UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2012
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) |
Registrants 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 registrants Class B Stock, par value $100, as of July 31, 2012, was 51,386,791.
PART I. FINANCIAL INFORMATION | 1 | |||||
Item 1. | Financial Statements (Unaudited) | 1 | ||||
STATEMENTS OF CONDITION | 1 | |||||
STATEMENTS OF INCOME | 2 | |||||
STATEMENTS OF COMPREHENSIVE INCOME | 3 | |||||
STATEMENTS OF CAPITAL | 4 | |||||
STATEMENTS OF CASH FLOWS | 5 | |||||
NOTES TO FINANCIAL STATEMENTS | 7 | |||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 30 | ||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 65 | ||||
Item 4. | Controls and Procedures | 69 | ||||
PART II. OTHER INFORMATION | 69 | |||||
Item 1. | Legal Proceedings | 69 | ||||
Item 1A. | Risk Factors | 69 | ||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 70 | ||||
Item 3. | Defaults Upon Senior Securities | 71 | ||||
Item 4. | Mine Safety Disclosure | 71 | ||||
Item 5. | Other Information | 71 | ||||
Item 6. | Exhibits | 71 | ||||
SIGNATURES | 72 |
Item 1. | Financial Statements |
FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CONDITION
(Unaudited)
(In millions, except par value)
As of | ||||||||
June 30, 2012 | December 31, 2011 | |||||||
Assets |
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Cash and due from banks |
$ | 13 | $ | 6 | ||||
Interest-bearing deposits (including deposits with other FHLBank of $2 as of June 30, 2012 and December 31, 2011) |
1,104 | 1,203 | ||||||
Federal funds sold |
13,048 | 12,630 | ||||||
Trading securities (includes other FHLBanks bond of $81 and $82 as of June 30, 2012 and December 31, 2011, respectively) |
2,400 | 3,120 | ||||||
Available-for-sale securities |
2,741 | 2,942 | ||||||
Held-to-maturity securities (fair value of $16,506 and $16,242 as of June 30, 2012 and December 31, 2011, respectively) |
16,408 | 16,243 | ||||||
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans of $9 and $6 as of June 30, 2012 and December 31, 2011, respectively |
1,423 | 1,633 | ||||||
Advances |
81,842 | 86,971 | ||||||
Accrued interest receivable |
274 | 314 | ||||||
Premises and equipment, net |
33 | 35 | ||||||
Derivative assets |
10 | 18 | ||||||
Other assets |
144 | 155 | ||||||
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Total assets |
$ | 119,440 | $ | 125,270 | ||||
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Liabilities |
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Interest-bearing deposits |
$ | 2,133 | $ | 2,655 | ||||
Consolidated obligations, net: |
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Discount notes |
21,427 | 24,330 | ||||||
Bonds |
89,079 | 90,662 | ||||||
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Total consolidated obligations, net |
110,506 | 114,992 | ||||||
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Mandatorily redeemable capital stock |
115 | 286 | ||||||
Accrued interest payable |
256 | 286 | ||||||
Affordable Housing Program payable |
98 | 109 | ||||||
Derivative liabilities |
140 | 241 | ||||||
Other liabilities |
127 | 140 | ||||||
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Total liabilities |
113,375 | 118,709 | ||||||
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Commitments and contingencies (Note 13) |
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Capital |
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Capital stock Class B putable ($100 par value) issued and outstanding shares: |
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Subclass B1 issued and outstanding shares: 12 as of June 30, 2012 and December 31, 2011 |
1,185 | 1,250 | ||||||
Subclass B2 issued and outstanding shares: 38 and 45 as of June 30, 2012 and December 31, 2011, respectively |
3,822 | 4,468 | ||||||
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Total capital stock Class B putable |
5,007 | 5,718 | ||||||
Retained earnings: |
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Restricted |
45 | 19 | ||||||
Unrestricted |
1,299 | 1,235 | ||||||
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Total retained earnings |
1,344 | 1,254 | ||||||
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Accumulated other comprehensive loss |
(286) | (411) | ||||||
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Total capital |
6,065 | 6,561 | ||||||
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Total liabilities and capital |
$ | 119,440 | $ | 125,270 | ||||
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The accompanying notes are an integral part of these financial statements.
1
FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF INCOME
(Unaudited)
(In millions)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Interest income |
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Advances |
$ | 76 | $ | 61 | $ | 142 | $ | 130 | ||||||||
Prepayment fees on advances, net |
3 | 3 | 5 | 5 | ||||||||||||
Interest-bearing deposits |
2 | 1 | 3 | 2 | ||||||||||||
Federal funds sold |
5 | 4 | 10 | 12 | ||||||||||||
Trading securities |
27 | 40 | 62 | 81 | ||||||||||||
Available-for-sale securities |
44 | 44 | 85 | 89 | ||||||||||||
Held-to-maturity securities |
78 | 101 | 161 | 214 | ||||||||||||
Mortgage loans held for portfolio |
20 | 25 | 41 | 51 | ||||||||||||
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Total interest income |
255 | 279 | 509 | 584 | ||||||||||||
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Interest expense |
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Consolidated obligations: |
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Discount notes |
6 | 4 | 9 | 11 | ||||||||||||
Bonds |
144 | 159 | 309 | 328 | ||||||||||||
Deposits |
1 | | 1 | 1 | ||||||||||||
Mandatorily redeemable capital stock |
1 | 1 | 2 | 2 | ||||||||||||
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Total interest expense |
152 | 164 | 321 | 342 | ||||||||||||
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Net interest income |
103 | 115 | 188 | 242 | ||||||||||||
Provision for credit losses |
| | 3 | | ||||||||||||
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Net interest income after provision for credit losses |
103 | 115 | 185 | 242 | ||||||||||||
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Noninterest income (loss) |
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Total other-than-temporary impairment losses |
| (12) | | (37) | ||||||||||||
Net amount of impairment losses reclassified from other comprehensive loss |
(8) | (25) | (15) | (52) | ||||||||||||
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Net impairment losses recognized in earnings |
(8) | (37) | (15) | (89) | ||||||||||||
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Net (losses) gains on trading securities |
(4) | 20 | (33) | (14) | ||||||||||||
Net (losses) gains on derivatives and hedging activities |
(1) | (20) | 53 | 26 | ||||||||||||
Letters of credit fees |
4 | 4 | 9 | 8 | ||||||||||||
Other |
3 | 1 | 3 | 2 | ||||||||||||
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Total noninterest (loss) income |
(6) | (32) | 17 | (67) | ||||||||||||
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Noninterest expense |
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Compensation and benefits |
16 | 18 | 31 | 35 | ||||||||||||
Other operating expenses |
10 | 10 | 18 | 19 | ||||||||||||
Finance Agency |
3 | 3 | 6 | 6 | ||||||||||||
Office of Finance |
1 | 1 | 2 | 3 | ||||||||||||
Other |
| | | (9) | ||||||||||||
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Total noninterest expense |
30 | 32 | 57 | 54 | ||||||||||||
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Income before assessments |
67 | 51 | 145 | 121 | ||||||||||||
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Assessments: |
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Affordable Housing Program |
7 | 4 | 15 | 10 | ||||||||||||
REFCORP |
| 9 | | 22 | ||||||||||||
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Total assessments |
7 | 13 | 15 | 32 | ||||||||||||
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Net income |
$ | 60 | $ | 38 | $ | 130 | $ | 89 | ||||||||
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The accompanying notes are an integral part of these financial statements.
2
FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In millions)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Net income |
$ | 60 | $ | 38 | $ | 130 | $ | 89 | ||||||||
Other comprehensive income: |
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Net noncredit portion of other-than-temporary impairment losses on available-for-sale securities: |
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Noncredit losses transferred from held-to-maturity securities |
| (6) | | (26) | ||||||||||||
Net change in fair value on other-than-temporary impairment available-for-sale securities |
(10) | 2 | 109 | 54 | ||||||||||||
Reclassification of noncredit portion of impairment losses included in net income |
8 | 31 | 15 | 78 | ||||||||||||
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Net noncredit portion of other-than-temporary impairment losses on available-for-sale securities |
(2) | 27 | 124 | 106 | ||||||||||||
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Net noncredit portion of other-than-temporary impairment losses on held-to-maturity securities: |
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Noncredit losses on held-to-maturity securities |
| (6) | | (26) | ||||||||||||
Reclassification of noncredit portion from held-to-maturity securities to available-for-sale securities |
| 6 | | 26 | ||||||||||||
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Net noncredit portion of other-than-temporary impairment losses on held-to-maturity securities |
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Pension and postretirement benefits: |
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Total other comprehensive income |
1 | | 1 | | ||||||||||||
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Total other comprehensive (loss) income |
(1) | 27 | 125 | 106 | ||||||||||||
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Total comprehensive income |
$ | 59 | $ | 65 | $ | 255 | $ | 195 | ||||||||
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The accompanying notes are an integral part of these financial statements.
3
FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011
(Unaudited)
(In millions)
Capital Stock Class B Putable | Retained Earnings | Accumulated Other Comprehensive Loss |
Total Capital | |||||||||||||||||||||||||
Shares | Par Value | Restricted | Unrestricted | Total | ||||||||||||||||||||||||
Balance, December 31, 2010 |
72 | $ | 7,224 | $ | | $ | 1,124 | $ | 1,124 | $ | (402) | $ | 7,946 | |||||||||||||||
Issuance of capital stock |
1 | 64 | | | | | 64 | |||||||||||||||||||||
Repurchase/redemption of capital stock |
(10) | (927) | | | | | (927) | |||||||||||||||||||||
Net shares reclassified to mandatorily redeemable capital stock |
| (28) | | | | | (28) | |||||||||||||||||||||
Comprehensive income |
| | | 89 | 89 | 106 | 195 | |||||||||||||||||||||
Cash dividends on capital stock |
| | | (29) | (29) | | (29) | |||||||||||||||||||||
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Balance, June 30, 2011 |
63 | $ | 6,333 | $ | | $ | 1,184 | $ | 1,184 | $ | (296) | $ | 7,221 | |||||||||||||||
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Balance, December 31, 2011 |
57 | $ | 5,718 | $ | 19 | $ | 1,235 | $ | 1,254 | $ | (411) | $ | 6,561 | |||||||||||||||
Issuance of capital stock |
6 | 531 | | | | | 531 | |||||||||||||||||||||
Repurchase/redemption of capital stock |
(12) | (1,189) | | | | | (1,189) | |||||||||||||||||||||
Net shares reclassified to mandatorily redeemable capital stock |
(1) | (53) | | | | | (53) | |||||||||||||||||||||
Comprehensive income |
| | 26 | 104 | 130 | 125 | 255 | |||||||||||||||||||||
Cash dividends on capital stock |
| | | (40) | (40) | | (40) | |||||||||||||||||||||
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Balance, June 30, 2012 |
50 | $ | 5,007 | $ | 45 | $ | 1,299 | $ | 1,344 | $ | (286) | $ | 6,065 | |||||||||||||||
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The accompanying notes are an integral part of these financial statements.
4
FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Six Months Ended June 30, | ||||||||
2012 | 2011 | |||||||
Operating activities |
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Net income |
$ | 130 | $ | 89 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
(24) | (9) | ||||||
Provision for credit losses |
3 | | ||||||
Loss due to change in net fair value adjustment on derivative and hedging activities |
146 | 199 | ||||||
Net change in fair value adjustment on trading securities |
33 | 14 | ||||||
Net impairment losses recognized in earnings |
15 | 89 | ||||||
Net change in: |
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Accrued interest receivable |
40 | 50 | ||||||
Other assets |
6 | 21 | ||||||
Affordable Housing Program payable |
(13) | (6) | ||||||
Accrued interest payable |
(29) | (20) | ||||||
Payable to REFCORP |
| (11) | ||||||
Other liabilities |
(14) | (22) | ||||||
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Total adjustments |
163 | 305 | ||||||
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Net cash provided by operating activities |
293 | 394 | ||||||
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Investing activities |
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Net change in: |
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Interest-bearing deposits |
153 | 231 | ||||||
Federal funds sold |
(418) | 1,591 | ||||||
Trading securities: |
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Proceeds from maturities |
690 | 272 | ||||||
Available-for-sale securities: |
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Proceeds from maturities |
318 | 404 | ||||||
Held-to-maturity securities: |
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Net change in short-term |
25 | 155 | ||||||
Proceeds from maturities of long-term |
1,946 | 2,555 | ||||||
Purchases of long-term |
(2,142) | (1,929) | ||||||
Advances: |
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Proceeds from principal collected |
97,168 | 34,047 | ||||||
Made |
(92,177) | (22,598) | ||||||
Mortgage loans held for portfolio: |
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Proceeds from principal collected |
200 | 204 | ||||||
Proceeds from sale of foreclosed assets |
7 | 6 | ||||||
Purchase of premise, equipment and software |
(1) | (2) | ||||||
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Net cash provided by investing activities |
5,769 | 14,936 | ||||||
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The accompanying notes are an integral part of these financial statements.
5
FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CASH FLOWS(Continued)
(Unaudited)
(In millions)
Six Months Ended June 30, | ||||||||
2012 | 2011 | |||||||
Financing activities |
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Net change in deposits |
(512) | (102) | ||||||
Net payments on derivatives containing a financing element |
(185) | (268) | ||||||
Proceeds from issuance of consolidated obligations: |
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Discount notes |
187,553 | 533,302 | ||||||
Bonds |
42,643 | 27,852 | ||||||
Payments for debt issuance costs |
(6) | (9) | ||||||
Payments for maturing and retiring consolidated obligations: |
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Discount notes |
(190,457) | (536,641) | ||||||
Bonds |
(44,169) | (38,380) | ||||||
Proceeds from issuance of capital stock |
531 | 64 | ||||||
Payments for repurchase/redemption of capital stock |
(1,189) | (927) | ||||||
Payments for repurchase/redemption of mandatorily redeemable capital stock |
(224) | (172) | ||||||
Cash dividends paid |
(40) | (29) | ||||||
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Net cash used in financing activities |
(6,055) | (15,310) | ||||||
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Net increase in cash and due from banks |
7 | 20 | ||||||
Cash and due from banks at beginning of the period |
6 | 5 | ||||||
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Cash and due from banks at end of the period |
$ | 13 | $ | 25 | ||||
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Supplemental disclosures of cash flow information: |
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Cash paid for: |
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Interest |
$ | 365 | $ | 379 | ||||
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AHP assessments, net |
$ | 26 | $ | 15 | ||||
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REFCORP assessments |
$ | | $ | 33 | ||||
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Noncash investing and financing activities: |
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Net shares reclassified to mandatorily redeemable capital stock |
$ | 53 | $ | 28 | ||||
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Held-to-maturity securities acquired with accrued liabilities |
$ | | $ | 146 | ||||
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Transfer of held-to-maturity securities to available-for-sale securities |
$ | 6 | $ | 348 | ||||
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Transfers of mortgage loans to real estate owned |
$ | 6 | $ | 9 | ||||
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The accompanying notes are an integral part of these financial statements.
6
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
Note 1Basis 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, 2012, 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, 2011, which are contained in the Banks 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 23, 2012 (Form 10-K).
A description of the Banks significant accounting policies is included in Note 2Summary of Significant Accounting Policies to the 2011 audited financial statements contained in the Banks Form 10-K. There have been no material changes to these policies as of June 30, 2012.
Note 2Recently Issued and Adopted Accounting Guidance
Recently Issued Accounting Guidance
Disclosures about Offsetting Assets and Liabilities. In December 2011, the Financial Accounting Standards Board (FASB) issued disclosure requirements that are intended to help investors and other financial statement users to better assess the effect or potential effect of offsetting arrangements on an entitys financial position. Entities are required to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, entities are required to disclose collateral received and posted in connection with master netting agreements or similar arrangements. This guidance is effective for interim and annual periods beginning on or after January 1, 2013 and will be applied retrospectively for all comparative periods presented. The adoption of this guidance will result in increased disclosures, but will have no effect on the Banks financial condition or results of operations.
Recently Adopted Accounting Guidance
Presentation of Comprehensive Income. In June 2011, the FASB issued amended guidance that eliminates the 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
7
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
presents the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and total comprehensive income; or (2) a two-statement approach, where the components of net income and total net income are presented in the first statement, immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and total comprehensive income. For public entities, this amended guidance is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Bank adopted this guidance effective January 1, 2012. The adoption of this guidance did not have any effect on the Banks 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. The Bank adopted this guidance effective January 1, 2012. The adoption of this guidance did not have any effect on the Banks 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 first interim or annual periods beginning on or after December 15, 2011. This guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. The Bank adopted this guidance effective January 1, 2012. The adoption of this guidance did not have any effect on the Banks financial condition or results of operations.
Note 3Trading Securities
Major Security Types. Trading securities were as follows:
As of June 30, 2012 | As of December 31, 2011 | |||||||
Government-sponsored enterprises debt obligations |
$ | 2,318 | $ | 3,035 | ||||
Other FHLBanks bond (1) |
81 | 82 | ||||||
State or local housing agency debt obligations |
1 | 3 | ||||||
|
|
|
|
|||||
Total |
$ | 2,400 | $ | 3,120 | ||||
|
|
|
|
(1) | The Federal Home Loan Bank of Chicago is the primary obligor of this consolidated obligation bond. |
8
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
Net unrealized and realized (losses) gains on trading securities were as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Net unrealized (losses) gains on trading securities held at period end |
$ | (4) | $ | 22 | $ | (26) | $ | (8) | ||||||||
Net unrealized/realized losses on trading securities sold/matured during the period |
| (2) | (7) | (6) | ||||||||||||
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|
|
|
|
|
|
|||||||||
Net (losses) gains on trading securities |
$ | (4) | $ | 20 | $ | (33) | $ | (14) | ||||||||
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|
|
As of June 30, 2012 and December 31, 2011, 99.9 percent of the Banks fixed-rate trading securities were swapped and all of the Banks variable-rate trading securities were swapped.
Note 4Available-for-sale Securities
During the six-month periods ended June 30, 2012 and 2011, 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 Banks held-to-maturity portfolio for which the Bank has recorded an other-than-temporary impairment loss. The Bank believes the other-than-temporary impairment loss constitutes 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.
The following table presents information on private-label MBS transferred. The amounts below represent the values as of the transfer date.
2012 | 2011 | |||||||||||||||||||||||
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, |
$ | 6 | $ | | $ | 6 | $ | 322 | $ | 20 | $ | 302 | ||||||||||||
Transferred at June 30, |
| | | 52 | 6 | 46 | ||||||||||||||||||
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|
|
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|
|||||||||||||
Total |
$ | 6 | $ | | $ | 6 | $ | 374 | $ | 26 | $ | 348 | ||||||||||||
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|
|
|
|
|
Major Security Types. Available-for-sale securities were as follows:
As of June 30, 2012 | ||||||||||||||||||||
Amortized Cost |
Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
||||||||||||||||
Private-label MBS |
$ | 3,015 | $ | 285 | $ | 15 | $ | 4 | $ | 2,741 | ||||||||||
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9
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
As of December 31, 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 |
$ | 3,340 | $ | 392 | $ | 12 | $ | 18 | $ | 2,942 | ||||||||||
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|
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|
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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 June 30, 2012 | ||||||||||||||||||||||||||||||||||||
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 |
5 | $ | 263 | $ | 7 | 42 | $ | 1,838 | $ | 282 | 47 | $ | 2,101 | $ | 289 | |||||||||||||||||||||
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|||||||||||||||||||
As of December 31, 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 |
10 | $ | 635 | $ | 26 | 42 | $ | 2,053 | $ | 384 | 52 | $ | 2,688 | $ | 410 | |||||||||||||||||||||
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The Bank did not swap any of its available-for-sale securities as of June 30, 2012 and December 31, 2011.
A summary of available-for-sale MBS issued by members or affiliates of members follows:
As of June 30, 2012 | ||||||||||||||||||||
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 |
$ | 1,878 | $ | 228 | $ | 7 | $ | 2 | $ | 1,655 | ||||||||||
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|
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|
|
|
|
|||||||||||
As of December 31, 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 |
$ | 2,027 | $ | 287 | $ | 1 | $ | 12 | $ | 1,729 | ||||||||||
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10
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
Note 5Held-to-maturity Securities
Major Security Types. Held-to-maturity securities were as follows:
As of June 30, 2012 | As of December 31, 2011 | |||||||||||||||||||||||||||||||
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 |
$ | 625 | $ | | $ | | $ | 625 | $ | 650 | $ | | $ | | $ | 650 | ||||||||||||||||
State or local housing agency debt obligations |
115 | 1 | | 116 | 100 | 1 | | 101 | ||||||||||||||||||||||||
Government-sponsored enterprises debt |
1,565 | 1 | | 1,566 | 1,111 | 1 | | 1,112 | ||||||||||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||||||||||||||
U.S. agency obligations-guaranteed |
720 | 8 | | 728 | 803 | 8 | | 811 | ||||||||||||||||||||||||
Government-sponsored enterprises |
10,210 | 178 | 2 | 10,386 | 9,886 | 185 | 5 | 10,066 | ||||||||||||||||||||||||
Private label |
3,173 | 27 | 115 | 3,085 | 3,693 | 28 | 219 | 3,502 | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 16,408 | $ | 215 | $ | 117 | $ | 16,506 | $ | 16,243 | $ | 223 | $ | 224 | $ | 16,242 | ||||||||||||||||
|
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|
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|
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The following tables summarize the held-to-maturity securities with unrealized losses. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
As of June 30, 2012 | ||||||||||||||||||||||||||||||||||||
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 |
||||||||||||||||||||||||||||
Government-sponsored enterprises debt obligations |
1 | $ | 150 | $ | | | $ | | $ | | 1 | $ | 150 | $ | | |||||||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||||||||||||||||||
Government-sponsored enterprises |
1 | 68 | 1 | 3 | 150 | 1 | 4 | 218 | 2 | |||||||||||||||||||||||||||
Private label |
11 | 154 | 1 | 63 | 1,715 | 114 | 74 | 1,869 | 115 | |||||||||||||||||||||||||||
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|
|||||||||||||||||||
Total |
13 | $ | 372 | $ | 2 | 66 | $ | 1,865 | $ | 115 | 79 | $ | 2,237 | $ | 117 | |||||||||||||||||||||
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|
As of December 31, 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 |
3 | $ | 350 | $ | | | $ | | $ | | 3 | $ | 350 | $ | | |||||||||||||||||||||
Government-sponsored enterprises debt obligations |
3 | 194 | | | | | 3 | 194 | | |||||||||||||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||||||||||||||||||
Government-sponsored enterprises |
9 | 1,104 | 3 | 10 | 804 | 2 | 19 | 1,908 | 5 | |||||||||||||||||||||||||||
Private label |
23 | 437 | 8 | 59 | 1,656 | 211 | 82 | 2,093 | 219 | |||||||||||||||||||||||||||
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|
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|
|
|
|
|
|||||||||||||||||||
Total |
38 | $ | 2,085 | $ | 11 | 69 | $ | 2,460 | $ | 213 | 107 | $ | 4,545 | $ | 224 | |||||||||||||||||||||
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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.
