Derivatives

Derivatives transactions may subject the Bank to credit risk due to potential nonperformance by counterparties to the agreements. The Bank seeks to limit counterparty risk by collateral requirements and netting procedures that establish collateral requirement thresholds. The Bank also manages counterparty credit risk through credit analysis, collateral management, and other credit enhancements. Additionally, the Bank follows applicable regulatory requirements, which set forth the eligibility criteria for counterparties (i.e., minimum capital requirements, NRSRO ratings, dollar and term limits, etc.). The Bank requires collateral agreements with counterparties that establish maximum allowable net unsecured credit exposure before collateral requirements are triggered. Limits are based on the credit rating of the counterparty. Uncollateralized exposures result when credit exposures to specific counterparties fall below collateralization trigger levels.

As of June 30, 2011, the Bank had $130.8 billion in total notional amount of derivatives outstanding compared to $142.2 billion at December 31, 2010. The notional amount serves as a factor in determining

 

66


Table of Contents

periodic interest payments or cash flows received and paid. It does not represent actual amounts exchanged or the Bank’s exposure to credit and market risk. The amount potentially subject to credit loss is based upon the counterparty’s net payment obligations. The credit risk of derivatives is measured on a portfolio basis by netting the market values of all outstanding transactions for each counterparty.

As of June 30, 2011, 99.9 percent of the total notional amount of outstanding derivatives was represented by 21 counterparties with a credit rating of A or better. Of these counterparties, there were two, Deutsche Bank AG, and Goldman Sachs Group, Inc., that each represented more than 10 percent of the Bank’s total notional amount, and there were three counterparties, Barclays Bank PLC, Bank of America National Association and Goldman Sachs Group, Inc., that represented more than 10 percent of the Bank’s net exposure. As of December 31, 2010, 99.2 percent of the total notional amount of outstanding derivatives was represented by 20 counterparties with a credit rating of A or better. Of these counterparties, there were three, JP Morgan Chase Bank, N.A., Deutsche Bank AG, and Goldman Sachs Group, Inc., that each represented more than 10 percent of the Bank’s total notional amount, and there were no counterparties that represented more than 10 percent of the Bank’s net exposure.

The following tables represent the credit ratings of and the Bank’s credit exposure to its derivative counterparties (in millions):

 

    As of June 30, 2011  
    Notional
Amount
    Total Net
Exposure
      at Fair Value      
    Total Net
Exposure
      Collateralized      
            Net Exposure         
After
Collateral
 

Credit Rating:

       

AA

              $ 35,279          $         7          $          —                   $ 7     

A

    95,363          56          50          6     

BBB

    101          —          —          —     

Member institutions*

    45          4          4          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives

    $      130,788          $        67          $          54                  $ 13     
 

 

 

   

 

 

   

 

 

   

 

 

 

 

* Collateral held with respect to derivative financial instruments with member institutions represents either 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.

 

    As of December 31, 2010  
    Notional
Amount
    Total Net
Exposure
      at Fair Value      
    Total Net
Exposure
      Collateralized      
            Net Exposure         
After
Collateral
 

Credit Rating:

       

AA

              $ 42,689          $         —          $          —                   $ —     

A

    98,353          66          66          —     

BBB

    121          —          —          —     

Member institutions*

    1,046          5          5          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives

    $      142,209          $        71          $          71                  $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

 

* Collateral held with respect to derivative financial instruments with member institutions represents either 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.

The maximum credit risk is the estimated cost of replacing interest-rate swaps, forward agreements, mandatory delivery contracts for mortgage loans and purchased caps and floors that have a net positive market value, if the counterparty defaults and the related collateral pledged to the Bank, if any, is of no value to the Bank.

 

67


Table of Contents

Any net exposure after collateral is treated as unsecured credit consistent with the Bank’s RMP and the Finance Agency regulations if the counterparty has an NRSRO rating. Under the Bank’s RMP, certain term restrictions may apply to a counterparty rated A or lower. If the counterparty does not have an NRSRO rating, the Bank requires collateral for the full amount of the exposure.

