10-Q 1 fhlb-atlq32013.htm 10-Q FHLB-ATL Q3 2013
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________ 
FORM 10-Q
_____________________________________
  
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-51845
 _____________________________________ 
FEDERAL HOME LOAN BANK OF ATLANTA
(Exact name of registrant as specified in its charter)
_____________________________________  

Federally chartered corporation
 
56-6000442
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
1475 Peachtree Street, NE, Atlanta, Ga.
 
30309
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (404) 888-8000
_____________________________________  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days.    ý  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).    ý  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    ý  No
The number of shares outstanding of the registrant’s Class B Stock, par value $100, as of October 31, 2013 was 46,436,472.


Table of Contents
 




PART I. FINANCIAL INFORMATION.

Item 1. Financial Statements.
FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CONDITION
(Unaudited)
(In millions, except par value)
 
As of September 30, 2013
 
As of December 31, 2012
Assets
 
 
 
Cash and due from banks
$
3,476

 
$
4,083

Interest-bearing deposits (including deposits with another FHLBank of $1 as of September 30, 2013 and December 31, 2012)
1,007

 
1,005

Securities purchased under agreements to resell
1,000

 
250

Federal funds sold
2,995

 
7,235

Trading securities (includes another FHLBank’s bond of $68 and $77 as of September 30, 2013 and December 31, 2012, respectively)
2,046

 
2,370

Available-for-sale securities
2,398

 
2,676

Held-to-maturity securities (fair value of $19,549 and $17,124 as of September 30, 2013 and December 31, 2012, respectively)
19,545

 
16,918

Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans of $11 as of September 30, 2013 and December 31, 2012.
972

 
1,244

Advances
78,193

 
87,503

Accrued interest receivable
215

 
240

Premises and equipment, net
29

 
32

Derivative assets
41

 
13

Other assets
151

 
136

Total assets
$
112,068

 
$
123,705

Liabilities
 
 
 
Interest-bearing deposits
$
1,890

 
$
2,094

Consolidated obligations, net:
 
 
 
Discount notes
16,282

 
31,737

Bonds
87,139

 
82,947

Total consolidated obligations, net
103,421

 
114,684

Mandatorily redeemable capital stock
24

 
40

Accrued interest payable
267

 
229

Affordable Housing Program payable
72

 
80

Derivative liabilities
195

 
158

Other liabilities
186

 
145

Total liabilities
106,055

 
117,430

Commitments and contingencies (Note 13)

 

Capital
 
 
 
Capital stock Class B putable ($100 par value) issued and outstanding shares:
 
 
 
Subclass B1 issued and outstanding shares: 9 and 12 as of September 30, 2013 and December 31, 2012, respectively
944

 
1,160

Subclass B2 issued and outstanding shares: 34 and 37 as of September 30, 2013 and December 31, 2012, respectively
3,407

 
3,738

Total capital stock Class B putable
4,351

 
4,898

Retained earnings:
 
 
 
Restricted
119

 
73

Unrestricted
1,460

 
1,362

Total retained earnings
1,579

 
1,435

Accumulated other comprehensive income (loss)
83

 
(58
)
Total capital
6,013

 
6,275

Total liabilities and capital
$
112,068

 
$
123,705

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

3

FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF INCOME
(Unaudited)
(In millions)
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Interest income
 
 
 
 
 
 
 
Advances
$
54

 
$
74

 
$
178

 
$
216

Prepayment fees on advances, net
1

 
1

 
2

 
6

Interest-bearing deposits
1

 
2

 
4

 
5

Securities purchased under agreements to resell
1

 
—

 
1

 
—

Federal funds sold
1

 
4

 
7

 
14

Trading securities
26

 
28

 
79

 
90

Available-for-sale securities
33

 
40

 
98

 
125

Held-to-maturity securities
65

 
71

 
188

 
232

Mortgage loans held for portfolio
14

 
18

 
47

 
59

Total interest income
196

 
238

 
604

 
747

Interest expense
 
 
 
 
 
 
 
Consolidated obligations:
 
 
 
 
 
 
 
 Discount notes
5

 
6

 
19

 
15

 Bonds
104

 
140

 
325

 
449

Deposits
—

 
—

 
—

 
1

Mandatorily redeemable capital stock
1

 
1

 
1

 
3

Total interest expense
110

 
147

 
345

 
468

Net interest income
86

 
91

 
259

 
279

Provision for credit losses
1

 
1

 
4

 
4

Net interest income after provision for credit losses
85

 
90

 
255

 
275

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

 
—

 
(1
)
 
—

Net amount of impairment losses (reclassified from) recorded in other comprehensive income
—

 
(1
)
 
1

 
(16
)
Net impairment losses recognized in earnings
—

 
(1
)
 
—

 
(16
)
Net losses on trading securities
(15
)
 
(9
)
 
(79
)
 
(42
)
Net gains on derivatives and hedging activities
34

 
30

 
151

 
83

Letters of credit fees
4

 
5

 
14

 
14

Other
2

 
(1
)
 
4

 
2

Total noninterest income
25

 
24

 
90

 
41

Noninterest expense
 
 
 
 
 
 
 
Compensation and benefits
16

 
15

 
49

 
46

Other operating expenses
11

 
11

 
32

 
29

Finance Agency
2

 
2

 
6

 
8

Office of Finance
2

 
2

 
5

 
4

Total noninterest expense
31

 
30

 
92

 
87

Income before assessments
79

 
84

 
253

 
229

Affordable Housing Program assessments
8

 
8

 
25

 
23

Net income
$
71

 
$
76

 
$
228

 
$
206


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

4

FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In millions)
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
71

 
$
76

 
$
228

 
$
206

Other comprehensive income:
 
 
 
 
 
 
 
Net noncredit portion of other-than-temporary impairment losses on available-for-sale securities:
 
 
 
 
 
 
 
Noncredit losses transferred from held-to-maturity securities
—

 
—

 
(1
)
 
—

Net change in fair value on other-than-temporary impairment available-for-sale securities
16

 
188

 
141

 
297

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

 
1

 
—

 
16

Net noncredit portion of other-than-temporary impairment losses on available-for-sale securities
16

 
189

 
140

 
313

Net noncredit portion of other-than-temporary impairment losses on held-to-maturity securities:
 
 
 
 
 
 
 
Noncredit losses on held-to-maturity securities
—

 
—

 
(1
)
 
—

Reclassification of noncredit portion from held-to-maturity securities to available-for-sale securities
—

 
—

 
1

 
—

Net noncredit portion of other-than-temporary impairment losses on held-to-maturity securities
—

 
—

 
—

 
—

Pension and postretirement benefits:
 
 
 
 
 
 
 
   Total other comprehensive income
—

 
—

 
1

 
1

Total other comprehensive income
16

 
189

 
141

 
314

Total comprehensive income
$
87

 
$
265

 
$
369

 
$
520


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

5

FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CAPITAL
(Unaudited)
(In millions)
 
 
Capital Stock Class B Putable
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total Capital    
 
Shares        
 
Par Value
 
Restricted    
 
Unrestricted    
 
Total        
 
Balance, December 31, 2011
57

 
$
5,718

 
$
19

 
$
1,235

 
$
1,254

 
$
(411
)
 
$
6,561

Issuance of capital stock
8

 
799

 
—

 
—

 
—

 
—

 
799

Repurchase/redemption of capital stock
(16
)
 
(1,667
)
 
—

 
—

 
—

 
—

 
(1,667
)
Net shares reclassified to mandatorily redeemable capital stock
(1
)
 
(59
)
 
—

 
—

 
—

 
—

 
(59
)
Comprehensive income
—

 
—

 
41

 
165

 
206

 
314

 
520

Cash dividends on capital stock
—

 
—

 
—

 
(59
)
 
(59
)
 
—

 
(59
)
Balance, September 30, 2012
48

 
$
4,791

 
$
60

 
$
1,341

 
$
1,401

 
$
(97
)
 
$
6,095

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2012
49

 
$
4,898

 
$
73

 
$
1,362

 
$
1,435

 
$
(58
)
 
$
6,275

Issuance of capital stock
34

 
3,427

 
—

 
—

 
—

 
—

 
3,427

Repurchase/redemption of capital stock
(40
)
 
(3,966
)
 
—

 
—

 
—

 
—

 
(3,966
)
Net shares reclassified to mandatorily redeemable capital stock
—

 
(8
)
 
—

 
—

 
—

 
—

 
(8
)
Comprehensive income
—

 
—

 
46

 
182

 
228

 
141

 
369

Cash dividends on capital stock
—

 
—

 
—

 
(84
)
 
(84
)
 
—

 
(84
)
Balance, September 30, 2013
43

 
$
4,351

 
$
119

 
$
1,460

 
$
1,579

 
$
83

 
$
6,013


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

6

FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
 
 
For the Nine Months Ended September 30,
 
2013
 
2012
Operating activities
 
 
 
Net income
$
228

 
$
206

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
(64
)
 
(32
)
  Provision for credit losses
4

 
4

  Loss due to change in net fair value adjustment on derivative and hedging activities
7

 
160

  Net change in fair value adjustment on trading securities
79

 
42

  Net impairment losses recognized in earnings
—

 
16

  Gain on extinguishment of debt
(2
)
 
—

     Loss on disposal of fixed assets and capital software costs
—

 
1

Net change in:
 
 
 
  Accrued interest receivable
26

 
50

  Other assets
(14
)
 
14

  Affordable Housing Program payable
(13
)
 
(18
)
  Accrued interest payable
38

 
13

  Other liabilities
1

 
(13
)
  Total adjustments
62

 
237

Net cash provided by operating activities
290

 
443

Investing activities
 
 
 
Net change in:
 
 
 
  Interest-bearing deposits
968

 
280

  Securities purchased under agreements to resell
(750
)
 
(250
)
  Federal funds sold
4,240

 
5,616

Trading securities:
 
 
 
  Proceeds from maturities
251

 
690

Available-for-sale securities:
 
 
 
  Proceeds from maturities
435

 
479

Held-to-maturity securities:
 
 
 
  Net change in short-term
550

 
75

  Proceeds from maturities of long-term
2,897

 
3,259

  Purchases of long-term
(6,042
)
 
(3,382
)
Advances:
 
 
 
  Proceeds from principal collected
127,399

 
131,679

  Made
(119,605
)
 
(125,387
)
Mortgage loans:
 
 
 
