10-Q 1 d233065d10q.htm 10-Q 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 September 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 October 31, 2011, was 62,477,400.

 

 

 


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      71   
Item 4.   Controls and Procedures      74   
PART II.   OTHER INFORMATION      75   
Item 1.   Legal Proceedings      75   
Item 1A.   Risk Factors      75   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      75   
Item 3.   Defaults Upon Senior Securities      76   
Item 4.   (Removed and Reserved)      76   
Item 5.   Other Information      76   
Item 6.   Exhibits      76   
SIGNATURES      77   


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)

 

     As of  
    

 

      September 30, 2011      

           December 31, 2010        

Assets

     

Cash and due from banks

       $ 4             $ 5     

Interest-bearing deposits (including deposits with other FHLBank of $2 as of September 30, 2011 and December 31, 2010)

     1,302           2     

Federal funds sold

     16,440           15,701     

Trading securities (includes $0 and $37 pledged as collateral as of September 30, 2011 and December 31, 2010, respectively, that may be repledged and includes other FHLBank’s bond of $83 and $74 as of September 30, 2011 and December 31, 2010, respectively)

     3,137           3,383     

Available-for-sale securities

     3,102           3,319     

Held-to-maturity securities, net (fair value of $17,262 and $17,511 as of September 30, 2011 and December 31, 2010, respectively)

     17,223           17,474     

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

     1,742           2,039     

Advances, net

     75,363           89,258     

Accrued interest receivable

     318           388     

Premises and equipment, net

     33           35     

Derivative assets

     33           5     

Other assets

     155           189     
  

 

 

    

 

 

 

Total assets

       $ 118,852             $ 131,798     
  

 

 

    

 

 

 

Liabilities

     

Interest-bearing deposits

       $ 3,170             $ 3,093     

Consolidated obligations, net:

     

Discount notes

     16,057           23,915     

Bonds

     91,720           95,198     
  

 

 

    

 

 

 

Total consolidated obligations, net

     107,777           119,113     
  

 

 

    

 

 

 

Mandatorily redeemable capital stock

     319           529     

Accrued interest payable

     340           357     

Affordable Housing Program payable

     115           126     

Payable to REFCORP

     —           20     

Derivative liabilities

     206           455     

Other liabilities

     129           159     
  

 

 

    

 

 

 

Total liabilities

     112,056           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: 13 and 15 as of September 30, 2011 and December 31, 2010, respectively

     1,330           1,466     

Subclass B2 issued and outstanding shares: 46 and 57 as of September 30, 2011 and December 31, 2010, respectively

     4,580           5,758     
  

 

 

    

 

 

 

Total capital stock Class B putable

     5,910           7,224     

Retained earnings:

     

Restricted

     6           —     

Unrestricted

     1,197           1,124     
  

 

 

    

 

 

 

Total retained earnings

     1,203           1,124     
  

 

 

    

 

 

 

Accumulated other comprehensive loss

     (317)           (402)     
  

 

 

    

 

 

 

Total capital

     6,796           7,946     
  

 

 

    

 

 

 

Total liabilities and capital

       $ 118,852             $ 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 September 30,              Nine Months Ended September 30,      
    

 

    2011    

         2010              2011              2010      

Interest income

           

Advances

       $ 57             $ 107             $ 195             $ 255     

Prepayment fees on advances, net

     2           2           7           7     

Interest-bearing deposits

     1           2           3           5     

Federal funds sold

     6           9           18           22     

Trading securities

     37           42           118           125     

Available-for-sale securities

     42           50           131           134     

Held-to-maturity securities

     95           130           309           450     

Mortgage loans held for portfolio

     24           30           75           93     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     264           372           856           1,091     
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense

           

Consolidated obligations:

           

Discount notes

     4           10           15           19     

Bonds

     144           222           472           642     

Deposits

     —           1           1           2     

Mandatorily redeemable capital stock

     1           1           3           1     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     149           234           491           664     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     115           138           365           427     
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income (loss)

           

Total other-than-temporary impairment losses

     (8)           (5)           (45)           (200)     

Portion of impairment losses recognized in other comprehensive loss

     (11)           (9)           (63)           68     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net impairment losses recognized in earnings

     (19)           (14)           (108)           (132)     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net gains on trading securities

     36           38           22           118     

Net losses on derivatives and hedging activities

     (67)           (30)           (41)           (105)     

Other

     —           1           2           2     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest loss

     (50)           (5)           (125)           (117)     
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expense

           

Compensation and benefits

     15           18           50           47     

Other operating expenses

     10           12           29           35     

Finance Agency

     2           2           8           6     

Office of Finance

     1           1           4           4     

Reversal of provision for credit losses on receivable

     —           (2)           —           (51)     

Other

     1           1           (8)           1     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

     29           32           83           42     
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before assessments

     36           101           157           268     
  

 

 

    

 

 

    

 

 

    

 

 

 

Affordable Housing Program

     4           9           14           22     

REFCORP

     —           18           22           49     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assessments

     4           27           36           71     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

       $ 32             $ 74             $ 121             $ 197     
  

 

 

    

 

 

    

 

 

    

 

 

 

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 NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Unaudited)

(In millions)

 

    Capital Stock Class B Putable     Retained Earnings     Accumulated Other
     Comprehensive Loss    
       
        Shares             Par Value             Restricted             Unrestricted             Total               Total Capital      

Balance, December 31, 2009

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

Issuance of capital stock

    2          203          —          —          —          —          203     

Repurchase/redemption of capital stock

    (5)          (507)          —          —          —          —          (507)     

Net shares reclassified to mandatorily redeemable capital stock

    (3)          (340)          —          —          —          —          (340)     

Comprehensive income:

             

Net income

    —          —          —          197          197          —          197     

Other comprehensive income

    —          —          —          —          —          293          293     
             

 

 

 

Total comprehensive income

    —          —          —          —          —          —          490     
             

 

 

 

Cash dividends on capital stock

    —          —          —          (19)          (19)          —          (19)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2010

    75            $ 7,480            $ —            $ 1,051            $ 1,051            $ (451)            $ 8,080     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2010

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

Issuance of capital stock

    2          173          —          —          —          —          173     

Repurchase/redemption of capital stock

    (14)          (1,440)          —          —          —          —          (1,440)     

Net shares reclassified to mandatorily redeemable capital stock

    (1)          (47)          —          —          —          —          (47)     

Comprehensive income:

             

Net income

    —          —          6          115          121          —          121     

Other comprehensive income

    —          —          —          —          —          85          85     
             

 

 

 

Total comprehensive income

    —          —          —          —          —          —          206     
             

 

 

 

Cash dividends on capital stock

    —          —          —          (42)          (42)          —          (42)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2011

    59            $ 5,910            $ 6            $ 1,197            $ 1,203            $ (317)            $ 6,796     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

         Nine Months Ended September 30,      
         2011              2010      

Operating activities

     

Net income

       $ 121             $ 197     

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

     

Depreciation and amortization

     (24)           (45)     

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

     376           765     

Net change in fair value adjustment on trading securities

     (22)           (118)     

Net impairment losses recognized in earnings

     108           132     

Reversal of provision for credit losses on receivable

     —           (51)     

Net change in:

     

Accrued interest receivable

     70           105     

Other assets

     31           (4)     

Affordable Housing Program payable

     (12)           —     

Accrued interest payable

     (17)           (148)     

Payable to REFCORP

     (20)           (2)     

Other liabilities

     (30)           8     
  

 

 

    

 

 

 

Total adjustments

     460           642     
  

 

 

    

 

 

 

Net cash provided by operating activities

     581           839     
  

 

 

    

 

 

 

Investing activities

     

Net change in:

     

Interest-bearing deposits

     (1,910)           (752)     

Federal funds sold

     (739)           (5,732)     

Trading securities:

     

Proceeds from maturities

     272           207     

Available-for-sale securities:

     

Proceeds from maturities

     589           407     

Held-to-maturity securities:

     

Net change in short-term

     90           (1,350)     

Proceeds from maturities of long-term

     3,394           3,904     

Purchases of long-term

     (3,634)           (3,333)     

Advances:

     

Proceeds from principal collected

     54,701           51,654     

Made

     (40,277)           (35,417)     

Mortgage loans held for portfolio:

     

Proceeds from principal collected

     284           329     

Proceeds from sale of foreclosed assets

     12           —     

Purchase of premise, equipment and software

     (4)           (8)     
  

 

 

    

 

 

 

Net cash provided by investing activities

     12,778           9,909     
  

 

 

    

 

 

 

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

 

4


Table of Contents
     Nine Months Ended September 30,  
         2011              2010      

Financing activities

     

Net change in deposits

     39           3,167     

Net payments on derivatives containing a financing element

     (379)           (556)     

Proceeds from issuance of consolidated obligations:

     

Discount notes

     780,788           792,092     

Bonds

     61,612           69,127     

Bonds transferred from other FHLBanks

     —           162     

Payments for debt issuance costs

     (12)           (14)     

Payments for maturing and retiring consolidated obligations:

     

Discount notes

     (788,638)           (781,575)     

Bonds

     (65,204)           (93,247)     

Proceeds from issuance of capital stock

     173           203     

Payments for repurchase/redemption of capital stock

     (1,440)         (507)     

Payment for repurchase/redemption of mandatorily redeemable capital stock

     (257)           (36)     

Cash dividends paid

     (42)           (19)     
  

 

 

    

 

 

 

Net cash used in financing activities

     (13,360)           (11,203)     
  

 

 

    

 

 

 

Net decrease in cash and cash equivalents

     (1)           (455)     

Cash and cash equivalents at beginning of the period

     5           465     
  

 

 

    

 

 

 

Cash and cash equivalents at end of the period

       $ 4             $ 10     
  

 

 

    

 

 

 

Supplemental disclosures of cash flow information:

     

Cash paid for:

     

Interest

       $ 536             $ 827     
  

 

 

    

 

 

 

AHP assessments, net

       $ 24             $ 20     
  

 

 

    

 

 

 

REFCORP assessments

       $ 42             $ 51     
  

 

 

    

 

 

 

Noncash investing and financing activities:

     

Net shares reclassified to mandatorily redeemable capital stock

       $ 47             $ 340     
  

 

 

    

 

 

 

Held-to-maturity securities acquired with accrued liabilities

       $ —             $ 8     
  

 

 

    

 

 

 

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

       $ 369             $ 1,298     
  

 

 

    

 

 

 

Transfers of mortgage loans to real estate owned

       $ 13             $ 13     
  

 

 

    

 

 

 

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 September 30, 2011.

Note 2—Recently Issued and Adopted Accounting Guidance

Recently Issued Accounting Guidance

Compensation Retirement Benefits – Multiemployer Plans: Disclosures about an Employer’s Participation in a Multiemployer Plan. In September 2011, the Financial Accounting Standards Board (FASB) issued amended guidance that provides new requirements for the disclosures that an employer should provide related to its participation in multiemployer pension plans. For public entities, this amended guidance is effective for fiscal years ending after December 15, 2011 (December 31, 2011 for the Bank) and should be applied retrospectively for all prior periods presented. Early adoption is permitted. The adoption of this guidance will result in enhanced disclosures, but will have no effect on the Bank’s financial condition or results of operations.

Presentation of Comprehensive Income. In June 2011, the 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

 

6


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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.