11
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
As of June 30, 2012 | As of December 31, 2011 | |||||||||||||||
Amortized Cost |
Estimated Fair Value |
Amortized Cost |
Estimated Fair Value |
|||||||||||||
Non-mortgage-backed securities: |
||||||||||||||||
Due in one year or less |
$ | 628 | $ | 628 | $ | 703 | $ | 702 | ||||||||
Due after one year through five years |
1,677 | 1,679 | 1,158 | 1,161 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total non-mortgage-backed securities |
2,305 | 2,307 | 1,861 | 1,863 | ||||||||||||
Mortgage-backed securities |
14,103 | 14,199 | 14,382 | 14,379 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 16,408 | $ | 16,506 | $ | 16,243 | $ | 16,242 | ||||||||
|
|
|
|
|
|
|
|
The amortized cost of the Banks MBS classified as held-to-maturity includes net discounts of $12 and $13 as of June 30, 2012 and December 31, 2011, respectively.
A summary of held-to-maturity MBS issued by members or affiliates of members follows:
As of June 30, 2012 | As of December 31, 2011 | |||||||||||||||||||||||||||||||
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 |
$ | 1,052 | $ | 11 | $ | 33 | $ | 1,030 | $ | 1,226 | $ | 10 | $ | 56 | $ | 1,180 | ||||||||||||||||
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|
Note 6Other-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 securitys amortized cost basis and its fair value as of the Statements of Condition date. For securities in an unrealized loss position that meet neither of 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 securitys amortized cost basis and its fair value.
Mortgage-backed Securities. The Banks 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 Banks investments in private-label MBS were rated AAA (or its equivalent) by a nationally recognized statistical rating organization (NRSRO), such as Moodys Investors Service (Moodys) and Standard and Poors Ratings Services (S&P), at purchase date. The AAA-rated securities achieved their
12
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
ratings through credit enhancement, overcollateralization 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 Banks 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 these investments and it is not more likely than not that the Bank will be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. The Bank does not consider these investments to be other-than-temporarily impaired as of June 30, 2012.
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 Banks 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 Banks housing price forecast as of June 30, 2012 assumed current-to-trough home price declines ranging from zero percent (for those housing markets that are believed to have reached their trough) to six percent. For those markets for which further home price declines are anticipated, such declines were projected to occur over the three- to nine-month period beginning April 1, 2012. For the vast majority of markets where further home price declines are anticipated, the declines were projected to range from one percent to four percent over the three-month period beginning April 1, 2012.
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 months as of June 30, 2012:
Months | Annualized Rates (%) | |
1 to 6 | 0.00 to 2.80 | |
7 to 18 | 0.00 to 3.00 | |
19 to 24 | 1.00 to 4.00 | |
25 to 30 | 2.00 to 4.00 | |
31 to 42 | 2.00 to 5.00 | |
43 to 66 | 2.00 to 6.00 | |
Thereafter | 2.30 to 5.60 |
13
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
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 (discounted at the securities effective yield) expected to be collected with respect to its private-label MBS to the amortized cost basis of the security to determine whether a credit loss exists. For the Banks variable rate and hybrid private-label MBS, the Bank uses a forward interest rate curve to project the future estimated cash flows. The Bank then uses the effective interest rate for the security prior to impairment for determining the present value of the future estimated cash flows. For securities previously identified as other-than-temporarily impaired, the Bank updates its estimate of future estimated cash flows on a quarterly basis.
The following table represents a summary of the significant inputs used to measure the amount of the credit loss recognized in earnings for those securities for which an other-than-temporary impairment was determined to have occurred during the three-month period ended June 30, 2012 as well as related current credit enhancement:
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: |
||||||||||||||||||||||||||||||||
2007 |
9.85 | 9.85 to 9.85 | 20.77 | 20.77 to 20.77 | 47.25 | 47.25 to 47.25 | 3.67 | 3.67 to 3.67 | ||||||||||||||||||||||||
2006 |
7.42 | 5.95 to 8.80 | 30.13 | 25.91 to 36.24 | 40.63 | 39.18 to 49.31 | 2.77 | 0.26 to 5.66 | ||||||||||||||||||||||||
2005 |
8.09 | 6.85 to 8.94 | 20.80 | 18.03 to 26.50 | 43.54 | 43.48 to 44.10 | 5.06 | 4.67 to 6.08 | ||||||||||||||||||||||||
Total Prime |
7.74 | 5.95 to 9.85 | 27.04 | 18.03 to 36.24 | 41.79 | 39.18 to 49.31 | 3.46 | 0.26 to 6.08 | ||||||||||||||||||||||||
Alt-A: |
||||||||||||||||||||||||||||||||
2006 |
6.03 | 6.03 to 6.03 | 60.35 | 60.35 to 60.35 | 58.78 | 58.78 to 58.78 | 0.02 | 0.02 to 0.02 | ||||||||||||||||||||||||
2005 |
8.76 | 4.58 to 9.26 | 33.07 | 29.46 to 63.54 | 49.78 | 48.56 to 60.08 | 0.40 | (0.02) to 3.95 | ||||||||||||||||||||||||
Total Alt-A |
8.02 | 4.58 to 9.26 | 40.42 | 29.46 to 63.54 | 52.20 | 48.56 to 60.08 | 0.30 | (0.02) to 3.95 | ||||||||||||||||||||||||
Total |
7.85 | 4.58 to 9.85 | 32.20 | 18.03 to 63.54 | 45.80 | 39.18 to 60.08 | 2.24 | (0.02) to 6.08 |
The following table presents a roll-forward of the amount of credit losses on the Banks investment securities recognized in earnings for which a portion of the other-than-temporary loss was recognized in accumulated other comprehensive loss:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Balance of credit losses previously recognized in earnings, beginning of period |
$ | 589 | $ | 516 | $ | 582 | $ | 464 | ||||||||
Amount related to credit loss for which an other-than-temporary impairment was not previously recognized |
| 1 | | 7 | ||||||||||||
Amount related to credit loss for which an other-than-temporary impairment was previously recognized |
8 | 36 | 15 | 82 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance of cumulative credit losses recognized in earnings, end of period |
$ | 597 | $ | 553 | $ | 597 | $ | 553 | ||||||||
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|
14
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
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 these securities and it is not more likely than not that the Bank will be required to sell these securities before the anticipated recovery of the securities remaining amortized cost basis, which may be at maturity. 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.
Note 7Advances
Redemption Terms. The Bank had advances outstanding, as summarized below.
As of June 30, 2012 | As of December 31, 2011 | |||||||
Overdrawn demand deposit accounts |
$ | | $ | 3 | ||||
Due in one year or less |
30,174 | 36,542 | ||||||
Due after one year through two years |
9,889 | 11,173 | ||||||
Due after two years through three years |
8,051 | 7,851 | ||||||
Due after three years through four years |
4,654 | 3,881 | ||||||
Due after four years through five years |
8,254 | 5,836 | ||||||
Due after five years |
16,590 | 17,283 | ||||||
|
|
|
|
|||||
Total par value |
77,612 | 82,569 | ||||||
Discount on AHP (1) advances |
(12) | (12) | ||||||
Discount on EDGE (2) advances |
(9) | (10) | ||||||
Hedging adjustments |
4,257 | 4,431 | ||||||
Deferred commitment fees |
(6) | (7) | ||||||
|
|
|
|
|||||
Total |
$ | 81,842 | $ | 86,971 | ||||
|
|
|
|
(1) | The Affordable Housing Program |
(2) | The Economic Development and Growth Enhancement program |
The following table summarizes advances by year of contractual maturity or, for convertible advances, next conversion date:
As of June 30, 2012 | As of December 31, 2011 | |||||||
Overdrawn demand deposit accounts |
$ | | $ | 3 | ||||
Due or convertible in one year or less |
35,515 | 42,376 | ||||||
Due or convertible after one year through two years |
10,220 | 11,946 | ||||||
Due or convertible after two years through three years |
8,102 | 7,716 | ||||||
Due or convertible after three years through four years |
4,265 | 3,464 | ||||||
Due or convertible after four years through five years |
7,003 | 5,021 | ||||||
Due or convertible after five years |
12,507 | 12,043 | ||||||
|
|
|
|
|||||
Total par value |
$ | 77,612 | $ | 82,569 | ||||
|
|
|
|
15
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
Interest-rate Payment Terms. The following table details interest-rate payment terms for advances:
As of June 30, 2012 | As of December 31, 2011 | |||||||
Fixed-rate: |
||||||||
Due in one year or less |
$ | 27,271 | $ | 32,389 | ||||
Due after one year |
38,806 | 38,811 | ||||||
|
|
|
|
|||||
Total fixed-rate |
66,077 | 71,200 | ||||||
|
|
|
|
|||||
Variable-rate: |
||||||||
Due in one year or less |
2,903 | 4,156 | ||||||
Due after one year |
8,632 | 7,213 | ||||||
|
|
|
|
|||||
Total variable-rate |
11,535 | 11,369 | ||||||
|
|
|
|
|||||
Total par value |
$ | 77,612 | $ | 82,569 | ||||
|
|
|
|
As of June 30, 2012 and December 31, 2011, 65.8 percent and 65.7 percent, respectively, of the Banks fixed-rate advances were swapped and 32.6 percent and 9.79 percent, respectively, of the Banks variable-rate advances were swapped.
Based on the collateral pledged as security for advances, managements credit analysis of members financial condition, and prior repayment history, no allowance for credit losses on advances was deemed necessary by management as of June 30, 2012 and December 31, 2011. No advance was past due as of June 30, 2012 and December 31, 2011.
The Banks potential credit risk from advances is concentrated in commercial banks, savings institutions and credit unions and further is concentrated in certain larger borrowing relationships. As of June 30, 2012 and December 31, 2011, the concentration of the Banks advances was $56,664 and $56,991, respectively, to 10 member institutions, and representing 73.0 percent and 69.0 percent, respectively, of total advances outstanding.
Note 8Consolidated Obligations
Consolidated obligations, consisting of consolidated obligation bonds and discount notes, are the joint and several obligations of the 12 Federal Home Loan Banks (FHLBanks) and are backed only by the financial resources of the FHLBanks. The Federal Home Loan Banks 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 Banks consolidated obligation bonds by interest-rate payment type:
As of June 30, 2012 | As of December 31, 2011 | |||||||
Fixed-rate |
$ | 83,476 | $ | 84,571 | ||||
Step up/down |
3,791 | 2,978 | ||||||
Simple variable-rate |
600 | 1,850 | ||||||
Variable-rate capped floater |
20 | 20 | ||||||
|
|
|
|
|||||
Total par value |
$ | 87,887 | $ | 89,419 | ||||
|
|
|
|
16
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
As of June 30, 2012 and December 31, 2011, 81.8 percent and 81.9 percent, respectively, of the Banks fixed-rate consolidated obligation bonds were swapped and 3.23 percent and 6.42 percent, respectively, of the Banks variable-rate consolidated obligation bonds were swapped.
Redemption Terms. The following is a summary of the Banks participation in consolidated obligation bonds outstanding, by year of contractual maturity:
As of June 30, 2012 | As of December 31, 2011 | |||||||||||||||
Amount | Weighted- average Interest Rate (%) |
Amount | Weighted- average Interest Rate (%) |
|||||||||||||
Due in one year or less |
$ | 50,404 | 0.70 | $ | 48,163 | 0.57 | ||||||||||
Due after one year through two years |
19,273 | 1.40 | 20,987 | 1.83 | ||||||||||||
Due after two years through three years |
2,874 | 4.16 | 7,927 | 2.40 | ||||||||||||
Due after three years through four years |
2,895 | 4.17 | 2,083 | 2.65 | ||||||||||||
Due after four years through five years |
7,664 | 2.49 | 4,005 | 3.79 | ||||||||||||
Due after five years |
4,777 | 3.09 | 6,254 | 3.97 | ||||||||||||
|
|
|
|
|||||||||||||
Total par value |
87,887 | 1.38 | 89,419 | 1.46 | ||||||||||||
Premiums |
91 | 101 | ||||||||||||||
Discounts |
(39) | (38) | ||||||||||||||
Hedging adjustments |
1,140 | 1,180 | ||||||||||||||
|
|
|
|
|||||||||||||
Total |
$ | 89,079 | $ | 90,662 | ||||||||||||
|
|
|
|
The Banks consolidated obligation bonds outstanding by call feature:
As of June 30, 2012 | As of December 31, 2011 | |||||||
Noncallable |
$ | 75,112 | $ | 60,794 | ||||
Callable |
12,775 | 28,625 | ||||||
|
|
|
|
|||||
Total par value |
$ | 87,887 | $ | 89,419 | ||||
|
|
|
|
The following table summarizes the Banks consolidated obligation bonds outstanding, by year of contractual maturity or, for callable consolidated obligation bonds, next call date:
As of June 30, 2012 | As of December 31, 2011 | |||||||
Due or callable in one year or less |
$ | 56,982 | $ | 60,321 | ||||
Due or callable after one year through two years |
17,473 | 17,467 | ||||||
Due or callable after two years through three years |
2,469 | 3,284 | ||||||
Due or callable after three years through four years |
2,462 | 1,110 | ||||||
Due or callable after four years through five years |
6,019 | 2,870 | ||||||
Due or callable after five years |
2,482 | 4,367 | ||||||
|
|
|
|
|||||
Total par value |
$ | 87,887 | $ | 89,419 | ||||
|
|
|
|
17
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
Consolidated Obligation Discount Notes. Consolidated obligation discount notes are issued to raise short-term funds. Consolidated obligation discount notes are consolidated obligations with contractual maturities of up to one year. These consolidated obligation discount notes are issued at less than their face amounts and redeemed at par value when they mature.
The Banks participation in consolidated obligation discount notes was as follows:
Book Value | Par Value | Weighted- average Interest Rate (%) |
||||||||||
As of June 30, 2012 |
$ | 21,427 | $ | 21,434 | 0.11 | |||||||
|
|
|
|
|
|
|||||||
As of December 31, 2011 |
$ | 24,330 | $ | 24,331 | 0.03 | |||||||
|
|
|
|
|
|
As of June 30, 2012 and December 31, 2011, 0.47 percent and 4.64 percent, respectively, of the Banks fixed-rate consolidated obligation discount notes were swapped to a variable rate.
Note 9Capital 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:
As of June 30, 2012 | As of December 31, 2011 | |||||||||||||||
Required | Actual | Required | Actual | |||||||||||||
Risk based capital |
$ | 1,749 | $ | 6,466 | $ | 1,951 | $ | 7,258 | ||||||||
Total capital-to-assets ratio |
4.00% | 5.41% | 4.00% | 5.79% | ||||||||||||
Total regulatory capital (1) |
$ | 4,778 | $ | 6,466 | $ | 5,011 | $ | 7,258 | ||||||||
Leverage ratio |
5.00% | 8.12% | 5.00% | 8.69% | ||||||||||||
Leverage capital |
$ | 5,972 | $ | 9,699 | $ | 6,264 | $ | 10,887 |
(1) | Mandatorily redeemable capital stock is considered capital for regulatory purposes, and total regulatory capital includes the Banks $115 and $286 in mandatorily redeemable capital stock as of June 30, 2012 and December 31, 2011, respectively. |
Mandatorily Redeemable Capital Stock. The following table provides the activity in mandatorily redeemable capital stock:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Balance, beginning of period |
$ | 328 | $ | 531 | $ | 286 | $ | 529 | ||||||||
Capital stock subject to mandatory redemption reclassified from equity during the period due to: |
||||||||||||||||
Attainment of nonmember status |
1 | 33 | 81 | 37 | ||||||||||||
Withdrawal |
| 1 | 1 | 1 | ||||||||||||
Repurchase/redemption of mandatorily redeemable capital stock |
(214) | (172) | (224) | (172) | ||||||||||||
Capital stock no longer subject to redemption due to the transfer of stock from a nonmember to a member |
| (8) | (29) | (10) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance, end of period |
$ | 115 | $ | 385 | $ | 115 | $ | 385 | ||||||||
|
|
|
|
|
|
|
|
18
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. The year of redemption in the table is the later of the end of the five-year redemption period, or with respect to activity-based stock, the later of the expiration of the five-year redemption period or the activitys maturity date.
As of June 30, 2012 | As of December 31, 2011 | |||||||
Due in one year or less |
$ | 1 | $ | 4 | ||||
Due after one year through two years |
4 | 8 | ||||||
Due after two years through three years |
28 | 52 | ||||||
Due after three years through four years |
15 | 122 | ||||||
Due after four years through five years |
66 | 99 | ||||||
Due after five years |
1 | 1 | ||||||
|
|
|
|
|||||
Total |
$ | 115 | $ | 286 | ||||
|
|
|
|
Note 10Accumulated Other Comprehensive Loss
Components comprising accumulated other comprehensive loss were as follows:
Pension
and Postretirement Benefits |
Noncredit Portion of Other-Than- Temporary Impairment Losses on Available-for- sale Securities |
Total
Accumulated Other Comprehensive Loss |
||||||||||
Balance, December 31, 2010 |
$ | (10) | $ | (392) | $ | (402) | ||||||
Current period other comprehensive income |
| 106 | 106 | |||||||||
|
|
|
|
|
|
|||||||
Balance, June 30, 2011 |
$ | (10) | $ | (286) | $ | (296) | ||||||
|
|
|
|
|
|
|||||||
Balance, December 31, 2011 |
$ | (13) | $ | (398) | $ | (411) | ||||||
Current period other comprehensive income |
1 | 124 | 125 | |||||||||
|
|
|
|
|
|
|||||||
Balance, June 30, 2012 |
$ | (12) | $ | (274) | $ | (286) | ||||||
|
|
|
|
|
|
Note 11Derivatives 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 its funding sources that finance these assets. The goal of the Banks interest-rate risk management strategies is not to eliminate interest-rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, the Bank has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes it is willing to accept. In addition, the Bank monitors the risk to its interest income, net interest margin, and average maturity of interest-earning assets and funding sources. For additional information on the Banks derivatives and hedging activities, see Note 18Derivatives and Hedging Activities to the 2011 audited financial statements contained in the Banks Form 10-K.
19
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
The Bank transacts most of its derivatives with large banks and major broker-dealers and generally enters into bilateral collateral agreements. 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.
The following table summarizes the fair value of derivative instruments. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest.