  Proceeds from principal collected
228

 
283

     Proceeds from sale of held for sale
18

 
—

Proceeds from sale of foreclosed assets
19

 
10

Purchase of premise, equipment, and software
(2
)
 
(3
)
Net cash provided by investing activities
10,606

 
13,349

 
 
 
 

7

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

 
For the Nine Months Ended September 30,
 
2013
 
2012
Financing activities
 
 
 
Net change in deposits
(199
)
 
(564
)
Net payments on derivatives containing a financing element
(121
)
 
(250
)
Proceeds from issuance of consolidated obligations:
 
 
 
 Discount notes
197,307

 
240,007

 Bonds
62,917

 
49,297

Payments for debt issuance costs
(6
)
 
(7
)
Payments for maturing and retiring consolidated obligations:
 
 
 
 Discount notes
(212,758
)
 
(242,574
)
 Bonds
(57,996
)
 
(58,465
)
Proceeds from issuance of capital stock
3,427

 
799

Payments for repurchase/redemption of capital stock
(3,966
)
 
(1,667
)
Payments for repurchase/redemption of mandatorily redeemable capital stock
(24
)
 
(303
)
Cash dividends paid
(84
)
 
(59
)
Net cash used in financing activities
(11,503
)
 
(13,786
)
Net (decrease) increase in cash and due from banks
(607
)
 
6

Cash and due from banks at beginning of the period
4,083

 
6

Cash and due from banks at end of the period
$
3,476

 
$
12

Supplemental disclosures of cash flow information:
 
 
 
 Cash paid for:
 
 
 
Interest
$
327

 
$
476

Affordable Housing Program assessments, net
$
34

 
$
40

 Noncash investing and financing activities:
 
 
 
Net shares reclassified to mandatorily redeemable capital stock
$
8

 
$
59

Held-to-maturity securities acquired with accrued liabilities
$
41

 
$
—

Transfer of held-to-maturity securities to available-for-sale securities
$
11

 
$
6

Transfers of mortgage loans to real estate owned
$
23

 
$
11


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

 


8

FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)

Note 1—Basis of Presentation

The accompanying unaudited interim financial statements of the Federal Home Loan Bank of Atlanta (Bank) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). To prepare the financial statements in conformity with GAAP, management must make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could be different from these estimates. The foregoing interim financial statements are unaudited; however, in the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the results for the interim periods, have been included. The results of operations for interim periods are not necessarily indicative of results to be expected for the year ending December 31, 2013, 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, 2012, which are contained in the Bank’s 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 22, 2013 (Form 10-K).

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

The net exposure for these financial instruments can change on a daily basis; therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested, and the time when this collateral is received or pledged. There may be a delay for excess collateral to be returned.  For derivative instruments, any excess cash collateral received or pledged is recognized as a derivative liability or derivative asset based on the terms of the individual master agreement between the Bank and its derivative counterparty.  Additional information regarding these agreements is provided in Note 11–Derivatives and Hedging Activities. Based on the fair value of the related securities held as collateral, the securities purchased under agreements to resell were fully collateralized for the periods presented. Additional information about the Bank's investments in securities purchased under agreements to resell is disclosed in Note 2–Summary of Significant Accounting Policies to the 2012 audited financial statements contained in the Bank's Form 10-K.

A description of all of the Bank’s significant accounting policies is included in Note 2–Summary of Significant Accounting Policies to the 2012 audited financial statements contained in the Bank’s Form 10-K. There have been no material changes to these policies as of September 30, 2013.

Note 2—Recently Issued and Adopted Accounting Guidance
Recently Issued Accounting Guidance

Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date.  In February 2013, the Financial Accounting Standards Board (FASB) issued guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. This guidance requires an entity to measure these obligations as the sum of (1) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (2) any additional amount the reporting entity expects to pay on behalf of its co-obligors. This guidance is effective for interim and annual periods beginning on or after December 15, 2013 and will be applied retrospectively to obligations with joint and several liabilities existing at the beginning of an entity's fiscal year of adoption. This guidance is not expected to materially affect the Bank's financial condition or results of operations. 
Recently Adopted Accounting Guidance

Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.  In July 2013, the FASB issued guidance permitting the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to the U.S. Treasury Rate and the London Interbank Offered Rate (LIBOR).  This guidance was effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.  The Bank adopted this guidance effective July 17, 2013. The adoption of

9
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


this guidance did not have any effect on the Bank's financial condition or results of operations, as the Bank has not designated any hedging relationships using OIS as the benchmark interest rate.

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. In January 2013, the FASB issued amended guidance to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. For public entities, this amended guidance was effective for reporting periods beginning after December 15, 2012. The Bank adopted this guidance effective January 1, 2013, which resulted in additional disclosures. The adoption of this guidance did not have any effect on the Bank's financial condition or results of operations.

Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. In January 2013, the FASB issued guidance to clarify the scope of transactions that are subject to previously issued guidance on disclosures about offsetting assets and liabilities. The disclosure guidance on offsetting assets and liabilities applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with GAAP or subject to a master netting arrangement or similar agreement. This guidance was effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Bank adopted and applied this guidance retrospectively effective January 1, 2013 for all comparative periods presented, which resulted in additional disclosures. The adoption of this guidance did not have any effect on the Bank's financial condition or results of operations.
Disclosures about Offsetting Assets and Liabilities. In December 2011, FASB issued disclosure requirements intended to help investors and other financial statement users 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 was effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Bank adopted and applied this guidance retrospectively effective January 1, 2013 for all comparative periods presented, which resulted in additional disclosures. The adoption of this guidance did not have any effect on the Bank's financial condition or results of operations.

Note 3—Trading Securities
Major Security Types. Trading securities were as follows:
 
 
As of September 30, 2013
 
As of December 31, 2012
Government-sponsored enterprises debt obligations
$
1,977

 
$
2,291

Another FHLBank’s bond (1)
68

 
77

State or local housing agency debt obligations
1

 
2

Total
$
2,046

 
$
2,370

 ____________
(1) 
The Federal Home Loan Bank of Chicago is the primary obligor of this consolidated obligation bond.
Net unrealized and realized losses on trading securities were as follows:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Net unrealized losses on trading securities held at period end
$
(15
)
 
$
(9
)
 
$
(77
)
 
$
(35
)
Net unrealized/realized losses on trading securities sold or matured during the period
—

 
—

 
(2
)
 
(7
)
Net losses on trading securities
$
(15
)
 
$
(9
)
 
$
(79
)
 
$
(42
)

Note 4—Available-for-sale Securities
During the nine months ended September 30, 2013 and 2012, the Bank transferred certain private-label mortgaged-backed securities (MBS) from its held-to-maturity portfolio to its available-for-sale portfolio. These securities represent private-label MBS in the Bank’s held-to-maturity portfolio for which the Bank has recorded an other-than-temporary impairment loss. The

10
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


Bank believes the other-than-temporary impairment loss constitutes evidence of a significant deterioration in the issuer’s 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.
 
2013
 
2012
 
Amortized    
Cost
 
Other-than-temporary
Impairment
Recognized in
Accumulated Other
Comprehensive Income
 
Estimated
Fair Value
 
Amortized    
Cost
 
Other-than-temporary
Impairment
Recognized in
Accumulated Other
Comprehensive Income
 
Estimated
Fair Value
Transferred at March 31,
$
12

 
$
1

 
$
11

 
$
6

 
$
—

 
$
6

Transferred at June 30,
—

 
—

 
—

 
—

 
—

 
—

Transferred at September 30,
—

 
—

 
—

 
—

 
—

 
—

Total
$
12

 
$
1

 
$
11

 
$
6

 
$
—

 
$
6


Major Security Types. Available-for-sale securities were as follows:
 
 
As of September 30, 2013
 
Amortized    
Cost
 
Other-than-temporary
Impairment
Recognized in
Accumulated Other
Comprehensive Income
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair Value
Private-label residential MBS
$
2,299

 
$
36

 
$
136

 
$
1

 
$
2,398


 
As of December 31, 2012
 
Amortized  
Cost
 
Other-than-temporary  
Impairment
Recognized in
Accumulated Other
Comprehensive Income
 
Gross
  Unrealized  
Gains
 
Gross
  Unrealized  
Losses
 
Estimated Fair Value  
Private-label residential MBS
$
2,717

 
$
120

 
$
79

 
$
—

 
$
2,676



11
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


The following tables summarize the available-for-sale securities with unrealized losses. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
 
 
As of September 30, 2013
 
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 residential MBS
8

 
$
340

 
$
5

 
11

 
$
365

 
$
32

 
19

 
$
705

 
$
37

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 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 residential MBS
3

 
$
154

 
$
1

 
26

 
$
1,240

 
$
119

 
29

 
$
1,394

 
$
120


A summary of available-for-sale MBS issued by members or affiliates of members follows:
 
 
As of September 30, 2013
 
Amortized  
Cost
 
Other-than-temporary  
Impairment
Recognized in
Other Accumulated
Comprehensive Income (Loss)
 
Gross
  Unrealized  
Gains
 
Gross
  Unrealized  
Losses
 
Estimated
  Fair  Value  
Bank of America Corporation, Charlotte, NC
$
1,465

 
$
35

 
$
86

 
$
—

 
$
1,516

 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2012
 
Amortized
Cost
 
Other-than-temporary
Impairment
Recognized in
Other Accumulated
Comprehensive Income (Loss)
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Bank of America Corporation, Charlotte, NC
$
1,712

 
$
112

 
$
41

 
$
—

 
$
1,641



12
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


Note 5—Held-to-maturity Securities
Major Security Types. Held-to-maturity securities were as follows:
 
 
As of September 30, 2013
 
As of December 31, 2012
 
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
$
—

 
$
—

 
$
—

 
$
—

 
$
550

 
$
—

 
$
—

 
$
550

State or local housing agency debt obligations
95

 
1

 
—

 
96

 
106

 
2

 
—

 
108

Government-sponsored enterprises debt obligations
3,238

 
1

 
23

 
3,216

 
2,133

 
—

 
—

 
2,133

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency obligations-guaranteed residential
494

 
7

 
—

 
501

 
622

 
8

 
—

 
630

Government-sponsored enterprises residential
13,639

 
104

 
82

 
13,661

 
10,763

 
184

 
2

 
10,945

Private-label residential
2,079

 
15

 
19

 
2,075

 
2,744

 
36

 
22

 
2,758

Total
$
19,545

 
$
128

 
$
124

 
$
19,549

 
$
16,918

 
$
230

 
$
24

 
$
17,124


The following tables summarize the held-to-maturity securities with unrealized losses. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
 