If the Bank’s credit ratings had been lowered from its current rating to the next lower rating that would have triggered additional collateral to be delivered, the Bank would have been required to deliver up to an additional $220 million of collateral (at fair value) to its derivative counterparties at June 30, 2011. The Bank’s credit rating did not change during the six-month period ended June 30, 2011, so no additional collateral was required. On August 8, 2011, S&P changed the Bank’s long-term credit rating from AAA to AA+, following S&P’s downgrade of the U.S. sovereign long-term credit rating to AA+. As of the date of this report, the Bank is still assessing any actual amount of additional collateral requirements triggered by this rating downgrade. However, this downgrade and any further downgrade by one or more rating agencies of the Bank’s credit rating could trigger additional collateral requirements and negatively affect the Bank’s derivatives pricing. See “Financial Condition – Consolidated Obligations” and “Liquidity and Capital Resources” above for further discussion of recent credit watch negative actions taken by Moody’s and S&P.

Mortgage Loan Programs

In 2008, the Bank ceased purchasing assets under the Mortgage Partnership Finance ® Program (MPF ® Program or MPF) and the Mortgage Purchase Program (MPP), and in 2006 the Bank ceased purchasing assets under the Affordable Multifamily Participation Program. The Bank maintains its existing portfolio of mortgage loans, which eventually will be reduced to zero in the ordinary course of the maturities of the assets.

The Bank seeks to manage the credit risk associated with MPP and the MPF Program by maintaining underwriting and eligibility standards and structuring possible losses into several layers, consisting of borrower equity, primary and/or supplemental mortgage insurance, loss accounts funded by the participating financial institution (PFI), and other forms of credit enhancement provided by the PFI. These loss layers are discussed in further detail in the Bank’s Form 10-K. Given the amount of loans outstanding, the aggregate credit enhancement available, and the historical performance of the MPF and MPP loans, the Bank believes its credit exposure under MPF and MPP was not significant as of June 30, 2011.

Critical Accounting Policies and Estimates

A description of the Bank’s critical accounting policies and estimates is contained in detail in the Bank’s Form 10-K. There have been no material changes to these policies and estimates during the period reported.

 

68


Table of Contents

Recently Issued and Adopted Accounting Guidance

See Note 2 to the Bank’s interim financial statements for a discussion of recently issued and adopted accounting guidance.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The following quantitative and qualitative disclosures about market risk should be read in conjunction with the quantitative and qualitative disclosures about market risk that are included in the Bank’s Form 10-K. The information provided herein is intended to update the disclosures made in the Bank’s Form 10-K.

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 component of market risk having the greatest effect on the Bank’s financial condition and results of operations is interest-rate risk. A description of the Bank’s management of interest-rate risk is contained in the Bank’s Form 10-K.

The Bank uses derivative financial instruments to reduce the interest-rate risk exposure inherent in otherwise unhedged assets and funding positions. These derivatives are used to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve risk management objectives.

The following table summarizes 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 hedge relationships that formally meet the hedge accounting requirements under GAAP.

 

69


Table of Contents
                    As of June 30, 2011                      As of December 31, 2010           

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

 

Non-qualifying
hedges

   

 

 

$        13,030  

 

100  

  

 

  

   

 

 

$        13,632  

 

100  

  

 

  

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

 

Non-qualifying
hedges

   

 

 

40,913  

 

991  

  

 

  

   

 

 

50,519  

 

1,241  

  

 

  

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     314          413     
Pay variable with embedded features, receive variable interest rate swap (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     —          323     
Pay variable, receive variable basis swap   Reduces interest rate sensitivity and repricing gaps by converting the advance’s variable rate to a different variable rate index.   Non-qualifying
hedges
    369          216     
     

 

 

   

 

 

 
    Total     55,717          66,444     
     

 

 

   

 

 

 
Investments        
Pay fixed, receive variable interest rate swap   Converts the investment’s fixed rate to a variable rate index.   Non-qualifying
hedges
    2,678          2,950     
Pay variable, receive variable interest rate swap   Converts the investment’s variable rate to a different variable rate index.   Non-qualifying
hedges
    50          50     
     

 

 

   

 

 

 
    Total     2,728          3,000     
     

 

 

   

 

 

 
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

 

Non-qualifying
hedges

   

 

 

39,862  

 

550  

  

 

  

   

 

 

38,310  

 

2,850  

  

 

  