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.

Recently Adopted Accounting Guidance

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, and should be applied retrospectively to the beginning of the annual period of adoption. The Bank adopted this guidance effective July 1, 2011. The adoption of this guidance did not have any effect on the Bank’s financial condition or results of operations.

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 September 30, 2011             As of December 31, 2010      

Government-sponsored enterprises debt obligations

      $ 3,051            $ 3,306     

Other FHLBank’s bond*

    83          74     

State or local housing agency debt obligations

    3          3     
 

 

 

   

 

 

 

Total

      $ 3,137            $ 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 September 30,             Nine Months Ended September 30,      
    2011     2010     2011     2010  

Net unrealized gains on trading securities held at period end

      $ 36            $ 38            $ 28            $ 119     

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

    —          —          (6)          (1)     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net gains on trading securities

      $ 36            $ 38            $ 22            $ 118     
 

 

 

   

 

 

   

 

 

   

 

 

 

At September 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 nine-month periods ended September 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     

Transferred at September 30,

     23           2           21           83           5           78     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

       $ 397             $ 28             $ 369             $ 1,458             $ 160             $ 1,298     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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

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

Private-label MBS

       $ 3,409             $ 309             $ 14                 $ 12             $ 3,102     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     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
 

Private-label MBS

       $ 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.

 

        As of September 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
 

Private-label MBS

    4            $ 286            $ 3          42             $ 2,183            $ 318          46            $ 2,469            $ 321     
 

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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
 

Private-label MBS

     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 $14 and $11 as of September 30, 2011 and December 31, 2010, respectively.

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

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

 

         As of September 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

       $ 2,091             $ 232             $ 4             $ 9             $ 1,854     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     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     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 5—Held-to-maturity Securities

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

 

    As of September 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

      $ 1,100            $ —            $ —            $ 1,100            $ 1,190            $ —            $ —            $ 1,190     

State or local housing agency debt obligations

    107          2          —          109          108          3          —          111     

Government-sponsored enterprises debt obligations

    829          —          —          829          873          —          3          870     

Mortgage-backed securities:

               

U.S. agency obligations-guaranteed

    843          7          —          850          960          9          —          969     

Government-sponsored enterprises

    10,251          203          3          10,451          8,716          210          14          8,912     

Private label

    4,093          35          205          3,923          5,627          49          217          5,459     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ 17,223            $ 247            $ 208            $ 17,262            $ 17,474            $ 271            $ 234            $ 17,511     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

10


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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 September 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

    7            $ 1,000            $ —          —            $ —            $ —          7            $ 1,000            $ —     

Government-sponsored enterprises debt obligations

    1          48          —          —          —          —          1          48          —     

Mortgage-backed securities:

                 

Government-sponsored enterprises

    12          1,403          2          7          562          1          19          1,965          3     

Private label

    20          438          8          60          1,836          197          80          2,274          205     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    40            $ 2,889            $ 10          67            $ 2,398            $ 198          107            $ 5,287            $ 208     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    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     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 September 30, 2011      As of December 31, 2010  
     Amortized
Cost
     Estimated
Fair  Value
     Amortized
Cost
     Estimated
Fair  Value
 

Non-mortgage-backed securities:

           

Due in one year or less

       $ 1,155             $ 1,155             $ 1,191             $ 1,191     

Due after one year through five years

     880           882           978           978     

Due after 10 years

     1           1           2           2     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-mortgage-backed securities

     2,036           2,038           2,171           2,171     

Mortgage-backed securities

     15,187           15,224           15,303           15,340     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

       $ 17,223             $ 17,262             $ 17,474             $ 17,511     
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost of the Bank’s MBS classified as held-to-maturity includes net discounts of $16 and $24 as of September 30, 2011 and December 31, 2010, respectively.

 

11


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

     As of September 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

       $ 1,337             $ 12             $ 52             $ 1,297             $ 2,035             $ 17             $ 75             $ 1,977     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 6—Other-than-temporary Impairment

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

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 “AAA” (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 “AAA”-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.

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

 

12


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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 September 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 as of September 30, 2011 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 July 1, 2011. From the trough, home prices were projected to recover using one of five different recovery paths that vary by housing market.

The following table presents projected home price recovery ranges by year:

 

    

Range (%)

Year one

   0.00 to 2.80

Year two

   0.00 to 3.00

Year three

   1.50 to 4.00

Year four

   2.00 to 5.00

Years five and six

   2.00 to 6.00

Thereafter

   2.30 to 5.60

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 September 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

    8.25          8.07 to 9.14          23.95          9.54 to 26.83          46.83          38.45 to 48.51          8.25          4.89 to 8.92     

2006

    8.42          7.70 to 9.31          22.52          14.97 to 36.39          51.21          46.79 to 54.44          3.98          3.44 to 4.99     

2005

    8.29          6.35 to 10.63          24.84          14.69 to 34.84          45.93          41.40 to 50.50          7.59          4.62 to 9.55     

2004

    9.04          8.49 to 9.68          28.71          24.26 to 34.50          43.51          42.56 to 45.16          9.79          8.69 to 12.64     

Total Prime

    8.56          6.35 to 10.63          25.23          9.54 to 36.39          46.86          38.45 to 54.44          7.36          3.44 to 12.64     

Alt-A:

               

2007

    6.61          4.77 to 7.38          60.85          55.05 to 66.03          48.27          45.27 to 53.32          9.18          0.04 to 13.63     

2006

    5.82          5.82 to 5.82          64.19          64.19 to 64.19          50.74          50.74 to 50.74          5.17          5.17 to 5.17     

2005

    7.84          6.17 to 7.99          29.01          28.05 to 39.67          50.98          42.54 to 51.75          2.82          2.29 to 8.68     

Total Alt-A

    6.89          4.77 to 7.99          52.64          28.05 to 66.03          49.11          42.54 to 53.32          7.30          0.04 to 13.63     

Total

    7.76          4.77 to 10.63          38.38          9.54 to 66.03          47.94          38.45 to 54.44          7.33          0.04 to 13.63     

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 September 30,     Nine Months Ended September 30,  
    2011     2010     2011     2010  

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

      $ 553            $ 439            $ 464            $ 321     

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

    —          —          10          38     

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

    19          14          98          94     
 

 

 

   

 

 

   

 

 

   

 

 

 

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

      $ 572            $ 453            $ 572            $ 453     
 

 

 

   

 

 

   

 

 

   

 

 

 

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 September 30, 2011             As of December 31, 2010      

Overdrawn demand deposit accounts

      $ 1            $ 1     

Due in one year or less

    20,429          26,628     

Due after one year through two years

    12,291          16,186     

Due after two years through three years

    10,137          10,938     

Due after three years through four years

    4,840          6,369     

Due after four years through five years

    4,802          3,678     

Due after five years

    18,142          21,251     
   

 

 

   

 

 

 

Total par value

    70,642          85,051     

Discount on AHP* advances

    (12)          (13)     

Discount on EDGE** advances

    (10)          (11)     

Hedging adjustments

    4,749          4,238     

Deferred commitment fees

    (6)          (7)     
   

 

 

   

 

 

 

Total

      $ 75,363            $ 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 September 30, 2011             As of December 31, 2010      

Overdrawn demand deposit accounts

      $ 1            $ 1     

Due or convertible in one year or less

    26,402          36,487     

Due or convertible after one year through two years

    13,218          14,302     

Due or convertible after two years through three years

    9,944          11,374     

Due or convertible after three years through four years

    4,531          6,065     

Due or convertible after four years through five years

    3,933          3,023     

Due or convertible after five years

    12,613          13,799     
   

 

 

   

 

 

 

Total par value

      $ 70,642            $ 85,051     
   

 

 

   

 

 

 

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

 

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

Fixed-rate:

     

Due in one year or less

       $ 16,785             $ 24,033     

Due after one year

     42,208           50,907     
  

 

 

    

 

 

 

Total fixed-rate

     58,993           74,940     
  

 

 

    

 

 

 

Variable-rate:

     

Due in one year or less

     3,646           2,596     

Due after one year

     8,003           7,515     
  

 

 

    

 

 

 

Total variable-rate

     11,649           10,111     
  

 

 

    

 

 

 

Total par value

       $ 70,642             $ 85,051     
  

 

 

    

 

 

 

 

15


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

At September 30, 2011 and December 31, 2010, 81.8 percent and 87.4 percent, respectively, of the Bank’s fixed-rate advances were swapped and 3.15 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 September 30, 2011 and December 31, 2010. No advance was past due as of September 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 September 30, 2011 and December 31, 2010, the concentration of the Bank’s advances was $44,856 and $58,043, respectively, to 10 member institutions, and this represented 63.5 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 September 30, 2011              As of December 31, 2010      

Fixed-rate

       $ 81,559             $ 73,779     

Step up/down

     5,355           7,686     

Simple variable-rate

     3,382           12,432     

Variable-rate capped floater

     20           30     
  

 

 

    

 

 

 

Total par value

       $ 90,316             $ 93,927     
  

 

 

    

 

 

 

At September 30, 2011 and December 31, 2010, 81.2 percent and 77.3 percent, respectively, of the Bank’s fixed-rate consolidated obligation bonds were swapped and 3.53 percent and 0.24 percent, respectively, of the Bank’s variable-rate consolidated obligation bonds were swapped.

 

16


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

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

Due in one year or less

       $ 49,660           0.50             $ 46,987           0.76     

Due after one year through two years

     14,275           2.47           13,751           1.50     

Due after two years through three years

     12,203           2.31           14,097           2.63     

Due after three years through four years

     2,271           2.17           4,378           3.70     

Due after four years through five years

     4,363           3.33           4,660           1.89     

Due after five years

     7,544           3.97           10,054           4.19     
  

 

 

       

 

 

    

Total par value

     90,316           1.51           93,927           1.70     

Premiums

     110              127        

Discounts

     (39)              (48)        

Hedging adjustments

     1,333              1,192        
  

 

 

       

 

 

    

Total

       $ 91,720                $ 95,198        
  

 

 

       

 

 

    

The Bank’s consolidated obligation bonds outstanding by type:

 

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

Noncallable

       $ 59,381             $ 69,248     

Callable

     30,935           24,679     
  

 

 

    

 

 

 

Total par value

       $ 90,316             $ 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 September 30, 2011             As of December 31, 2010      

Due or callable in one year or less

      $ 64,468            $ 61,505     

Due or callable after one year through two years

    11,683          11,329     

Due or callable after two years through three years

    5,676          10,477     

Due or callable after three years through four years

    860          2,685     

Due or callable after four years through five years

    2,520          1,062     

Due or callable after five years

    5,109          6,869     
   

 

 

   

 

 

 

Total par value

      $ 90,316            $ 93,927     
   

 

 

   

 

 

 

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.