 
As of September 30, 2013
 
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
6

 
$
1,321

 
$
23

 
—

 
$
—

 
$
—

 
6

 
$
1,321

 
$
23

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises residential
69

 
4,854

 
82

 
—

 
—

 
—

 
69

 
4,854

 
82

Private-label residential
37

 
770

 
10

 
18

 
252

 
9

 
55

 
1,022

 
19

Total
112

 
$
6,945

 
$
115

 
18

 
$
252

 
$
9

 
130

 
$
7,197

 
$
124

 
 
As of December 31, 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
3

 
$
750

 
$
—

 
—

 
$
—

 
$
—

 
3

 
$
750

 
$
—

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises residential
1

 
154

 
1

 
1

 
13

 
1

 
2

 
167

 
2

Private-label residential
—

 
—

 
—

 
43

 
974

 
22

 
43

 
974

 
22

Total
4

 
$
904

 
$
1

 
44

 
$
987

 
$
23

 
48

 
$
1,891

 
$
24


13
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)



Redemption Terms. The amortized cost and estimated fair value of held-to-maturity securities by contractual maturity are shown below. Expected maturities of some securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

 
As of September 30, 2013
 
As of December 31, 2012
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Non-mortgage-backed securities:
 
 
 
 
 
 
 
Due in one year or less
$
730

 
$
730

 
$
1,092

 
$
1,093

Due after one year through five years
2,603

 
2,582

 
1,697

 
1,698

Total non-mortgage-backed securities
3,333

 
3,312

 
2,789

 
2,791

Mortgage-backed securities
16,212

 
16,237

 
14,129

 
14,333

Total
$
19,545

 
$
19,549

 
$
16,918

 
$
17,124


A summary of held-to-maturity MBS issued by members or affiliates of members follows:
 
 
As of September 30, 2013
 
As of December 31, 2012
 
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
$
675

 
$
5

 
$
7

 
$
673

 
$
896

 
$
11

 
$
8

 
$
899


Note 6—Other-than-temporary Impairment

The Bank evaluates its individual available-for-sale and held-to-maturity securities holdings in an unrealized loss position for other-than-temporary impairment on a quarterly basis. As part of this process, the Bank considers its intent to sell each debt security and whether it is more likely than not the Bank will be required to sell the security before its anticipated recovery. If either of these conditions is met, the Bank recognizes the maximum impairment loss in earnings which is equal to the entire difference between the security’s amortized cost basis and its fair value as of the Statements of Condition dates. For securities in an unrealized loss position that meet neither of these conditions, the Bank evaluates whether there is other-than-temporary impairment by performing an analysis to determine if any of these securities will incur a credit loss, which could be up to the difference between the security’s amortized cost basis and its fair value.
Mortgage-backed Securities. The Bank’s investments in MBS consist of U.S. agency guaranteed securities and senior tranches of private-label MBS. The Bank has increased exposure to the risk of loss on its investments in MBS when the loans backing the MBS exhibit high rates of delinquency and foreclosures, as well as losses on the sale of foreclosed properties. The Bank regularly requires high levels of credit enhancements from the structure of the collateralized mortgage obligation to reduce its risk of loss on such securities. Credit enhancements are defined as the percentage of subordinate tranches, overcollateralization, or excess spread, or the support of monoline insurance, if any, in a security structure that will absorb the losses before the security the Bank purchased will take a loss. The Bank does not purchase credit enhancements for its MBS from monoline insurance companies.
The Bank’s investments in private-label MBS were rated “AAA” (or its equivalent) by a nationally recognized statistical rating organization (NRSRO), such as Moody’s Investors Service (Moody’s) and Standard and Poor’s Ratings Services (S&P), at their purchase dates. The “AAA”-rated securities achieved their 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 Bank’s private-label MBS have changed since their purchase dates.
Non-private-label MBS. The unrealized losses related to U.S. agency MBS are caused by interest rate changes and not credit quality. These securities are guaranteed by government agencies or government-sponsored enterprises (GSEs) and the Bank does not expect these securities to be settled at a price less than their amortized cost basis. In addition, the Bank does not intend to sell these investments and it is not more likely than not that the Bank will be required to sell these investments

14
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


before recovery of their amortized cost basis, which may be at maturity. The Bank does not consider these investments to be other-than-temporarily impaired as of September 30, 2013.
Private-label MBS. To assess whether the entire amortized cost basis of its private-label MBS will be recovered, the Bank performs a cash flow analysis for each of its private-label MBS. In performing the cash flow analysis for each of these securities, the Bank uses two third-party models. The first model considers borrower characteristics and the particular attributes of the loans underlying the Bank’s securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults, and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas (CBSAs), which are based upon an assessment of the individual housing markets. The term CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the United States Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area of 10,000 or more people. The Bank’s housing price forecast as of September 30, 2013 included a short-term housing price forecast with projected changes ranging from a decrease of five percent to an increase of eight percent over the 12 month period beginning July 1, 2013.
For the vast majority of markets, the short-term housing price forecast has changes from a decrease of one percent to an increase of seven percent. Thereafter, home prices were projected to recover using one of five different recovery paths. The following table presents projected home price recovery ranges by months following the short-term housing price forecast as of September 30, 2013:
 
Months
 
Annualized Rates (%)    
1 to 6
 
0.00 to 3.00
7 to 12
 
1.00 to 4.00
13 to 18  
 
2.00 to 4.00
19 to 30  
 
2.00 to 5.00
31 to 54 
 
2.00 to 6.00
Thereafter  
 
2.30 to 5.60
 
The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults, and loss severities, were then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. The model classifies securities 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 Bank’s variable rate and hybrid private-label MBS, the Bank uses a forward interest rate curve to project the future estimated cash flows. The Bank then uses the effective interest rate for the security prior to impairment for determining the present value of the future estimated cash flows. For securities previously identified as other-than-temporarily impaired, the Bank updates its estimate of future estimated cash flows on a quarterly basis. There were no securities for which an other-than-temporary-impairment was determined to have occurred during the three-month period ended September 30, 2013.


15
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


The following table presents a roll-forward of the amount of credit losses on the Bank’s investment securities recognized in earnings during the life of the securities for which a portion of the other-than-temporary loss was recognized in accumulated other comprehensive income:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Balance, beginning of period
$
584

 
$
592

 
$
586

 
$
582

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

 
1

 
—

 
16

Increase in cash flows recognized over the remaining life of the securities
(4
)
 
(3
)
 
(6
)
 
(8
)
Balance, end of period
$
580

 
$
590

 
$
580

 
$
590


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. This assessment is based on the fact that the Bank has sufficient capital and liquidity to operate its business and has no need to sell these securities, nor has the Bank entered into any contractual constraints that would require the Bank to sell these securities.


16
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


Note 7—Advances
Redemption Terms. The Bank had advances outstanding, as summarized below.  
 
As of September 30, 2013
 
As of December 31, 2012
Overdrawn demand deposit accounts
$
—

 
$
2

Due in one year or less
38,267

 
41,482

Due after one year through two years
6,148

 
7,915

Due after two years through three years
4,866

 
4,735

Due after three years through four years
8,639

 
5,821

Due after four years through five years
6,377

 
8,758

Due after five years
11,783

 
15,157

Total par value
76,080

 
83,870

Discount on AHP(1)
(8
)
 
(11
)
Discount on EDGE(2) advances
(7
)
 
(8
)
Hedging adjustments
2,133

 
3,658

Deferred commitment fees
(5
)
 
(6
)
Total
$
78,193

 
$
87,503

___________
(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 September 30, 2013
 
As of December 31, 2012
Overdrawn demand deposit accounts
$
—

 
$
2

Due or convertible in one year or less
41,522

 
46,198

Due or convertible after one year through two years
6,337

 
7,886

Due or convertible after two years through three years
4,678

 
4,748

Due or convertible after three years through four years
7,184

 
5,368

Due or convertible after four years through five years
4,944

 
6,570

Due or convertible after five years
11,415

 
13,098

Total par value
$
76,080

 
$
83,870


Interest-rate Payment Terms. The following table details interest-rate payment terms for advances:
 
 
As of September 30, 2013
 
As of December 31, 2012
Fixed-rate:
 
 
 
 Due in one year or less
$
33,492

 
$
38,307

 Due after one year
29,915

 
33,425

Total fixed-rate
63,407

 
71,732

Variable-rate:
 
 
 
 Due in one year or less
4,775

 
3,177

 Due after one year
7,898

 
8,961

Total variable-rate
12,673

 
12,138

Total par value
$
76,080

 
$
83,870



17
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


Credit Risk. The Bank’s potential credit risk from advances is concentrated in commercial banks, thrifts, and credit unions and further is concentrated in certain larger borrowing relationships. As of September 30, 2013 and December 31, 2012, the concentration of the Bank’s advances was $54,980 and $62,488, respectively, to 10 member institutions, representing 72.3 percent and 74.5 percent, respectively, of total advances outstanding.
Based on the collateral pledged as security for advances, the Bank's credit analysis of members’ financial condition, and prior repayment history, no allowance for credit losses on advances was deemed necessary by the Bank as of September 30, 2013 and December 31, 2012. No advance was past due as of September 30, 2013 and December 31, 2012.