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     19,441          21,962     
Receive variable with embedded features, pay variable interest rate swap (callable)   Reduces interest rate sensitivity and repricing gaps by converting the bond’s variable rate to a different variable rate index and/or offsets embedded option risk in the bond.   Fair value hedges     30          30     
Receive variable, pay variable basis swap   Reduces interest rate sensitivity and repricing gaps by converting the bond’s variable rate to a different variable rate index.   Non-qualifying
hedges
    100          —     
     

 

 

   

 

 

 
    Total     59,983          63,152     
     

 

 

   

 

 

 
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     1,095          1,295     
     

 

 

   

 

 

 
    Total     1,095          1,295     
     

 

 

   

 

 

 
Balance Sheet        
Pay fixed, receive variable interest rate swap   Converts the asset or liability fixed rate to a variable rate index.   Non-qualifying
hedges
    175          225     
Interest rate cap or floor   Protects against changes in income of certain assets due to changes in interest rates.   Non-qualifying
hedges
    11,000          6,000     
     

 

 

   

 

 

 
    Total     11,175          6,225     
     

 

 

   

 

 

 

 

70


Table of Contents
                    As of June 30, 2011                      As of December 31, 2010           

Hedged Item / Hedging Instrument

 

Hedging Objective

  Hedge
Accounting
    Designation    
  Notional Amount     Notional Amount  

Intermediary Positions and Other

 

     
Pay fixed, receive fixed interest rate swap   To offset interest rate swaps executed with members by executing interest rate swaps with derivatives counterparties.   Non-qualifying
hedges
    —          1     
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
    90          92     
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
    —          2,000     
     

 

 

   

 

 

 
    Total     90          2,093     
     

 

 

   

 

 

 

Total notional amount

        $      130,788          $        142,209     
     

 

 

   

 

 

 

The Bank measures interest-rate risk exposure by various methods, including calculating the effective duration and convexity of assets, liabilities, and equity under various scenarios, and 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.

Bank policy requires the Bank to maintain its effective duration of equity within a range of +5 years to –5 years, assuming current interest rates, and within a range of +7 years to –7 years, assuming an instantaneous parallel increase or decrease in market interest rates of 200 basis points. The table below reflects the Bank’s effective duration exposure measurements as calculated in accordance with Bank policy.

 

Effective Duration Exposure  
(In years)  
    As of June 30, 2011     As of December 31, 2010  
    Up 200
    Basis Points    
      Current       Down 200
    Basis Points*    
    Up 200
     Basis Points    
      Current       Down 200
    Basis Points*    
 

Assets

    0.67          0.42          0.10          0.67          0.46          0.01     

Liabilities

    0.51          0.55          0.18          0.50          0.57          0.23     

Equity

    2.70          (1.24)          (0.92)          2.95          (0.97)          (2.89)     

Effective duration gap

    0.16          (0.13)          (0.08)          0.17          (0.11)          (0.22)     

 

* The “down 200 basis points” scenarios shown above are considered to be “constrained shocks”, intended to prevent the possibility of negative interest rates when a designated low rate environment exists.

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 the fair value hierarchy approach as more fully described in Note 18 to the 2010 audited financial statements contained in the Bank’s Form 10-K. 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 Bank’s

 

71


Table of Contents

total capital decreased by $725 million from December 31, 2010 to June 30, 2011, and the market value of equity decreased by $774 million during this same period.

 

Market Value of Equity   
(In millions)   
    As of June 30, 2011     As of December 31, 2010  
    Up 200
      Basis Points      
              Current                Down 200
      Basis Points*      
    Up 200
      Basis Points      
              Current                Down 200
      Basis Points*      
 

Assets

      $ 111,787            $ 113,124            $ 113,733            $ 125,891            $ 127,451            $ 128,219     

Liabilities

    104,665          105,785          106,399          118,095          119,338          120,156     

Equity

    7,122          7,339          7,334          7,796          8,113          8,063     

 

 

* The “down 200 basis points” scenarios shown above are considered to be “constrained shocks”, intended to prevent the possibility of negative interest rates when a designated low rate environment exists.

 

Item 4. 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.

As of June 30, 2011, the Bank’s Certifying Officers have evaluated the effectiveness of the design and operation of its disclosure controls and procedures. Based on that evaluation, they 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 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.

Changes in Internal Control Over Financial Reporting

During the second quarter of 2011, 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.