 

17


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

The Bank’s participation in consolidated obligation discount notes, all of which are due within one year, was as follows:

 

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

As of September 30, 2011

       $ 16,057             $ 16,059               0.06     
  

 

 

    

 

 

    

 

 

 

As of December 31, 2010

       $ 23,915             $ 23,919               0.14     
  

 

 

    

 

 

    

 

 

 

At September 30, 2011 and December 31, 2010, 7.03 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:

 

Required Required Required Required
         As of September 30, 2011              As of December 31, 2010      
         Required              Actual              Required              Actual      

Risk based capital

       $ 2,155             $ 7,432             $ 2,377             $ 8,877     

Total capital-to-assets ratio

     4.00%           6.25%           4.00%           6.74%     

Total regulatory capital*

       $ 4,754             $ 7,432             $ 5,272             $ 8,877     

Leverage ratio

     5.00%           9.38%           5.00%           10.10%     

Leverage capital

       $ 5,943             $ 11,148             $ 6,590             $ 13,316     

 

* Mandatorily redeemable capital stock is considered capital for regulatory purposes, and “total regulatory capital” includes the Bank’s $319 and $529 in mandatorily redeemable capital stock at September 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 September 30,         Nine Months Ended September 30,    
            2011             2010             2011             2010      

Balance, beginning of period

      $ 385            $ 508            $ 529            $ 188     

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

       

Attainment of nonmember status

    32          24          69          359     

Withdrawal

    —          —          1          —     

Repurchase/redemption of mandatorily redeemable capital stock

    (85)          (36)          (257)          (36)     

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

    (13)          (4)          (23)          (19)     
   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

      $ 319            $ 492            $ 319            $ 492     
   

 

 

   

 

 

   

 

 

   

 

 

 

 

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 September 30, 2011              As of December 31, 2010      

Due in one year or less

       $ 5             $ —     

Due after one year through two years

     2           8     

Due after two years through three years

     49           12     

Due after three years through four years

     159           137     

Due after four years through five years

     98           366     

Due after five years

     6           6     
    

 

 

    

 

 

 

Total

       $ 319             $ 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 (loss) income were as follows:

 

          Three Months Ended September 30,         Nine Months Ended September 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

      $ (32)            $ 152            $ 22            $ 361     

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

    13          14          91          93     
   

 

 

   

 

 

   

 

 

   

 

 

 

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

    (19)          166          113          454     
   

 

 

   

 

 

   

 

 

   

 

 

 

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

    (2)          (5)          (28)          (161)     
   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

      $ (21)            $ 161            $ 85            $ 293     
   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Noncredit Other-
Than-Temporary-
Impairment Losses
         Held-to-maturity    
Securities
Noncredit  Other-
Than-Temporary-
Impairment Losses
             Total          

Balance, December 31, 2010

       $ (10)             $ (392)             $ —             $ (402)     

Other comprehensive income (loss) during the period

     —           113           (28)           85     

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

     —           (28)           28           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, September 30, 2011

       $ (10)             $ (307)             $ —             $ (317)     
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

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.

 

20


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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 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.

 

21


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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 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.

 

22


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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.

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 September 30, 2011.

 

23


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

Total net exposure at fair value *

       $ 61             $ 71     

Cash collateral held

     28           66     
    

 

 

    

 

 

 

Net positive exposure after cash collateral

     33           5     

Other collateral

     6           5     
    

 

 

    

 

 

 

Net exposure after collateral

       $ 27             $ —     
    

 

 

    

 

 

 

 

* Includes net accrued interest receivable of $29 and $22 as of September 30, 2011 and December 31, 2010, respectively.

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 September 30, 2011 was $3,902 for which the Bank has posted collateral of $3,705 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 $144 of collateral (at fair value) to its derivative counterparties at September 30, 2011.

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 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.

 

24


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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.

 

$140,038 $140,038 $140,038 $140,038 $140,038 $140,038
        As of September 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

      $ 122,972            $ 1,489            $ (4,780)            $ 126,484            $ 1,466            $ (4,460)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives in hedging relationships

    122,972          1,489          (4,780)          126,484          1,466          (4,460)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Derivatives not designated as hedging instruments:

           

Interest rate swaps

    4,566          18          (592)          7,725          26          (526)     

Interest rate caps or floors

    12,500          56          (41)          8,000          53          (38)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives not designated as hedging instruments

    17,066          74          (633)          15,725          79          (564)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives before netting and collateral adjustments

      $ 140,038          1,563          (5,413)            $ 142,209          1,545          (5,024)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Netting adjustments

      (1,502)          1,502            (1,473)          1,473     

Cash collateral and related accrued interest

      (28)          3,705            (67)          3,096     
   

 

 

   

 

 

     

 

 

   

 

 

 

Total collateral and netting adjustments *

      (1,530)          5,207            (1,540)          4,569     
   

 

 

   

 

 

     

 

 

   

 

 

 

Derivative assets and derivative liabilities

        $ 33            $ (206)              $ 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 on derivatives and hedging activities as presented in the Statements of Income:

 

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

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

Losses on
Derivatives and
Hedging Activities
 

Derivatives and hedged items in fair value hedging relationships:

   

Interest rate swaps

      $ 28            $ 45     
   

 

 

   

 

 

 

Total net gain related to fair value hedge ineffectiveness

    28          45     
   

 

 

   

 

 

 

Derivatives not designated as hedging instruments:

   

Interest rate swaps

    (40)          (36)     

Interest rate caps or floors

    (20)          (7)     

Net interest settlements

    (35)          (32)     
   

 

 

   

 

 

 

Total net loss related to derivatives not designated as hedging instruments

    (95)          (75)     
   

 

 

   

 

 

 

Net losses on derivatives and hedging activities

      $ (67)            $ (30)     
   

 

 

   

 

 

 

 

25


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Amount of Gain (Loss) Amount of Gain (Loss) Amount of Gain (Loss)
            Nine Months Ended September 30,      
    2011     2010  
        Amount of Gain (Loss)    
Recognized in Net

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

Losses on
Derivatives and
Hedging Activities
 

Derivatives and hedged items in fair value hedging relationships:

   

Interest rate swaps

      $ 101            $ 139     
   

 

 

   

 

 

 

Total net gain related to fair value hedge ineffectiveness

    101          139     
   

 

 

   

 

 

 

Derivatives not designated as hedging instruments:

   

Interest rate swaps

    (15)          (114)     

Interest rate caps or floors

    (19)          (21)     

Net interest settlements

    (108)          (109)     
   

 

 

   

 

 

 

Total net loss related to derivatives not designated as hedging instruments

    (142)          (244)     
   

 

 

   

 

 

 

Net losses on derivatives and hedging activities

      $ (41)            $ (105)     
   

 

 

   

 

 

 

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 September 30, 2011      

              Hedged

            Item Type            

       Gain (Loss) on    
Derivative
         Gain (Loss) on    
Hedged Item
         Net Fair Value    
Hedge
Ineffectiveness
     Effect of
    Derivatives on Net Interest    
Income *
 

Advances

       $ (889)         $ 912             $ 23             $ (491)     

Consolidated obligations:

           

Bonds

     169           (164)           5           200     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

       $ (720)             $ 748             $ 28             $ (291)     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* 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 September 30, 2010      

              Hedged

            Item Type            

       Gain (Loss) on    
Derivative
         Gain (Loss) on    
Hedged Item
     Net Fair Value
Hedge
    Ineffectiveness    
     Effect of
    Derivatives on Net Interest    
Income *
 

Advances

       $ (515)             $ 582             $ 67             $ (708)     

Consolidated obligations:

           

Bonds

     204           (226)           (22)           237     

Discount notes

     2           (2)           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

       $ (309)             $ 354             $ 45             $ (471)     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* 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)

 

            Nine Months Ended September 30, 2011      

              Hedged

            Item Type             

    Gain (Loss) on  
Derivative
      Gain (Loss) on  
Hedged Item
    Net Fair  Value
Hedge
  Ineffectiveness  
    Effect of
Derivatives on Net Interest
Income *
 

Advances

      $ (508)            $ 618            $ 110            $ (1,622)     

Consolidated obligations:

       

Bonds

    162          (171)          (9)          634     

Discount notes

    (2)          2          —          2     
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

        $ (348)            $ 449            $ 101            $ (986)     
   

 

 

   

 

 

   

 

 

   

 

 

 

 

* 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.

 

        Nine Months Ended September 30, 2010  

              Hedged

            Item Type             

    Gain (Loss) on  
Derivative
      Gain (Loss) on  
Hedged Item
    Net Fair  Value
Hedge
  Ineffectiveness  
    Effect of
Derivatives on Net Interest
Income *
 

Advances

      $ (1,013)            $ 1,186            $ 173            $ (2,410)     

Consolidated obligations:

       

Bonds

    488          (519)          (31)          932     

Discount notes

    (6)          3          (3)          8     
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

        $ (531)            $ 670            $ 139            $ (1,470)     
   

 

 

   

 

 

   

 

 

   

 

 

 

 

* 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 nine-month period ended September 30, 2011.

 

27


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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:

 

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

Assets

              

Trading securities:

              

Government-sponsored enterprises debt obligations

       $ —             $ 3,051             $ —             $ —             $ 3,051     

Other FHLBank’s bond

     —           83           —           —           83     

State or local housing agency debt obligations

     —           3           —           —           3     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total trading securities

     —           3,137           —           —           3,137     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities:

              

Private-label MBS

     —           —           3,102           —           3,102     

Derivative assets:

              

Interest-rate related

     —           1,563           —           (1,530)           33     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

       $ —             $ 4,700             $ 3,102             $ (1,530)             $ 6,272     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

              

Derivative liabilities:

              

Interest-rate related

       $ —             $ (5,413)             $ —             $ 5,207             $ (206)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

       $ —             $ (5,413)             $ —             $ 5,207             $ (206)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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

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 positions 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 September 30,      
                 2011                      2010          

Balance, beginning of period

       $ 3,308             $ 3,452     

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

     21           78     

Total (losses) gains realized and unrealized:*

     

Included in net impairment losses recognized in earnings

     (19)           (14)     

Included in other comprehensive loss

     (23)           163     

Settlements

     (185)           (193)     
    

 

 

    

 

 

 

Balance, end of period

       $ 3,102             $ 3,486     
    

 

 

    

 

 

 

 

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

 

             Nine Months Ended September 30,      
                 2011                      2010          

Balance, beginning of period

       $ 3,319             $ 2,256     

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

     369           1,298     

Total (losses) gains realized and unrealized:*

     

Included in net impairment losses recognized in earnings

     (101)           (108)     

Included in other comprehensive loss

     104           447     

Settlements

     (589)           (407)     
    

 

 

    

 

 

 

Balance, end of period

       $ 3,102             $ 3,486     
    

 

 

    

 

 

 

 

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

Assets:

         

Cash and due from banks

      $ 4            $ 4            $ 5            $ 5     

Interest-bearing deposits

    1,302          1,302          2          2     

Federal funds sold

    16,440          16,440          15,701          15,701     

Trading securities

    3,137          3,137          3,383          3,383     

Available-for-sale securities

    3,102          3,102          3,319          3,319     

Held-to-maturity securities

    17,223          17,262          17,474          17,511     

Mortgage loans held for portfolio, net

    1,742          1,909          2,039          2,189     

Advances, net

    75,363          75,683          89,258          89,330     

Accrued interest receivable

    318          318          388          388     

Derivative assets

    33          33          5          5     

Liabilities:

       

Interest-bearing deposits

    (3,170)          (3,170)          (3,093)          (3,093)     

Consolidated obligations, net:

       

Discount notes

    (16,057)          (16,058)          (23,915)          (23,916)     

Bonds

    (91,720)          (92,771)          (95,198)          (95,993)     

Mandatorily redeemable capital stock

    (319)          (319)          (529)          (529)     

Accrued interest payable

    (340)          (340)          (357)          (357)     

Derivative liabilities

    (206)          (206)          (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 $590,231 and $678,528 at September 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 September 30, 2011             As of December 31, 2010      

Outstanding notional

       $ 21,764          $ 22,333   

Original terms

     Less than 12 months to 20 years     Less than two months to 20 years

Final expiration year

     2030        2030   

 

* The Bank had outstanding one standby letter of credit for less than $1 as of September 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 $77 and $92 as of September 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 September 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 September 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 September 30, 2011, the Bank had committed to the issuance of $4,055 (par value) in consolidated obligation bonds, all 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 may 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 course of the

 

31


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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 20.1 percent of the Bank’s total regulatory capital stock as of September 30, 2011, was considered a related party. Total advances outstanding to Bank of America, N.A. were $15,439 and $25,040 as of September 30, 2011 and December 31, 2010, respectively. Total deposits held in the name of Bank of America, N.A. were less than $1 at September 30, 2011 and December 31, 2010. No mortgage loans or mortgage-backed securities were acquired from Bank of America, N.A. during the nine-month periods ended September 30, 2011 and 2010.