Note 8—Consolidated 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 Bank’s consolidated obligation bonds by interest-rate payment type: 
 
As of September 30, 2013
 
As of December 31, 2012
Fixed-rate
$
67,446

 
$
76,212

Step up/down
7,796

 
4,419

Simple variable-rate
11,505

 
1,250

Variable-rate capped floater
45

 
20

Total par value
$
86,792

 
$
81,901


Redemption Terms. The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding, by year of contractual maturity:
 
 
As of September 30, 2013
 
As of December 31, 2012
 
Amount
 
Weighted-
average
Interest Rate (%)    
 
Amount
 
Weighted-
average
Interest Rate (%)    
Due in one year or less
$
43,203

 
0.67
 
$
55,397

 
0.79
Due after one year through two years
11,427

 
0.44
 
7,587

 
2.08
Due after two years through three years
8,032

 
1.92
 
2,507

 
1.92
Due after three years through four years
7,528

 
2.51
 
3,344

 
4.25
Due after four years through five years
5,603

 
2.06
 
6,298

 
2.82
Due after five years
10,999

 
1.91
 
6,768

 
2.31
Total par value
86,792

 
1.16
 
81,901

 
1.36
Premiums
87

 
 
 
91

 
 
Discounts
(26
)
 
 
 
(34
)
 
 
Hedging adjustments
286

 
 
 
989

 
 
Total
$
87,139

 
 
 
$
82,947

 
 


18
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


The Bank’s consolidated obligation bonds outstanding by call feature:
 
 
As of September 30, 2013
 
As of December 31, 2012
Noncallable
$
64,594

 
$
71,880

Callable
22,198

 
10,021

Total par value
$
86,792

 
$
81,901


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

 
As of September 30, 2013
 
As of December 31, 2012
Due or callable in one year or less
$
62,535

 
$
62,540

Due or callable after one year through two years
10,527

 
6,550

Due or callable after two years through three years
4,150

 
2,136

Due or callable after three years through four years
6,123

 
3,024

Due or callable after four years through five years
2,207

 
6,028

Due or callable after five years
1,250

 
1,623

Total par value
$
86,792

 
$
81,901


Consolidated Obligation Discount Notes. Consolidated obligation discount notes are issued to raise short-term funds. Consolidated obligation discount notes are consolidated obligations with contractual maturities of up to one year. These consolidated obligation discount notes are issued at less than their face amounts and redeemed at par value when they mature.
The Bank’s participation in consolidated obligation discount notes was as follows:
 
 
Book Value
 
Par Value
 
Weighted-average
Interest Rate (%)
As of September 30, 2013
$
16,282

 
$
16,285

 
0.08
As of December 31, 2012
$
31,737

 
$
31,745

 
0.12

Note 9—Capital and Mandatorily Redeemable Capital Stock
Capital. The Bank was in compliance with the Federal Housing Finance Agency's (Finance Agency) regulatory capital rules and requirements as shown in the following table:
 
 
As of September 30, 2013
 
As of December 31, 2012
 
Required    
 
Actual        
 
Required    
 
Actual        
Risk based capital
$
2,167

 
$
5,955

 
$
1,625

 
$
6,373

Total capital-to-assets ratio
4.00
%
 
5.31
%
 
4.00
%
 
5.15
%
Total regulatory capital (1)
$
4,483

 
$
5,955

 
$
4,948

 
$
6,373

Leverage ratio
5.00
%
 
7.97
%
 
5.00
%
 
7.73
%
Leverage capital
$
5,603

 
$
8,932

 
$
6,185

 
$
9,560

___________
(1) 
Mandatorily redeemable capital stock is considered capital for regulatory purposes, and “total regulatory capital” includes the Bank’s $24 and $40 in mandatorily redeemable capital stock as of September 30, 2013 and December 31, 2012, respectively.


19
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


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

 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Balance, beginning of period
$
25

 
$
115

 
$
40

 
$
286

Capital stock subject to mandatory redemption reclassified from equity during the period due to:
 
 
 
 
 
 
 
  Attainment of non-member status
1

 
6

 
8

 
87

  Withdrawal
—

 
—

 
—

 
1

Repurchase/redemption of mandatorily redeemable capital stock
(2
)
 
(79
)
 
(24
)
 
(303
)
Capital stock no longer subject to redemption due to the transfer of stock from a non-member to a member
—

 
—

 
—

 
(29
)
Balance, end of period
$
24

 
$
42

 
$
24


$
42


The following table shows the amount of mandatorily redeemable capital stock by year of redemption. The year of redemption in the table is the end of the five-year redemption period, or with respect to activity-based stock, the later of the expiration of the five-year redemption period or the activity’s maturity date.
 
 
As of September 30, 2013
 
As of December 31, 2012
Due in one year or less
$
5

 
$
—

Due after one year through two years
4

 
12

Due after two years through three years
8

 
9

Due after three years through four years
6

 
17

Due after four years through five years
—

 
1

Due after five years
1

 
1

Total
$
24

 
$
40



20
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


Note 10—Accumulated Other Comprehensive Income (Loss)
Components comprising accumulated other comprehensive income (loss) were as follows:
 
Pension and
Postretirement
Benefits
 
Noncredit Portion
of Other-than-
temporary
Impairment  Losses
on Available-for-
sale Securities
 
Noncredit Portion of Other-than-temporary Impairment Losses on Held-to-maturity Securities
 
Total  Accumulated
Other
Comprehensive
Income (Loss)
Balance, June 30, 2012
$
(12
)
 
$
(274
)
 
$
—

 
$
(286
)
Other comprehensive loss before reclassifications:
 
 
 
 
 
 
 
     Net change in fair value
—

 
188

 
—

 
188

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

 
1

 
—

 
1

Net current period other comprehensive income
—

 
189

 
—

 
189

Balance, September 30, 2012
$
(12
)
 
$
(85
)
 
$
—

 
$
(97
)
Balance, June 30, 2013
$
(16
)
 
$
83

 
$
—

 
$
67

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

 
16

 
—

 
16

Net current period other comprehensive income
—

 
16

 
—

 
16

Balance, September 30, 2013
$
(16
)
 
$
99

 
$
—

 
$
83


 
Pension and
Postretirement
Benefits
 
Noncredit Portion
of Other-than-
temporary
Impairment  Losses
on Available-for-
sale Securities
 
Noncredit Portion of Other-than-temporary Impairment Losses on Held-to-maturity Securities
 
Total  Accumulated
Other
Comprehensive
Income (Loss)
Balance, December 31, 2011
$
(13
)
 
$
(398
)
 
$
—

 
$
(411
)
Other comprehensive loss before reclassifications:
 
 
 
 
 
 
 
     Net change in fair value
—

 
297

 
—

 
297

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

 
16

 
—

 
16

     Amortization of pension and postretirement(1)
1

 
—

 
—

 
1

Net current period other comprehensive income
1

 
313

 
—

 
314

Balance, September 30, 2012
$
(12
)
 
$
(85
)
 
$
—

 
$
(97
)
Balance, December 31, 2012
$
(17
)
 
$
(41
)
 
$
—

 
$
(58
)
Other comprehensive loss before reclassifications:
 
 
 
 
 
 
 
     Noncredit other-than-temporary impairment losses
—

 
—

 
(1
)
 
(1
)
Noncredit other-than-temporary impairment losses transferred
—

 
(1
)
 
1

 
—

     Net change in fair value
—

 
141

 
—

 
141

Reclassification from other comprehensive loss to net income:
 
 
 
 
 
 
 
     Amortization of pension and postretirement(1)
1

 
—

 
—

 
1

Net current period other comprehensive income
1

 
140

 
—

 
141

Balance, September 30, 2013
$
(16
)
 
$
99

 
$
—

 
$
83

___________
(1)
Included in Compensation and benefits on the Statements of Income.


21
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


Note 11—Derivatives and Hedging Activities
Nature of Business Activity
The Bank is exposed to interest-rate risk primarily from the effect of interest rate changes on its interest-earning assets and its funding sources that finance these assets. The goal of the Bank’s interest-rate risk management strategies is not to eliminate interest-rate risk, but to manage it within appropriate limits. 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. The Bank enters into derivatives to manage the interest-rate risk exposure inherent in its otherwise unhedged assets and funding sources, to achieve the Bank's risk management objectives, and to act as an intermediary between its members and counterparties. For additional information on the Bank’s derivatives and hedging activities, see Note 18—Derivatives and Hedging Activities to the 2012 audited financial statements contained in the Bank’s Form 10-K.

The Bank transacts most of its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute consolidated obligations. Over-the-counter derivative transactions may be either executed with a counterparty (bilateral derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent), with a Derivative Clearing Organization (cleared derivatives).

Once a derivative transaction has been accepted for clearing by a Derivative Clearing Organization (Clearinghouse), the derivative transaction is novated and the executing counterparty is replaced with the Clearinghouse. The Clearinghouse notifies the clearing agent of the required initial and variation margin and the clearing agent notifies the Bank of the required initial and variation margin. The Bank is not a derivative dealer and 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 counterparties, the types of derivatives, the items being hedged, and any offsets between the derivatives and the items being hedged.

22
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


The following table summarizes the fair value of derivative instruments. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest.
 
 
As of September 30, 2013
 
As of December 31, 2012
 
Notional
Amount of Derivatives    
 
Derivative Assets    
 
Derivative Liabilities    
 
Notional
Amount of Derivatives    
 
Derivative Assets    
 
Derivative Liabilities    
Derivatives in hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
  Interest rate swaps
$
95,265

 
$
864

 
$
(2,599
)
 
$
102,660

 
$
1,129

 
$
(3,689
)
Total derivatives in hedging relationships
95,265

 
864

 
(2,599
)
 
102,660

 
1,129

 
(3,689
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
  Interest rate swaps
6,839

 
23

 
(354
)
 
9,570

 
29

 
(497
)
  Interest rate caps or floors
12,500

 
41

 
(28
)
 
12,500

 
32

 
(22
)
Total derivatives not designated as hedging instruments
19,339

 
64

 
(382
)
 
22,070

 
61

 
(519
)
Total derivatives before netting and collateral adjustments
$
114,604

 
928

 
(2,981
)
 
$
124,730

 
1,190

 
(4,208
)
Netting adjustments
 
 
(800
)
 
800

 
 
 
(1,089
)
 
1,089

Cash collateral and related accrued interest
 
 
(87
)
 
1,986

 
 
 
(88
)
 
2,961

Total collateral and netting adjustments (1)
 
 
(887
)
 
2,786

 
 
 
(1,177
)
 
4,050

Derivative assets and derivative liabilities
 
 
$
41

 
$
(195
)
 
 
 
$
13

 
$
(158
)
___________
(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.
The following tables present the components of net gains on derivatives and hedging activities as presented in the Statements of Income:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Derivatives and hedged items in fair value hedging relationships:
 
 
 
 
 
 
 
  Interest rate swaps
$
39

 
$
49

 
$
134

 
$
136

Total net gains related to fair value hedge ineffectiveness
39

 
49

 
134

 
136

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
  Interest rate swaps
16

 
6

 
78

 
30

  Interest rate caps or floors
(1
)
 
(1
)
 
3

 
(5
)
  Net interest settlements
(20
)
 
(24
)
 
(64
)
 
(78
)
Total net (losses) gains related to derivatives not designated as hedging instruments
(5
)
 
(19
)
 
17

 
(53
)
Net gains on derivatives and hedging activities
$
34

 
$
30

 
$
151

 
$
83


The following tables present, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Bank’s net interest income:
 
 
 
For the Three Months Ended September 30,
 
 
2013
 
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)
 
Gains (Losses) on Derivative       
 
Gains (Losses) on Hedged Item  
 
Net Fair Value
Hedge Ineffectiveness
 
Effect of Derivatives on Net Interest Income (1)
Advances
 
$
114

 
$
(68
)
 
$
46

 
$
(259
)
 
$
17

 
$
45

 
$
62

 
$
(337
)
Consolidated obligations bonds
 
10

 
(17
)
 
(7
)
 
150

 
—

 
(13
)
 
(13
)
 
140

Total
 
$
124

 
$
(85
)
 
$
39

 
$
(109
)
 
$
17

 
$
32

 
$
49

 
$
(197
)
____________
(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.