As of June 30, 2012 | As of December 31, 2011 | |||||||||||||||||||||||
Notional Amount of Derivatives |
Derivative Assets |
Derivative Liabilities |
Notional Amount of Derivatives |
Derivative Assets |
Derivative Liabilities |
|||||||||||||||||||
Derivatives in hedging relationships: |
||||||||||||||||||||||||
Interest rate swaps |
$ | 115,250 | $ | 1,265 | $ | (4,249) | $ | 120,999 | $ | 1,344 | $ | (4,467) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total derivatives in hedging relationships |
115,250 | 1,265 | (4,249) | 120,999 | 1,344 | (4,467) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||||||||||||
Interest rate swaps |
5,742 | 10 | (542) | 6,221 | 14 | (567) | ||||||||||||||||||
Interest rate caps or floors |
12,500 | 38 | (31) | 12,500 | 64 | (53) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total derivatives not designated as hedging instruments |
18,242 | 48 | (573) | 18,721 | 78 | (620) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total derivatives before netting and collateral adjustments |
$ | 133,492 | 1,313 | (4,822) | $ | 139,720 | 1,422 | (5,087) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Netting adjustments |
(1,266) | 1,266 | (1,377) | 1,377 | ||||||||||||||||||||
Cash collateral and related accrued interest |
(37) | 3,416 | (27) | 3,469 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total collateral and netting adjustments (1) |
(1,303) | 4,682 | (1,404) | 4,846 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Derivative assets and derivative liabilities |
$ | 10 | $ | (140) | $ | 18 | $ | (241) | ||||||||||||||||
|
|
|
|
|
|
|
|
(1) | 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. |
20
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
The following tables present the components of net (losses) gains on derivatives and hedging activities as presented in the Statements of Income:
Three Months Ended June 30, | ||||||||
2012 | 2011 | |||||||
Derivatives and hedged items in fair value hedging relationships: |
||||||||
Interest rate swaps |
$ | 36 | $ | 35 | ||||
|
|
|
|
|||||
Total net gains related to fair value hedge ineffectiveness |
36 | 35 | ||||||
|
|
|
|
|||||
Derivatives not designated as hedging instruments: |
||||||||
Interest rate swaps |
(3) | (17) | ||||||
Interest rate caps or floors |
(10) | (2) | ||||||
Net interest settlements |
(24) | (36) | ||||||
|
|
|
|
|||||
Total net losses related to derivatives not designate as hedging instruments |
(37) | (55) | ||||||
|
|
|
|
|||||
Net losses on derivatives and hedging activities |
$ | (1) | $ | (20) | ||||
|
|
|
|
|||||
Six Months Ended June 30, | ||||||||
2012 | 2011 | |||||||
Derivatives and hedged items in fair value hedging relationships: |
||||||||
Interest rate swaps |
$ | 87 | $ | 73 | ||||
|
|
|
|
|||||
Total net gains related to fair value hedge ineffectiveness |
87 | 73 | ||||||
|
|
|
|
|||||
Derivatives not designated as hedging instruments: |
||||||||
Interest rate swaps |
24 | 25 | ||||||
Interest rate caps or floors |
(4) | 1 | ||||||
Net interest settlements |
(54) | (73) | ||||||
|
|
|
|
|||||
Total net losses related to derivatives not designate as hedging instruments |
(34) | (47) | ||||||
|
|
|
|
|||||
Net gains on derivatives and hedging activities |
$ | 53 | $ | 26 | ||||
|
|
|
|
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 Banks net interest income:
Three Months Ended June 30, 2012 | ||||||||||||||||
Hedged Item Type |
Gains (Losses) on Derivative |
Gains (Losses) on Hedged Item |
Net Fair
Value Hedge Ineffectiveness |
Effect
of Derivatives on Net Interest Income (1) |
||||||||||||
Advances |
$ | (345) | $ | 386 | $ | 41 | $ | (362) | ||||||||
Consolidated obligations: |
||||||||||||||||
Bonds |
5 | (10) | (5) | 146 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | (340) | $ | 376 | $ | 36 | $ | (216) | ||||||||
|
|
|
|
|
|
|
|
(1) | The net interest on derivatives in fair value hedge relationships is presented in the interest income or expense line item of the respective hedged item. |
21
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
Three Months Ended June 30, 2011 | ||||||||||||||||
Hedged Item Type |
Gains (Losses) on Derivative |
Gains (Losses) on Hedged Item |
Net Fair Value Hedge Ineffectiveness |
Effect of Derivatives on Net Interest |
||||||||||||
Advances |
$ | (271) | $ | 311 | $ | 40 | $ | (541) | ||||||||
Consolidated obligations: |
||||||||||||||||
Bonds |
193 | (198) | (5) | 218 | ||||||||||||
Discount notes |
(1) | 1 | | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | (79) | $ | 114 | $ | 35 | $ | (322) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
|
||||||||||||||||
(1) The net interest on derivatives in fair value hedge relationships is presented in the interest income or expense line item of the respective hedged item. |
| |||||||||||||||
Six Months Ended June 30, 2012 | ||||||||||||||||
Hedged Item Type |
Gains (Losses)
on |
Gains (Losses) on Hedged Item |
Net Fair Value Hedge Ineffectiveness |
Effect of Derivatives on Net
Interest |
||||||||||||
Advances |
$ | 152 | $ | (45) | $ | 107 | $ | (748) | ||||||||
Consolidated obligations: |
||||||||||||||||
Bonds |
(45) | 25 | (20) | 289 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 107 | $ | (20) | $ | 87 | $ | (459) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
|
||||||||||||||||
(1) The net interest on derivatives in fair value hedge relationships is presented in the interest income or expense line item of the respective hedged item. |
| |||||||||||||||
Six Months Ended June 30, 2011 | ||||||||||||||||
Hedged Item Type |
Gains (Losses)
on |
Gains (Losses) on Hedged Item |
Net Fair Value Hedge Ineffectiveness |
Effect of Derivatives on Net
Interest |
||||||||||||
Advances |
$ | 381 | $ | (294) | $ | 87 | $ | (1,131) | ||||||||
Consolidated obligations: |
||||||||||||||||
Bonds |
(7) | (7) | (14) | 434 | ||||||||||||
Discount notes |
(2) | 2 | | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 372 | $ | (299) | $ | 73 | $ | (695) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
|
||||||||||||||||
(1) The net interest on derivatives in fair value hedge relationships is presented in the interest income or expense line item of the respective hedged item. |
|
Managing Credit Risk on Derivatives
The Bank is subject to credit risk due to nonperformance by counterparties to the derivative agreements. The amount of counterparty risk depends on the extent to which master netting arrangements are included in such contracts to mitigate the risk. The Bank manages counterparty credit risk through credit analysis, collateral requirements and adherence to the requirements set forth in Bank policies and Finance Agency regulations. Based on credit analyses and collateral requirements, Bank management presently does not anticipate any credit losses on its existing derivative agreements with counterparties as of June 30, 2012.
22
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 counterpartys pledged collateral to the Bank exceeds the Banks net position.
As of June 30, 2012 | As of December 31, 2011 | |||||||
Total net exposure at fair value (1) |
$ | 46 | $ | 45 | ||||
Cash collateral held |
36 | 27 | ||||||
|
|
|
|
|||||
Net positive exposure after cash collateral |
10 | 18 | ||||||
Other collateral |
1 | 5 | ||||||
|
|
|
|
|||||
Net exposure after collateral (2) |
$ | 9 | $ | 13 | ||||
|
|
|
|
(1) | Includes net accrued interest (payable) receivable of $(4) and $1 as of June 30, 2012 and December 31, 2011, respectively. |
(2) | The Bank had net credit exposure of $7 and $0 at June 30, 2012 and December 31, 2011, respectively, due to instances where the Banks pledged collateral to a counterparty exceeds the Banks net position. |
Certain of the Banks derivative instruments contain provisions that require the Bank to post additional collateral with its counterparties if there is deterioration in the Banks credit rating. If the Banks 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) as of June 30, 2012 was $3,548 for which the Bank has posted collateral of $3,415 in the normal course of business. If the Banks 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 $126 of collateral (at fair value) to its derivative counterparties as of June 30, 2012.
Note 12Estimated 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 19Estimated Fair Values to the 2011 audited financial statements contained in the Banks Form 10-K. There have been no changes in the fair value hierarchy classification of financial assets and liabilities, valuation techniques or significant inputs during the six-month period ended June 30, 2012.
23
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 Banks financial assets and liabilities that are measured at fair value on a recurring basis on its Statements of Condition:
As of June 30, 2012 | ||||||||||||||||||||
Fair Value Measurements Using | Netting Adjustment (1) |
|||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||
Assets |
||||||||||||||||||||
Trading securities: |
||||||||||||||||||||
Government-sponsored enterprises debt obligations |
$ | | $ | 2,318 | $ | | $ | | $ | 2,318 | ||||||||||
Other FHLBanks bond |
| 81 | | | 81 | |||||||||||||||
State or local housing agency debt obligations |
| 1 | | | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total trading securities |
| 2,400 | | | 2,400 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Available-for-sale securities: |
||||||||||||||||||||
Private-label MBS |
| | 2,741 | | 2,741 | |||||||||||||||
Derivative assets: |
||||||||||||||||||||
Interest-rate related |
| 1,313 | | (1,303) | 10 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets at fair value |
$ | | $ | 3,713 | $ | 2,741 | $ | (1,303) | $ | 5,151 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities |
||||||||||||||||||||
Derivative liabilities: |
||||||||||||||||||||
Interest-rate related |
$ | | $ | (4,822) | $ | | $ | 4,682 | $ | (140) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities at fair value |
$ | | $ | (4,822) | $ | | $ | 4,682 | $ | (140) | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | 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, 2011 | ||||||||||||||||||||
Fair Value Measurements Using | Netting Adjustment (1) |
|||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||
Assets |
||||||||||||||||||||
Trading securities: |
||||||||||||||||||||
Government-sponsored enterprises debt obligations |
$ | | $ | 3,035 | $ | | $ | | $ | 3,035 | ||||||||||
Other FHLBanks bond |
| 82 | | | 82 | |||||||||||||||
State or local housing agency debt obligations |
| 3 | | | 3 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total trading securities |
| 3,120 | | | 3,120 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Available-for-sale securities: |
||||||||||||||||||||
Private-label MBS |
| | 2,942 | | 2,942 | |||||||||||||||
Derivative assets: |
||||||||||||||||||||
Interest-rate related |
| 1,422 | | (1,404) | 18 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets at fair value |
$ | | $ | 4,542 | $ | 2,942 | $ | (1,404) | $ | 6,080 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities |
||||||||||||||||||||
Derivative liabilities: |
||||||||||||||||||||
Interest-rate related |
$ | | $ | (5,087) | $ | | $ | 4,846 | $ | (241) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities at fair value |
$ | | $ | (5,087) | $ | | $ | 4,846 | $ | (241) | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | 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. |
24
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
The following table presents a reconciliation of available-for-sale securities that are measured at fair value using significant unobservable inputs (Level 3):
Six Months Ended June 30, | ||||||||
2012 | 2011 | |||||||
Balance, beginning of period |
$ | 2,942 | $ | 3,319 | ||||
Transfer of private-label MBS from held-to-maturity to available-for-sale |
6 | 348 | ||||||
Total (losses) gains realized and unrealized: (1) |
||||||||
Included in net impairment losses recognized in earnings |
(15) | (82) | ||||||
Included in other comprehensive loss (2) |
124 | 132 | ||||||
Included in interest income |
2 | (5) | ||||||
Settlements |
(318) | (404) | ||||||
|
|
|
|
|||||
Balance, end of period |
$ | 2,741 | $ | 3,308 | ||||
|
|
|
|
(1) | Related to available-for-sale securities held at period end. |
(2) | This amount is included in other comprehensive loss within the net change in fair value on other-than-temporary impairment available-for-sale securities and reclassification of noncredit portion of impairment losses included in net income. |
The following estimated fair value amounts have been determined by the Bank using available market information and the Banks best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank as of June 30, 2012 and December 31, 2011. Although the Bank uses its best judgment in estimating the fair values of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology.
For example, because an active secondary market does not exist for a portion of the Banks financial instruments, in certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. Therefore, these estimated fair values are not necessarily indicative of the amounts that would be realized in current market transactions, although they do reflect the Banks 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.
25
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
The carrying values and estimated fair values of the Banks financial instruments were as follows:
As of June 30, 2012 | ||||||||||||||||||||||||
Estimated Fair Value | ||||||||||||||||||||||||
Carrying
Value |
Total | Level 1 | Level 2 | Level 3 | Netting Adjustment |
|||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Cash and due from banks |
$ | 13 | $ | 13 | $ | 13 | $ | | $ | | $ | | ||||||||||||
Interest bearing-deposits |
1,104 | 1,104 | | 1,104 | | | ||||||||||||||||||
Federal funds sold |
13,048 | 13,048 | | 13,048 | | | ||||||||||||||||||
Trading securities |
2,400 | 2,400 | | 2,400 | | | ||||||||||||||||||
Available-for-sale securities |
2,741 | 2,741 | | | 2,741 | | ||||||||||||||||||
Held-to-maturity securities |
16,408 | 16,506 | | 13,421 | 3,085 | | ||||||||||||||||||
Mortgage loans held for portfolio, net |
1,423 | 1,570 | | 1,570 | | | ||||||||||||||||||
Advances |
81,842 | 82,685 | | 82,685 | | | ||||||||||||||||||
Accrued interest receivable |
274 | 274 | | 274 | | | ||||||||||||||||||
Derivative assets |
10 | 10 | | 1,313 | | (1,303) | ||||||||||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest-bearing deposits |
(2,133) | (2,133) | | (2,133) | | | ||||||||||||||||||
Consolidated obligations, net: |
||||||||||||||||||||||||
Discount notes |
(21,427) | (21,427) | | (21,427) | | | ||||||||||||||||||
Bonds |
(89,079) | (90,001) | | (90,001) | | | ||||||||||||||||||
Mandatorily redeemable capital stock |
(115) | (115) | (115) | | | | ||||||||||||||||||
Accrued interest payable |
(256) | (256) | | (256) | | | ||||||||||||||||||
Derivative liabilities |
(140) | (140) | | (4,822) | | 4,682 |
26
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
As of December 31, 2011 | ||||||||
Carrying
Value |
Estimated
Fair Value |
|||||||
Assets: |
||||||||
Cash and due from banks |
$ | 6 | $ | 6 | ||||
Interest-bearing deposits |
1,203 | 1,203 | ||||||
Federal funds sold |
12,630 | 12,629 | ||||||
Trading securities |
3,120 | 3,120 | ||||||
Available-for-sale securities |
2,942 | 2,942 | ||||||
Held-to-maturity securities |
16,243 | 16,242 | ||||||
Mortgage loans held for portfolio, net |
1,633 | 1,796 | ||||||
Advances |
86,971 | 87,655 | ||||||
Accrued interest receivable |
314 | 314 | ||||||
Derivative assets |
18 | 18 | ||||||
Liabilities: |
||||||||
Interest-bearing deposits |
(2,655) | (2,655) | ||||||
Consolidated obligations, net: |
||||||||
Discount notes |
(24,330) | (24,330) | ||||||
Bonds |
(90,662) | (91,839) | ||||||
Mandatorily redeemable capital stock |
(286) | (286) | ||||||
Accrued interest payable |
(286) | (286) | ||||||
Derivative liabilities |
(241) | (241) |
Note 13Commitments and Contingencies
As described in Note 8Consolidated Obligations, consolidated obligations are backed only by the financial resources of the 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 ever 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 $575,874 and $578,118 as of June 30, 2012 and December 31, 2011, respectively, exclusive of the Banks own outstanding consolidated obligations.
27
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
The Banks outstanding standby letters of credit were as follows:
As of June 30, 2012 | As of December 31, 2011 | |||||||
Outstanding notional |
$ 18,988 | $ 21,510 | ||||||
Original terms (1) |
Less than six months to 20 years | Less than 12 months to 20 years | ||||||
Final expiration year |
2030 | 2030 |
(1) | The Bank had two standby letters of credit for a total of $3 as of June 30, 2012, and no standby letters of credit as of December 31, 2011, that have no stated maturity date and are subject to renewal on an annual basis. |
The carrying value of the guarantees related to standby letters of credit is recorded in other liabilities and amounted to $68 and $80 as of June 30, 2012 and December 31, 2011, respectively. Based on managements 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 member. 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 institutions overall financial health and takes into account quality of assets, earnings, and capital position. In general, borrowers categorized into the highest risk rating category have more restrictions on the types of collateral they may use to secure standby letters of credit, may be required to maintain higher collateral maintenance levels and deliver loan collateral, and may face more stringent collateral reporting requirements.
The Bank did not have any commitments that unconditionally obligate the Bank to purchase closed mortgage loans as of June 30, 2012 and December 31, 2011. Such commitments would be recorded as derivatives at their fair values.
As of June 30, 2012, the Bank had committed to the issuance of $55 (par value) in consolidated obligation bonds, of which $45 were hedged with associated interest rate swaps that had traded but not yet settled. As of December 31, 2011, the Bank had committed to the issuance of $3,492 (par value) in consolidated obligation bonds, of which $3,475 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 Banks financial condition or results of operations.
28
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
Note 14Transactions 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 Banks Statements of Condition. All holders of the Banks capital stock receive dividends on their investments, to the extent declared by the Banks board of directors. All advances are issued to members and eligible housing associates under the Federal Home Loan Bank Act, 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 Banks 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, National Association, which held 13.8 percent of the Banks total regulatory capital stock as of June 30, 2012, was considered a related party. Total advances outstanding to Bank of America, National Association were $13,889 and $16,039 as of June 30, 2012 and December 31, 2011, respectively. Total deposits held in the name of Bank of America, National Association were less than $1 as of June 30, 2012 and December 31, 2011. No mortgage loans or mortgage-backed securities were acquired from Bank of America, National Association during the six-month periods ended June 30, 2012 and 2011.
Note 15Subsequent Events
On July 26, 2012, the Banks board of directors approved a cash dividend for the second quarter of 2012 in the amount of $19. The Bank paid the second quarter 2012 dividend on August 3, 2012.
On July 30, 2012, 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 August 15, 2012. The amount of excess stock to be repurchased from any individual shareholder will be based on the shareholders total excess capital stock as of August 14, 2012.
29
Item 2. | Managements 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 Banks control and which may cause the Banks 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 Banks 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 Banks 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 Banks 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 Banks 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 Banks results of operations and financial condition for the second quarter and the first six months ended June 30, 2012 and 2011. Managements discussion and analysis should be read in conjunction with the financial statements and accompanying notes presented elsewhere in this report, as well as the Banks audited financial statements for the year ended December 31, 2011.
30
Executive Summary
General Overview
The Bank is a cooperative whose primary business activity is providing competitively-priced loans, which the Bank refers to as advances, to its members and eligible housing associates to help them meet the credit needs of their communities. The Bank also makes grants and subsidized advances under the Affordable Housing Program, and provides certain cash management services to members and eligible nonmembers. The consolidated obligations (COs) issued by the Office of Finance on behalf of the FHLBanks are the principal funding source for Bank assets. The Bank is primarily liable for repayment of COs issued on its behalf and is jointly and severally liable for the COs issued on behalf of the other FHLBanks. Deposits, other borrowings, and the issuance of capital stock provide additional funding to the Bank. The Bank also maintains a portfolio of investments for liquidity purposes, to provide available funds to meet member credit needs, and to provide additional earnings.
Financial Condition
As of June 30, 2012, total assets were $119.4 billion, a decrease of $5.8 billion, or 4.65 percent, from December 31, 2011. This decrease was primarily due to a $5.1 billion, or 5.90 percent, decrease in advances. Advances, the largest asset on the Banks balance sheet, decreased as a result of scheduled maturities, prepayments, and members significant liquidity.
As of June 30, 2012, total liabilities were $113.4 billion, a decrease of $5.3 billion, or 4.49 percent, from December 31, 2011. This decrease was primarily due to a $4.5 billion, or 3.90 percent, decrease in COs. The decrease in COs corresponds to the decrease in demand for advances by the Banks members during the period.
As of June 30, 2012, total capital was $6.1 billion, a decrease of $496 million, or 7.55 percent, from December 31, 2011. This decrease was primarily due to the repurchase of $1.2 billion in excess capital stock, excluding capital stock classified as mandatorily redeemable capital stock, partially offset by the issuance of $497 million of activity-based capital stock and $34 million of membership capital stock, and a $125 million decrease in accumulated other comprehensive loss during the period. The decrease in accumulated other comprehensive loss was primarily due to improvements in the fair value of the Banks available-for-sale securities.
Results of Operations
The Bank recorded net income of $60 million for the second quarter of 2012, an increase of $22 million, or 55.8 percent, from net income of $38 million for the second quarter of 2011. The increase in net income was primarily due to a $29 million decrease in net impairment losses recognized in earnings and a $6 million decrease in total assessments, partially offset by a $12 million decrease in net interest income. These items are discussed in more detail in Managements Discussion and AnalysisResults of Operations below.
31
The Bank recorded net income of $130 million for the first six months of 2012, an increase of $41 million, or 46.1 percent, from net income of $89 million during the same period in 2011. The increase in net income was primarily due to a $74 million decrease in net impairment losses recognized in earnings and a $17 million decrease in total assessments, partially offset by a $54 million decrease in net interest income. These items are discussed in more detail in Managements Discussion and AnalysisResults of Operations below.
One way in which the Bank analyzes its performance is by comparing its annualized return on equity (ROE) to three-month average London Interbank Offered Rate (LIBOR). The Banks ROE was 3.76 percent for the second quarter of 2012, compared to 2.01 percent for the second quarter of 2011. ROE increased for the second quarter of 2012, compared to the second quarter of 2011, primarily as a result of an increase in net income, as discussed above, and a decrease in average total capital during the period. ROE spread to three-month average LIBOR increased to 329 basis points for the second quarter of 2012, compared to 175 basis points for the second quarter of 2011. The increase in the ROE spread to LIBOR was primarily due to the increase in ROE as previously discussed.
The Banks annualized ROE was 3.97 percent for the first six months of 2012, compared to 2.29 percent during the same period in 2011. ROE increased for the first six months of 2012, compared to the same period in 2011, primarily as a result of an increase in net income, as discussed above, and a decrease in average total capital during the period. ROE spread to three-month average LIBOR increased to 348 basis points for the first six months of 2012, compared to 200 basis points for the same period in 2011. The increase in the ROE spread to LIBOR was primarily due to the increase in ROE as previously discussed.
The Banks interest rate spread was 30 basis points and 33 basis points for the second quarter of 2012 and 2011, respectively, and 26 basis points and 34 basis points for the first six months of 2012 and 2011, respectively. The decrease in the Banks interest rate spread during the second quarter and first six months of 2012, compared to the same periods in 2011, was primarily due to a decrease in yield on the Banks long-term investment portfolio during the periods.
Business Outlook
The Banks business outlook remains largely unchanged from the outlook discussion in the Banks Form 10-K. The increase in advances from the first quarter of 2012 and from the second quarter of 2011 reflects moderate demand for new advances among previously less active borrowers and signs of improving financial health throughout the Banks membership, although the majority of these new advances are short-term advances subject to refinancing risk. The Bank expects overall advances to decline over the course of the year.
The Bank has recently seen recovery in fair market values for some of its private-label MBS and the credit related portion of other-than-temporary impairment losses recognized in earnings was lower for the second quarter of 2012 compared to the second quarter of 2011. However, other-than-temporary impairment losses have been highly volatile. If the loans underlying the Banks securities further deteriorate or if certain assumptions related to forecasts of home prices, prepayments, defaults, or loss severities continue to decline, the Bank could record additional other-than-temporary impairment losses.
32
The Bank continues to face challenges to net income as advances and investments decline in a low interest rate environment with few attractive reinvestment opportunities.