Note 15—Subsequent Events

On October 27, 2011, the Bank’s board of directors approved a cash dividend for the third quarter of 2011 in the amount of $12. The Bank paid the third quarter 2011 dividend on November 3, 2011.

On October 27, 2011, the Bank sent a notice to each current shareholder of the Bank announcing that it will repurchase up to $700 of excess capital stock on November 17, 2011. The amount of excess stock to be repurchased from any individual shareholder will be based on the shareholder’s total excess capital stock as of November 10, 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 third quarter and the first nine months ended September 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 September 30, 2011, total assets were $118.9 billion, a decrease of $12.9 billion, or 9.82 percent, from December 31, 2010. This decrease was due primarily to a $13.9 billion, or 15.6 percent, decrease in advances, partially offset by a $1.9 billion increase in short-term investments. Advances, the largest asset on the Bank’s balance sheet, decreased consistent with recent trends. The increase in short-term investments was due primarily to a $1.3 billion increase in interest-bearing deposits during the period, as further discussed in “Management’s Discussion and Analysis – Financial Condition – Investments” below.

As of September 30, 2011, total liabilities were $112.1 billion, a decrease of $11.8 billion, or 9.52 percent, from December 31, 2010. This decrease was due primarily to an $11.3 billion, or 9.52 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 September 30, 2011, total capital was $6.8 billion, a decrease of $1.2 billion, or 14.5 percent, from December 31, 2010. This decrease was due primarily to the repurchase of $1.4 billion of excess capital stock and the payment of $42 million in dividends during the period.

 

34


Table of Contents

Results of Operations

The Bank recorded net income of $32 million for the third quarter of 2011, a decrease of $42 million, or 57.5 percent, from net income of $74 million for the third quarter of 2010. This decrease was due primarily to a $37 million increase in net losses on derivatives and hedging activities, a $23 million decrease in net interest income, and a $5 million increase in net impairment losses recognized in earnings, partially offset by a $23 million decrease in total assessments during the period.

The Bank recorded net income of $121 million for the first nine months of 2011, a decrease of $76 million, or 39.0 percent, from net income of $197 million for the same period in 2010. This decrease was due primarily to a $62 million decrease in net interest income and a $41 million increase in noninterest expense, partially offset by a $27 million decrease in REFCORP assessments during the period.

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 1.78 percent for the third quarter of 2011, compared to 3.71 percent for the third 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 1.48 percent for the third quarter of 2011 compared to 3.32 percent for the third quarter of 2010. This decrease was due primarily to a 193 basis point decrease in ROE compared to a nine basis point decrease in LIBOR during the period.

The Bank’s annualized ROE was 2.13 percent for the first nine months of 2011, compared to 3.23 percent for the first nine 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 1.84 percent for the first nine months of 2011 compared to 2.87 percent for the same period in 2010. This decrease was due primarily to a 110 basis point decrease in ROE compared to a seven basis point decrease in LIBOR during the period.

The Bank’s interest rate spread was 33 basis points and 32 basis points for the third quarter of 2011 and 2010, respectively, and 35 basis points and 33 basis points for the first nine months of 2011 and 2010, respectively. The Bank’s interest rate spread has remained relatively stable during the reported periods.

Business Outlook

The U.S. debt ceiling debate during early August, concerns about the continued weaknesses of the U.S. economy and stress in the European financial markets during the third quarter of 2011 continued to create a challenging environment in which to operate.

Advances continued to decrease during the third quarter of 2011, and 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.

 

35


Table of Contents

The Federal Reserve has taken several measures intended to depress interest rates, including an announcement that it expects to maintain short-term interest rates near zero until mid-2013 as well as to implement “Operation Twist” pursuant to which the Federal Reserve intends to drive down longer-term interest rates by purchasing longer-dated assets and selling shorter-dated assets. These measures are intended to spur business activity. These measures could adversely impact the Bank in various ways, including through lower market yields on investments, and faster prepayments on Bank investments with associated reinvestment risk. The Bank’s investment income and, in turn, the Bank’s financial condition and results of operations, could be adversely impacted to the extent that the foregoing, or similar, risks are realized. However, the Bank could also experience increased demand for advances if these measures result in increased business activity with associated demand for loans from Bank members that choose to fund such loans with advances. Increased demand for advances would tend to increase net interest income and offset any adverse impact on investment income. Accordingly, the Bank is not able to predict the full impact of the Federal Reserve’s measures to depress interest rates.

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.

Selected Financial Data

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

 

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

Statements of Condition (at period end)

              

Total assets

       $ 118,852             $ 116,817             $ 123,633             $ 131,798             $ 141,492     

Investments (1)

     41,204           36,979           39,876           39,879           39,126     

Mortgage loans held for portfolio

     1,743           1,828           1,916           2,040           2,195     

Allowance for credit losses on mortgage loans

     (1)           (1)           (1)           (1)           (1)     

Advances, net

     75,363           77,427           81,257           89,258           99,425     

Interest-bearing deposits

     3,170           3,008           2,955           3,093           6,201     

Consolidated obligations, net:

              

Discount notes

     16,057           20,573           15,700           23,915           27,599     

Bonds

     91,720           84,640           94,854           95,198           97,942     

Total consolidated obligations, net (2)

     107,777           105,213           110,554           119,113           125,541     

Mandatorily redeemable capital stock

     319           385           531           529           492     

Affordable Housing Program payable

     115           121           127           126           127     

Payable to REFCORP

     —           10           13           20           19     

Capital stock - putable

     5,910           6,333           7,263           7,224           7,480     

Total retained earnings

     1,203           1,184           1,160           1,124           1,051     

Accumulated other comprehensive loss

     (317)           (296)           (323)           (402)           (451)     

Total capital

     6,796           7,221           8,100           7,946           8,080     

 

36


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

Statements of Income (for the period ended)

              

Net interest income

     115           119           131           131           138     

Net impairment losses recognized in earnings

     (19)           (37)           (52)           (11)           (14)     

Net gains (losses) on trading securities

     36           20           (34)           (87)           38     

Net (losses) gains on derivatives and hedging activities

     (67)           (20)           46           113           (30)     

Other income (3)

     —           1           1           1           1     

Noninterest expense (4)

     29           32           22           37           32     

Income before assessments

     36           51           70           110           101     

Assessments (5)

     4           13           19           29           27     

Net income

     32           38           51           81           74     

Performance Ratios (%)

              

Return on equity (6)

     1.78           2.01           2.56           3.99           3.71     

Return on assets (7)

     0.10           0.13           0.16           0.23           0.21     

Net interest margin (8)

     0.38           0.40           0.41           0.38           0.39     

Regulatory capital ratio (at period end) (9)

     6.25           6.76           7.24           6.74           6.38     

Equity to assets ratio (10)

     5.77           6.27           6.21           5.84           5.65     

Dividend payout ratio (11)

     40.09           37.89           28.74           9.23           11.51     

 

(1) Investments consist of interest-bearing deposits, 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):

 

September 30, 2011

       $ 590,231        

June 30, 2011

     623,513        

March 31, 2011

     656,491        

December 31, 2010

     678,528        

September 30, 2010

     682,238        

 

(3) Other income includes service fees and other.
(4) For the three months ended September 30, 2010 amount includes $2 million, which represents the reversal of a portion of the provision for credit losses established on a receivable due from Lehman Brothers Special Financing Inc.
(5) On August 5, 2011, the Finance Agency certified that the FHLBanks have satisfied their REFCORP obligation.
(6) Calculated as net income divided by average total equity.
(7) Calculated as net income divided by average total assets.
(8) Net interest margin is net interest income as a percentage of average earning assets.
(9) Regulatory capital ratio is regulatory capital stock plus retained earnings as a percentage of total assets at period end.
(10) Calculated as average equity divided by average total assets.
(11) Calculated as dividends declared during the period divided by net income during the period.

 

37


Table of Contents

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

Advances, net

       $ 75,363           63.41             $ 89,258           67.72             $ (13,895)           (15.57)     

Long-term investments

     22,362           18.82           22,986           17.44           (624)           (2.71)     

Short-term investments

     18,842           15.85           16,893           12.82           1,949           11.54     

Mortgage loans, net

     1,742           1.47           2,039           1.55           (297)           (14.58)     

Other assets

     543           0.45           622           0.47           (79)           (12.79)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total assets

       $ 118,852           100.00             $ 131,798           100.00             $ (12,946)           (9.82)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Consolidated obligations, net:

                 

Discount notes

       $ 16,057           14.33             $ 23,915           19.31             $ (7,858)           (32.86)     

Bonds

     91,720           81.85           95,198           76.86           (3,478)           (3.65)     

Deposits

     3,170           2.83           3,093           2.50           77           2.51     

Other liabilities

     1,109           0.99           1,646           1.33           (537)           (32.62)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total liabilities

       $ 112,056           100.00             $ 123,852           100.00             $ (11,796)           (9.52)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Capital stock

       $ 5,910           86.96             $ 7,224           90.92             $ (1,314)           (18.20)     

Retained earnings

     1,203           17.70           1,124           14.14           79           7.02     

Accumulated other comprehensive loss

     (317)           (4.66)           (402)           (5.06)           85           21.28     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total capital

       $ 6,796           100.00             $ 7,946           100.00             $ (1,150)           (14.48)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Advances

The decrease in advances from December 31, 2010 to September 30, 2011 was due to maturing advances, prepayments by large borrowers, member failures, and members’ significant deposit balances and slow loan growth. At September 30, 2011, 83.5 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 September 30, 2011 and December 31, 2010, 81.8 percent and 87.4 percent, respectively, of the Bank’s fixed-rate advances were swapped and 3.15 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.

 

38


Table of Contents

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

 

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

Adjustable or variable-rate indexed

       $ 11,282           15.97             $ 8,852           10.41     

Fixed-rate

     23,018           32.58           23,073           27.13     

Convertible

     9,672           13.69           12,592           14.80     

Hybrid

     25,627           36.28           39,415           46.34     

Amortizing*

     1,043           1.48           1,119           1.32     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total par value

       $ 70,642           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
 

September 30, 2011

       $ 44,856         63.50   

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, during the first two quarters of 2011, to satisfy the Bank’s annual REFCORP assessment. On August 5, 2011, the Finance Agency certified that the FHLBanks have fully satisfied their REFCORP obligation.