23
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)



 
 
For the Nine Months Ended September 30,
 
 
2013
 
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)
 
Gains (Losses) on Derivative       
 
Gains (Losses) on Hedged Item  
 
Net Fair Value
Hedge Ineffectiveness
 
Effect of Derivatives on Net Interest Income (1)
Advances
 
$
1,486

 
$
(1,333
)
 
$
153

 
$
(797
)
 
$
169

 
$
—

 
$
169

 
$
(1,085
)
Consolidated obligations bonds
 
(700
)
 
681

 
(19
)
 
469

 
(45
)
 
12

 
(33
)
 
429

Total
 
$
786

 
$
(652
)
 
$
134

 
$
(328
)
 
$
124

 
$
12

 
$
136

 
$
(656
)
____________
(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 the risk of nonperformance by counterparties to its derivative transactions and manages credit risk through credit analysis, collateral requirements, and adherence to the requirements set forth in its policies, U.S. Commodity Futures Trading Commission regulations, and Finance Agency regulations. For bilateral derivatives, the degree of credit risk depends on the extent to which master netting arrangements are included in such contracts to mitigate the risk. The Bank requires collateral agreements with collateral delivery thresholds on all bilateral derivatives. Additionally, collateral related to derivatives with member institutions includes collateral assigned to the Bank, as evidenced by a written security agreement and held by the member institution for the benefit of the Bank.

For cleared derivatives, the Clearinghouse is the Bank's counterparty. The requirement that the Bank post initial and variation margin through the clearing agent, to the Clearinghouse, exposes the Bank to institutional credit risk if the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral is posted daily through a clearing agent for changes in the value of cleared derivatives. The Bank has analyzed the enforceability of offsetting rights incorporated in its cleared derivative transactions and determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable law upon an event of default including a bankruptcy, insolvency or similar proceeding involving the Clearinghouse or the Bank’s clearing agent, or both. Based on this analysis, the Bank presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular Clearinghouse.

The Bank presents derivative instruments, related cash collateral, including initial and variation margin, received or pledged and associated accrued interest, on a net basis by clearing agent and/or by counterparty when it has met the netting requirements.

24
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)



The following table presents the fair value of derivative instruments meeting or not meeting netting requirements, including the related collateral received from or pledged to counterparties.
 
 
As of September 30, 2013
 
As of December 31, 2012
 
Derivative Assets
 
Derivative Liabilities
 
Derivative Assets
 
Derivative Liabilities
Gross recognized amount:
 
 
 
 
 
 
 
     Bilateral derivatives
$
923

 
$
(2,959
)
 
$
1,190

 
$
(4,208
)
     Cleared derivatives
5

 
(22
)
 
—

 
—

Total gross recognized amount
928

 
(2,981
)
 
1,190

 
(4,208
)
Gross amounts of netting adjustments and cash collateral:
 
 
 
 
 
 
 
     Bilateral derivatives
(917
)
 
2,764

 
(1,177
)
 
4,050

     Cleared derivatives
30

 
22

 
—

 
—

Total gross amounts of netting adjustments and cash collateral
(887
)
 
2,786

 
(1,177
)
 
4,050

Derivative assets and derivative liabilities:
 
 
 
 
 
 
 
     Bilateral derivatives
6

 
(195
)
 
13

 
(158
)
     Cleared derivatives
35

 
—

 
—

 
—

Total derivative assets and total derivative liabilities
41

 
(195
)
 
13

 
(158
)
Non-cash collateral received or pledged not offset-cannot be sold or repledged: (1)


 
 
 


 
 
     Bilateral derivatives
—

 
—

 
1

 
—

     Cleared derivatives
—

 
—

 
—

 
—

Total cannot be sold or repledged
—

 
—

 
1

 
—

Net unsecured amounts: (2)
 
 
 
 
 
 
 
  Bilateral derivatives
6

 
(195
)
 
12

 
(158
)
  Cleared derivatives
35

 
—

 
—

 
—

Total net unsecured amount
$
41

 
$
(195
)
 
$
12

 
$
(158
)
____________ 
(1) Collateral held with respect to derivatives with member institutions where the Bank is acting as an intermediary represents the amount of eligible collateral physically held by or on behalf of the Bank or collateral assigned to the Bank, as evidenced by a written security agreement, and held by the member institution for the benefit of the Bank.
(2) The Bank had net credit exposure of $38 and $8 as of September 30, 2013 and December 31, 2012, respectively, due to instances where the Bank’s pledged collateral to a counterparty exceeds the Bank’s net derivative liability position.
Certain of the Bank’s bilateral derivative instruments contain provisions that require the Bank to post additional collateral with its counterparties if there is deterioration in the Bank’s credit rating. If the Bank’s credit rating is lowered by a NRSRO, the Bank may be required to deliver additional collateral on bilateral derivative instruments in net liability positions. The aggregate fair value of all bilateral derivative instruments with credit-risk-related contingent features that were in a net liability position (before cash collateral and related accrued interest) as of September 30, 2013 was $2,131 for which the Bank has posted collateral with a fair value of $1,939 in the normal course of business. If the Bank’s credit ratings had been lowered from its current rating to the next lower rating that would have triggered additional collateral to be delivered, the Bank would have been required to deliver an additional $127 of collateral at fair value to its derivative counterparties as of September 30, 2013.

Note 12—Estimated Fair Values

The Bank records trading securities, available-for-sale securities, derivative assets and liabilities, and grantor trust assets (publicly-traded mutual funds) at estimated fair value on a recurring basis. Fair value is a market-based measurement and is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the assets or owes the liability. In general, the transaction price will equal the exit price and, therefore, represent the fair value of the asset or liability at initial recognition. In determining whether a transaction price represents the fair value of the asset or liability at initial recognition, each reporting entity is required to consider factors specific to the transaction and the asset or liability, the principal or most advantageous market for the asset or liability, and market participants with whom the entity would transact in the market.


25
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


A fair value hierarchy is used to prioritize the inputs of valuation techniques used to measure fair value. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of how market-observable the fair value measurement is and defines the level of disclosure. The fair value hierarchy defines fair value in terms of a price in an orderly transaction between market participants to sell an asset or transfer a liability in the principal (or most advantageous) market for the asset or liability at the measurement date (an exit price). In order to determine the fair value or the exit price, entities must determine the unit of account, highest and best use, principal market, and market participants. These determinations allow the reporting entity to define the inputs for fair value and level of hierarchy.

Outlined below is the application of the “fair value hierarchy” to the Bank's financial assets and financial liabilities that are carried at fair value.

Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. As of September 30, 2013 and December 31, 2012, the Bank carried grantor trust assets at fair value hierarchy Level 1.

Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. As of September 30, 2013 and December 31, 2012, the Bank carried trading securities and derivatives at fair value hierarchy Level 2.

Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are supported by little or no market activity and reflect the entity's own assumptions. As of September 30, 2013 and December 31, 2012, the Bank carried available-for-sale securities at fair value hierarchy Level 3.

The Bank utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
Fair Value on a Recurring Basis. The following tables present, for each fair value hierarchy level, the Bank’s financial assets and liabilities that are measured at fair value on a recurring basis on its Statements of Condition:
 
 
As of September 30, 2013
 
Fair Value Measurements Using
 
Netting Adjustment (1)
 
 
 
Level 1        
 
Level 2        
 
Level 3        
 
Total
Assets
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
  Government-sponsored enterprises debt obligations
$
—

 
$
1,977

 
$
—

 
$
—

 
$
1,977

  Another FHLBank’s bond
—

 
68

 
—

 
—

 
68

  State or local housing agency debt obligations
—

 
1

 
—

 
—

 
1

Total trading securities
—

 
2,046

 
—

 
—

 
2,046

Available-for-sale securities:
 
 
 
 
 
 
 
 
 
  Private-label residential MBS
—

 
—

 
2,398

 
—

 
2,398

Derivative assets:
 
 
 
 
 
 
 
 
 
  Interest-rate related
—

 
928

 
—

 
(887
)
 
41

Grantor trust (included in Other assets)
19

 
—

 
—

 
—

 
19

Total assets at fair value
$
19

 
$
2,974

 
$
2,398

 
$
(887
)
 
$
4,504

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
Interest-rate related
$
—

 
$
(2,981
)
 
$
—

 
$
2,786

 
$
(195
)
Total liabilities at fair value
$
—

 
$
(2,981
)
 
$
—

 
$
2,786

 
$
(195
)
____________ 
(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.


26
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


 
As of December 31, 2012
 
Fair Value Measurements Using
 
Netting Adjustment (1)    
 
 
 
Level 1        
 
Level 2        
 
Level 3        
 
Total
Assets
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises debt obligations
$
—

 
$
2,291

 
$
—

 
$
—

 
$
2,291

  Another FHLBank’s bond
—

 
77

 
—

 
—

 
77

  State or local housing agency debt obligations
—

 
2

 
—

 
—

 
2

Total trading securities
—

 
2,370

 
—

 
—

 
2,370

Available-for-sale securities:
 
 
 
 
 
 
 
 
 
  Private-label residential MBS
—

 
—

 
2,676

 
—

 
2,676

Derivative assets:
 
 
 
 
 
 
 
 
 
  Interest-rate related
—

 
1,190

 
—

 
(1,177
)
 
13

Grantor trust (included in Other assets)
17

 
—

 
—

 
—

 
17

Total assets at fair value
$
17

 
$
3,560

 
$
2,676

 
$
(1,177
)
 
$
5,076

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
Interest-rate related
$
—

 
$
(4,208
)
 
$
—

 
$
4,050

 
$
(158
)
Total liabilities at fair value
$
—

 
$
(4,208
)
 
$
—

 
$
4,050

 
$
(158
)
____________ 
(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.