Selected Financial Data
The following table presents a summary of certain financial information for the Bank for the periods indicated (dollars in millions):
As of and for the Three Months Ended | ||||||||||||||||||||
June 30, 2012 |
March 31, 2012 |
December 31, 2011 |
September 30, 2011 |
June 30, 2011 |
||||||||||||||||
Statements of Condition (at period end) |
||||||||||||||||||||
Total assets |
$ | 119,440 | $ | 109,137 | $ | 125,270 | $ | 118,852 | $ | 116,817 | ||||||||||
Investments (1) |
35,701 | 34,536 | 36,138 | 41,204 | 36,979 | |||||||||||||||
Mortgage loans held for portfolio |
1,432 | 1,534 | 1,639 | 1,743 | 1,828 | |||||||||||||||
Allowance for credit losses on mortgage loans |
(9) | (9) | (6) | (1) | (1) | |||||||||||||||
Advances |
81,842 | 72,441 | 86,971 | 75,363 | 77,427 | |||||||||||||||
Interest-bearing deposits |
2,133 | 3,078 | 2,655 | 3,170 | 3,008 | |||||||||||||||
Consolidated obligations, net: |
||||||||||||||||||||
Discount notes |
21,427 | 16,178 | 24,330 | 16,057 | 20,573 | |||||||||||||||
Bonds |
89,079 | 81,719 | 90,662 | 91,720 | 84,640 | |||||||||||||||
Total consolidated obligations, net (2) |
110,506 | 97,897 | 114,992 | 107,777 | 105,213 | |||||||||||||||
Mandatorily redeemable capital stock |
115 | 328 | 286 | 319 | 385 | |||||||||||||||
Affordable Housing Program payable |
98 | 109 | 109 | 115 | 121 | |||||||||||||||
Payable to REFCORP |
| | | | 10 | |||||||||||||||
Capital stock - putable |
5,007 | 5,899 | 5,718 | 5,910 | 6,333 | |||||||||||||||
Retained earnings |
1,344 | 1,306 | 1,254 | 1,203 | 1,184 | |||||||||||||||
Accumulated other comprehensive loss |
(286) | (285) | (411) | (317) | (296) | |||||||||||||||
Total capital |
6,065 | 6,920 | 6,561 | 6,796 | 7,221 | |||||||||||||||
Statements of Income (for the period ended) |
||||||||||||||||||||
Net interest income |
103 | 85 | 108 | 109 | 115 | |||||||||||||||
Provision for credit losses |
| 3 | 5 | | | |||||||||||||||
Net impairment losses recognized in earnings |
(8) | (7) | (10) | (19) | (37) | |||||||||||||||
Net (losses) gains on trading securities |
(4) | (29) | (20) | 36 | 20 | |||||||||||||||
Net (losses) gains on derivatives and hedging activities |
(1) | 54 | 32 | (67) | (20) | |||||||||||||||
Letters of credit fees |
4 | 5 | 5 | 6 | 4 | |||||||||||||||
Other income (3) |
3 | | | | 1 | |||||||||||||||
Noninterest expense |
30 | 27 | 40 | 29 | 32 | |||||||||||||||
Income before assessments |
67 | 78 | 70 | 36 | 51 | |||||||||||||||
Assessments (4) |
7 | 8 | 7 | 4 | 13 | |||||||||||||||
Net income |
60 | 70 | 63 | 32 | 38 | |||||||||||||||
Performance Ratios (%) |
||||||||||||||||||||
Return on equity (5) |
3.76 | 4.18 | 3.85 | 1.78 | 2.01 | |||||||||||||||
Return on assets (6) |
0.20 | 0.23 | 0.21 | 0.10 | 0.13 | |||||||||||||||
Net interest margin (7) |
0.34 | 0.28 | 0.35 | 0.36 | 0.38 | |||||||||||||||
Regulatory capital ratio (at year end) (8) |
5.41 | 6.90 | 5.79 | 6.25 | 6.76 | |||||||||||||||
Equity to assets ratio (9) |
5.25 | 5.43 | 5.39 | 5.77 | 6.27 | |||||||||||||||
Dividend payout ratio (10) |
36.94 | 24.94 | 19.70 | 40.09 | 37.89 |
33
(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 Banks primary obligations on consolidated obligations outstanding. The par value of the FHLBanks outstanding consolidated obligations for which the Bank is jointly and severally liable was as follows (in millions): |
June 30, 2012 |
$ | 575,874 | ||
March 31, 2012 |
561,317 | |||
December 31, 2011 |
578,118 | |||
September 30, 2011 |
590,231 | |||
June 30, 2011 |
623,513 |
(3) | Other income includes service fees and other. |
(4) | On August 5, 2011, the Finance Agency certified that the FHLBanks have satisfied their REFCORP obligation. |
(5) | Calculated as net income divided by average total equity. |
(6) | Calculated as net income divided by average total assets. |
(7) | Net interest margin is net interest income as a percentage of average earning assets. |
(8) | Regulatory capital ratio is regulatory capital stock plus retained earnings as a percentage of total assets at period end. |
(9) | Calculated as average equity divided by average total assets. |
(10) | Calculated as dividends declared during the period divided by net income during the period. |
Financial Condition
The Banks 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 COs by the Office of Finance on the Banks behalf.
The following table presents the distribution of the Banks total assets, liabilities, and capital by major class as of the dates indicated (dollars in millions). These items are discussed in more detail below.
As of June 30, 2012 | As of December 31, 2011 | Increase (Decrease) | ||||||||||||||||||||||
Amount | Percent of Total |
Amount | Percent of Total |
Amount | Percent | |||||||||||||||||||
Advances |
$ | 81,842 | 68.52 | $ | 86,971 | 69.43 | $ | (5,129) | (5.90) | |||||||||||||||
Long-term investments |
20,924 | 17.52 | 21,655 | 17.29 | (731) | (3.37) | ||||||||||||||||||
Short-term investments |
14,777 | 12.37 | 14,483 | 11.56 | 294 | 2.03 | ||||||||||||||||||
Mortgage loans, net |
1,423 | 1.19 | 1,633 | 1.30 | (210) | (12.82) | ||||||||||||||||||
Other assets |
474 | 0.40 | 528 | 0.42 | (54) | (10.62) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total assets |
$ | 119,440 | 100.00 | $ | 125,270 | 100.00 | $ | (5,830) | (4.65) | |||||||||||||||
|
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|
|
|
|
|
|
|
|
|||||||||||||||
Consolidated obligations, net: |
||||||||||||||||||||||||
Discount notes |
$ | 21,427 | 18.90 | $ | 24,330 | 20.50 | $ | (2,903) | (11.93) | |||||||||||||||
Bonds |
89,079 | 78.57 | 90,662 | 76.37 | (1,583) | (1.75) | ||||||||||||||||||
Deposits |
2,133 | 1.88 | 2,655 | 2.24 | (522) | (19.66) | ||||||||||||||||||
Other liabilities |
736 | 0.65 | 1,062 | 0.89 | (326) | (30.72) | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|||||||||||||||
Total liabilities |
$ | 113,375 | 100.00 | $ | 118,709 | 100.00 | $ | (5,334) | (4.49) | |||||||||||||||
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|
|
|
|
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|
|
|
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Capital stock |
$ | 5,007 | 82.56 | $ | 5,718 | 87.15 | $ | (711) | (12.42) | |||||||||||||||
Retained earnings |
1,344 | 22.16 | 1,254 | 19.11 | 90 | 7.20 | ||||||||||||||||||
Accumulated other comprehensive loss |
(286) | (4.72) | (411) | (6.26) | 125 | 30.32 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
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Total capital |
$ | 6,065 | 100.00 | $ | 6,561 | 100.00 | $ | (496) | (7.55) | |||||||||||||||
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|
|
|
|
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|
34
Advances
The decrease in advances from December 31, 2011 to June 30, 2012 was due to maturing advances, prepayments, and decreased demand for new advances. The Bank has not seen a discernible impact on either the volume of advances or the distribution of advances outstanding by year of maturity as a result of the Federal Reserve Boards (Federal Reserve) recent announcements that it expects to maintain short-term interest rates near zero through 2014. As of June 30, 2012, 85.1 percent of the Banks advances were fixed-rate. However, the Bank often simultaneously enters into derivatives with the issuance of advances to convert the rates on them, in effect, into a short-term variable interest rate, usually based on LIBOR. As of June 30, 2012 and December 31, 2011, 65.8 percent and 65.7 percent, respectively, of the Banks fixed-rate advances were swapped and 32.6 percent and 9.79 percent, respectively, of the Banks variable-rate advances were swapped. The majority of the Banks variable-rate advances were indexed to LIBOR. The Bank also offers variable-rate advances tied to the federal funds rate, prime rate, and constant maturity swap rates.
The following table sets forth the par value of outstanding advances by product characteristics (dollars in millions):
As of June 30, 2012 | As of December 31, 2011 | |||||||||||||||
Amount | Percent of Total |
Amount | Percent of Total |
|||||||||||||
Adjustable or variable rate indexed |
$ | 11,148 | 14.37 | $ | 10,977 | 13.29 | ||||||||||
Fixed rate (1) |
30,021 | 38.68 | 37,038 | 44.86 | ||||||||||||
Hybrid |
28,794 | 37.10 | 25,082 | 30.38 | ||||||||||||
Convertible |
6,405 | 8.25 | 8,276 | 10.02 | ||||||||||||
Amortizing (2) |
1,244 | 1.60 | 1,196 | 1.45 | ||||||||||||
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|
|
|||||||||
Total par value |
$ | 77,612 | 100.00 | $ | 82,569 | 100.00 | ||||||||||
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|
|
|
|
(1) | Includes convertible advances whose conversion options have expired. |
(2) | The Bank offers a fixed-rate advance that may be structured with principal amortization in either equal increments or similar to a mortgage. |
Refer to Note 7Advances to the Banks interim financial statements for the concentration of the Banks advances to its 10 largest borrowing institutions.
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 Banks capacity to meet its commitment to affordable housing and community investment, and to cover operating expenses.
The Banks short-term investments consist of overnight and term federal funds sold, certificates of deposit, and interest-bearing deposits. The Banks long-term investments consist of MBS issued by government-sponsored mortgage agencies or private securities that, at purchase, carried the highest rating from Moodys 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.
35
The following table sets forth more detailed information regarding short- and long-term investments held by the Bank (dollars in millions):
Increase (Decrease) | ||||||||||||||||
As of June 30, 2012 | As of December 31, 2011 | Amount | Percent | |||||||||||||
Short-term investments: |
||||||||||||||||
Interest-bearing deposits (1) |
$ | 1,104 | $ | 1,203 | $ | (99) | (8.21) | |||||||||
Certificates of deposit |
625 | 650 | (25) | (3.85) | ||||||||||||
Federal funds sold |
13,048 | 12,630 | 418 | 3.31 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total short-term investments |
14,777 | 14,483 | 294 | 2.03 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Long-term investments: |
||||||||||||||||
State or local housing agency debt obligations |
116 | 103 | 13 | 12.36 | ||||||||||||
U.S. government agency debt obligations |
3,964 | 4,228 | (264) | (6.25) | ||||||||||||
Mortgage-backed securities: |
||||||||||||||||
U.S. government agency securities |
10,930 | 10,689 | 241 | 2.26 | ||||||||||||
Private label |
5,914 | 6,635 | (721) | (10.86) | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total mortgage-backed securities |
16,844 | 17,324 | (480) | (2.76) | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total long-term investments |
20,924 | 21,655 | (731) | (3.37) | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total investments |
$ | 35,701 | $ | 36,138 | $ | (437) | (1.21) | |||||||||
|
|
|
|
|
|
(1) | As of June 30, 2012 and December 31, 2011, interest-bearing deposits includes a $1.1 billion and $1.2 billion, respectively, business money market account with Branch Banking and Trust Company, one of the Banks ten largest borrowers. One of the Banks member directors is a senior executive vice president of Branch Banking and Trust Company. Pursuant to Finance Agency regulation, the Banks 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. |
The Finance Agency limits an FHLBanks investment in MBS and asset-backed securities by requiring that the total amortized historical costs for securities classified as held-to-maturity or available-for-sale, and fair value for MBS securities classified as trading owned by the FHLBank generally may not exceed 300 percent of the FHLBanks previous month-end total capital, as defined by regulation, plus its mandatorily redeemable capital stock on the day it purchases the securities. These investments amounted to 265 percent and 244 percent of total capital plus mandatorily redeemable capital stock as of June 30, 2012 and December 31, 2011, respectively. The Bank was below its target range of 250 percent to 275 percent as of December 31, 2011 due to a lack of quality MBS at attractive prices during recent market conditions and due to the Banks high level of excess capital stock; however, the Bank was within its target range as of June 30, 2012 due to a decrease in total capital as a result of the repurchase of $1.4 billion in excess capital stock during the second quarter of 2012. 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 June 30, 2012 compared to December 31, 2011. In addition, private-label MBS are experiencing faster prepayments than U.S. government agency MBS, further increasing the proportion of U.S. government agency MBS in the Banks MBS portfolio.
Refer to Note 4Available-for-sale Securities and Note 5Held-to-maturity Securities to the Banks interim financial statements for information on securities with unrealized losses as of June 30, 2012 and December 31, 2011.
The Bank evaluates its individual investment securities for other-than-temporary impairment on at least a quarterly basis, as described in Note 6Other-than-temporary Impairment to the Banks interim financial statements. For a discussion regarding impairment losses recognized in earnings during the reported periods see Managements Discussion and AnalysisResults of OperationsNoninterest Income (Loss) below.
36
Mortgage Loans Held for Portfolio
The decrease in mortgage loans held for portfolio from December 31, 2011 to June 30, 2012 was due to the Bank ceasing to purchase these assets and the maturity of these assets during the period.
As of June 30, 2012 and December 31, 2011, the Banks conventional mortgage loan portfolio was concentrated in the southeastern United States because those members selling 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.
As of June 30, 2012 | As of December 31, 2011 | |||||||
Percent of Total | Percent of Total | |||||||
South Carolina |
24.50 | 24.61 | ||||||
Florida |
24.63 | 23.17 | ||||||
Georgia |
14.52 | 14.45 | ||||||
North Carolina |
12.24 | 12.99 | ||||||
Virginia |
8.45 | 8.90 | ||||||
All other |
15.66 | 15.88 | ||||||
|
|
|
|
|||||
Total |
100.00 | 100.00 | ||||||
|
|
|
|
Consolidated Obligations
The Bank funds its assets primarily through the issuance of consolidated obligation bonds and, to a lesser extent, consolidated obligation discount notes. As of June 30, 2012, CO issuances financed 92.5 percent of the $119.4 billion in total assets, remaining relatively stable from the financing ratio of 91.8 percent as of December 31, 2011.
The decrease in COs from December 31, 2011 to June 30, 2012 corresponds to the decrease in demand for advances by the Banks members and the increase in liquidity from maturing and prepaid advances during the period. As of June 30, 2012 and December 31, 2011, COs outstanding were primarily fixed-rate. However, the Bank often simultaneously enters into derivatives with the issuance of CO bonds to convert the interest rates, in effect, into short-term variable interest rates, usually based on LIBOR. As of June 30, 2012 and December 31, 2011, 81.8 percent and 81.9 percent, respectively, of the Banks fixed-rate CO bonds were swapped and 3.23 percent and 6.42 percent, respectively, of the Banks variable-rate CO bonds were swapped. As of June 30, 2012 and December 31, 2011, 0.47 percent and 4.64 percent, respectively, of the Banks fixed-rate CO discount notes were swapped to a variable rate.
As of June 30, 2012, callable CO bonds constituted 14.5 percent of the total par value of CO bonds outstanding, compared to 32.0 percent at December 31, 2011. This decrease was due to market conditions during the first six months of 2012 that continued to favor issuance of swapped fixed maturity debt to replace called CO bonds. The derivatives that the Bank may employ to hedge against the interest-rate risk associated with the Banks callable CO bonds are callable by the counterparty; if the call feature of the derivative is exercised, the Bank in turn will generally call the hedged CO bond. These call features pose risk that the Bank could be required to refinance a substantial portion of outstanding liabilities during times of decreasing interest rates. With recent European financial market stress pushing pricing on swapped fixed maturity debt to historic lows, the Bank has been replacing hedged callable CO bonds with
37
swapped fixed maturity debt to reduce the Banks level of refunding risk. Call options on unhedged callable CO bonds generally are exercised when the bond can be replaced at a lower economic cost.
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 Banks 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 as of June 30, 2012 compared to December 31, 2011.
To support its member deposits, the FHLBank Act requires the Bank to have as a reserve an amount equal to or greater than the current deposits received from members. These reserves are required to be invested in obligations of the United States, deposits in eligible banks or trust companies or advances with maturities not exceeding five years. The Bank was in compliance with this depository liquidity requirement as of June 30, 2012.
Capital
The decrease in total capital from December 31, 2011 to June 30, 2012 was primarily due to the repurchase of $1.2 billion in excess capital stock, excluding capital stock classified as mandatorily redeemable capital stock, partially offset by the issuance of $497 million of activity-based capital stock and $34 million of membership capital stock, and a $125 million decrease in accumulated other comprehensive loss during the period. The decrease in accumulated other comprehensive loss was primarily due to improvements in the fair value of the Banks available-for-sale securities.
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 Note 9Capital and Mandatorily Redeemable Capital Stock to the Banks interim financial statements.
Finance Agency regulations establish criteria based on the amount and type of capital held by an FHLBank for four capital classifications as follows:
| Adequately Capitalized - FHLBank meets both risk-based and minimum capital requirements; |
| Undercapitalized - FHLBank does not meet one or both of its risk-based or minimum capital requirements; |
| 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. |
38
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 regulations delineate the types of prompt corrective actions the Director may order in the event an FHLBank is not adequately capitalized, including submission of a capital restoration plan by the FHLBank and restrictions on its dividends, stock redemptions, executive compensation, new business activities, or any other actions the Director determines will ensure safe and sound operations and capital compliance by the FHLBank. On June 19, 2012, the Bank received notification from the Director that, based on March 31, 2012 data, the Bank meets the definition of adequately capitalized.
As of June 30, 2012, the Bank had capital stock subject to mandatory redemption from 51 members and former members, consisting of B1 membership stock and B2 activity-based capital stock, compared to 68 members and former members as of December 31, 2011, consisting of B1 membership capital stock and B2 activity-based capital stock. The Bank is not required to redeem or repurchase such capital stock until the expiration of the five-year redemption period or, with respect to activity-based capital 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, after financial results are known for the preceding quarter.
As of June 30, 2012 and December 31, 2011, the Banks outstanding stock included $462 million and $1.1 billion, respectively, of excess shares subject to repurchase by the Bank at its discretion. The decrease in excess shares was due to the repurchases of excess capital stock. On April 9, 2012 and May 30, 2012, the Bank repurchased $700 million and $698 million, respectively, of excess capital stock; the amount of excess capital stock repurchased from each shareholder was based on the shareholders total excess capital stock as of March 30, 2012 and May 29, 2012. On July 30, 2012, the Bank announced that it will repurchase up to $700 of excess capital stock on August 15, 2012, based on each shareholders total excess capital stock as of August 14, 2012. Given the quarterly determinations of excess stock repurchases and ordinary fluctuations in advances, the Bank expects the amount of excess activity-based stock to fluctuate throughout the year but at a relatively low level. The Bank paid $22 million in dividends during the second quarter of 2012.
In 2011, the FHLBanks entered into a Joint Capital Enhancement Agreement (Joint Capital Agreement) which is intended to enhance the capital position of each FHLBank and the safety and soundness of the FHLBank System. The intent of the Joint Capital Agreement is to allocate that portion of each FHLBanks earnings historically paid to satisfy its REFCORP obligation to a restricted retained earnings account at that FHLBank. These restricted retained earnings are not available to pay dividends. Each FHLBank subsequently amended its capital plan to implement the provisions of the Joint Capital Agreement. The Finance Agency approved the capital plan amendments and certified satisfaction of the REFCORP obligation on August 5, 2011. In accordance with the Joint Capital Agreement, starting in the third quarter of 2011, each FHLBank contributes 20 percent of its net income to a restricted retained earnings account.
39
Results of Operations
Net Income
The following table sets forth the Banks significant income items for the second quarter and first six months of 2012 and 2011, and provides information regarding the changes during the periods (dollars in millions). These items are discussed in more detail below.
Three Months Ended June 30, | Increase (Decrease) | Six Months Ended June 30, | Increase (Decrease) | |||||||||||||||||||||||||||||
2012 | 2011 | Amount | Percent | 2012 | 2011 | Amount | Percent | |||||||||||||||||||||||||
Net interest income |
$ | 103 | $ | 115 | $ | (12) | (10.27) | $ | 188 | $ | 242 | $ | (54) | (21.83) | ||||||||||||||||||
Provision for credit losses |
| | | 100.00 | 3 | | 3 | * | ||||||||||||||||||||||||
Noninterest (loss) income |
(6) | (32) | 26 | 79.09 | 17 | (67) | 84 | 124.95 | ||||||||||||||||||||||||
Noninterest expense |
30 | 32 | (2) | (4.48) | 57 | 54 | 3 | 7.82 | ||||||||||||||||||||||||
Total assessments |
7 | 13 | (6) | (51.65) | 15 | 32 | (17) | (54.66) | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Net income |
$ | 60 | $ | 38 | $ | 22 | 55.85 | $ | 130 | $ | 89 | $ | 41 | 46.14 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
* | Not meaningful |
Net Interest Income
The primary source of the Banks 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 COs, 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 second quarter and first six months of 2012, compared to the same periods in 2011, was primarily due to a 60 basis points and 64 basis points decrease in yield on the Banks long-term investments portfolio, respectively, during the periods. The yield on the Banks long-term investment portfolio continued to decline primarily due to the maturity or prepayment of higher yielding investments and the purchase of lower yielding instruments.
As discussed above, net interest income also includes components of 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. Also, when hedging relationships qualify for hedge accounting, the interest components of the hedging derivatives will be reflected in interest income or expense. As shown in the table summarizing the net effect of derivatives and hedging activity on the Banks results of operations, the impact of hedging on interest income was a decrease of $265 million and $360 million for the second quarters of 2012 and 2011, respectively, and a decrease of $572 million and $770 million for the first six months of 2012 and 2011, respectively.
40
The following tables present spreads between the average yield on total interest-earning assets and the average cost of total interest-bearing liabilities for the second quarters and first six months of 2012 and 2011 (dollars in millions).