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

 

39


Table of Contents

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 September 30, 2011         As of December 31, 2010         Amount         Percent    

Short-term investments:

       

Interest-bearing deposits (1)

      $ 1,302            $ 2            $ 1,300          NM     

Certificates of deposit

    1,100          1,190          (90)          (7.56)     

Federal funds sold

    16,440          15,701          739          4.71     
 

 

 

   

 

 

   

 

 

   

Total short-term investments

    18,842          16,893          1,949          11.54     
 

 

 

   

 

 

   

 

 

   

Long-term investments:

       

State or local housing agency debt obligations

    110          111          (1)          (0.91)     

U.S. government agency debt obligations

    3,963          4,253          (290)          (6.80)     

Mortgage-backed securities:

       

U.S. government agency securities

    11,094          9,676          1,418          14.65     

Private label

    7,195          8,946          (1,751)          (19.57)     
 

 

 

   

 

 

   

 

 

   

Total mortgage-backed securities

    18,289          18,622          (333)          (1.79)     
 

 

 

   

 

 

   

 

 

   

Total long-term investments

    22,362          22,986          (624)          (2.71)     
 

 

 

   

 

 

   

 

 

   

Total investments

      $ 41,204            $ 39,879            $ 1,325          3.33     
 

 

 

   

 

 

   

 

 

   

 

NM – Not meaningful

(1) As of September 30, 2011, interest-bearing deposits includes a $1.3 billion business money market account with Branch Banking and Trust Company. As reported in the Bank’s Form 10-K, as of December 31, 2010, Branch Banking and Trust Company was one of the Bank’s ten largest borrowers. One of the Bank’s member directors is a senior executive vice president of Branch Banking and Trust Company. Pursuant to Finance Agency regulation, the Bank’s member directors serve as officers or directors of a Bank member, and the Bank may enter into business transactions with such members from time to time in the ordinary course of business.

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 250 percent and 210 percent of total capital plus mandatorily redeemable capital stock at September 30, 2011 and December 31, 2010, respectively. The Bank was below its target range of 250 percent to 275 percent at December 31, 2010 due to a lack of quality MBS at attractive prices during recent market conditions. The Bank suspended new purchases of private label MBS beginning in the first quarter of 2008, resulting in a greater percentage of U.S. government agency MBS as of September 30, 2011 compared to December 31, 2010.

As of September 30, 2011, the Bank had a total of 46 securities classified as available-for-sale in an unrealized loss position, with total gross unrealized losses of $321 million and a total of 107 securities classified as held-to-maturity in an unrealized loss position, with total gross unrealized losses of $208 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 third quarter and first nine months of 2011, the Bank recognized total other-

 

40


Table of Contents

than-temporary impairment losses of $8 million and $45 million, respectively, related to private-label MBS in its investment securities portfolio. The total amount of other-than-temporary impairment is calculated as the difference between the security’s amortized cost basis and its fair value. The credit related portion of $19 million and $108 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 $(11) million and $(63) million, respectively, of the other-than-temporary impairment losses is recorded as a component of other comprehensive loss. For the third quarter and first nine months of 2010, the Bank recognized total other-than-temporary impairment losses of $5 million and $200 million, respectively, related to private-label MBS in its investment securities portfolio. The credit related portion of $14 million and $132 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 $(9) million and $68 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 September 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 September 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.

 

000As of September 30, 2011000 000As of September 30, 2011000 000As of September 30, 2011000
                    As of September  30, 2011                             As of December  31, 2010              
        Percent of Total     Percent of Total  

South Carolina

    24.51          24.50     

Florida

    22.43          21.07     

Georgia

    14.57          14.42     

North Carolina

    13.45          14.12     

Virginia

    8.94          9.19     

All other

    16.10          16.70     
   

 

 

   

 

 

 

Total

      100.00          100.00     
   

 

 

   

 

 

 

 

41


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 90.7 percent of the $118.9 billion in total assets at September 30, 2011, remaining relatively stable from 90.4 percent as of December 31, 2010.

The decrease in COs from December 31, 2010 to September 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 September 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 September 30, 2011 and December 31, 2010, 81.2 percent and 77.3 percent, respectively, of the Bank’s fixed-rate CO bonds were swapped and 3.53 percent and 0.24 percent, respectively, of the Bank’s variable-rate CO bonds were swapped.

As of September 30, 2011, callable CO bonds constituted 34.3 percent of the total par value of CO bonds outstanding, compared to 26.3 percent at December 31, 2010. This increase was due to market conditions during the third quarter of 2011 that made the issuance of swapped callable fixed maturity debt more 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 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 July 15, 2011, S&P placed the long-term AAA credit ratings of 10 of the 12 FHLBanks, including the Bank, 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.

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

 

42


Table of Contents

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 did not experience a material impact on the Bank’s ability to issue COs or on the Bank’s financial condition or results of operations for the third quarter of 2011. However, any additional downgrade of the U.S. sovereign debt and a resultant downgrade of the FHLBanks 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.

In accordance with the agreement on the debt ceiling, a joint select committee on deficit reduction was convened to form a proposal for a minimum of $2.5 trillion in deficit reduction measures in addition to the deficit reduction measures that have already been agreed to in connection with the agreement. These deficit reduction measures must be enacted by December 23, 2011, or $1.2 trillion in spending cuts will automatically take effect. S&P or other NRSROs could further downgrade the U.S. government, and in turn the FHLBanks, if this process results in weakened perceptions of the U.S. government’s commitment to satisfy its obligations or otherwise falls short of what the NRSROs believe is necessary for the U.S. government to retain its current credit ratings.

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 September 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 September 30, 2011.

Capital

The decrease in total capital from December 31, 2010 to September 30, 2011 was due primarily to the repurchase of $1.4 billion of excess capital stock during the period.

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:

 

43


Table of Contents
   

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;

 

   

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 September 30, 2011, the Bank received notification from the Director that, based on June 30, 2011 data, the Bank meets the definition of “adequately capitalized.”

As of September 30, 2011, the Bank had capital stock subject to mandatory redemption from 65 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 September 30, 2011 and December 31, 2010, the Bank’s outstanding stock included $1.9 billion and $2.7 billion, respectively, of excess shares subject to repurchase by the Bank at its discretion. On October 27, 2011, the Bank announced that it would purchase up to $700 million of excess shares on November 17, 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.

During the third quarter of 2011, the Bank paid $13 million in dividends. On October 27, 2011, the board of directors declared an annualized dividend rate of 0.80 percent for the third quarter, that was paid on November 3, 2011.

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 (as amended on August 5, 2011, the Amended 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. On August 5, 2011, the Finance Agency certified that the FHLBanks fully satisfied their REFCORP obligation during the second quarter of 2011. In accordance with the Amended

 

44


Table of Contents

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 related changes to 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 third quarter and first nine 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.

 

        Three Months Ended September 30,                 Increase (Decrease)                  Nine Months Ended September 30,                 Increase (Decrease)           
    2011     2010     Amount     Percent     2011     2010     Amount     Percent  

Net interest income

      $ 115            $ 138            $ (23)          (15.86)            $ 365            $ 427            $ (62)          (14.46)     

Noninterest loss

    (50)          (5)          (45)          (837.58)          (125)          (117)          (8)          (6.94)     

Noninterest expense

    29          32          (3)          (2.85)          83          42          41          104.04     

Total assessments

    4          27          (23)          (87.63)          36          71          (35)          (50.04)     

Net income

    32          74          (42)          (57.49)          121          197          (76)          (38.95)     

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 certain derivative instruments and hedging activities related adjustments.

The decrease in net interest income during the third quarter and first nine 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 discussed under Noninterest Income (Loss) below, the impact of derivatives and hedging on net interest income was a decrease of $336 million and $515 million for the third quarter of 2011 and 2010, respectively, and a decrease of $1.1 billion and $1.6 billion for the first nine months of 2011 and 2010, respectively.

 

45


Table of Contents

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 third quarter and the first nine months of 2011 and 2010 (dollars in millions).

Spread and Yield Analysis

 

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

Assets

                 

Federal funds sold

       $ 17,403             $ 6           0.14             $ 13,926             $ 9           0.25     

Interest-bearing deposits (1)

     4,190           1           0.12           4,000           2           0.20     

Certificates of deposit

     1,075           —           0.19           1,542           1           0.41     

Long-term investments (2)

     21,800           174           3.15           21,209           221           4.13     

Advances

     75,849           59           0.31           97,716           109           0.44     

Mortgage loans held for portfolio (3)

     1,786           24           5.37           2,257           30           5.25     

Loans to other FHLBanks

     3           —           0.11           2           —           0.20     
  

 

 

    

 

 

       

 

 

    

 

 

    

Total interest-earning assets

     122,106           264           0.86           140,652           372           1.05     
     

 

 

          

 

 

    

Allowance for credit losses on mortgage loans

     (1)                 (1)           

Other assets

     822                 942           
  

 

 

          

 

 

       

Total assets

       $ 122,927                   $ 141,593           
  

 

 

          

 

 

       

Liabilities and Capital

                 

Deposits (4)

       $ 2,771           —           0.02             $ 3,350           1           0.13     

Short-term borrowings

     22,182           4           0.06           21,441           10           0.19     

Long-term debt

     86,275           144           0.66           102,701           222           0.86     

Other borrowings

     363           1           0.70           500           1           0.62     
  

 

 

    

 

 

       

 

 

    

 

 

    

Total interest-bearing liabilities

     111,591           149           0.53           127,992           234           0.73     
     

 

 

          

 

 

    

Other liabilities

     4,237                 5,607           

Total capital

     7,099                 7,994           
  

 

 

          

 

 

       

Total liabilities and capital

       $ 122,927                   $ 141,593           
  

 

 

          

 

 

       

Net interest income and net yield on interest-earning assets

          $ 115           0.38                $ 138           0.39     
     

 

 

    

 

 

       

 

 

    

 

 

 

Interest rate spread

           0.33                 0.32     
        

 

 

          

 

 

 

Average interest-earning assets to interest-bearing liabilities

           109.42                 109.89     
        

 

 

          

 

 

 

 

(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.