For financial instruments carried at fair value, the Bank reviews the fair value hierarchy classification of financial assets and liabilities on a quarterly basis. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out at fair value as of the beginning of the quarter in which the changes occur. There were no such transfers during the periods presented.
The following table presents a reconciliation of available-for-sale securities that are measured at fair value using significant unobservable inputs (Level 3):
 
 
For the Nine Months Ended September 30,
 
2013
 
2012
Balance, beginning of period
$
2,676

 
$
2,942

Transfer of private-label MBS from held-to-maturity to available-for-sale
11

 
6

Total (losses) gains realized and unrealized: (1)
 
 
 
  Included in net impairment losses recognized in earnings
—

 
(16
)
     Included in other comprehensive income (2)
141

 
313

     Accretion of credit losses in net interest income
5

 
4

Settlements
(435
)
 
(479
)
Balance, end of period
$
2,398

 
$
2,770

____________ 
(1) 
Related to available-for-sale securities held at period end.
(2) 
This amount is included in other comprehensive income 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.

Described below are the Bank's fair value measurement methodologies for financial assets and liabilities measured or disclosed at fair value.

Cash and Due from Banks. The estimated fair value approximates the recorded carrying value.

Interest-bearing Deposits. The estimated fair value is determined by calculating the present value of the expected future cash flows from the deposits and reducing this amount for accrued interest receivable. The discount rate used in these calculations is the rate for deposits with similar terms and represents market observable rates.

27
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)



Securities purchased under agreements to resell. The estimated fair value is determined by calculating the present value of the expected future cash flows. The discount rates used in these calculations are the rates for securities with similar terms and represent market observable rates.

Federal Funds Sold. The estimated fair value is determined by calculating the present value of the expected future cash flows. The discount rates used in these calculations are the rates for federal funds with similar terms and represent market observable rates.

Investment Securities. The Bank obtains prices from four designated third-party pricing vendors when available to estimate the fair value of its investment securities. The pricing vendors use various proprietary models to price investment securities. The inputs to those models are derived from various sources including, but not limited to: benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers, and other market-related data. Since many investment securities do not trade on a daily basis, the pricing vendors use available information as applicable such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing to determine the prices for individual securities. Each pricing vendor has an established challenge process in place for all investment securities valuations, which facilitates resolution of potentially erroneous prices identified by the Bank.

The Bank periodically conducts reviews of the four pricing vendors to confirm and further augment its understanding of the vendors' pricing processes, methodologies, and control procedures for agency and private-label MBS.

The Bank's valuation technique for estimating the fair value of its investment securities first requires the establishment of a “median” price for each security.

All prices that are within a specified tolerance threshold of the median price are included in the “cluster” of prices that are averaged to compute a “default” price. All prices that are outside the threshold (“outliers”) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, and/or non-binding dealer estimates) to determine if an outlier is a better estimate of fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price rather than the default price. Alternatively, if the analysis does not provide evidence that an outlier is in fact more representative of the fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of the security.

If all prices received for a security are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.

As of September 30, 2013 and December 31, 2012, four vendor prices were received for a majority of the Bank's investment securities holdings and the final prices for those securities were computed by averaging the prices received. Based on the Bank's review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or, in those instances in which there were outliers or significant yield variances, the Bank's additional analyses), the Bank believes its final prices are representative of the prices that would have been received if the assets had been sold at the measurement date (i.e., exit prices) and further that the fair value measurements are classified appropriately in the fair value hierarchy. Based on the lack of significant market activity for private-label MBS, the fair value measurement for those securities were classified as Level 3 within the fair value hierarchy as of September 30, 2013 and December 31, 2012.

Mortgage Loans Held for Portfolio. The estimated fair values for mortgage loans are determined based on quoted market prices of similar mortgage loans available in the pass-through securities market. These prices, however, can change rapidly based upon market conditions and are highly dependent upon the underlying prepayment assumptions.

Advances. The Bank determines the estimated fair values of advances by calculating the present value of expected future cash flows from the advances and excluding the amount of the accrued interest receivable. The discount rates used in these calculations are the replacement advance rates based on the market observable LIBOR curve for advances with similar terms as of September 30, 2013 and December 31, 2012, respectively. In accordance with the advances regulations, advances with a maturity or repricing period greater than six months require a prepayment fee sufficient to make the Bank financially indifferent to the borrower's decision to prepay the advances, thereby removing prepayment risk from the fair value calculation. The Bank

28
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


did not adjust the fair value measurement of advances for creditworthiness because advances were fully collateralized (see Note 7—Advances for additional information).

Accrued Interest Receivable and Payable. The estimated fair value approximates the recorded carrying value.

Derivative Assets and Liabilities. The Bank calculates the fair value of derivatives using a present value of future cash flows discounted by a market observable rate. The Bank used OIS to discount future cash flows for collateralized derivatives.

Derivative instruments are transacted primarily in the institutional dealer market and priced with observable market assumptions at a mid-market valuation point. The Bank does not provide a credit valuation adjustment based on aggregate exposure by derivative counterparty when measuring the fair value of its derivatives. This is because the collateral provisions pertaining to the Bank's derivatives obviate the need to provide such a credit valuation adjustment. The fair values of the Bank's derivatives take into consideration the effects of legally enforceable master netting agreements, where applicable, that allow the Bank to settle positive and negative positions and offset cash collateral with the same counterparty on a net basis. The Bank and each bilateral derivative counterparty have collateral thresholds that take into account both the Bank's and the counterparty's credit ratings. As a result of these practices and agreements, the Bank has concluded that the impact of the credit differential between the Bank and its derivative counterparties was mitigated to an immaterial level and no further adjustments were deemed necessary to the recorded fair values of derivative assets and liabilities on the Statements of Condition as of September 30, 2013 and December 31, 2012.

Grantor Trust Assets. Grantor trust assets, included as a component of Other assets, are carried at estimated fair value based on quoted market prices.

Interest-bearing Deposits. The Bank determines estimated fair values of Bank deposits by calculating the present value of expected future cash flows from the deposits and reducing this amount for accrued interest payable. The discount rate used in these calculations is based on LIBOR.

Consolidated Obligations. The Bank calculates the fair value of consolidated obligation bonds and discount notes by using the present value of future cash flows using a cost of funds as the discount rate. The cost of funds discount curves are based primarily on the market observable LIBOR and to some extent on the Office of Finance cost of funds curve, which also is market observable.

Mandatorily Redeemable Capital Stock. The fair value of mandatorily redeemable capital stock is par value, including estimated dividends earned at the time of reclassification from capital to liabilities, until such amount is paid. Capital stock can be acquired by members only at par value and redeemed by the Bank at par value. Capital stock is not traded and no market mechanism exists for the exchange of capital stock outside the cooperative structure.
The following estimated fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank as of September 30, 2013 and December 31, 2012. Although the Bank uses its best judgment in estimating the fair values of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology.
For example, because an active secondary market does not exist for a portion of the Bank’s financial instruments, in certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. Therefore, these estimated fair values are not necessarily indicative of the amounts that would be realized in current market transactions, although they do reflect the Bank’s judgment of how a market participant would estimate the fair value. The fair value tables presented below do not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.

29
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


The carrying values and estimated fair values of the Bank’s financial instruments were as follows:
 
As of September 30, 2013
 
 
 
Estimated Fair Value
 
Carrying Value
 
Total        
 
Level 1        
 
Level 2        
 
Level 3        
 
Netting Adjustment    
Assets:
 
 
 
 
 
 
 
 
 
 
 
 Cash and due from banks
$
3,476

 
$
3,476

 
$
3,476

 
$
—

 
$
—

 
$
—

 Interest bearing-deposits
1,007

 
1,007

 
—

 
1,007

 
—

 
—

Securities purchased under agreements to resell
1,000

 
1,000

 
—

 
1,000

 
—

 
—

 Federal funds sold
2,995

 
2,995

 
—

 
2,995

 
—

 
—

 Trading securities
2,046

 
2,046

 
—

 
2,046

 
—

 
—

 Available-for-sale securities
2,398

 
2,398

 
—

 
—

 
2,398

 
—

 Held-to-maturity securities
19,545

 
19,549

 
—

 
17,474

 
2,075

 
—

 Mortgage loans held for portfolio, net
972

 
1,082

 
—

 
1,082

 
—

 
—

 Advances
78,193

 
77,967

 
—

 
77,967

 
—

 
—

 Accrued interest receivable
215

 
215

 
—

 
215

 
—

 
—

 Derivative assets
41

 
41

 
—

 
928

 
—

 
(887
)
    Grantor trust assets (included in Other assets)
19

 
19

 
19

 
—

 
—

 
—

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 Interest-bearing deposits
(1,890
)
 
(1,890
)
 
—

 
(1,890
)
 
—

 
—

 Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
Discount notes
(16,282
)
 
(16,283
)
 
—

 
(16,283
)
 
—

 
—

Bonds
(87,139
)
 
(87,285
)
 
—

 
(87,285
)
 
—

 
—

 Mandatorily redeemable capital stock
(24
)
 
(24
)
 
(24
)
 
—

 
—

 
—

 Accrued interest payable
(267
)
 
(267
)
 
—

 
(267
)
 
—

 
—

 Derivative liabilities
(195
)
 
(195
)
 
—

 
(2,981
)
 
—

 
2,786



30
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


 
 
As of December 31, 2012
 
 
 
Estimated Fair Value
 
Carrying Value
 
Total        
 
Level 1        
 
Level 2        
 
Level 3        
 
Netting Adjustment    
Assets:
 
 
 
 
 
 
 
 
 
 
 
 Cash and due from banks
$
4,083

 
$
4,083

 
$
4,083

 
$
—

 
$
—

 
$
—

 Interest bearing-deposits
1,005

 
1,005

 
—

 
1,005

 
—

 
—

 Securities purchased under agreements to resell
250

 
250

 
—

 
250

 
—

 
—

 Federal funds sold
7,235

 
7,235

 
—

 
7,235

 
—

 
—

 Trading securities
2,370

 
2,370

 
—

 
2,370

 
—

 
—

 Available-for-sale securities
2,676

 
2,676

 
—

 
—

 
2,676

 
—

 Held-to-maturity securities
16,918

 
17,124

 
—

 
14,366

 
2,758

 
—

 Mortgage loans held for portfolio, net
1,244

 
1,377

 
—

 
1,377

 
—

 
—

 Advances
87,503

 
87,945

 
—

 
87,945

 
—

 
—

 Accrued interest receivable
240

 
240

 
—

 
240

 
—

 
—

 Derivative assets
13

 
13

 
—

 
1,190

 
—

 
(1,177
)
    Grantor trust assets (included in Other assets)
17

 
17

 
17

 
—

 
—

 
—

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 Interest-bearing deposits
(2,094
)
 