Three Months Ended June 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Average
Balance |
Interest | Yield/ Rate (%) |
Average
Balance |
Interest | Yield/ Rate (%) |
|||||||||||||||||||
Assets |
||||||||||||||||||||||||
Federal funds sold |
$ | 12,097 | $ | 5 | 0.17 | $ | 13,380 | $ | 4 | 0.14 | ||||||||||||||
Interest-bearing deposits (1) |
4,252 | 2 | 0.18 | 2,713 | 1 | 0.10 | ||||||||||||||||||
Certificates of deposit |
1,000 | 1 | 0.29 | 834 | | 0.22 | ||||||||||||||||||
Long-term investments (2) |
21,586 | 148 | 2.76 | 22,082 | 185 | 3.36 | ||||||||||||||||||
Advances |
80,046 | 79 | 0.40 | 79,338 | 64 | 0.32 | ||||||||||||||||||
Mortgage loans held for portfolio (3) |
1,481 | 20 | 5.36 | 1,872 | 25 | 5.33 | ||||||||||||||||||
Loans to other FHLBanks |
1 | | 0.14 | 1 | | 0.10 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-earning assets |
120,463 | 255 | 0.85 | 120,220 | 279 | 0.93 | ||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Allowance for credit losses on mortgage loans |
(9) | (1) | ||||||||||||||||||||||
Other assets |
702 | 891 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total assets |
$ | 121,156 | $ | 121,110 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Liabilities and Capital |
||||||||||||||||||||||||
Deposits (4) |
$ | 2,799 | 1 | 0.06 | $ | 2,835 | | 0.01 | ||||||||||||||||
Short-term borrowings |
22,049 | 6 | 0.11 | 17,461 | 4 | 0.09 | ||||||||||||||||||
Long-term debt |
85,683 | 144 | 0.68 | 88,761 | 159 | 0.72 | ||||||||||||||||||
Other borrowings |
201 | 1 | 1.92 | 460 | 1 | 0.83 | ||||||||||||||||||
|
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|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing liabilities |
110,732 | 152 | 0.55 | 109,517 | 164 | 0.60 | ||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Other liabilities |
4,060 | 3,993 | ||||||||||||||||||||||
Total capital |
6,364 | 7,600 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total liabilities and capital |
$ | 121,156 | $ | 121,110 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income and net yield on |
$ | 103 | 0.34 | $ | 115 | 0.38 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Interest rate spread |
0.30 | 0.33 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Average interest-earning assets to |
108.79 | 109.77 | ||||||||||||||||||||||
|
|
|
|
(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. |
41
Six Months Ended June 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Average
Balance |
Interest | Yield/ Rate (%) |
Average
Balance |
Interest | Yield/ Rate (%) |
|||||||||||||||||||
Assets |
||||||||||||||||||||||||
Federal funds sold |
$ | 12,556 | $ | 10 | 0.16 | $ | 14,111 | $ | 12 | 0.18 | ||||||||||||||
Interest-bearing deposits (1) |
4,363 | 3 | 0.16 | 2,749 | 2 | 0.13 | ||||||||||||||||||
Certificates of deposit |
922 | 1 | 0.31 | 817 | 1 | 0.24 | ||||||||||||||||||
Long-term investments (2) |
21,915 | 307 | 2.82 | 22,366 | 383 | 3.46 | ||||||||||||||||||
Advances |
80,961 | 147 | 0.36 | 82,314 | 135 | 0.33 | ||||||||||||||||||
Mortgage loans held for portfolio (3) |
1,532 | 41 | 5.35 | 1,921 | 51 | 5.31 | ||||||||||||||||||
Loans to other FHLBanks |
2 | | 0.11 | 3 | | 0.16 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-earning assets |
122,251 | 509 | 0.84 | 124,281 | 584 | 0.95 | ||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Allowance for credit losses on mortgage loans |
(8) | (1) | ||||||||||||||||||||||
Other assets |
703 | 921 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total assets |
$ | 122,946 | $ | 125,201 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Liabilities and Capital |
||||||||||||||||||||||||
Deposits (4) |
$ | 2,841 | 1 | 0.04 | $ | 2,842 | 1 | 0.05 | ||||||||||||||||
Short-term borrowings |
22,032 | 9 | 0.09 | 18,335 | 11 | 0.12 | ||||||||||||||||||
Long-term debt |
87,021 | 309 | 0.71 | 91,597 | 328 | 0.72 | ||||||||||||||||||
Other borrowings |
248 | 2 | 1.80 | 496 | 2 | 1.03 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing liabilities |
112,142 | 321 | 0.58 | 113,270 | 342 | 0.61 | ||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Other liabilities |
4,234 | 4,113 | ||||||||||||||||||||||
Total capital |
6,570 | 7,818 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total liabilities and capital |
$ | 122,946 | $ | 125,201 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income and net yield on |
$ | 188 | 0.31 | $ | 242 | 0.39 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Interest rate spread |
0.26 | 0.34 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Average interest-earning assets to |
109.01 | 109.72 | ||||||||||||||||||||||
|
|
|
|
(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 Banks interest rate spread decreased by three basis points and eight basis points during the second quarter and first six months of 2012, respectively, compared to the same periods in 2011, primarily due to a decrease in yield on the Banks long-term investments portfolio as previously discussed.
42
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 Banks interest income and interest expense (in millions). As noted in the table, the overall change in net interest income during the second quarter and first six months of 2012, compared to the same periods in 2011, was primarily rate related.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
2012 vs. 2011 | 2012 vs. 2011 | |||||||||||||||||||||||
Volume (1) | Rate (1) | Increase (Decrease) |
Volume (1) | Rate (1) | Increase (Decrease) |
|||||||||||||||||||
Increase (decrease) in interest income: |
||||||||||||||||||||||||
Federal funds sold |
$ | | $ | 1 | $ | 1 | $ | (1) | $ | (1) | $ | (2) | ||||||||||||
Interest-bearing deposits |
| 1 | 1 | 1 | | 1 | ||||||||||||||||||
Certificates of deposit |
| 1 | 1 | | | | ||||||||||||||||||
Long-term investments |
(4) | (33) | (37) | (7) | (69) | (76) | ||||||||||||||||||
Advances |
1 | 14 | 15 | (2) | 14 | 12 | ||||||||||||||||||
Mortgage loans held for portfolio |
(5) | | (5) | (11) | 1 | (10) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
(8) | (16) | (24) | (20) | (55) | (75) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Increase (decrease) in interest expense: |
||||||||||||||||||||||||
Deposits |
| 1 | 1 | | | | ||||||||||||||||||
Short-term borrowings |
1 | 1 | 2 | 2 | (4) | (2) | ||||||||||||||||||
Long-term debt |
(5) | (10) | (15) | (16) | (3) | (19) | ||||||||||||||||||
Other borrowings |
(1) | 1 | | (1) | 1 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
(5) | (7) | (12) | (15) | (6) | (21) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Decrease in net interest income |
$ | (3) | $ | (9) | $ | (12) | $ | (5) | $ | (49) | $ | (54) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | 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 June 30, | Increase (Decrease) | Six Months Ended June 30, | Increase (Decrease) | |||||||||||||||||||||||||||||
2012 | 2011 | Amount | Percent | 2012 | 2011 | Amount | Percent | |||||||||||||||||||||||||
Net impairment losses recognized in earnings |
$ | (8) | $ | (37) | $ | 29 | 78.48 | $ | (15) | $ | (89) | $ | 74 | 82.98 | ||||||||||||||||||
Net (losses) gains on trading securities |
(4) | 20 | (24) | (118.04) | (33) | (14) | (19) | (134.18) | ||||||||||||||||||||||||
Net (losses) gains on derivatives and hedging activities |
(1) | (20) | 19 | 94.00 | 53 | 26 | 27 | 102.07 | ||||||||||||||||||||||||
Letters of Credit |
4 | 4 | | 8.45 | 9 | 8 | 1 | 9.23 | ||||||||||||||||||||||||
Other |
3 | 1 | 2 | 139.34 | 3 | 2 | 1 | 55.92 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total noninterest (loss) income |
$ | (6) | $ | (32) | $ | 26 | 79.09 | $ | 17 | $ | (67) | $ | 84 | 124.95 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The change in total noninterest (loss) income noted in the above table was primarily due to a decrease in net impairment losses recognized in earnings. The Bank recognized $8 million and $15 million of credit-related other-than-temporary impairment losses during the second quarter and first six months of 2012, respectively, which reflected the impact of additional projected losses on loan collateral underlying certain private-label MBS. Each quarter, the Bank updates its other-than-temporary impairment analysis to reflect current housing market conditions, changes in anticipated housing market conditions, observed and anticipated borrower behavior, and updated information on the loans supporting the Banks private-label MBS. Factors that adversely affected projected borrower default rates and projected loan loss severity included
43
the impact of large inventories of unsold homes on current and forecasted housing prices, continued weakness in the economy and in employment, and increased foreclosure costs and delays, resulting in continued credit losses. The change in net (losses) gains on trading securities and on derivatives and hedging activities noted in the table above generally offset each other during the periods.
The following tables summarize the net effect of derivatives and hedging activity on the Banks results of operations (in millions):
Three Months Ended June 30, 2012 | ||||||||||||||||||||||||
Advances | Investments | Consolidated Obligation Bonds |
Consolidated Obligation Discount Notes |
Balance Sheet |
Total | |||||||||||||||||||
Net interest income: |
||||||||||||||||||||||||
Amortization or accretion of hedging activities in net interest income (1) |
$ | (59) | $ | | $ | 10 | $ | | $ | | $ | (49) | ||||||||||||
Net interest settlements included in net interest income (2) |
(362) | | 146 | | | (216) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total net interest (expense) income |
(421) | | 156 | | | (265) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net gains (losses) on derivatives and hedging activities: |
||||||||||||||||||||||||
Gains (losses) on fair value hedges |
41 | | (5) | | | 36 | ||||||||||||||||||
Losses on derivatives not receiving hedge accounting |
| (22) | | | (15) | (37) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total net gains (losses) on derivatives and hedging activities |
41 | (22) | (5) | | (15) | (1) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total net interest (expense) income and net gains (losses) on derivatives and hedging activities |
(380) | (22) | 151 | | (15) | (266) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net losses on trading securities (3) |
| (4) | | | | (4) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total net effect of derivatives and hedging activities |
$ | (380) | $ | (26) | $ | 151 | $ | | $ | (15) | $ | (270) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Represents the amortization or accretion of hedging fair value adjustments for both open and closed hedge positions. |
(2) | Represents interest income or expense on derivatives included in net interest income. |
(3) |
Includes only those gains or losses on trading securities or financial instruments held at fair value that have an economic derivative assigned, therefore, this line item may not agree to the income statement. |
Three Months Ended June 30, 2011 | ||||||||||||||||||||||||
Advances | Investments | Consolidated Obligation Bonds |
Consolidated Obligation Discount Notes |
Balance Sheet |
Total | |||||||||||||||||||
Net interest income: |
||||||||||||||||||||||||
Amortization or accretion of hedging activities in net interest income (1) |
$ | (47) | $ | | $ | 9 | $ | | $ | | $ | (38) | ||||||||||||
Net interest settlements included in net interest income (2) |
(541) | | 218 | 1 | | (322) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total net interest (expense) income |
(588) | | 227 | 1 | | (360) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net gains (losses) on derivatives and hedging activities: |
||||||||||||||||||||||||
Gains (losses) on fair value hedges |
40 | | (5) | | | 35 | ||||||||||||||||||
(Losses) gains on derivatives not receiving hedge accounting |
| (55) | 5 | | (5) | (55) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total net gains (losses) on derivatives and hedging activities |
40 | (55) | | | (5) | (20) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total net interest (expense) income and net gains (losses) on derivatives and hedging activities |
(548) | (55) | 227 | 1 | (5) | (380) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net gains on trading securities (3) |
| 20 | | | | 20 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total net effect of derivatives and hedging activities |
$ | (548) | $ | (35) | $ | 227 | $ | 1 | $ | (5) | $ | (360) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents the amortization or accretion of hedging fair value adjustments for both open and closed hedge positions. |
(2) | Represents interest income or expense on derivatives included in net interest income. |
(3) |
Includes only those gains or losses on trading securities or financial instruments held at fair value that have an economic derivative assigned, therefore, this line item may not agree to the income statement. |
44
Six Months Ended June 30, 2012 | ||||||||||||||||||||||||
Advances | Investments | Consolidated Obligation Bonds |
Consolidated Obligation Discount Notes |
Balance
Sheet |
Total | |||||||||||||||||||
Net interest income: |
||||||||||||||||||||||||
Amortization or accretion of hedging activities in net interest income (1) |
$ | (128) | $ | | $ | 15 | $ | | $ | | $ | (113) | ||||||||||||
Net interest settlements included in net interest income (2) |
(748) | | 289 | | | (459) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total net interest (expense) income |
(876) | | 304 | | | (572) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net gains (losses) on derivatives and hedging activities: |
||||||||||||||||||||||||
Gains (losses) on fair value hedges |
107 | | (20) | | | 87 | ||||||||||||||||||
Gains (losses) on derivatives not receiving hedge accounting |
1 | (29) | 2 | | (8) | (34) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total net gains (losses) on derivatives and hedging activities |
108 | (29) | (18) | | (8) | 53 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total net interest (expense) income and net gains (losses) on derivatives and hedging activities |
(768) | (29) | 286 | | (8) | (519) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net losses on trading securities (3) |
| (33) | | | | (33) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total net effect of derivatives and hedging activities |
$ | (768) | $ | (62) | $ | 286 | $ | | $ | (8) | $ | (552) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents the amortization or accretion of hedging fair value adjustments for both open and closed hedge positions. |
(2) | Represents interest income or expense on derivatives included in net interest income. |
(3) |
Includes only those gains or losses on trading securities or financial instruments held at fair value that have an economic derivative assigned, therefore, this line item may not agree to the income statement. |
Six Months Ended June 30, 2011 | ||||||||||||||||||||||||
Advances | Investments | Consolidated Obligation Bonds |
Consolidated Obligation Discount Notes |
Balance
Sheet |
Total | |||||||||||||||||||
Net interest income: |
||||||||||||||||||||||||
Amortization or accretion of hedging activities in net interest income (1) |
$ | (95) | $ | | $ | 20 | $ | | $ | | $ | (75) | ||||||||||||
Net interest settlements included in net interest income (2) |
(1,131) | | 434 | 2 | | (695) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total net interest (expense) income |
(1,226) | | 454 | 2 | | (770) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net gains (losses) on derivatives and hedging activities: |
||||||||||||||||||||||||
Gains (losses) on fair value hedges |
87 | | (14) | | | 73 | ||||||||||||||||||
Gains (losses) on derivatives not receiving hedge accounting |
1 | (51) | 5 | | (2) | (47) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total net gains (losses) on derivatives and hedging activities |
88 | (51) | (9) | | (2) | 26 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total net interest (expense) income and net gains (losses) on derivatives and hedging activities |
(1,138) | (51) | 445 | 2 | (2) | (744) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net losses on trading securities (3) |
| (14) | | | | (14) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total net effect of derivatives and hedging activities |
$ | (1,138) | $ | (65) | $ | 445 | $ | 2 | $ | (2) | $ | (758) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents the amortization or accretion of hedging fair value adjustments for both open and closed hedge positions. |
(2) | Represents interest income or expense on derivatives included in net interest income. |
(3) |
Includes only those gains or losses on trading securities or financial instruments held at fair value that have an economic derivative assigned, therefore, this line item may not agree to the income statement. |
45
Noninterest Expense and Assessments
Noninterest expense decreased to $30 million for the second quarters of 2012, compared to $32 million for the second quarter of 2011. This decrease is due to a $2 million decrease in compensation and benefits expense during the second quarter of 2012, compared to the second quarter of 2011, which reflects the Banks efforts during the past year to control operating expenses.
Noninterest expense was $57 million and $54 million for the first six months of 2012 and 2011, respectively. The $3 million increase during the first six months of 2012, compared to the same period in 2011, was primarily due to the discontinuation of the Banks Economic Development and Growth Enhancement Program (EDGE) during the first quarter of 2011. The EDGE was a selective program that provided subsidized advances to member financial institutions for specific community economic development projects; however, EDGE experienced low utilization by members. The Bank had a $9 million liability related to uncommitted funds as of the date the EDGE was discontinued, which was reduced to zero with a corresponding reduction to other expense during the period. Compensation and benefits expense decreased by $4 million during the first six months of 2012, compared to the same period in 2011, which reflects the Banks efforts during the past year to control operating expenses.
Total assessments were $7 million and $13 million for the second quarters of 2012 and 2011, respectively, and $15 million and $32 million for the first six months of 2012 and 2011, respectively. The decrease during the second quarter and first six months of 2012, compared to the same periods in 2011, was primarily due to the satisfaction of the Banks 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 COs, 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. The Bank maintains contingent liquidity, 45-day liquidity, and operational liquidity.
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 first six months of 2012. During the recent financial crisis, the Finance Agency provided liquidity guidance to the FHLBanks generally to provide ranges of days within which each FHLBank should maintain positive cash balances based upon different assumptions and scenarios. The Bank has operated within these ranges since the Finance Agency issued this guidance.
In addition, the Bank strives to maintain sufficient liquidity to service debt obligations for at least 45 days, assuming restricted debt market access. The Banks 45-day debt service goal is closely aligned with those recommended by the Finance Agency and reflects the Banks practice of not committing to consolidated obligation settlements beyond 30 days. The Bank met its internal liquidity goal during the first six months of 2012.
The Banks principal source of liquidity is CO 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 Banks ability to access the capital markets at competitive market rates. Although the Bank maintains secured and
46
unsecured lines of credit with money market counterparties, the Banks income and liquidity would be adversely affected if it were not able to access the capital markets at competitive rates for an extended period. Historically, the FHLBanks have had excellent capital market access, although the FHLBanks experienced a decrease in investor demand for consolidated obligation bonds beginning in mid-July 2008 and continuing through the first half of 2009. During that time, the Bank increased its issuance of short-term discount notes as an alternative source of funding. The Banks funding costs and ability to issue longer-term and structured debt generally have returned to pre-2008 levels, but continue to reflect some market volatility.
Contingency plans are in place that prioritize the allocation of liquidity resources in the event of operational disruptions at the Bank or the Office of Finance, as well as systemic Federal Reserve wire transfer system disruptions. Under the FHLBank Act, the Secretary of Treasury has the authority, at his discretion, to purchase COs up to an aggregate amount of $4.0 billion. No borrowings under this authority have been outstanding since 1977.
Off-balance Sheet Commitments
The Banks primary off-balance sheet commitments are as follows:
| the Banks joint and several liability for all FHLBank COs; and |
| the Banks outstanding commitments arising from standby letters of credit. |
Should an FHLBank be unable to satisfy its payment obligation under a CO 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 liabilities 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 as of June 30, 2012 and December 31, 2011. As of June 30, 2012, the FHLBanks had $685.2 billion in aggregate par value of COs issued and outstanding, $109.3 billion of which was attributable to the Bank. No FHLBank has ever defaulted on its principal or interest payments under any CO, 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.
Refer to Note 13 Commitments and Contingencies in the Banks interim financial statements for the amount of outstanding standby letters of credit as of June 30, 2012 and December 31, 2011. The Bank expects its overall standby letter of credit activity to remain relatively stable for the near future.
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
47
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 beneficiarys 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 Banks underwriting and collateral requirements for standby letters of credit are the same or in some instances more stringent as those requirements for advances. Based on managements credit analyses and collateral requirements, the Bank does not deem it necessary to have an allowance for credit losses for these unfunded standby letters of credit as of June 30, 2012. Management regularly reviews its standby letter of credit pricing in light of several factors, including the Banks potential liquidity needs related to draws on its standby letters of credit.
Contractual Obligations
As of June 30, 2012, there has been no material change outside the ordinary course of business in the Banks contractual obligations as reported in the Banks Form 10-K.
Legislative and Regulatory Developments
The legislative and regulatory environment in which the Bank operates continues to undergo rapid change driven principally by regulations enacted pursuant to the Housing and Economic Reform Act of 2008, as amended (Housing Act) and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). The Banks business operations, funding costs, rights, obligations, and/or the environment in which the Bank carries out its housing finance mission are likely to continue to be significantly impacted by these changes. Significant regulatory actions and developments for the period covered by this report are summarized below.
Dodd-Frank Act Developments
Definitions of Certain Terms under New Derivatives Requirements. 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 U.S. Commodity Futures Trading Commission (the CFTC) and/or the SEC. Based on the definitions in the final rules jointly issued by the CFTC and SEC in April 2012, the Bank is not expected be required to register as either a major swap participant or as a swap dealer because of the derivative transactions that the Bank enters into for the purposes of hedging and managing interest rate risk or the derivatives transactions that the Bank intermediates for member institutions.
Based on the final rules and accompanying interpretive guidance jointly issued by the CFTC and SEC in July 2012, call and put optionality in certain advances to member institutions will not be treated as swaps as long as the optionality relates solely to the interest rate on the advance and does not result in enhanced or inverse performance or other risks unrelated to the interest rate. Accordingly, the Banks ability to offer these advance products to member customers should not be affected by the new derivatives regulation.
Mandatory Clearing of 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
48
facilities. As further discussed in the Banks Form 10-K, cleared swaps will be subject to new requirements including mandatory reporting, recordkeeping and documentation requirements established by applicable regulators and initial and variation margin requirements established by the clearinghouse and its clearing members.
The CFTC recently finalized an end-user exception to mandatory clearing that would not apply to the derivatives transactions that the Bank enters into to hedge and manage its interest rate risk but that would apply to derivatives transactions that the Bank intermediates for member institutions with $10 billion or less in assets, as long as the member uses the swaps to hedge or mitigate the members commercial risk. As a result, the Bank could continue to intermediate swaps for member institutions with $10 billion or less in assets on an uncleared basis, subject to the new requirements for uncleared swaps discussed below. The Bank is evaluating the feasibility of continuing to intermediate derivatives transactions as uncleared swaps.
Uncleared Derivatives Transactions. 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 requirements, including mandatory reporting, recordkeeping, documentation, and minimum margin and capital requirements established by applicable regulators. These requirements are discussed in the Banks Form 10-K. At this time, the Bank does not expect to have to comply with such requirements until the beginning of 2013, at the earliest.
The CFTC, the SEC, the Finance Agency, and other bank regulators are expected to continue to issue final rulemakings implementing the foregoing requirements between now and the end of 2012.
Effectiveness of Key Rules for Derivatives Transactions. Many of the provisions of the Dodd-Frank Act that will have the most effect on the Bank will take effect on a date determined by the CFTC, which must be no less than 60 days after the CFTC publishes final regulations implementing such provisions. Compliance dates for certain of these rulemakings that have been finalized and published by the CFTC, including new recordkeeping and reporting requirements, are based on the effectiveness of the final rules further defining the term swap jointly issued by the CFTC and SEC. Such final rules were issued in July 2012 but have not been published in the Federal Register and will not become effective until at least 60 days after they are published in the Federal Register. The implementation timeframe for mandatory clearing of eligible interest rate swaps is based on the effectiveness of the CFTCs eligibility determinations, which were released in proposed form for interest rate swaps on July 24, 2012. The CFTC will finalize these determinations in the beginning of November 2012, and the Bank will have to clear eligible interest rate swaps within 180 days after publication of the final determinations, which the Bank estimates will be sometime during second quarter 2013.