 

 

46


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

Assets

                 

Federal funds sold

       $ 15,220             $ 18           0.16             $ 13,071             $ 22           0.23     

Interest-bearing deposits (1)

     3,235           3           0.13           3,658           5           0.18     

Certificates of deposit

     904           1           0.22           992           3           0.37     

Long-term investments (2)

     22,175           557           3.36           21,713           706           4.35     

Advances

     80,135           202           0.34           103,900           262           0.34     

Mortgage loans held for portfolio (3)

     1,876           75           5.33           2,362           93           5.26     

Loans to other FHLBanks

     3           —           0.14           1           —           0.18     
  

 

 

    

 

 

       

 

 

    

 

 

    

Total interest-earning assets

     123,548           856           0.93           145,697           1,091           1.00     
     

 

 

          

 

 

    

Allowance for credit losses on mortgage loans

     (1)                 (1)           

Other assets

     888                 1,019           
  

 

 

          

 

 

       

Total assets

       $ 124,435                   $ 146,715           
  

 

 

          

 

 

       

Liabilities and Capital

                 

Deposits (4)

       $ 2,818           1           0.04             $ 3,073           2           0.08     

Short-term borrowings

     19,632           15           0.10           17,531           19           0.14     

Long-term debt

     89,804           472           0.70           112,157           642           0.77     

Other borrowings

     451           3           0.94           411           1           0.39     
  

 

 

    

 

 

       

 

 

    

 

 

    

Total interest-bearing liabilities

     112,705           491           0.58           133,172           664           0.67     
     

 

 

          

 

 

    

Other liabilities

     4,155                 5,375           

Total capital

     7,575                 8,168           
  

 

 

          

 

 

       

Total liabilities and capital

       $ 124,435                   $ 146,715           
  

 

 

          

 

 

       

Net interest income and net yield on interest-earning assets

          $ 365           0.40                $ 427           0.39     
     

 

 

    

 

 

       

 

 

    

 

 

 

Interest rate spread

           0.35                 0.33     
        

 

 

          

 

 

 

Average interest-earning assets to interest-bearing liabilities

           109.62                 109.40     
        

 

 

          

 

 

 

 

(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 one basis point during the third quarter of 2011, compared to the third quarter of 2010, and increasing by two basis points during the first nine months of 2011 compared to the same period in 2010.

 

47


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 third quarter and first nine months of 2011, compared to the same periods in 2010, was primarily rate related.

Volume and Rate Table*

 

                Three Months Ended  September 30,                                 Nine Months Ended  September 30,                  
    2011 vs. 2010     2011 vs. 2010  
    Volume     Rate     Increase
(Decrease)
    Volume     Rate     Increase
(Decrease)
 

Increase (decrease) in interest income:

           

Federal funds sold

      $ 2            $ (5)            $ (3)            $ 3            $ (7)            $ (4)     

Interest-bearing deposits

    —          (1)          (1)          (1)          (1)          (2)     

Certificates of deposit

    —          (1)          (1)          (1)          (1)          (2)     

Long-term investments

    6          (53)          (47)          15          (164)          (149)     

Advances

    (21)          (29)          (50)          (59)          (1)          (60)     

Mortgage loans held for portfolio

    (7)          1          (6)          (19)          1          (18)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    (20)          (88)          (108)          (62)          (173)          (235)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in interest expense:

           

Deposits

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

Short-term borrowings

    1          (7)          (6)          2          (6)          (4)     

Long-term debt

    (32)          (46)          (78)          (121)          (49)          (170)     

Other borrowings

    —          —          —          —          2          2     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    (31)          (54)          (85)          (119)          (54)          (173)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in net interest income

      $ 11            $ (34)            $ (23)            $ 57            $ (119)            $ (62)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* 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.

Noninterest Income (Loss)

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

 

    Three Months Ended September 30,         Increase (Decrease)         Nine Months Ended September 30,         Increase (Decrease)      
    2011     2010     Amount     Percent     2011     2010     Amount     Percent  

Noninterest Income (Loss):

               

Net impairment losses recognized in earnings

      $ (19)            $ (14)            $ (5)          (39.59)            $ (108)            $ (132)            $ 24          18.12     

Net gains on trading securities

    36          38          (2)          (5.62)          22          118          (96)          (81.64)     

Net losses on derivatives and hedging activities

    (67)          (30)          (37)          (123.87)          (41)          (105)          64          60.99     

Other

    —          1          (1)          (76.92)          2          2          —          (6.93)     
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total noninterest loss

  $ (50)            $ (5)            $ (45)          (837.58)            $ (125)            $ (117)            $ (8)          (6.94)     
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

48


Table of Contents

The overall change in noninterest income (loss) for the third quarter and first nine 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 on derivatives and hedging activities (including those related to trading securities). The net gains of $36 million and $38 million on trading securities during the third quarter of 2011 and 2010, respectively, was due primarily to a decrease in long-term interest rates during those periods. 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 $67 million and $30 million on derivatives and hedging activities during the third quarter of 2011 and 2010, respectively, were due primarily to net losses of $37 million and $42 million, respectively, on non-qualifying hedges related to the Bank’s trading securities which are reported as part of net losses on derivatives and hedging activities.

The net gains of $22 million and $118 million on trading securities during the first nine months of 2011 and 2010, respectively, were due primarily to a decrease in long-term interest rates during the second and third quarters of both 2011 and 2010. There was a greater decrease in long-term interest rates during the second quarter of 2010 compared to the second quarter of 2011. The net losses of $41 million and $105 million on derivatives and hedging activities during the first nine months of 2011 and 2010, respectively, were due primarily to net losses of $13 million and $127 million, respectively, on non-qualifying hedges related to the Bank’s trading securities which are reported as part of net losses on derivatives and hedging activities.

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

 

    Three Months Ended September 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)

      $ (55)            $ —            $ 10            $ —            $ —            $ (45)     

Net interest settlements included in net interest income(2)

    (491)          —          200          —          —          (291)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net interest (expense) income

    (546)          —          210          —          —          (336)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net gains (losses) on derivatives and hedging activities:

           

Gains on fair value hedges

    23          —          5          —          —          28     

Gains (losses) on derivatives not receiving hedge
accounting

    6          (72)          2          —          (31)          (95)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net gains (losses) on derivatives and hedging activities

    29          (72)          7          —          (31)          (67)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    (517)          (72)          217          —          (31)          (403)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net gains on trading securities(3)

    —          36          —          —          —          36     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net effect of derivatives and hedging activities

      $ (517)            $ (36)            $ 217            $ —            $ (31)            $ (367)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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
     Three Months Ended September 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)

       $ (56)             $ —             $ 12             $ —             $ —             $ (44)     

Net interest settlements included in net interest income(2)

     (708)           —           237           —           —           (471)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net interest (expense) income

     (764)           —           249           —           —           (515)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net gains (losses) on derivatives and hedging activities:

                 

Gains (losses) on fair value hedges

     67           —           (22)           —           —           45     

(Losses) gains on derivatives not receiving hedge accounting

     —           (80)           8           —           (3)           (75)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net gains (losses) on derivatives and hedging activities

     67           (80)           (14)           —           (3)           (30)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

     (697)           (80)           235           —           (3)           (545)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net gains on trading securities(3)

     —           38           —           —           —           38     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net effect of derivatives and hedging activities

       $ (697)             $ (42)             $ 235             $ —             $ (3)             $ (507)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

 

     Nine Months Ended September 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)

       $ (150)             $ —             $ 30             $ —             $ —             $ (120)     

Net interest settlements included in net interest income(2)

     (1,622)           —           634           2           —           (986)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net interest (expense) income

     (1,772)           —           664           2           —           (1,106)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net gains (losses) on derivatives and hedging activities:

                 

Gains (losses) on fair value hedges

     110           —           (9)           —           —           101     

Gains (losses) on derivatives not receiving hedge accounting

     7           (123)           7           —           (33)           (142)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net gains (losses) on derivatives and hedging activities

     117           (123)           (2)           —           (33)           (41)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

     (1,655)           (123)           662           2           (33)           (1,147)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net gains on trading securities(3)

     —           22           —           —           —           22     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net effect of derivatives and hedging activities

       $ (1,655)             $ (101)             $ 662             $ 2             $ (33)             $ (1,125)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

 

50


Table of Contents
     Nine Months Ended September 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)

       $ (191)         $ —             $ 43             $ —             $ —             $ (148)     

Net interest settlements included in net interest income(2)

     (2,410)           —           932           8           —           (1,470)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net interest (expense) income

     (2,601)           —           975           8           —           (1,618)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net gains (losses) on derivatives and hedging activities:

                 

Gains (losses) on fair value hedges

     173           —           (31)           (3)           —           139     

(Losses) gains on derivatives not receiving hedge accounting

     —           (242)           15           —           (17)           (244)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net gains (losses) on derivatives and hedging activities

     173           (242)           (16)           (3)           (17)           (105)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

     (2,428)           (242)           959           5           (17)           (1,723)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net gains on trading securities(3)

     —           118           —           —           —           118     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net effect of derivatives and hedging activities

       $ (2,428)         $ (124)             $ 959             $ 5             $ (17)             $ (1,605)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

Noninterest Expense and Assessments

Noninterest expense remained relatively stable at $29 million and $32 million for the third quarter of 2011 and 2010, respectively. Noninterest expense was $83 million and $42 million for the first nine months of 2011 and 2010, respectively. The increase during the first nine months of 2011, compared to the same period in 2010, was due primarily to the Bank’s reduction in its provision for credit losses on a receivable due from Lehman Brothers Special Financing Inc. by $51 million during the first nine months of 2010, which resulted in an increase in income for that period.

Total assessments were $4 million and $27 million for the third quarter of 2011 and 2010, respectively, and $36 million and $71 million for the first nine months of 2011 and 2010, respectively. The decrease during the third quarter and first nine months of 2011, compared to the same periods in 2010, was due primarily to the satisfaction of the Bank’s REFCORP obligation during the second quarter of 2011 as previously discussed.

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 third 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.

 

51


Table of Contents

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 nine months of 2011.

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 investor demand may shift from consolidated obligation bonds to short-term consolidated obligation discount notes during periods of market stress or volatility, such as during part of the recent financial crisis. The Bank’s funding costs and ability to issue longer-term and structured debt generally returned to pre-financial crisis 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 discount 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. Although some temporary tightening occurred in the capital markets immediately prior to the August 2, 2011 debt limit deadline, the Bank was essentially unaffected as a result of its prior increase in liquidity. After the debt ceiling agreement was announced, the debt markets generally stabilized. The Bank maintained higher than historical levels of short-term liquidity during the third quarter of 2011, and expects to continue to do so for the near future, in order to take advantage of relatively attractive investment rates in a prolonged low-rate environment and protect against continued general market uncertainty.

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. However, the Bank did not experience a material impact on its ability to meet its liquidity goals or on the Bank’s financial condition or results of operations for the third quarter of 2011. It is possible that any further changes to the U.S. sovereign credit rating, and consequently to the FHLBanks’ credit ratings, 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.

 

52


Table of Contents

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 September 30, 2011 and December 31, 2010. As of September 30, 2011, the FHLBanks had $696.6 billion in aggregate par value of COs issued and outstanding, $106.4 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 September 30, 2011, the Bank had outstanding standby letters of credit of $21.8 billion with original terms of less than 12 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. The Bank expects its overall standby letter of credit activity to remain relatively stable for the near future. S&P’s downgrade of the U.S. sovereign credit rating and S&P’s related downgrade of the issuer credit ratings of the FHLBanks did not have a material impact on the Bank’s standby letter of credit activity during the third quarter of 2011. However, any further downgrade of the Bank’s credit rating by one or more NRSROs 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 and appropriate additional fees.

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 a 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

 

53


Table of Contents

Bank does not deem it necessary to have an allowance for credit losses for these unfunded standby letters of credit as of September 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 September 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.

Legislative and Regulatory Developments

The legislative and regulatory environment for the Bank continues to change 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 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 an important impact on the Bank are summarized below, although the full effect of the Dodd-Frank Act will become known only after the required regulations, studies, and reports are issued and finalized.