(2,094
)
 
—

 
(2,094
)
 
—

 
—

 Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
Discount notes
(31,737
)
 
(31,739
)
 
—

 
(31,739
)
 
—

 
—

Bonds
(82,947
)
 
(83,750
)
 
—

 
(83,750
)
 
—

 
—

 Mandatorily redeemable capital stock
(40
)
 
(40
)
 
(40
)
 
—

 
—

 
—

 Accrued interest payable
(229
)
 
(229
)
 
—

 
(229
)
 
—

 
—

 Derivative liabilities
(158
)
 
(158
)
 
—

 
(4,208
)
 
—

 
4,050


Note 13—Commitments and Contingencies
As described in Note 8–Consolidated Obligations, consolidated obligations are backed only by the financial resources of the 12 FHLBanks. The Finance Agency may at any time require any FHLBank to make principal or interest payments due on any consolidated obligations, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation. No FHLBank has 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 $617,648 and $574,257 as of September 30, 2013 and December 31, 2012, respectively, exclusive of the Bank’s own outstanding consolidated obligations.
The Bank’s outstanding standby letters of credit were as follows:
 
 
As of September 30, 2013
 
As of December 31, 2012
Outstanding notional
$
20,049

 
$
17,687

Original terms(1)
One month to 20 years

 
Less than four months to 20 years

Final expiration year
2030

 
2030

____________ 
(1) 
The Bank had 13 standby letters of credit for a total of $10 and five standby letters of credit for a total of $49 as of September 30, 2013 and December 31, 2012, respectively, 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 $75 and $74 as of September 30, 2013 and December 31, 2012, respectively. Based on the Bank’s credit analyses and collateral requirements, the Bank does not deem it necessary to record any additional liability on these commitments.
The Bank monitors the creditworthiness of its standby letters of credit based on an evaluation of the member. In addition, standby letters of credit are fully collateralized from the time of issuance. The Bank has established parameters for the

31
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


measurement, review, classification, and monitoring of credit risk related to these standby letters of credit that results in an internal credit rating, which focuses primarily on an institution’s overall financial health and takes into account quality of assets, earnings, and capital position. In general, borrowers categorized into the highest risk rating category have more restrictions on the types of collateral they may use to secure standby letters of credit, may be required to maintain higher collateral maintenance levels and deliver loan collateral, and may face more stringent collateral reporting requirements.
Commitments that legally bind and unconditionally obligate the Bank for additional advances were $125 and $5 as of September 30, 2013 and December 31, 2012, respectively, and may be outstanding for periods of up to two years.
The Bank had no commitments that unconditionally obligate the Bank to purchase closed mortgage loans as of September 30, 2013 and December 31, 2012. Such commitments would be recorded as derivatives at their fair values.
As of September 30, 2013, the Bank had committed to the issuance of $213 (par value) in consolidated obligation bonds, of which $160 were hedged with associated interest rate swaps that had traded but not yet settled. As of December 31, 2012, the Bank had committed to the issuance of $3,055 (par value) in consolidated obligation bonds, of which $3,035 were hedged with associated interest rate swaps that had traded but not yet settled.
The Bank is subject to legal proceedings arising in the normal course of business. After consultation with legal counsel, management does not anticipate, as of the date of the financial statements, that the ultimate liability, if any, arising out of these matters will have a material effect on the Bank’s financial condition or results of operations.

Note 14—Transactions with Members and their Affiliates and with Housing Associates
The Bank is a cooperative whose member institutions own substantially all of the capital stock of the Bank. Former members, and certain non-members that own the Bank's capital stock as a result of a merger or acquisition of the Bank's member, own the remaining capital stock to support business transactions still carried on the Bank’s Statements of Condition. All holders of the Bank’s capital stock receive dividends on their investments, to the extent declared by the Bank’s board of directors. All advances are issued to members and eligible “housing associates” under the Federal Home Loan Bank Act of 1932 (FHLBank Act), and mortgage loans held for portfolio are purchased from members. The Bank also maintains demand deposit accounts primarily to facilitate settlement activities that are related directly to advances and mortgage loan purchases.

Transactions with any member that has an officer or director who also is a director of the Bank are subject to the same Bank policies as transactions with other members, and transactions with members which are entered into in the ordinary course of the Bank’s business are not considered related party transactions subject to disclosure. In August 2013, the Bank sold its multifamily mortgage loan portfolio, with an unpaid principal balance of $18, to a member outside the ordinary course of the Bank’s advances business which resulted in a gain of less than $1.

The Bank routinely discloses related party transactions with each of the other FHLBanks and those members with regulatory capital stock outstanding in excess of 10 percent of the Bank's total regulatory capital stock. As of September 30, 2013, one member institution, Bank of America, National Association, held 16.9 percent of the Bank’s total regulatory capital stock. Total advances outstanding to Bank of America, National Association were $15,963 and $9,914 as of September 30, 2013 and December 31, 2012, respectively. Total deposits held in the name of Bank of America, National Association were $24 and less than $1 as of September 30, 2013 and December 31, 2012, respectively. No mortgage loans or MBS were acquired from Bank of America, National Association during the nine months ended September 30, 2013 and 2012.

Note 15—Subsequent Events

On October 24, 2013, the Bank’s board of directors approved a cash dividend for the third quarter of 2013 in the amount of $32. The Bank paid the third quarter 2013 dividend on October 30, 2013.



32

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

Forward-Looking Information

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

•
the Bank’s business strategy and changes in operations, including, without limitation, product growth and change in product mix;
•
future performance, including profitability, developments, or market forecasts;
•
forward-looking accounting and financial statement effects; and
•
those other factors identified and discussed in the Bank’s public filings with the SEC.

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

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

The discussion presented below provides an analysis of the Bank’s financial condition as of September 30, 2013 and December 31, 2012, and results of operations for the quarter and nine months ended September 30, 2013 and 2012. Management’s discussion and analysis should be read in conjunction with the financial statements and accompanying notes presented elsewhere in this report, as well as the Bank’s audited financial statements for the year ended December 31, 2012.

Executive Summary

Financial Condition

As of September 30, 2013, total assets were $112.1 billion, a decrease of $11.6 billion, or 9.41 percent, from December 31, 2012. This decrease was primarily due to a $9.3 billion decrease in advances and a $1.5 billion decrease in total investments. These items are discussed in more detail in the Management's Discussion and Analysis—Financial Condition below.

As of September 30, 2013, total liabilities were $106.1 billion, a decrease of $11.4 billion, or 9.69 percent, from December 31, 2012. This decrease was primarily due to a $11.3 billion decrease in consolidated obligations (COs). The decrease in COs corresponds to the decrease in advances during the period.

As of September 30, 2013, total capital was $6.0 billion, a decrease of $262 million, or 4.17 percent, from December 31, 2012. This decrease was primarily due to the net repurchase/redemption of $539 million in capital stock and the payment of $84 million in dividends, partially offset by $369 million in comprehensive income during the period. The main components of comprehensive income include $228 million of net income and a $140 million net increase in the fair value of the Bank's available-for-sale securities during the period.


33

Results of Operations

The Bank recorded net income of $71 million for the third quarter of 2013, a decrease of $5 million, or 6.16 percent, from net income of $76 million for the third quarter of 2012. This decrease was primarily due to a $5 million decrease in net interest income as discussed in more detail in Management's Discussion and Analysis—Results of Operations below.

The Bank recorded net income of $228 million for the first nine months of 2013, an increase of $22 million, or 10.8 percent, from net income of $206 million during the same period in 2012. This increase was primarily due to a $49 million increase in noninterest income, partially offset by a $20 million decrease in net interest income and a $5 million increase in noninterest expense. These items are discussed in more detail in Management's Discussion and Analysis—Results 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 LIBOR. The Bank's ROE was 4.50 percent for the third quarter of 2013, compared to 5.04 percent for the third quarter of 2012. ROE decreased for the third quarter of 2013, compared to the third quarter of 2012, primarily as a result of a decrease in net income, as discussed above, and an increase in average total capital during the period. The Bank's annualized ROE was 4.92 percent for the first nine months of 2013, compared to 4.31 percent during the same period in 2012. ROE increased for the first nine months of 2013, compared to the same period in 2012, 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 decreased to 424 basis points for the third quarter of 2013, compared to 461 basis points for the third quarter of 2012. The decrease in the ROE spread to LIBOR was primarily due to the decrease in ROE as previously discussed. ROE spread to three-month average LIBOR increased to 464 basis points for the first nine months of 2013, compared to 384 basis points for the same period in 2012. The increase in the ROE spread to LIBOR was primarily due to the increase in ROE as previously discussed.

The Bank's interest rate spread was 26 basis points for the third quarter of 2013 and 2012, and for the first nine months of 2013 and 2012.

Business Outlook

The Bank’s business outlook remains largely unchanged from the discussion in the Bank’s Form 10-K. Advances balances continued to fluctuate during the third quarter of 2013, as the percentage of the Bank's short-term advances remains elevated. In addition, members continue to experience high levels of liquidity and low loan demand, which may reduce overall member demand for advances. It is unclear what the full impact of new and proposed financial services regulations will have on member demand for advances or on the duration of advances that members may prefer. The prolonged low interest rate environment caused by the Federal Reserve's quantitative easing efforts continues to place pressure on the Bank's investment portfolio, as higher-yielding investments mature or prepay in an environment with limited attractive reinvestment opportunities.