The Bank, together with the other FHLBanks, will continue to monitor these rulemakings and the overall regulatory process to implement the derivatives reform under the Dodd-Frank Act. The Bank will also continue to work with the other FHLBanks to implement the processes and documentation necessary to comply with the Dodd-Frank Acts new requirements for derivatives.
Oversight Council Final Rule on SIFI Designation. On April 11, 2012, the Financial Stability Oversight Council (the Oversight Council) issued a final rule and guidance on the standards and procedures the Oversight Council will follow in determining whether to designate a nonbank financial company for supervision by the Federal Reserve and to be subject to certain heightened prudential standards. The rule became effective May 11, 2012. If the Oversight Council designates the Bank as a nonbank financial company
49
subject to supervision by the Federal Reserve, the Bank would be subject to a separate prudential standards rule that has been proposed by the Federal Reserve, but is not yet final. The guidance issued with this final rule provides that the Oversight Council expects generally to follow a process in making its determinations consisting of:
| a first stage that will identify those nonbank financial companies that have $50 billion or more of total consolidated assets and exceed any one of five threshold indicators of interconnectedness or susceptibility to material financial distress, including whether a company has $20 billion or more in total debt outstanding. As of June 30 , 2012, the Bank had $119.4 billion in total assets and $110.5 billion in total outstanding consolidated obligations, the Banks principal form of outstanding debt; |
| a second stage involving a robust analysis of the potential threat that the subject nonbank financial company could pose to U.S. financial stability based on additional quantitative and qualitative factors that are both industry and company specific; and |
| a third stage analyzing the subject nonbank financial company using information collected directly from it. |
The final rule provides that, in making its determinations, the Oversight Council will consider as one factor whether the nonbank financial company is subject to oversight by a primary financial regulatory agency (for the Bank, the Finance Agency). A nonbank financial company that the Oversight Council proposes to designate for additional supervision and prudential standards under this rule has the opportunity to contest the designation. To date, the Bank has not received any request for information or communication from the Oversight Council pursuant to the final rule and guidance.
Significant Finance Agency Developments
Final Rule on Prudential Management and Operations Standards. On June 8, 2012, the Finance Agency issued a final rule regarding prudential standards for the operation and management of the FHLBanks, including, among others, prudential standards for internal controls and information systems, internal audit systems, market and interest rate risks, liquidity, asset growth, investments, credit and counterparty risk management, and records maintenance. The rule requires an FHLBank that fails to meet a standard to file a corrective action plan with the Finance Agency within 30 calendar days. If an acceptable corrective action plan is not submitted by the deadline or the terms of such a plan are not complied with, the Director can impose sanctions, such as limits on asset growth, increases in the level of retained earnings, and prohibitions on dividends or the redemption or repurchase of capital stock. The final rule became effective August 7, 2012.
Advisory Bulletin on Asset Classification. On April 9, 2012, the Finance Agency issued Advisory Bulletin 2012-02, Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention (AB 2012-02), effective the date of issuance. AB 2012-02 establishes a standard and uniform methodology for adverse classification and identification of special mention assets and off-balance sheet credit exposures at the FHLBanks, excluding investment securities. The Bank does not expect adoption of the accounting guidance in AB 2012-02 to have a significant impact on the Banks financial condition or results of operations.
Other Significant Developments
Basel Committee on Banking Supervision Capital Framework. In September 2010, the Basel Committee on Banking Supervision (Basel Committee) approved a new capital framework for internationally active banks. Banks subject to the new framework will be required to have increased amounts of capital with core capital being more strictly defined to include only common equity and other capital assets that are able to fully absorb losses.
On June 7, 2012, the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (Agencies) concurrently published three joint notices of proposed
50
rulemaking (NPRs) seeking comments on comprehensive revisions to the Agencies capital framework to incorporate the Basel Committees new capital framework.
These revisions would, among other things:
| implement the Basel Committees capital standards related to minimum requirements, regulatory capital, and additional capital buffers; |
| revise the methodologies for calculating risk-weighted assets in the general risk-based capital rules; and |
| revise the approach by which large banks determine their capital adequacy. |
The NPRs do not incorporate the reforms related to liquidity risk management published in Basel III, which the Agencies are expected to propose in a separate rulemaking.
If the new NPRs are adopted as proposed and depending on the liquidity framework expected to be proposed by the Agencies, some of the Banks members may need to divest assets in order to comply with the more stringent capital and liquidity requirements, thereby tending to decrease their need for advances. The requirements may also adversely impact investor demand for COs to the extent that affected institutions divest or limit their investments in COs. On the other hand, any new liquidity requirements could motivate Bank members to borrow term advances from the Bank to create and maintain balance sheet liquidity.
Risk Management
The Banks lending, investment, and funding activities and the use of derivative hedge instruments expose the Bank to a number of risks. A robust risk management framework aligns risk-taking activities with the Banks strategies and risk appetite. A risk management framework also balances risks and rewards. The Banks risk management framework consists of risk governance, risk appetite, and risk management policies.
The Banks board of directors and management recognize that risks are inherent to the Banks business model and that the process of establishing a risk appetite does not imply that the Bank seeks to mitigate or eliminate all risk. By defining and managing to a specific risk appetite, the board of directors and management ensure that there is a common understanding of the Banks desired risk profile which enhances their ability to make improved strategic and tactical decisions. Additionally, the Bank aspires to achieve and exceed best practices in governance, ethics, and compliance, and to sustain a corporate culture that fosters transparency, integrity, and adherence to legal and ethical obligations.
The Banks board of directors and management have established this risk appetite statement and risk metrics for controlling and escalating actions based on the nine continuing objectives that represent the foundation of the Banks strategic and tactical planning, as described in the Banks Form 10-K.
Discussion of the Banks management of its credit risk and market risk is provided below. Further discussion of these risks, as well as the Banks management of its liquidity, operational, and business risks, is contained in the Banks Form 10-K.
51
Credit Risk
The Bank faces credit risk primarily with respect to its advances, investments, derivatives and mortgage loan assets.
Advances
Secured advances to member financial institutions account for the largest category of Bank assets; thus, advances are a major source of the Banks 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 institutions 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 managements assessment of the borrower and its collateral.
The following table sets forth the number of borrowers and the par amount of advances outstanding to borrowers with the specified ratings as of the specified dates (dollars in millions).
As of June 30, 2012 |
As of December 31, 2011 | |||||||
Rating |
Number of Borrowers |
Outstanding
|
Number of Borrowers |
Outstanding
| ||||
1-9 |
518 | $ 75,116 | 536 | $ 78,355 | ||||
10 |
98 | 2,215 | 117 | 3,033 |
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 borrowers 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 borrowers overall creditworthiness. The credit limit generally is expressed as a percentage equal to the ratio of the borrowers 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 borrowers total assets. Generally, borrowers are held to a credit limit of no more than 30 percent. However, the Banks board of directors, or a relevant committee thereof, may approve a higher limit at its discretion, and such borrowers may be subject to certain additional collateral reporting and maintenance requirements. As of June 30, 2012, nine 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
52
of qualifying collateral for purposes of determining the amount of credit that such qualifying collateral will support. For each type of qualifying collateral, the Bank discounts the market value of the qualifying collateral to calculate the LCV. The Bank regularly reevaluates the appropriate level of discounting. The following table provides information about the types of collateral held for the Banks advances (dollars in millions).
Total Par Value of Outstanding Advances |
LCV of Collateral Pledged by Members |
First Mortgage Collateral (%) |
Securities Collateral (%) |
Other Real Estate Related Collateral (%) |
||||||||||||||||
As of June 30, 2012 |
$ | 77,612 | $ | 189,836 | 66.60 | 8.60 | 24.80 | |||||||||||||
As of December 31, 2011 |
82,569 | 188,597 | 64.36 | 10.93 | 24.71 |
For purposes of determining each members LCV, the Bank generally estimates the current market value of all loans pledged as collateral based on information provided by the member on individual loans or its loan portfolio through the regular collateral reporting process. The estimated market value is discounted to account for the price volatility of loans as well as estimated liquidation and servicing costs in the event of the members default. Market values, and thus LCVs, change monthly. The Bank believes a market-based valuation methodology allows the Bank to establish its collateral discounts with greater precision and greater transparency with respect to the valuation of collateral pledged for advances and other credit products offered by the Bank.
The following table provides information on FDIC-insured institutions that were placed into receivership during the periods indicated.
Three Months Ended June 30, |
Six Months Ended June 30, | |||||||||||||
2012 |
2011 |
2012 |
2011 | |||||||||||
FHLBank Atlanta members |
8 | 15 | 14 | 25 | ||||||||||
Non-FHLBank Atlanta members |
7 | 10 | 17 | 26 | ||||||||||
|
|
|
| |||||||||||
Total FDIC-insured |
15 | 25 | 31 | 51 | ||||||||||
|
|
|
|
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 Bank expects more member institution failures during 2012, but at a lower rate than during 2011 as capital levels, asset quality, and the overall financial condition of member institutions slowly improve.
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 of a party that (1) would be entitled to priority under otherwise applicable law; and (2) is an actual bona fide purchaser for value or is an actual secured party whose security interest is perfected in accordance with applicable state law.
53
In its history, the Bank has never experienced a credit loss on an advance. In consideration of this, and the Banks policies and practices detailed above, the Bank has not established an allowance for credit losses on advances as of June 30, 2012 and December 31, 2011.
Investments
The Bank is subject to credit risk on certain unsecured investments, including interest-bearing deposits, certificates of deposit 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 Banks mortgage purchase programs; (2) certain investments targeted to low-income people or communities; (3) certain marketable direct obligations of state, local, or tribal government units or agencies having at least the second highest credit rating from a NRSRO; (4) MBS or asset-backed securities backed by manufactured housing loans or home equity loans; and (5) certain foreign housing loans authorized under section 12(b) of the FHLBank Act; |
| interest-only or principal-only stripped MBS, collateralized mortgage obligations (CMOs), collateralized debt obligations, 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 Banks 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 regular basis, management produces financial monitoring reports detailing the financial condition of the Banks counterparties. These reports are reviewed by the Banks board of directors. In light of significant European sovereign credit concerns which triggered falling equity prices and higher credit default swap spreads during the third quarter of 2011, the Bank suspended overnight
54
and term trading with its French counterparties, and the Bank has limited term trades and capped overnight trades with certain European counterparties based on their financial condition. The Bank may further limit or suspend overnight and term trading in addition to RMP and regulatory requirements. Limiting or suspending counterparties limits the pool of available counterparties, shifts the geographical concentration of counterparty exposure, and may reduce the Banks overall short-term investment opportunities. As noted above, Finance Agency regulations prohibit the Bank from investing in non-U.S. sovereign debt.
The Bank enters into investments only with U.S. counterparties or U.S. branches and agency offices of foreign commercial banks that have been approved by the Bank through its internal approval process, but may have exposure to foreign entities if a counterpartys parent entity is located in another country. The tables below represent the Banks gross exposure, by instrument type, according to the location of the parent company of the counterparty (in millions):
As of June 30, 2012 | ||||||||||||||||||||
Federal Funds Sold |
Interest-bearing Deposits |
Certificates |
Net Derivative Exposure (1) |
Total | ||||||||||||||||
Australia |
$ | 860 | $ | | $ | | $ | | $ | 860 | ||||||||||
Canada |
2,320 | | | | 2,320 | |||||||||||||||
France |
| | | 4 | 4 | |||||||||||||||
Germany |
| | | 34 | 34 | |||||||||||||||
Japan |
| | 625 | | 625 | |||||||||||||||
Norway |
1,265 | | | | 1,265 | |||||||||||||||
Sweden |
3,175 | | | | 3,175 | |||||||||||||||
United Kingdom |
625 | | | | 625 | |||||||||||||||
United States of America |
4,803 | 1,104 | | 8 | 5,915 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 13,048 | $ | 1,104 | $ | 625 | $ | 46 | $ | 14,823 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Amounts do not reflect collateral; see the table under Risk Management Credit Risk Derivatives below for a breakdown of the credit ratings of and the Banks credit exposure to derivative counterparties, including net exposure after collateral. |
55
As of December 31, 2011 | ||||||||||||||||||||
Federal Funds Sold |
Interest-bearing Deposits |
Certificates |
Net Derivative Exposure (1) |
Total | ||||||||||||||||
Australia |
$ | 1,335 | $ | | $ | | $ | | $ | 1,335 | ||||||||||
Canada |
2,050 | | | | 2,050 | |||||||||||||||
France |
| | | 3 | 3 | |||||||||||||||
Germany |
1,225 | | | 37 | 1,262 | |||||||||||||||
Japan |
| | 650 | | 650 | |||||||||||||||
Norway |
950 | | | | 950 | |||||||||||||||
Spain |
575 | | | 5 | 580 | |||||||||||||||
Sweden |
3,090 | | | | 3,090 | |||||||||||||||
Switzerland |
400 | | | | 400 | |||||||||||||||
United Kingdom |
1,700 | | | | 1,700 | |||||||||||||||
United States of America |
1,305 | 1,203 | | | 2,508 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 12,630 | $ | 1,203 | $ | 650 | $ | 45 | $ | 14,528 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Amounts do not reflect collateral; see the table under Risk Management Credit Risk Derivatives below for a breakdown of the credit ratings of and the Banks credit exposure to derivative counterparties, including net exposure after collateral. |
The Bank experienced an increase in unsecured credit exposure in its investment portfolio related to non-U.S. government or non-U.S. government agency counterparties from $14.5 billion as of December 31, 2011 to $14.8 billion as of June 30, 2012. There were five such counterparties that represented 50.6 percent, and three such counterparties, Bank of Nova Scotia, Bank of New York Mellon, and Svenska Handelsbanken, 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. None of the foregoing named counterparties is a member, or advances borrower, of the Bank. The Banks unsecured credit portfolio currently consists of securities with scheduled maturities of less than 90 days and is comprised primarily of federal funds sold.
The Banks 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 Moodys 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.
56
The tables below provide information on the credit ratings of the Banks investments held as of June 30, 2012 and December 31, 2011, based on their credit ratings as of June 30, 2012 and December 31, 2011 (in millions). The credit ratings reflect the lowest long-term credit rating as reported by an NRSRO.
|
As of June 30, 2012
Carrying Value (1) |
| ||||||||||||||||||||||||||||||||||||||
Investment Grade | Below Investment Grade | |||||||||||||||||||||||||||||||||||||||
AAA | AA | A | BBB | BB | B | CCC | CC | C | D | |||||||||||||||||||||||||||||||
Short-term investments: |
||||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits |
$ | | $ | 2 | $ | 1,102 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||||||||
Certificates of deposit |
| | 625 | | | | | | | | ||||||||||||||||||||||||||||||
Federal funds sold |
| 7,378 | 5,670 | | | | | | | | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total short-term investments |
| 7,380 | 7,397 | | | | | | | | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Long-term investments: |
||||||||||||||||||||||||||||||||||||||||
State or local housing agency debt obligations |
| 116 | | | | | | | | | ||||||||||||||||||||||||||||||
U.S. government agency debt obligations |
| 3,964 | | | | | | | | | ||||||||||||||||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||||||||||||||||||||||
U.S. government agency securities |
| 10,930 | | | | | | | | | ||||||||||||||||||||||||||||||
Private label |
480 | 223 | 534 | 461 | 762 | 835 | 1,187 | 686 | 513 | 233 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total mortgage-backed securities |
480 | 11,153 | 534 | 461 | 762 | 835 | 1,187 | 686 | 513 | 233 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total long-term investments |
480 | 15,233 | 534 | 461 | 762 | 835 | 1,187 | 686 | 513 | 233 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total investments |
$ | 480 | $ | 22,613 | $ | 7,931 | $ | 461 | $ | 762 | $ | 835 | $ | 1,187 | $ | 686 | $ | 513 | $ | 233 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
(1) Investment amounts noted in the above table represent the carrying value and do not include related accrued interest receivable of $67 million as of June 30, 2012. |
| |||||||||||||||||||||||||||||||||||||||
As of December 31, 2011
Carrying Value (1) |
||||||||||||||||||||||||||||||||||||||||
Investment Grade | Below Investment Grade | |||||||||||||||||||||||||||||||||||||||
AAA | AA | A | BBB | BB | B | CCC | CC | C | D | |||||||||||||||||||||||||||||||
Short-term investments: |
||||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits |
$ | | $ | 2 | $ | 1,201 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||||||||
Certificates of deposit |
| | 650 | | | | | | | | ||||||||||||||||||||||||||||||
Federal funds sold |
| 5,825 | 6,805 | | | | | | | | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total short-term investments |
| 5,827 | 8,656 | | | | | | | | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Long-term investments: |
||||||||||||||||||||||||||||||||||||||||
State or local housing agency debt obligations |
| 103 | | | | | | | | | ||||||||||||||||||||||||||||||
U.S. government agency debt obligations |
| 4,228 | | | | | | | | | ||||||||||||||||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||||||||||||||||||||||
U.S. government agency securities |
| 10,689 | | | | | | | | | ||||||||||||||||||||||||||||||
Private label |
664 | 314 | 757 | 559 | 689 | 891 | 1,394 | 663 | 689 | 15 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total mortgage-backed securities |
664 | 11,003 | 757 | 559 | 689 | 891 | 1,394 | 663 | 689 | 15 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
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|
|||||||||||||||||||||
Total long-term investments |
664 | 15,334 | 757 | 559 | 689 | 891 | 1,394 | 663 | 689 | 15 | ||||||||||||||||||||||||||||||
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Total investments |
$ | 664 | $ | 21,161 | $ | 9,413 | $ | 559 | $ | 689 | $ | 891 | $ | 1,394 | $ | 663 | $ | 689 | $ | 15 | ||||||||||||||||||||
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(1) | Investment amounts noted in the above table represent the carrying value and do not include related accrued interest receivable of $83 million as of December 31, 2011. |
57
Subsequent to June 30, 2012, $215 million, or 0.60 percent, of the Banks investments has been downgraded as of July 31, 2012 as outlined in the table below (in millions):
Investment Ratings |
Downgrades - Balances Based on Carrying Values at June 30, 2012 |
|||||||||
As of June 30, 2012 |
As of July 31, 2012 |
Private-label MBS | ||||||||
From |
To |
Carrying Value | Fair Value | |||||||
AA |
A | $ | 21 | $ | 21 | |||||
A |
BBB | 3 | 3 | |||||||
CC |
D | 154 | 154 | |||||||
C |
D | 37 | 37 | |||||||
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|
|
|||||||
Total |
$ | 215 | $ | 215 | ||||||
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|
|
The following table presents all investments, excluding overnight investments, held on June 30, 2012 and on negative watch as of July 31, 2012 (in millions):
On Negative Watch - Balances Based on Carrying Values as of June 30, 2012 |
||||||||
Private-label MBS | ||||||||
Investment Ratings |
Carrying Value | Fair Value | ||||||
AA |
$ | 9 | $ | 9 | ||||
A |
48 | 49 | ||||||
BBB |
75 | 75 | ||||||
BB |
74 | 73 | ||||||
CC |
29 | 29 | ||||||
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|
|
|
|||||
Total |
$ | 235 | $ | 235 | ||||
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|
Private-label MBS
As of June 30, 2012, the Banks long-term investment portfolio included $5.9 billion of private-label MBS, which represented 28.3 percent of the carrying value of the Banks long-term investment portfolio. 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. As of June 30, 2012, based on the classification by the originator at the time of origination, approximately 87.0 percent of the underlying mortgages collateralizing the Banks private-label MBS were considered prime and the remaining underlying mortgages collateralizing these securities were considered Alt-A.
58
The table below provides information on the interest-rate payment terms of the Banks private-label MBS backed by prime and Alt-A loans (in millions).
As of June 30, 2012 | As of December 31, 2011 | |||||||||||||||||||||||
Fixed-Rate | Variable-Rate | Total | Fixed-Rate | Variable-Rate | Total | |||||||||||||||||||
Prime |
$ | 666 | $ | 5,264 | $ | 5,930 | $ | 933 | $ | 5,751 | $ | 6,684 | ||||||||||||
Alt-A |
391 | 496 | 887 | 451 | 529 | 980 | ||||||||||||||||||
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Total unpaid principal balance |
$ | 1,057 | $ | 5,760 | $ | 6,817 | $ | 1,384 | $ | 6,280 | $ | 7,664 | ||||||||||||
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The tables below provide additional information, including changes in ratings since the original purchase date, on the Banks private-label MBS by year of securitization as of June 30, 2012 (dollars in millions).