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 to determine which types of swaps will be subject to mandatory clearing, but has not yet made any such determinations. The CFTC has also proposed a rule setting forth an implementation schedule for effectiveness of its mandatory clearing determinations. Pursuant to this proposed rule, regardless of when the CFTC determines that a type of swap is required to be cleared, such mandatory clearing would not take effect until certain rules being promulgated by the CFTC and the SEC under the Dodd-Frank Act have been finalized. In addition, the proposed rule provides that each time the CFTC determines that a type of swap is required to be cleared, the CFTC would have the option to implement such requirement in three phases. Under the proposed rule, the Bank would be a “category 2 entity” and would therefore have to comply with mandatory clearing requirements for a particular swap during phase 2 (within 180 days of the CFTC’s issuance of such requirements). Based on the CFTC’s proposed implementation schedule 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 third quarter of 2012, at the earliest.

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 swaps 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

 

54


Table of Contents

documentation with clearing members (which the Bank is currently negotiating) and additional documentation with the Bank’s swap counterparties.

The CFTC has issued a proposed rule requiring that collateral posted by swap 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.

It is also unclear how the final rule will treat the call and put optionality in certain advances to 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 what products will and will not be regulated as “swaps.” While it is unlikely that advance transactions between the Bank and its 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 defined in the final regulations, the Bank may be faced with the business decision of whether to continue to offer certain types of advance products 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 costs 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 its advance activities, 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 Bank’s hedging activities would not be subject to the full requirements that will generally be imposed on traditional swap dealers.

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 mandatory reporting, documentation, and minimum margin and capital requirements. 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, 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, making such trades more costly.

 

55


Table of Contents

The CFTC has proposed a rule setting forth an implementation schedule for the effectiveness of the new margin and documentation requirements for uncleared swaps. Pursuant to the proposed rule, regardless of when the final rules regarding these requirements are issued, such rules would not take effect until (1) certain other rules being promulgated under the Dodd-Frank Act take effect and (2) a certain additional time period has elapsed. The length of this additional time period depends on the type of entity entering into the uncleared swaps. The Bank would be a “category 2 entity” and would therefore have to comply with the new requirements during phase 2 (within 180 days of the effectiveness of the final applicable rulemaking). Accordingly, it is not likely that the Bank would have to comply with such requirements until the third quarter of 2012, at the earliest.

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: (i) the effective date of the applicable final rule further defining the relevant terms; or (ii) December 31, 2011. The CFTC has recently proposed an amendment to this order that would extend the exemptions contained in the existing order until the earlier of (i) the effective date of the applicable final rules further defining the relevant terms; or (ii) July 16, 2012. 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 during the fourth quarter of 2011 or the first quarter of 2012, but it is not expected that such final regulations will become effective until the first or second quarter of 2012, and delays beyond that time are possible. In addition, as discussed above, mandatory clearing requirements and new margin and documentation requirements for uncleared swaps may be subject to additional implementation schedules, further delaying the effectiveness of such requirements.

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 is also working with the other FHLBanks 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, including the Federal Reserve Board, have rescinded 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.

Oversight Council Authority to Supervise and Regulate Certain Nonbank Financial Companies. On October 18, 2011, the Financial Stability Oversight Council (Oversight Council) issued a notice of proposed rulemaking with a comment deadline of December 19, 2011 and guidance regarding the standards and procedures it will follow when it considers whether to designate nonbank financial companies for heightened prudential supervision and oversight by the Federal Reserve Board. This notice rescinded a prior proposal on these designations. Under the proposed designation process, the Oversight Council will first identify those U.S. nonbank financial companies that have $50 billion or more of total consolidated assets and exceed any

 

56


Table of Contents

one of five threshold indicators of interconnectedness or susceptibility to material financial distress. Significantly for the Bank, in addition to the asset size criterion, one of the five thresholds is whether a company has $20 billion or more of borrowing outstanding, including bonds (in the Bank’s case, COs) issued. As of September 30, 2011, the Bank had $118.9 billion in total consolidated assets and $107.8 billion in total outstanding COs. If the Bank is designated by the Oversight Council for supervision and oversight by the Federal Reserve Board, then the Bank’s operations and business could be adversely impacted by additional costs and business activity restrictions resulting from such oversight.

Significant Finance Agency Regulatory Actions

Home Affordable Refinance Program Changes. The Finance Agency, Fannie Mae and Freddie Mac (the Enterprises) have announced a series of changes to the Home Affordable Refinance Program that are intended to assist more eligible borrowers who can benefit from refinancing their home mortgage. The changes include lowering or eliminating certain risk-based fees, removing the current 125 percent loan-to-value ceiling on fixed-rate mortgages that are purchased by the Enterprises, waiving certain representations and warranties, eliminating the need for a new property appraisal where there is a reliable automated valuation model estimate provided by the Enterprises, and extending the end date for the program until December 31, 2013 for loans originally sold to the Enterprises on or before May 31, 2009. The Bank has estimated that less than 10 percent of the loans underlying the Bank’s total MBS portfolio is eligible for new refinancing or further refinancing under these new changes. Even if those eligible mortgage loans experience an increased rate of refinancing, the Bank believes there will be no material impact to the Bank’s financial condition or results of operations because the Bank’s agency MBS are primarily floating rate MBS and thus the mortgage loans refinance at an amount at or very near the Bank’s expected return.

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 became effective July 20, 2011.

Other Significant Regulatory Actions

Anti-Money Laundering Regulation. The Financial Crimes Enforcement Network (FinCEN) announced on November 3, 2011 proposed regulations that would require the Fannie Mae, Freddie Mac and the FHLBanks (the GSEs) to develop anti-money laundering (AML) programs and file suspicious activity reports (SARs) with FinCEN. The GSEs, including the FHLBanks, currently file fraud reports with the Finance Agency, which then files SARs with FinCEN when the facts in a particular fraud report warrant a SAR under FinCEN’s reporting standards. The proposed regulations would require that the FHLBanks file SARS directly with FinCEN. The Bank is evaluating the impact of this proposal on its operations and comments on the proposal are due within 60 days of its publication in the Federal Register.

 

57


Table of Contents

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 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 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.

 

58


Table of Contents

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):

 

00000Number of00000 00000Number of00000 00000Number of00000 00000Number of00000 00000Number of00000
    As of September 30, 2011     As of December 31, 2010  

Rating

  Number of
Borrowers
    Outstanding
Advances
    Number of
Borrowers
    Outstanding
Advances
 

1-9

    538            $ 65,239          569            $ 79,170     

10

    139          3,795          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 September 30, 2011, 10 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 September 30, 2011

       $ 70,642             $ 179,639           65.29           10.48           24.23     

As of December 31, 2010

     85,051           188,212           67.43           10.19           22.38     

Beginning in 2010, for purposes of determining each member’s LCV, the Bank estimates the current market value of all residential first mortgage loans, home equity loans and lines of credit 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. 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 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.

 

59


Table of Contents

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

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
            2011                     2010                     2011                     2010          

FHLBank Atlanta members

    13          21          38          45     

Non-FHLBank Atlanta members

    13          20          36          82     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total FDIC-insured

    26          41          74          127     
 

 

 

   

 

 

   

 

 

   

 

 

 

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 September 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 interest-bearing deposits, certificates of deposits and federal funds sold.

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;

 

   

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

 

60


Table of Contents
 

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.

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. In light of significant European sovereign credit concerns which triggered falling equity prices and higher credit default swap spreads, the Bank suspended overnight and term trading with its French counterparties. The Bank may further limit or suspend overnight and term trading for other European counterparties in addition to RMP and regulatory requirements.

The Bank experienced an increase in unsecured credit exposure in its investment portfolio related to non-U.S. government or non-U.S. government agency counterparties from $16.9 billion as of December 31, 2010 to $18.8 billion as of September 30, 2011. There were seven such counterparties (including Branch Banking and Trust Company, one of the Bank’s ten largest borrowers as of December 31, 2010, as reported in the Form 10-K) that represented 56.6 percent, and two such counterparties, Barclays Bank PLC and Nordea Bank of Finland PLC, 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 September 30, 2011, the Bank’s long-term investment portfolio included $7.2 billion of private-label MBS, which represented 32.2 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 September 30, 2011 and December 31, 2010, based on their credit ratings as of September 30, 2011 and December 31, 2010 (in millions). The credit ratings reflect the lowest long-term credit rating as reported by an NRSRO.

 

61


Table of Contents

As of September 30, 2011

Carrying Value (1)

 

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

Short-term investments:

                             

Interest-bearing deposits

       $ —             $ 2             $ 1,300             $ —             $ —             $ —             $ —             $ —             $ —             $ —     

Certificates of deposit

     —           —           1,100           —           —           —           —           —           —           —     

Federal funds sold

     —           6,555           9,885           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term investments

     —           6,557           12,285           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Long-term investments:

                             

State or local housing agency debt obligations

     1           109           —           —           —           —           —           —           —           —     

U.S. government agency debt obligations

     —           3,963           —           —           —           —           —           —           —           —     

Mortgage-backed securities:

                             

U.S. government agency securities

     —           11,094           —           —           —           —           —           —           —           —     

Private label

     876           267           889           563           720           1,113           1,814           650           285           18     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     876           11,361           889           563           720           1,113           1,814           650           285           18     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term investments

     877           15,433           889           563           720           1,113           1,814           650           285           18     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

       $ 877             $ 21,990             $ 13,174             $ 563             $ 720             $ 1,113             $ 1,814             $ 650             $ 285             $ 18     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Investment amounts noted in the above table represent the carrying value and do not include related accrued interest receivable of $81 million at September 30, 2011.

As of December 31, 2010

Carrying Value (1)

 

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

Short-term investments:

                          

Interest-bearing deposits

       $ —             $ 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.

 

62


Table of Contents

Subsequent to September 30, 2011, $2.1 billion, or 5.07 percent, of the Bank’s investments have been downgraded as of October 31, 2011 as outlined in the table below (in millions):

 

Investment Ratings

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

At September 30, 2011

  

At October 31, 2011

   Private-label MBS      Non-MBS Investments  

From

  

To

     Carrying Value            Fair Value            Carrying Value            Fair Value      

AAA

  

AA

       $ 112             $ 109             $ —             $ —     
  

A

     6           5           —           —     

AA

  

A

     —           —           1,000         1,000   
  

BBB

     21           20           —           —     

A

  

CCC

     43           43           —           —     

BBB

  

BB

     29           27           —           —     

B

  

CCC

     114           107           —           —     
  

C

     46           46           —           —     

CCC

  

CC

     301           301           —           —     
  

C

     188           188           —           —     

CC

  

C

     229           229           —           —     
     

 

 

    

 

 

    

 

 

    

 

 

 

Total

          $ 1,089             $ 1,075             $ 1,000             $ 1,000     
     

 

 

    

 

 

    

 

 

    

 

 

 

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

 

         On Negative Watch - Balances Based on Carrying Values at  September 30, 2011  
         Private-label MBS      Non-MBS Investments  

Investment

Ratings

                Carrying Value                Fair Value                 Carrying Value                Fair Value           

AAA

         $ 2             $ 3             $ —             $ —     

A

       —           —           90           90     
    

 

 

    

 

 

    

 

 

    

 

 

 

Total

         $ 2             $ 3             $ 90             $ 90     
    

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2011, based on the classification by the originator at the time of origination, approximately 87.4 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.

 

63


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 September 30, 2011 (dollars in millions).