 

72


Table of Contents

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

On January 18, 2011, the Bank filed a complaint in the State Court of Fulton County, Georgia relating to material misrepresentations in the offering documents of thirty private-label MBS sold to the Bank. The Bank’s complaint is an action for monetary damages and other relief and alleges violations of the Georgia RICO (Racketeer Influenced and Corrupt Organizations) Act, fraud and negligent misrepresentation in violation of Georgia law. On May 19, 2011, the defendants filed a Joint Motion to Dismiss or in the Alternative for a More Definite Statement. The Bank filed its opposition to the defendants’ motion to dismiss and alternative motion for a more definite statement on July 8, 2011. For a discussion of this litigation, see “Part I. Item 3. Legal Proceedings” in the Bank’s Form 10-K, and “Part II. Item 1. Legal Proceedings” in the Bank’s Form 10-Q for the period ended March 31, 2011.

On January 21, 2011, the Bank (together with certain other private-label MBS holders) instructed Bank of New York, in its capacity as indenture trustee, to pursue enforcement of seller representations and warranties concerning the eligibility of mortgages for securitization in certain Countrywide-issued private-label MBS. On June 29, 2011, a proposed settlement was announced between the trustee and certain Countrywide affiliates with respect to nearly all trust-related claims arising out of these private-label MBS. The proposed settlement includes the following key terms: (a) $8.5 billion cash payment to the RMBS trusts upon final court approval of the settlement; (b) improvements to the servicing process to begin immediately; (c) prompt review of the private-label MBS loan documentation to ensure that all pledged loans in the trusts have a first lien in the underlying real estate; and (d) release of all past, current and future trust-related claims arising out of the vast majority of Countrywide private-label MBS. On June 29, 2011, the Bank and other investors filed a Notice of Petition to Intervene with the Supreme Court of the State of New York, County of New York in support of final court approval of this settlement. It is not certain at this time whether the court will approve the settlement, the timing of any final settlement or the amount of any distribution the Bank may receive as part of a final settlement. For a discussion of this proceeding, see “Part I. Item 3. Legal Proceedings” in the Bank’s Form 10-K.

The Bank may be subject to various other legal proceedings arising in the normal course of business. After consultation with legal counsel, management is not aware of any other such proceedings that might result in the Bank’s ultimate liability in an amount that will have a material effect on the Bank’s financial condition or results of operations.

 

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Bank’s Form 10-K, which could materially affect the Bank’s business, financial condition or future results. The risks described in the Bank’s Form 10-K are not the only risks facing the Bank. Additional risks and uncertainties not currently known to the Bank or that the Bank currently deems to be immaterial also may materially adversely affect the Bank’s business, financial condition and/or operating results.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

 

73


Table of Contents
Item 3. Defaults Upon Senior Securities

None.

 

Item 4. (Removed and Reserved)

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

  3.1    Restated Organization Certificate of the Federal Home Loan Bank of Atlanta (1)
  3.2    Bylaws of the Federal Home Loan Bank of Atlanta (Revised and Restated) (2)
  4.1    Capital Plan of the Federal Home Loan Bank of Atlanta(3)
31.1    Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +
31.2    Certification of the Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +
32.1    Certification of the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +
101    Unaudited financial statements from the Quarterly Report on Form 10-Q of Federal Home Loan Bank of Atlanta for the quarter ended June 30, 2011, filed on August 10, 2011, formatted in XBRL: (i) the Statements of Condition, (ii) Statements of Income (iii) the Statements of Capital, (iv) the Statements of Cash Flows and (v) the Notes to Financial Statements.+

 

(1) Filed on March 17, 2006 with the Securities and Exchange Commission in the Bank’s Form 10 Registration Statement and incorporated herein by reference.
(2) Filed on March 25, 2010 with the Securities and Exchange Commission in the Bank’s Form 10-K and incorporated herein by reference.
(3) Filed on August 5, 2011 with the Securities and Exchange Commission in the Bank’s Form 8-K and incorporated herein by reference.
+ Furnished herewith.

 

74


Table of Contents

SIGNATURES

Pursuant to the requirements of Section 12 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: August 10, 2011   By:   /s/ W. Wesley McMullan
  Name:   W. Wesley McMullan
  Title:   President and Chief Executive Officer
  By:   /s/ Kirk R. Malmberg
  Name:   Kirk R. Malmberg
  Title:   Executive Vice President and Chief Financial Officer

 

75