Year of Securitization - Prime | ||||||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 and
Prior |
Total | |||||||||||||||||||
Investment Ratings: |
||||||||||||||||||||||||
AAA |
$ | | $ | | $ | | $ | 19 | $ | 464 | $ | 483 | ||||||||||||
AA |
| | | | 219 | 219 | ||||||||||||||||||
A |
| | | 170 | 245 | 415 | ||||||||||||||||||
BBB |
| 23 | | 19 | 208 | 250 | ||||||||||||||||||
BB |
| 43 | 7 | 288 | 339 | 677 | ||||||||||||||||||
B |
| | | 289 | 517 | 806 | ||||||||||||||||||
CCC |
46 | 546 | 92 | 578 | 65 | 1,327 | ||||||||||||||||||
CC |
115 | 298 | 168 | 234 | | 815 | ||||||||||||||||||
C |
| 212 | 367 | 15 | | 594 | ||||||||||||||||||
D |
| 85 | 192 | 67 | | 344 | ||||||||||||||||||
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|||||||||||||
Total unpaid principal balance |
$ | 161 | $ | 1,207 | $ | 826 | $ | 1,679 | $ | 2,057 | $ | 5,930 | ||||||||||||
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Amortized cost |
$ | 143 | $ | 963 | $ | 676 | $ | 1,559 | $ | 2,038 | $ | 5,379 | ||||||||||||
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Gross unrealized losses |
$ | (3) | $ | (55) | $ | (35) | $ | (121) | $ | (100) | $ | (314) | ||||||||||||
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Fair value |
$ | 140 | $ | 919 | $ | 646 | $ | 1,439 | $ | 1,957 | $ | 5,101 | ||||||||||||
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|||||||||||||
Other-than-temporary impairment (Year-to-date): |
||||||||||||||||||||||||
Credit-related losses |
$ | | $ | (5) | $ | (9) | $ | (1) | $ | | $ | (15) | ||||||||||||
Non-credit-related losses |
| (5) | (9) | (1) | | (15) | ||||||||||||||||||
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|||||||||||||
Total other-than-temporary impairment losses |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
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Weighted average percentage of fair value to unpaid principal balance |
87.33% | 76.12% | 78.14% | 85.73% | 95.18% | 86.03% | ||||||||||||||||||
Original weighted average credit support |
15.72% | 13.77% | 10.21% | 6.72% | 3.34% | 7.71% | ||||||||||||||||||
Weighted average credit support |
10.25% | 4.33% | 2.14% | 6.28% | 8.36% | 6.14% | ||||||||||||||||||
Weighted average collateral delinquency |
18.22% | 25.07% | 21.71% | 12.75% | 8.26% | 15.10% |
59
Year of Securitization Alt-A | ||||||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 and Prior |
Total | |||||||||||||||||||
Investment Ratings: |
||||||||||||||||||||||||
AAA |
$ | | $ | | $ | | $ | | $ | 1 | $ | 1 | ||||||||||||
AA |
| | | | 5 | 5 | ||||||||||||||||||
A |
| | | | 121 | 121 | ||||||||||||||||||
BBB |
| | | | 211 | 211 | ||||||||||||||||||
BB |
| | | | 88 | 88 | ||||||||||||||||||
B |
| | | | 65 | 65 | ||||||||||||||||||
CCC |
| | | 174 | | 174 | ||||||||||||||||||
CC |
| | | 166 | | 166 | ||||||||||||||||||
C |
| 56 | | | | 56 | ||||||||||||||||||
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|
|
|||||||||||||
Total unpaid principal balance |
$ | | $ | 56 | $ | | $ | 340 | $ | 491 | $ | 887 | ||||||||||||
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|||||||||||||
Amortized cost |
$ | | $ | 41 | $ | | $ | 276 | $ | 492 | $ | 809 | ||||||||||||
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|||||||||||||
Gross unrealized losses |
$ | | $ | (4) | $ | | $ | (82) | $ | (4) | $ | (90) | ||||||||||||
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Fair value |
$ | | $ | 37 | $ | | $ | 194 | $ | 494 | $ | 725 | ||||||||||||
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|||||||||||||
Other-than-temporary impairment (Year-to-date): |
||||||||||||||||||||||||
Credit-related losses |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Non-credit-related losses |
| | | | | | ||||||||||||||||||
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|
|||||||||||||
Total other-than-temporary impairment losses |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
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|
|||||||||||||
Weighted average percentage of fair value to unpaid principal balance |
0.00% | 66.50% | 0.00% | 57.02% | 100.51% | 81.72% | ||||||||||||||||||
Original weighted average credit support |
0.00% | 12.29% | 0.00% | 26.07% | 7.25% | 14.77% | ||||||||||||||||||
Weighted average credit support |
0.00% | (0.77)% | 0.00% | 18.21% | 11.63% | 13.36% | ||||||||||||||||||
Weighted average collateral delinquency |
0.00% | 34.75% | 0.00% | 37.91% | 7.23% | 20.71% |
The following table represents a summary of the significant inputs used to evaluate each of the Banks private-label MBS for other-than-temporary impairment:
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 |
7.04 | 7.04 to 7.04 | 30.92 | 30.92 to 30.92 | 45.04 | 45.04 to 45.04 | 10.25 | 9.47 to 12.21 | ||||||||||||||||||||||||
2007 |
12.52 | 7.92 to 35.72 | 18.21 | 1.72 to 23.01 | 39.66 | 23.72 to 52.81 | 4.42 | 1.66 to 8.12 | ||||||||||||||||||||||||
2006 |
8.10 | 5.95 to 30.68 | 32.02 | 6.93 to 40.91 | 42.29 | 33.09 to 49.31 | 2.82 | 0.00 to 7.32 | ||||||||||||||||||||||||
2005 |
12.17 | 5.21 to 17.58 | 12.73 | 1.40 to 26.50 | 32.11 | 20.08 to 44.46 | 6.80 | 3.73 to 13.67 | ||||||||||||||||||||||||
2004 and prior |
17.98 | 5.73 to 40.30 | 8.17 | 0.00 to 23.89 | 25.85 | 0.00 to 43.11 | 8.00 | 2.52 to 43.58 | ||||||||||||||||||||||||
Total Prime |
14.31 | 5.21 to 40.30 | 13.74 | 0.00 to 40.91 | 31.38 | 0.00 to 52.81 | 6.89 | 0.00 to 43.58 | ||||||||||||||||||||||||
Alt-A: |
||||||||||||||||||||||||||||||||
2007 |
6.42 | 4.34 to 8.01 | 55.09 | 44.30 to 63.59 | 48.53 | 43.79 to 53.48 | 3.98 | (0.77) to 9.41 | ||||||||||||||||||||||||
2006 |
6.76 | 6.03 to 7.26 | 53.57 | 45.08 to 60.35 | 52.30 | 43.46 to 58.78 | 1.46 | 0.00 to 4.37 | ||||||||||||||||||||||||
2005 |
6.73 | 2.36 to 9.26 | 48.93 | 29.46 to 77.19 | 50.46 | 42.30 to 60.08 | 10.69 | (0.02) to 35.58 | ||||||||||||||||||||||||
2004 and prior |
13.03 | 7.91 to 17.14 | 13.20 | 1.14 to 43.60 | 30.35 | 18.01 to 78.41 | 12.04 | 3.67 to 38.77 | ||||||||||||||||||||||||
Total Alt-A |
8.08 | 2.36 to 17.14 | 43.45 | 1.14 to 77.19 | 45.46 | 18.01 to 78.41 | 7.36 | (0.77) to 38.77 | ||||||||||||||||||||||||
Total |
11.84 | 2.36 to 40.30 | 25.52 | 0.00 to 77.19 | 36.97 | 0.00 to 78.41 | 7.08 | (0.77) to 43.58 |
60
For those securities for which an other-than-temporary impairment was determined to have occurred during the second quarter of 2012, a summary of the significant inputs used to measure the amount of the credit loss recognized in earnings is contained in Note 6Other-than-temporary Impairment to the Banks interim financial statements.
The tables below summarize the total other-than-temporary impairment losses by newly impaired and previously impaired securities (in millions):
Three Months Ended June 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Credit Losses |
Net Noncredit Losses |
Total Losses |
Credit Losses |
Net Noncredit Losses |
Total Losses |
|||||||||||||||||||
Securities newly impaired during the period |
$ | | $ | | $ | | $ | (1) | $ | 6 | $ | (7) | ||||||||||||
Securities previously impaired prior to current period (1) |
(8) | (8) | | (36) | (31) | (5) | ||||||||||||||||||
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|
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|
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|
|||||||||||||
Total |
$ | (8) | $ | (8) | $ | | $ | (37) | $ | (25) | $ | (12) | ||||||||||||
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|
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(1) | For the three months ended June 30, 2012 and 2011, Securities previously impaired prior to current period represents all securities that were also previously impaired prior to April 1, 2012 and 2011, respectively. |
Six Months Ended June 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Credit Losses |
Net Noncredit Losses |
Total Losses |
Credit Losses |
Net Noncredit Losses |
Total Losses |
|||||||||||||||||||
Securities newly impaired during the period |
$ | | $ | | $ | | $ | (7) | $ | 26 | $ | (33) | ||||||||||||
Securities previously impaired prior to current period (1) |
(15) | (15) | | (82) | (78) | (4) | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | (15) | $ | (15) | $ | | $ | (89) | $ | (52) | $ | (37) | ||||||||||||
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|
|
(1) | For the six months ended June 30, 2012 and 2011, Securities previously impaired prior to current period represents all securities that were also previously impaired prior to January 1, 2012 and 2011, respectively. |
In addition to the cash flow analysis of the Banks private-label MBS under a base case (best estimate) housing price scenario as described in Note 6Other-than-temporary Impairment to the Banks interim financial statements, a cash flow analysis was also performed based on a housing price scenario that is more adverse than the base case (adverse case housing price scenario). 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 five percent to 11.0 percent over the three- to nine-month period beginning April 1, 2012. For most of the housing markets, the declines were projected to occur over the three-month period beginning April 1, 2012.
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 months under the adverse case scenario:
61
Months | Annualized Rates (%) | |
1 to 6 |
0.00 to 1.90 | |
7 to 18 |
0.00 to 2.00 | |
19 to 24 |
0.70 to 2.70 | |
25 to 30 |
1.30 to 2.70 | |
31 to 42 |
1.30 to 3.40 | |
43 to 66 |
1.30 to 4.00 | |
Thereafter |
1.50 to 3.80 |
The adverse case housing price scenario and associated results do not represent the Banks current expectations, and therefore should not be construed as a prediction of the Banks 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 Banks base case assessment.
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 securitys amortized cost basis and fair value, because the Bank believes fair value would decrease in the adverse case housing price scenario.
Three Months Ended June 30, 2012 | ||||||||||||||||||||||||
Housing Price Scenario | ||||||||||||||||||||||||
Base Case (2) | 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 |
|||||||||||||||||||
Prime loans (1) |
11 | $ | 492 | $ | (8 | ) | 40 | $ | 2,365 | $ | (39 | ) | ||||||||||||
Alt-A (1) |
1 | 166 | | 6 | 452 | (8 | ) | |||||||||||||||||
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|
|
|
|
|
|
|
|
|||||||||||||
Total |
12 | $ | 658 | $ | (8 | ) | 46 | $ | 2,817 | $ | (47 | ) | ||||||||||||
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|
|
(1) | Based on the originators classification of collateral at the time of origination or based on classification of collateral by an NRSRO upon issuance of the MBS. |
(2) | Represents securities and related other-than-temporary-impairment credit losses for the three months ended June 30, 2012. |
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 Banks future modeling assumptions. Many factors could influence the Banks future modeling assumptions, including economic, financial market, and housing market conditions. If performance of the underlying loan collateral deteriorates and/or the Banks modeling assumptions become more pessimistic, the Bank could experience further losses on its investment portfolio.
Non-Private-label MBS. The unrealized losses related to U.S. agency MBS are caused by interest rate changes. Because these securities are guaranteed by government agencies or government-sponsored enterprises, it is expected that these securities would not be settled at a price less than the amortized cost basis. The Bank does not consider these investments to be other-than-temporarily impaired as of June 30,
62
2012 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. In light of significant European sovereign credit concerns, beginning in the third quarter of 2011, the Bank suspended new derivative transactions with French counterparties. The Bank may further limit or suspend derivative transactions for other European counterparties in addition to RMP and regulatory requirements.
As of June 30, 2012, the Bank had $133.5 billion in total notional amount of derivatives outstanding compared to $139.7 billion at December 31, 2011. 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 Banks exposure to credit and market risk. The amount potentially subject to credit loss is based upon the counterpartys net payment obligations. The credit risk of derivatives is measured on a portfolio basis by netting the market values of all outstanding transactions for each counterparty.
As of June 30, 2012, 90.1 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 three, BNP Paribas, Deutsche Bank AG, and Goldman Sachs Group, Inc., that each represented more than 10 percent of the Banks total notional amount, and there were two counterparties, Deutsche Bank AG, and Goldman Sachs Group, Inc., that represented more than 10 percent of the Banks net exposure. As of December 31, 2011, 95.6 percent of the total notional amount of outstanding derivatives was represented by 18 counterparties with a credit rating of A or better. Of these counterparties, there were three, BNP Paribas, Deutsche Bank AG, and Goldman Sachs Group, Inc., that each represented more than 10 percent of the Banks total notional amount, and there were two counterparties, Deutsche Bank AG and Natixis Financial Products, that represented more than 10 percent of the Banks net exposure. None of the foregoing named counterparties is a member, or advances borrower, of the Bank.
63
The following tables represent the credit ratings of and the Banks credit exposure to its derivative counterparties (in millions):
As of June 30, 2012 | ||||||||||||||||
Notional Amount |
Total Net Exposure at Fair Value (2) |
Total Net Exposure Collateralized |
Net Exposure After Collateral |
|||||||||||||
AA |
$ | 3,647 | $ | | $ | | $ | | ||||||||
A |
116,650 | 45 | 36 | 9 | ||||||||||||
BBB |
13,191 | | | | ||||||||||||
Member institutions (1) |
4 | 1 | 1 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivatives |
$ | 133,492 | $ | 46 | $ | 37 | $ | 9 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
(1) 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. (2) At June 30, 2012, the Bank had net credit exposure of $7 million due to instances where the Banks pledged collateral to a counterparty exceeds the Banks net position. |
| |||||||||||||||
As of December 31, 2011 | ||||||||||||||||
Notional Amount |
Total Net Exposure at Fair Value (2) |
Total Net Exposure Collateralized |
Net Exposure After Collateral |
|||||||||||||
AA |
$ | 3,751 | $ | | $ | | $ | | ||||||||
A |
129,805 | 40 | 27 | 13 | ||||||||||||
BBB |
6,125 | | | | ||||||||||||
Member institutions (1) |
39 | 5 | 5 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivatives |
$ | 139,720 | $ | 45 | $ | 32 | $ | 13 | ||||||||
|
|
|
|
|
|
|
|
(1) | 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. |
(2) | At December 31, 2011, the Bank had net credit exposure of $0 due to instances where the Banks pledged collateral to a counterparty exceeds the Banks net position. |
The maximum credit risk is the estimated cost of replacing interest-rate swaps, forward agreements, mandatory delivery contracts for mortgage loans, and purchased caps and floors that have a net positive market value, if the counterparty defaults and any related collateral pledged to the Bank is of no value to the Bank.
If the Banks 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 $126 million of collateral (at fair value) to its derivative counterparties as of June 30, 2012.
Mortgage Loan Programs
The Bank seeks to manage the credit risk associated with the Mortgage Purchase Program (MPP) and the Mortgage Partnership Finance® Program* (MPF® Program or MPF) by maintaining underwriting and eligibility standards and structuring possible losses into several layers to be shared with the participating financial institution (PFI). In some cases, a portion of the credit support for MPP and MPF loans is provided under a primary and/or supplemental mortgage insurance policy. Currently, eight mortgage insurance companies provide primary and/or supplemental mortgage insurance for loans in which the
* | Mortgage Partnership Finance and MPF are registered trademarks of FHLBank Chicago. |
64
Bank has a retained interest. As of June 30, 2012, all of the Banks mortgage insurance providers have been rated below AA by one or more NRSROs for their claims paying ability or insurer financial strength. Ratings downgrades imply an increased risk that these mortgage insurers may be unable to fulfill their obligations to pay claims that may be made under the insurance policies. The Bank holds additional risk-based capital to mitigate the incremental risk, if any, that results from the supplemental mortgage insurance providers.
As of June 30, 2012 and 2011, the allowance for credit losses on MPF loans was $8 million and $0, respectively. The primary driver for the increased loan loss reserve was the increase in the Banks loss severity estimates. The loss severity rate used in the loan loss reserve methodology for MPF loans increased to 40.30 percent at June 30, 2012 from 19.14 percent at June 30, 2011. The increase was based on weakening performance of the Banks portfolio of MPF loans. The Bank uses actual loss claim data from its MPF loans to estimate future losses and experienced a significant increase in the loss severity amount for claims settled during the period. The loss severity rate does not reflect the application of any credit enhancement that may be available on a given pool. Another factor contributing to the increased loan loss reserve was an increased percentage of seriously delinquent loans. The Banks seriously delinquent rate for conventional single-family residential mortgages increased to 6.48 percent as of June 30, 2012 from 4.98 percent as of June 30, 2011.
Critical Accounting Policies and Estimates
A description of the Banks critical accounting policies and estimates is contained in detail in the Banks Form 10-K. There have been no material changes to these policies and estimates during the period reported.
Recently Issued and Adopted Accounting Guidance
See Note 2Recently Issued and Adopted Accounting Guidance to the Banks 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 Banks Form 10-K. The information provided herein is intended to update the disclosures made in the Banks Form 10-K.
Changes in interest rates and spreads can have a direct effect on the value of the Banks assets and liabilities. As a result of the volume of the Banks interest-earning assets and interest-bearing liabilities, the component of market risk having the greatest effect on the Banks financial condition and results of operations is interest-rate risk. A description of the Banks management of interest-rate risk is contained in the Banks 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.
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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 June 30, 2012 | As of December 31, 2011 | |||||||||||
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 advances fixed rate to a variable rate index. | Fair value hedges |
$ | 8,093 | $ | 13,160 | ||||||
Non-qualifying |
100 | 100 | ||||||||||
Pay fixed, receive variable interest rate swap (with options) | Converts the advances fixed rate to a variable rate index and offsets option risk in the advance. | Fair value hedges |
34,543 | 32,749 | ||||||||
Non-qualifying |
741 | 741 | ||||||||||
Pay variable with embedded features, receive variable interest rate swap (non-callable) | Reduces interest rate sensitivity and repricing gaps by converting the advances variable rate to a different variable rate index and/or offsets embedded option risk in the advance. | Fair value hedges |
3,532 | 864 | ||||||||
Pay variable, receive variable basis swap | Reduces interest rate sensitivity and repricing gaps by converting the advances variable rate to a different variable rate index. | Non-qualifying hedges |
228 | 248 | ||||||||
|
|
|
|
|||||||||
Total | 47,237 | 47,862 | ||||||||||
|
|
|
|
|||||||||
Investments |
||||||||||||
Pay fixed, receive variable interest rate swap | Converts the investments fixed rate to a variable rate index. | Non-qualifying hedges |
1,990 | 2,678 | ||||||||
Pay variable, receive variable interest rate swap | Converts the investments variable rate to a different variable rate index. | Non-qualifying hedges |
50 | 50 | ||||||||
|
|
|
|
|||||||||
Total | 2,040 | 2,728 | ||||||||||
|
|
|
|
|||||||||
Consolidated Obligation Bonds |
||||||||||||
Receive fixed, pay variable interest rate swap (without options) | Converts the bonds fixed rate to a variable rate index. | Fair value hedges |
56,898 | 46,674 | ||||||||
Non-qualifying |
2,500 | 1,100 | ||||||||||
Receive fixed, pay variable interest rate swap (with options) | Converts the bonds fixed rate to a variable rate index and offsets option risk in the bond. | Fair value hedges |
12,064 | 26,403 | ||||||||
Non-qualifying |
| 1,000 | ||||||||||
Receive variable with embedded features, pay variable interest rate swap (callable) | Reduces interest rate sensitivity and repricing gaps by converting the bonds variable rate to a different variable rate index and/or offsets embedded option risk in the bond. | Fair value hedges |
20 | 20 | ||||||||
Receive variable, pay variable basis swap | Reduces interest rate sensitivity and repricing gaps by converting the bonds variable rate to a different variable rate index. | Non-qualifying hedges |
| 100 | ||||||||
|
|
|
|
|||||||||
Total | 71,482 | 75,297 | ||||||||||
|
|
|
|
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As of June 30, 2012 | As of December 31, 2011 | |||||||||||
Hedged Item / Hedging Instrument |
Hedging Objective |
Hedge |
Notional Amount | Notional Amount | ||||||||
Consolidated Obligation Discount Notes | ||||||||||||
Receive fixed, pay variable interest rate swap | Converts the discount notes fixed rate to a variable rate index. | Fair value hedges | 100 | 1,129 | ||||||||
|
|
|
|
|||||||||
Total | 100 | 1,129 | ||||||||||
|
|
|
|
|||||||||
Balance Sheet | ||||||||||||
Pay fixed, receive variable interest rate swap | Converts the asset or liability fixed rate to a variable rate index. | Non-qualifying hedges |
125 | 125 | ||||||||
Interest rate cap or floor | Protects against changes in income of certain assets due to changes in interest rates. | Non-qualifying hedges | 12,500 | 12,500 | ||||||||
|
|
|
|
|||||||||
Total | 12,625 | 12,625 | ||||||||||
|
|
|
|
|||||||||
Intermediary Positions and Other | ||||||||||||
Pay fixed, receive variable interest rate swap, and receive-fixed, pay variable interest rate swap | To offset interest rate swaps executed with members by executing interest rate swaps with derivatives counterparties. | Non-qualifying hedges |
8 | 79 | ||||||||
|
|
|
|
|||||||||
Total |
8 | 79 | ||||||||||
|
|
|
|
|||||||||
Total notional amount |
$ | 133,492 | $ | 139,720 | ||||||||
|
|
|
|
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 Banks 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.
Under normal circumstances, effective duration is computed by calculating an option adjusted spread based on market price. This method works well if the market price is dependent on interest rates instead of credit or liquidity. In light of the ongoing credit concerns and lack of liquidity in the private-label MBS market, however, market prices are influenced more by credit and liquidity than interest rates, resulting in very low prices and very high option adjusted spreads which distort the effective duration impact. Thus, in the third quarter of 2009, management changed its method of calculating effective duration to use the option adjusted spread at a date prior to the recent market disruptions. To capture interest-rate changes, management further adjusted its option adjusted spread by adding a spread to reflect option adjusted spread changes in callable debt instruments with like effective duration characteristics. This approach provides effective duration values that more accurately reflect the Banks interest-rate risk but may still result in modest differences due to volatility and uncertainty in the capital markets (such as changing credit standards, variable mortgage refinancing capacity, the spread between MBS rates and Treasury rates, and uncertainty regarding future MBS actions by the Federal Reserve; factors such as these are difficult to reduce to quantitative model inputs). Given this limitation, management views its current effective duration gap exposure calculations as approximate, rather than absolute, values.
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The table below reflects the Banks effective duration exposure measurements as calculated in accordance with Bank policy (in years).