 

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

Investment Ratings:

           

AAA

      $ —            $ —            $ —            $ 26            $ 828            $ 854     

AA

    —          —          —          21          182          203     

A

    —          —          —          239          482          721     

BBB

    —          30          —          29          251          310     

BB

    —          107          10          320          286          723     

B

    —          18          134          360          572          1,084     

CCC

    191          797          360          746          34          2,128     

CC

    —          278          291          161          —          730     

C

    —          136          166          16          —          318     

D

    —          28          —          —          —          28     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total unpaid principal balance

      $ 191            $ 1,394            $ 961            $ 1,918            $ 2,635            $ 7,099     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amortized cost

      $ 174            $ 1,157            $ 815            $ 1,795            $ 2,612            $ 6,553     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross unrealized losses

      $ —            $ (59)            $ (47)            $ (181)            $ (134)            $ (421)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value

      $ 176            $ 1,106            $ 772            $ 1,615            $ 2,504            $ 6,173     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

           

Credit-related losses

      $ —            $ (27)            $ (18)            $ (29)            $ (9)            $ (83)     

Non-credit-related losses

    —          (18)          (18)          (25)          23          (38)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other-than-temporary impairment losses

      $ —            $ (9)            $ —            $ (4)            $ (32)            $ (45)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average percentage of fair value to unpaid principal balance

    92.23%          79.30%          80.41%          84.24%          94.99%          86.96%     

Original weighted average credit support

    15.72%          13.22%          9.89%          6.65%          3.18%          7.33%     

Weighted average credit support

    13.40%          7.38%          4.61%          7.66%          7.81%          7.41%     

Weighted average collateral delinquency

    17.93%          23.15%          20.03%          13.08%          7.05%          13.89%     

 

64


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

Investment Ratings:

           

AAA

      $ —            $ —            $ —            $ —            $ 29            $ 29     

AA

    —          —          —          —          65          65     

A

    —          —          —          —          175          175     

BBB

    —          —          —          —          253          253     

B

    —          —          —          —          82          82     

CCC

    —          —          —          188          —          188     

CC

    —          —          —          172          —          172     

C

    —          62          —          —          —          62     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total unpaid principal balance

      $ —            $ 62            $ —            $ 360            $ 604            $ 1,026     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amortized cost

      $ —            $ 47            $ —            $ 297            $ 605            $ 949     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross unrealized losses

      $ —            $ (4)            $ —            $ (95)            $ (6)            $ (105)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value

      $ —            $ 42            $ —            $ 203            $ 607            $ 852     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

           

Credit-related losses

      $ —            $ (2)            $ —            $ (23)            $ —            $ (25)     

Non-credit-related losses

    —          (2)          —          (23)          —          (25)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other-than-temporary impairment losses

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average percentage of fair value to unpaid principal balance

    0.00%          68.13%          0.00%          56.37%          100.48%          83.07%     

Original weighted average credit support

    0.00%          12.29%          0.00%          26.46%          7.04%          14.17%     

Weighted average credit support

    0.00%          2.92%          0.00%          22.48%          11.42%          14.78%     

Weighted average collateral delinquency

    0.00%          34.73%          0.00%          39.52%          6.61%          19.84%     

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).

 

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

Prime

      $ 1,105            $ 5,994            $ 7,099            $ 1,649            $ 7,041            $ 8,690     

Alt-A

    482          544          1,026          574          587          1,161     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total unpaid principal balance

      $ 1,587            $ 6,538            $ 8,125            $ 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 third 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.

 

65


Table of Contents

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

 

Weighted Weighted Weighted Weighted Weighted Weighted Weighted Weighted
     Significant Inputs  
     Prepayment Rate      Default Rates      Loss Severities      Current Credit Enhancement  

Year of

Securitization

       Weighted    
Average
(%)
         Range (%)              Weighted    
Average
(%)
         Range (%)              Weighted    
Average
(%)
         Range (%)              Weighted    
Average
(%)
         Range (%)      

Prime:

                       

2008

     6.91           6.91 to 6.91           40.02           40.02 to 40.02           47.58           47.58 to 47.58           13.40           13.23 to 13.82     

2007

     10.15           7.93 to 22.97           13.26           0.69 to 26.83           38.08           19.95 to 48.51           5.41           3.06 to 8.92     

2006

     8.44           5.65 to 18.05           18.17           10.56 to 36.39           50.02           34.90 to 62.85           4.72           1.75 to 7.33     

2005

     10.11           5.11 to 13.31           11.09           0.99 to 34.84           36.44           19.65 to 50.50           7.44           4.62 to 14.42     

2004

     18.03           4.05 to 41.81           8.30           0.00 to 34.50           27.11           0.00 to 55.73           7.46           2.28 to 41.13     

Total Prime

     13.68           4.05 to 41.81           11.73           0.00 to 40.02           33.83           0.00 to 62.85           7.21           1.75 to 41.13     

Alt-A:

                       

2007

     6.56           4.77 to 7.66           59.04           44.77 to 67.91           50.06           45.27 to 54.09           8.07           0.04 to 13.63     

2006

     6.35           5.52 to 7.57           58.22           51.13 to 65.34           50.16           44.39 to 55.57           4.50           1.22 to 6.18     

2005

     6.22           2.92 to 7.99           51.87           28.05 to 78.28           51.96           42.54 to 59.37           14.44           2.29 to 41.05     

2004

     10.70           7.79 to 16.83           9.75           0.00 to 42.10           30.91           0.00 to 57.77           11.88           3.44 to 39.55     

Total Alt-A

     7.47           2.92 to 16.83           44.61           0.00 to 78.28           45.81           0.00 to 59.37           10.25           0.04 to 41.05     

Total

     11.38           2.92 to 41.81           23.92           0.00 to 78.28           38.27           0.00 to 62.85           8.34           0.04 to 41.13     

For those securities for which an other-than-temporary impairment was determined to have occurred during the third 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):

 

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

Securities newly impaired during the period

      $ —            $ 2            $ (2)            $ —            $ 5            $ (5)     

Securities previously impaired prior to current period*

    (19)          (13)          (6)          (14)          (14)          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ (19)            $ (11)            $ (8)            $ (14)            $ (9)            $ (5)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

66


Table of Contents
     Nine Months Ended September 30,  
     2011      2010  
       Credit Losses        Net
     Noncredit    
Losses
       Total Losses          Credit Losses        Net
     Noncredit    
Losses
       Total Losses    

Securities newly impaired during the period

       $ (10)             $ 27             $ (37)             $ (38)             $ 159             $ (197)     

Securities previously impaired prior to current period*

     (98)           (90)           (8)           (94)           (91)           (3)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

       $ (108)             $ (63)             $ (45)             $ (132)             $ 68             $ (200)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* For the nine months ended September 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 July 1, 2011. From the trough, home prices were projected to recover using one of five different recovery paths that vary by housing market. The below table presents projected home price recovery ranges by year under the adverse case scenario.

 

                 Range (%)             

Year one

   0.00 to 1.90

Year two

   0.00 to 2.00

Year three

   1.00 to 2.70

Year four

   1.30 to 3.40

Years five and six

   1.30 to 4.00

Thereafter

   1.50 to 3.80

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.

 

67


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). Under the adverse case housing price scenario, the Bank may recognize a credit loss in excess of the maximum credit loss, the difference between the security’s amortized cost basis and fair value, because the Bank believes fair value would decrease in the adverse case housing price scenario.

 

    Three Months Ended September 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 *

    18            $ 1,317            $ (14)          47            $ 3,216            $ (103)     

Alt-A*

    1          172          (5)          2          181          (9)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    19            $ 1,489            $ (19)          49            $ 3,397            $ (112)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* 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 September 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 September 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.

 

68


Table of Contents

As of September 30, 2011, the Bank had $140.0 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 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 September 30, 2011, 95.4 percent of the total notional amount of outstanding derivatives was represented by 19 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 two counterparties, Deutsche Bank AG 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. None of the foregoing named counterparties is a member, or advances borrower, of the Bank.

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

 

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

AA

       $ 39,469             $ 1             $ —             $ 1     

A

     94,196           54           28           26     

BBB

     6,324           —           —           —     

Member institutions*

     49           6           6           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

       $ 140,038             $ 61             $ 34             $ 27     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* Collateral held with respect to intermediated 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.

 

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

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 intermediated 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.

 

69


Table of Contents

The maximum credit risk is the estimated cost of replacing interest-rate swaps, forward agreements, 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.

In the foregoing tables, “Net exposure after collateral” includes uncollateralized exposures that result when credit exposures to specific counterparties fall below collateralization trigger levels. The Bank experienced an increase in the number of counterparties that were below collateralization trigger levels at September 30, 2011 compared to December 31, 2010. 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 $144 million of collateral (at fair value) to its derivative counterparties at September 30, 2011.

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 September 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.

 

70


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.

 

71


Table of Contents

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.

 

               As of September 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
       $

 

 

12,679  

 

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

    

 

 

34,772  

 

741  

  

 

  

    

 

 

    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      93           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

     273           216     
        

 

 

    

 

 

 
      Total      48,658           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

    

 

 

42,633  

 

350  

  

 

  

    

 

 

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      31,646           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      20           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      74,749           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      1,129           1,295     
        

 

 

    

 

 

 
      Total      1,129           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

     12,500           6,000     
        

 

 

    

 

 

 
      Total      12,675           6,225     
        

 

 

    

 

 

 

 

72


Table of Contents
               As of September 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
     99           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      99           2,093     
        

 

 

    

 

 

 
Total notional amount              $ 140,038             $ 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 September 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

     0.58           0.36           —           0.67           0.46           0.01     

Liabilities

     0.50           0.53           0.07           0.50           0.57           0.23     

Equity

     1.65           (1.99)           (1.04)           2.95           (0.97)           (2.89)     

Effective duration gap

     0.08           (0.17)           (0.07)           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

 

73


Table of Contents

total capital decreased by $1.2 billion from December 31, 2010 to September 30, 2011 primarily due to the repurchase of $1.4 billion of excess capital stock during the period, and the market value of equity decreased by $1.4 billion during this same period.

Market Value of Equity

(In millions)

 

     As of September 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

       $ 112,978             $ 114,250             $ 114,847             $ 125,891             $ 127,451             $ 128,219     

Liabilities

     106,376           107,506           107,992           118,095           119,338           120,156     

Equity

     6,602           6,744           6,855           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 September 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 third 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.

 

74


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. The parties are awaiting a decision on the defendants’ motion to dismiss. 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 and for the period ended June 30, 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, and the Bank and other investors (Institutional 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. On August 26, 2011, certain other interested investors (Objectors) removed the action to the United States District Court, Southern District of New York; Bank of New York subsequently moved to remand the action back to state court. On October 19, 2011, the district court denied the motion to remand. On October 31, 2011, the Institutional Investors filed a petition with the United States Court of Appeals for the Second Circuit seeking to appeal the denial of motion to remand. It is not certain at this time whether the settlement will ultimately be approved, 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, and “Part II. Item 1. Legal Proceedings” in the Bank’s Form 10-Q for the period ended June 30, 2011.

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.

 

75


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 September 30, 2011, filed on November 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 September 27, 2011 with the Securities and Exchange Commission in the Bank’s Form 8-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.

 

76


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: November 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

 

77