As of June 30, 2012 | As of December 31, 2011 | |||||||||||||||||||||||
Up 200 Basis Points |
Current | Down 200 Basis Points (1) |
Up 200 Basis Points |
Current | Down 200 Basis Points (1) |
|||||||||||||||||||
Assets |
0.55 | 0.34 | | 0.56 | 0.37 | (0.03) | ||||||||||||||||||
Liabilities |
0.44 | 0.49 | 0.06 | 0.45 | 0.43 | 0.06 | ||||||||||||||||||
Equity |
2.15 | (1.95) | (0.89) | 2.27 | (0.53) | (1.33) | ||||||||||||||||||
Effective duration gap |
0.11 | (0.15) | (0.06) | 0.11 | (0.06) | (0.09) |
(1) | 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 a Level 3 pricing approach as more fully described in Note 12Estimated Fair Values to the Banks interim financial statements. The difference between the market value of total assets and the market value of total liabilities is the market value of equity. A more volatile market value of equity under different shock scenarios tends to result in a higher effective duration of equity, indicating increased sensitivity to interest rate changes. From December 31, 2011 to June 30, 2012, the Banks total capital decreased by $496 million and the market value of equity decreased by $175 million.
The table below reflects the Banks market value of equity measurements as calculated in accordance with Bank policy (in millions).
As of June 30, 2012 | As of December 31, 2011 | |||||||||||||||||||||||
Up 200 Basis Points |
Current | Down 200 Basis Points (1) |
Up 200 Basis Points |
Current | Down 200 Basis Points (1) |
|||||||||||||||||||
Assets |
$ | 114,819 | $ | 115,960 | $ | 116,387 | $ | 120,027 | $ | 121,356 | $ | 121,878 | ||||||||||||
Liabilities |
108,452 | 109,455 | 109,747 | 113,610 | 114,676 | 114,904 | ||||||||||||||||||
Equity |
6,367 | 6,505 | 6,640 | 6,417 | 6,680 | 6,974 |
(1) | 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. |
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Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
The Banks President and Chief Executive Officer and the Banks Executive Vice President and Chief Financial Officer (Certifying Officers) are responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.
As of June 30, 2012, the Banks 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 Banks 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 Banks disclosure controls and procedures, the Banks Certifying Officers recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Changes in Internal Control Over Financial Reporting
During the second quarter of 2012, there were no changes in the Banks internal control over financial reporting that have affected materially, or are reasonably likely to affect materially, the Banks internal control over financial reporting.
Item 1. | Legal Proceedings |
MBS Litigation
On January 18, 2011, the Bank filed a complaint in the State Court of Fulton County, Georgia against Countrywide Financial Corporation (n/k/a/ Bank of America Home Loans), Countywide Securities Corporation, Countrywide Home Loans, Inc., Bank of America Corporation (as successor to the Countrywide defendants), J.P. Morgan Securities, LLC (f/k/a J.P. Morgan Securities, Inc. and Bear Stearns & Co., Inc.) and UBS Securities, LLC, et al. The Banks claims arise from material misrepresentations in the offering documents of thirty private-label MBS sold to the Bank. The Banks complaint alleges that the Countrywide Defendants (Countrywide Financial Corporation, Countrywide Securities Corporation, and Countrywide Home Loans, Inc.) and J.P. Morgan Securities, LLC violated the Georgia RICO (Racketeer Influenced and Corrupt Organizations) Act. The complaint further alleges that those defendants, as well as UBS Securities, LLC committed fraud and negligent misrepresentation in violation of Georgia law, and that Bank of America Corporation is liable to the Bank as a successor to the
69
Countrywide Defendants. The Bank is seeking monetary damages and other relief as compensation for losses it has incurred in connection with the purchase of these private-label MBS.
On January 5, 2012, the State Court of Fulton County, Georgia entered into a scheduling order that requires the parties to complete fact discovery by December 15, 2012 and expert discovery by March 1, 2013, requires the parties to file pretrial dispositive motions by May 1, 2013 and responses by June 1, 2013, establishes September 15, 2013 as the date for the consolidated pretrial order, and sets trial for October 2013. On March 1, 2012, the court granted a motion to sever the Banks claims against the J.P. Morgan entities so that these claims will proceed in a separate action. For further discussion of this litigation, see the Banks Form 10-K.
MBS Proposed Settlement
In a separate matter, on January 21, 2011, the Bank (together with certain other private-label MBS holders collectively comprising greater than 25 percent of the voting rights with respect to certain private-label MBS) instructed The Bank of New York Mellon, 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 July 23, 2012, Walnut Place LLC and certain of its affiliates who previously objected to the settlement formally withdrew from the proceeding. On July 31, 2012, The Western and Southern Life Insurance Company and other affiliated objectors also formally withdrew from the proceeding. 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 further discussion of this proposed settlement and previous material developments, see the Banks Form 10-K.
Other
The Bank is subject to other various legal proceedings and actions from time to time in the ordinary course of its business. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of those matters presently known to the Bank will have a material adverse effect on the Banks financial condition or results of operations.
Item 1A. | Risk Factors |
In addition to the other information set forth in this report, the factors discussed in Part I, Item 1A. Risk Factors in the Banks Form 10-K, should be carefully considered as they could materially affect the Banks business, financial condition or future results. The risks described in the Banks 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 Banks business, financial condition and/or operating results.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Not applicable.
70
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Mine Safety Disclosure |
Not applicable.
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) | |
10.1 | Federal Home Loan Bank of Atlanta 2012 Directors Compensation Policy, as amended July 26, 2012 + | |
31.1 | Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. + | |
31.2 | Certification of the Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. + | |
32.1 | Certification of the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. + | |
101 | Unaudited financial statements from the Quarterly Report on Form 10-Q of Federal Home Loan Bank of Atlanta for the quarter ended June 30, 2012, filed on August 9, 2012, formatted in XBRL: (i) Statements of Condition, (ii) Statements of Income, (iii) Statements of Comprehensive Income, (iv) Statements of Capital, (v) Statements of Cash Flows, and (vi) Notes to Financial Statements.+ |
(1) | Filed on March 17, 2006 with the Securities and Exchange Commission in the Banks Form 10 Registration Statement and incorporated herein by reference. |
(2) | Filed on September 27, 2011 with the Securities and Exchange Commission in the Banks Form 8-K and incorporated herein by reference. |
(3) | Filed on August 5, 2011 with the Securities and Exchange Commission in the Banks Form 8-K and incorporated herein by reference. |
+ | Furnished herewith. |
71
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Federal Home Loan Bank of Atlanta | ||||||
Date: August 9, 2012 | 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 |
72
EXHIBIT 10.1
Department:
Corporate Secretary |
Name of Policy:
2012 Directors Compensation Policy |
Department Policy Number:
1 | ||
Effective Date:
July 26, 2012 |
Supersedes Revisions:
January 1, 2012 |
Authority to Approve and Amend:
Board of Directors | ||
Next Review Date:
January 2013 |
Department Policy Owner:
Corporate Secretary |
A. General
1. | The Bank will pay each member of the board of directors a fee for attendance at any official meeting (in person or by telephone) of the board or a committee of the board. An official meeting includes a meeting of any ad hoc committee established by the board for a specific purpose. In addition, the Bank will pay any director representative to the Council of Federal Home Loan Banks (FHLBanks) a fee for attendance at any official meeting of that group. The Bank will not pay a fee for a directors attendance at any Federal Home Loan Bank System meeting. The fees for attendance at these meetings are outlined below. |
2. | The Bank will pay a fee only for a directors actual attendance and participation at a meeting, unless the directors absence is due to unanticipated transportation problems encountered while in route to the meeting. Participation by telephone for in-person meetings is discouraged unless necessary to attain a quorum. The Bank will not pay for a directors participation by telephone for an in-person meeting unless the Chairman approves such participation. The Bank will not pay a fee for a directors attendance at meetings other than those described above. |
3. | The Bank will not advance the payment of fees to any director. |
4. | Effective January 1, 2012, the following annual compensation limits shall apply: |
a) |
Chairman of the Board | $ | 70,000 | |||
b) |
Vice Chairman of the Board | $ | 65,000 | |||
c) |
Chairman of the Audit Committee | $ | 65,000 | |||
d) |
Other Chairmen of Committees (excluding Audit and Executive) | $ | 60,000 | |||
e) |
All Other Directors | $ | 55,000 |
Once a director reaches his or her annual compensation limit, the Bank will not pay additional fees to that director, even if the director attends a meeting at which a fee otherwise would be paid under this policy.
Page 1 of 3
B. | In-Person Meeting Fees |
1. | Chairman of the Board |
a) | $ 6,900 per meeting of the board when chairing a board meeting |
b) | $ 2,100 per meeting of a committee of the board of which he/she is chairman |
c) | $ 1,600 per meeting of a committee of the board of which he/she is a member |
d) | $ 1,600 per joint meeting of the Affordable Housing Advisory Council and board or committee |
e) | $ 800 per meeting of the Council of FHLBanks |
f) | $ 800 per meeting of the FHLBanks Chairs/Vice Chairs |
2. | Vice Chairman of the Board |
a) | $ 6,400 per meeting of the board |
b) | $ 2,100 per meeting of a committee of the board of which he/she is chairman |
c) | $ 1,600 per meeting of a committee of the board of which he/she is a member |
d) | $ 6,900 per meeting of the board when serving as Chairman for the entire meeting |
e) | $ 1,600 per joint meeting of the Affordable Housing Advisory Council and board or committee |
f) | $ 800 per meeting of the Council of FHLBanks |
g) | $ 800 per meeting of the FHLBanks Chairs/Vice Chairs |
3. | All Directors (other than the Chairman or Vice Chairman of the Board) |
a) | $ 6,400 per meeting of the board |
b) | $ 2,100 per meeting of a committee when serving as committee chairman |
c) | $ 1,600 per meeting of a committee of the board of which he/she is a member |
d) | $ 1,600 per joint meeting of the Affordable Housing Advisory Council and board or committee |
e) | $ 800 per meeting of the Council of FHLBanks |
f) | $ 500 for attending new director orientation (new directors only) |
C. | Fees for Telephonic Meetings of the Board and Committees of the Board |
1. | Chairman; Vice Chairman, if serving as Chairman; or Committee Chairman, if serving as Chairman |
$1,200 per meeting
2. | All Directors (other than the individual Chairman for the meeting) |
$800 per meeting
D. | Expenses |
1. | In accordance with the Banks normal reimbursement policy, the Bank will reimburse a directors travel expenses incurred in connection with attendance at any meeting for which the director is paid a fee. Please consult the Banks Travel and Entertainment Policy for a more detailed explanation regarding expense reimbursement. |
Page 2 of 3
2. | The Bank will reimburse a directors registration fees and travel expenses incurred in connection with any other meeting, hearing, ceremony, continuing education seminar, etc. only if the Chairman determines that the meeting is relevant to the Banks business activities or the directors duties as a board member and the director attends the meeting at the request of, or with the approval of, the Chairman. The Vice Chairman shall approve all such fees and expenses for the Chairman. These amounts will be reimbursable to the extent provided for such purpose in the Banks annual budget and in accordance with the Banks Travel and Entertainment Policy. The Bank will not pay a fee for a directors participation in these types of activities, and in accordance with 12 CFR Part 1261, the Bank will not reimburse directors for entertainment expenses at these events. |
3. | The Bank will pay the transportation and other ordinary travel expenses of one guest of a director to attend a board meeting only as specified in advance by the Bank. It will be the directors responsibility to pay the transportation and other travel expenses of a guest that accompanies such director to any other board meeting. |
4. | A board member may invite a guest to Bank-sponsored board dinners or receptions held in connection with board meetings at the expense of the Bank, so long as such guest otherwise pays his or her own transportation and travel expenses. |
5. | The Bank will pay for activities of directors and their guests at board meetings only as specified in advance by the Bank. |
Page 3 of 3
EXHIBIT 31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, W. Wesley McMullan, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of the Federal Home Loan Bank of Atlanta; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 9, 2012 | /s/ W. Wesley McMullan | |
W. Wesley McMullan | ||
President and Chief Executive Officer |
EXHIBIT 31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Kirk R. Malmberg, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of the Federal Home Loan Bank of Atlanta; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 9, 2012 | /s/ Kirk R. Malmberg | |||||
Kirk R. Malmberg | ||||||
Executive Vice President and | ||||||
Chief Financial Officer |
EXHIBIT 32.1
Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of the Federal Home Loan Bank of Atlanta (the Registrant) for the period ended June 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the Report), W. Wesley McMullan, President and Chief Executive Officer of the Bank, and Kirk R. Malmberg, Executive Vice President and Chief Financial Officer of the Bank, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
1. | The Registrants Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
Date: August 9, 2012 | /s/ W. Wesley McMullan | |||||
W. Wesley McMullan | ||||||
President and Chief Executive Officer | ||||||
/s/ Kirk R. Malmberg | ||||||
Kirk R. Malmberg | ||||||
Executive Vice President and | ||||||
Chief Financial Officer |
The foregoing certification will not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934.
Consolidated Obligations (Details) (USD $)
In Millions, unless otherwise specified |
Jun. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Consolidated Obligation Bonds by Interest-Rate Payment | ||
Total par value | $ 87,887 | $ 89,419 |
Fixed-Rate [Member]
|
||
Consolidated Obligation Bonds by Interest-Rate Payment | ||
Total par value | 83,476 | 84,571 |
Step Up/Down [Member]
|
||
Consolidated Obligation Bonds by Interest-Rate Payment | ||
Total par value | 3,791 | 2,978 |
Simple Variable-Rate [Member]
|
||
Consolidated Obligation Bonds by Interest-Rate Payment | ||
Total par value | 600 | 1,850 |
Variable-Rate Capped Floater [Member]
|
||
Consolidated Obligation Bonds by Interest-Rate Payment | ||
Total par value | $ 20 | $ 20 |
Other-than-temporary Impairment (Details 2) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2012
|
Jun. 30, 2011
|
Jun. 30, 2012
|
Jun. 30, 2011
|
|
Schedule of Roll-Forward Cumulative Credit Losses Recognized | ||||
Balance of credit losses previously recognized in earnings, beginning of period | $ 589 | $ 516 | $ 582 | $ 464 |
Amount related to credit loss for which an other-than-temporary impairment was not previously recognized | 1 | 7 | ||
Amount related to credit loss for which an other-than-temporary impairment was previously recognized | 8 | 36 | 15 | 82 |
Balance of cumulative credit losses recognized in earnings, end of period | $ 597 | $ 553 | $ 597 | $ 553 |
Estimated Fair Values (Tables)
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6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2012
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Estimated Fair Values [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial Assets and Liabilities Measured at Fair Value on Recurring Basis |
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:
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Reconciliation of Available-For-Sale Securities Measured at Fair Value |
The following table presents a reconciliation of available-for-sale securities that are measured at fair value using significant unobservable inputs (Level 3):
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Carrying Values and Estimated Fair Values |
The carrying values and estimated fair values of the Bank’s financial instruments were as follows:
|
Commitments and Contingencies (Details) (Standby Letters of Credit [Member], USD $)
In Millions, unless otherwise specified |
6 Months Ended | 12 Months Ended |
---|---|---|
Jun. 30, 2012
|
Dec. 31, 2011
|
|
Outstanding Standby Letters of Credit | ||
Outstanding notional | $ 18,988 | $ 21,510 |
Final expiration year | 2030 | 2030 |
Range, Maximum [Member]
|
||
Outstanding Standby Letters of Credit | ||
Original terms | Less than four months to 20 years | Less than 12 months to 20 years |
Subsequent Events (Details Textual) (USD $)
In Millions, except Per Share data, unless otherwise specified |
Jul. 30, 2012
|
Jul. 26, 2012
|
---|---|---|
Subsequent Events (Textual) [Abstract] | ||
Cash Dividend | $ 19 | |
Maximum amount of repurchase of excess capital stock | $ 700 |
Estimated Fair Values (Details 1) (USD $)
In Millions, unless otherwise specified |
6 Months Ended | |
---|---|---|
Jun. 30, 2012
|
Jun. 30, 2011
|
|
Reconciliation of Available-For-Sale Securities Measured at Fair Value | ||
Balance, beginning of period | $ 2,942 | $ 3,319 |
Transfer of private-label MBS from held-to-maturity to available-for-sale | 6 | 348 |
Included in net impairment losses recognized in earnings | (15) | (82) |
Included in other comprehensive loss | 124 | 132 |
Included in interest income | 2 | (5) |
Settlements | (318) | (404) |
Balance, end of period | $ 2,741 | $ 3,308 |
Available-for-Sale Securities (Tables)
|
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2012
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Available-for-Sale Securities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Information on Private-Label MBS Transferred and Dates |
The following table presents information on private-label MBS transferred. The amounts below represent the values as of the transfer date.
|
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Available-for-Sale Securities Reconciliation |
Major Security Types. Available-for-sale securities were as follows:
|
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Available-for-Sale Securities with Unrealized Losses |
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.
|
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Summary of Available-for-Sale MBS Issued by Members or Affiliates of Members |
A summary of available-for-sale MBS issued by members or affiliates of members follows:
|
Advances (Details) (USD $)
In Millions, unless otherwise specified |
Jun. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Advances Outstanding by Redemption Terms | ||
Overdrawn demand deposit accounts | $ 3 | |
Due in one year or less | 30,174 | 36,542 |
Due after one year through two years | 9,889 | 11,173 |
Due after two years through three years | 8,051 | 7,851 |
Due after three years through four years | 4,654 | 3,881 |
Due after four years through five years | 8,254 | 5,836 |
Due after five years | 16,590 | 17,283 |
Total par value | 77,612 | 82,569 |
Discount on AHP (1) advances | (12) | (12) |
Discount on EDGE (2) advances | (9) | (10) |
Hedging adjustments | 4,257 | 4,431 |
Deferred commitment fees | (6) | (7) |
Total | $ 81,842 | $ 86,971 |
Transactions With Members and Their Affiliates and With Housing Associates (Details) (USD $)
In Millions, unless otherwise specified |
6 Months Ended | |
---|---|---|
Jun. 30, 2012
|
Dec. 31, 2011
|
|
Transactions with Members and their Affiliates and with Housing Associates (Textual) [Abstract] | ||
Related parties, minimum stock percent owned | 10.00% | |
Percent of capital stock held by Bank of America, National Association | 13.80% | |
Total advances outstanding to Bank of America, National Association | $ 13,889 | $ 16,039 |
Maximum deposits held in the name of Bank of America, National Association | $ 1 | $ 1 |
Available-for-Sale Securities (Details) (USD $)
In Millions, unless otherwise specified |
1 Months Ended | 1 Months Ended | |||
---|---|---|---|---|---|
Jun. 30, 2011
|
Jun. 30, 2012
|
Jun. 30, 2011
Private-Label MBS Transferred [Member]
|
Mar. 31, 2011
Private-Label MBS Transferred [Member]
|
Mar. 31, 2012
Private-Label MBS Transferred [Member]
|
|
Information on Private-Label MBS Transferred and Dates | |||||
Available for sale securities transferred, amortized cost | $ 374 | $ 6 | $ 52 | $ 322 | $ 6 |
Available-for-sale Securities Transferred, Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss | 26 | 6 | 20 | ||
Available-for-sale Securities Transferred, Estimated Fair Value | $ 348 | $ 6 | $ 46 | $ 302 | $ 6 |
Advances (Details 2) (USD $)
In Millions, unless otherwise specified |
Jun. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Advances by Interest-Rate Payment Terms | ||
Fixed-rate, Due in one year or less | $ 27,271 | $ 32,389 |
Fixed-rate, Due after one year | 38,806 | 38,811 |
Total fixed-rate | 66,077 | 71,200 |
Variable-rate, Due in one year or less | 2,903 | 4,156 |
Variable-rate, Due after one year | 8,632 | 7,213 |
Total variable-rate | 11,535 | 11,369 |
Total par value | $ 77,612 | $ 82,569 |
Capital and Mandatorily Redeemable Capital Stock (Details 1) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | 6 Months Ended | ||
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Jun. 30, 2012
|
Jun. 30, 2011
|
Jun. 30, 2012
|
Jun. 30, 2011
|
|
Activity In Mandatorily Redeemable Capital Stock | ||||
Balance, beginning of period | $ 328 | $ 531 | $ 286 | $ 529 |
Attainment of nonmember status | 1 | 33 | 81 | 37 |
Withdrawal | 1 | 1 | 1 | |
Repurchase/redemption of mandatorily redeemable capital stock | (214) | (172) | (224) | (172) |
Capital stock no longer subject to redemption due to the transfer of stock from a nonmember to a member | (8) | (29) | (10) | |
Balance, end of period | $ 115 | $ 385 | $ 115 | $ 385 |
Recently Issued and Adopted Accounting Guidance
|
6 Months Ended |
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Jun. 30, 2012
|
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Recently Issued and Adopted Accounting Guidance [Abstract] | |
Recently Issued And Adopted Accounting Guidance |
Note 2—Recently Issued and Adopted Accounting Guidance Recently Issued Accounting Guidance Disclosures about Offsetting Assets and Liabilities. In December 2011, the Financial Accounting Standards Board (FASB) issued disclosure requirements that are intended to help investors and other financial statement users to better assess the effect or potential effect of offsetting arrangements on an entity’s financial position. Entities are required to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, entities are required to disclose collateral received and posted in connection with master netting agreements or similar arrangements. This guidance is effective for interim and annual periods beginning on or after January 1, 2013 and will be applied retrospectively for all comparative periods presented. The adoption of this guidance will result in increased disclosures, but will have no effect on the Bank’s financial condition or results of operations. Recently Adopted Accounting Guidance Presentation of Comprehensive Income. In June 2011, the FASB issued amended guidance that eliminates the option to report other comprehensive income and its components in the statement of change in equity. The main provisions of this amended guidance provide that an entity that reports items of other comprehensive income present comprehensive income in either: (1) a single financial statement that presents the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and total comprehensive income; or (2) a two-statement approach, where the components of net income and total net income are presented in the first statement, immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and total comprehensive income. For public entities, this amended guidance is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Bank adopted this guidance effective January 1, 2012. The adoption of this guidance did not have any 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. The Bank adopted this guidance effective January 1, 2012. The adoption of this guidance did not have any 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 first interim or annual periods beginning on or after December 15, 2011. This guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. The Bank adopted this guidance effective January 1, 2012. The adoption of this guidance did not have any effect on the Bank’s financial condition or results of operations. |