34

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
 
September 30,
2013
 
June 30,
2013
 
March 31,
2013
 
December 31,
2012
 
September 30,
2012
Statements of Condition (at period end)
 
 
 
 
 
 
 
 
 
Total assets
$
112,068

 
$
121,778

 
$
111,547

 
$
123,705

 
$
112,078

Investments (1)
28,991

 
30,825

 
29,697

 
30,454

 
29,718

Mortgage loans held for portfolio
983

 
1,076

 
1,167

 
1,255

 
1,345

Allowance for credit losses on mortgage loans
(11
)
 
(12
)
 
(13
)
 
(11
)
 
(10
)
Advances
78,193

 
89,450

 
80,260

 
87,503

 
80,543

Interest-bearing deposits
1,890

 
2,172

 
2,037

 
2,094

 
2,061

Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
  Discount notes
16,282

 
26,161

 
20,040

 
31,737

 
21,767

  Bonds
87,139

 
86,196

 
82,858

 
82,947

 
81,434

Total consolidated obligations, net (2)
103,421

 
112,357

 
102,898

 
114,684

 
103,201

Mandatorily redeemable capital stock
24

 
25

 
34

 
40

 
42

Affordable Housing Program payable
72

 
75

 
78

 
80

 
93

Capital stock - putable
4,351

 
4,847

 
4,380

 
4,898

 
4,791

Retained earnings
1,579

 
1,537

 
1,477

 
1,435

 
1,401

Accumulated other comprehensive income (loss)
83

 
67

 
23

 
(58
)
 
(97
)
Total capital
6,013

 
6,451

 
5,880

 
6,275

 
6,095

Statements of Income (for the period ended)
 
 
 
 
 
 
 
 
 
Net interest income
86

 
86

 
87

 
97

 
91

Provision for credit losses
1

 
1

 
2

 
2

 
1

Net impairment losses recognized in earnings
—

 
—

 
—

 
—

 
(1
)
Net losses on trading securities
(15
)
 
(40
)
 
(24
)
 
(25
)
 
(9
)
Net gains on derivatives and hedging activities
34

 
75

 
42

 
34

 
30

Letters of credit fees
4

 
5

 
5

 
4

 
5

Other income (loss) (3)
2

 
1

 
1

 
1

 
(1
)
Noninterest expense
31

 
31

 
30

 
38

 
30

Income before assessments
79

 
95

 
79

 
71

 
84

Assessments
8

 
9

 
8

 
7

 
8

Net income
71

 
86

 
71

 
64

 
76

Performance Ratios (%)
 
 
 
 
 
 
 
 
 
Return on equity (4)
4.50

 
5.61

 
4.65

 
4.10

 
5.04

Return on assets (5)
0.24

 
0.29

 
0.24

 
0.21

 
0.26

Net interest margin (6)
0.29

 
0.29

 
0.30

 
0.32

 
0.31

Regulatory capital ratio (at period end) (7)
5.31

 
5.26

 
5.28

 
5.15

 
5.56

Equity to assets ratio (8)
5.23

 
5.16

 
5.12

 
5.15

 
5.15

Dividend payout ratio (9)
40.25

 
30.99

 
40.66

 
46.18

 
25.57


35

____________
(1) 
Investments consist of interest-bearing deposits, securities purchased under agreements to resell, federal funds sold, and securities classified as trading, available-for-sale, and held-to-maturity.
(2) 
The amounts presented are the Bank’s primary obligations on consolidated obligations outstanding. The par value of the FHLBanks’ outstanding consolidated obligations for which the Bank is jointly and severally liable was as follows (in millions):
September 30, 2013
$
617,648

June 30, 2013
592,479

March 31, 2013
563,929

December 31, 2012
574,257

September 30, 2012
572,473


(3) 
Other income (loss) includes service fees and other.
(4) 
Calculated as net income divided by average total equity.
(5) 
Calculated as net income divided by average total assets.
(6) 
Net interest margin is net interest income as a percentage of average earning assets.
(7) 
Regulatory capital ratio is regulatory capital stock plus retained earnings as a percentage of total assets at period end.
(8) 
Calculated as average equity divided by average total assets.
(9) 
Calculated as dividends declared during the period divided by net income during the period.

Financial Condition

The Bank’s principal assets consist of advances, short- and long-term investments, and mortgage loans held for portfolio. The Bank obtains funding to support its business primarily through the issuance of debt securities in the form of COs by the Office of Finance on the Bank’s behalf.
The following table presents the distribution of the Bank’s total assets, liabilities, and capital by major class as of the dates indicated (dollars in millions). These items are discussed in more detail below.
 
 
As of September 30, 2013
 
As of December 31, 2012
 
Increase (Decrease)
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
Amount
 
Percent
Advances
$
78,193

 
69.77
 
$
87,503

 
70.73

 
$
(9,310
)
 
(10.64
)
Long-term investments
23,989

 
21.41
 
21,414

 
17.31

 
2,575

 
12.02

Short-term investments
5,002

 
4.46
 
9,040

 
7.31

 
(4,038
)
 
(44.67
)
Mortgage loans, net
972

 
0.87
 
1,244

 
1.01

 
(272
)
 
(21.85
)
Other assets
3,912

 
3.49
 
4,504

 
3.64

 
(592
)
 
(13.15
)
Total assets
$
112,068

 
100.00
 
$
123,705

 
100.00

 
$
(11,637
)
 
(9.41
)
Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
  Discount notes
$
16,282

 
15.35
 
$
31,737

 
27.03

 
$
(15,455
)
 
(48.70
)
  Bonds
87,139

 
82.17
 
82,947

 
70.64

 
4,192

 
5.05

Deposits
1,890

 
1.78
 
2,094

 
1.78

 
(204
)
 
(9.73
)
Other liabilities
744

 
0.70
 
652

 
0.55

 
92

 
14.13

Total liabilities
$
106,055

 
100.00
 
$
117,430

 
100.00

 
$
(11,375
)
 
(9.69
)
Capital stock
$
4,351

 
72.36
 
$
4,898

 
78.05

 
$
(547
)
 
(11.16
)
Retained earnings
1,579

 
26.26
 
1,435

 
22.87

 
144

 
10.03

Accumulated other comprehensive income (loss)
83

 
1.38
 
(58
)
 
(0.92
)
 
141

 
243.19

Total capital
$
6,013

 
100.00
 
$
6,275

 
100.00

 
$
(262
)
 
(4.17
)

Advances

Total advances decreased as of September 30, 2013 compared to December 31, 2012 primarily due to maturing advances. As of September 30, 2013, 83.3 percent of the Bank’s advances were fixed-rate. However, the Bank often simultaneously enters into derivatives with the issuance of advances to convert the rates on them, in effect, into a short-term variable interest rate, usually based on LIBOR. As of September 30, 2013 and December 31, 2012, 52.8 percent of the Bank’s fixed-rate advances were swapped and 29.2 percent and 28.8 percent, respectively, of the Bank’s variable-rate advances were swapped. The majority of the Bank’s variable-rate advances were indexed to LIBOR. The Bank also offers variable-rate advances tied to the federal funds rate, prime rate, and constant maturity swap rates.


36

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

 
As of September 30, 2013
 
As of December 31, 2012
 
Amount
 
Percent of Total
 
Amount
 
Percent of Total
Adjustable or variable rate indexed
$
12,158

 
15.98
 
$
11,678

 
13.92
Fixed rate (1)
36,348

 
47.78
 
40,503

 
48.29
Hybrid
22,131

 
29.09
 
24,352

 
29.04
Convertible
3,651

 
4.80
 
5,174

 
6.17
Amortizing (2)
1,792

 
2.35
 
2,163

 
2.58
Total par value
$
76,080

 
100.00
 
$
83,870

 
100.00
____________ 
(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 7—Advances to the Bank’s interim financial statements for the concentration of the Bank’s advances to its 10 largest borrowing institutions.

Investments
The following table sets forth more detailed information regarding short- and long-term investments held by the Bank (dollars in millions):
 
 
 
 
Increase (Decrease)
 
As of September 30, 2013
 
As of December 31, 2012
 
Amount    
 
Percent    
Short-term investments:
 
 
 
 
 
 
 
Interest-bearing deposits (1)
$
1,007

 
$
1,005

 
$
2

 
0.17

Certificates of deposit
—

 
550

 
(550
)
 
(100.00
)
Securities purchased under agreements to resell
1,000

 
250

 
750

 
300.00

Federal funds sold
2,995

 
7,235

 
(4,240
)
 
(58.60
)
Total short-term investments
5,002

 
9,040

 
(4,038
)
 
(44.67
)
Long-term investments:
 
 
 
 
 
 
 
State or local housing agency debt obligations
96

 
108

 
(12
)
 
(11.00
)
U.S. government agency debt obligations
5,283

 
4,501

 
782

 
17.36

  Mortgage-backed securities:
 
 
 
 
 
 
 
U.S. government agency securities
494

 
622

 
(128
)
 
(20.54
)
       Government-sponsored
  enterprises
13,639

 
10,763

 
2,876

 
26.72

Private-label
4,477

 
5,420

 
(943
)
 
(17.40
)
Total mortgage-backed securities
18,610

 
16,805

 
1,805

 
10.74

Total long-term investments
23,989

 
21,414

 
2,575

 
12.02

Total investments
$
28,991

 
$
30,454

 
$
(1,463
)
 
(4.81
)
____________ 
(1) 
As of September 30, 2013 and December 31, 2012, interest-bearing deposits includes a $1.0 billion business money market account with Branch Banking and Trust Company, one of the Bank’s ten largest borrowers. One of the Bank’s member directors is a senior executive vice president of Branch Banking and Trust Company and was elected chairman of the Bank's board of directors effective January 1, 2013. Pursuant to Finance Agency regulation, the Bank’s member directors serve as officers or directors of a Bank member, and the Bank may enter into business transactions with such members from time to time in the ordinary course of business.

The decrease in short-term investments from December 31, 2012 to September 30, 2013 was primarily due to a decrease in federal funds sold, partially offset by an increase in securities purchased under agreements to resell. The amount held in federal funds sold will vary each day based on the federal funds rates, the Bank’s liquidity requirements, and the availability of high

37

quality counterparties in the federal funds market. During the first nine months of 2013, the Federal Reserve paid interest on required and excess reserves balances held by depository institutions at a rate of 0.25 percent, which has led to a decrease in demand for federal funds from the Bank. Additionally, federal funds sold decreased as the Bank increased its cash reserves balance at the Federal Reserve by approximately $3.5 billion during the third quarter of 2013 in preparation to meet the needs of its members as a result of the government shutdown in October 2013. The increase in securities purchased under agreements to resell is consistent with the Bank's efforts to reduce its unsecured credit exposure.
The Finance Agency limits an FHLBank’s investment in MBS and asset-backed securities by requiring that the total amortized historical costs for these 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 FHLBank’s previous month-end total capital, as defined by regulation, plus its mandatorily redeemable capital stock on the day it purchases the securities. The Bank was in compliance with this regulatory requirement as of December 31, 2012, as these investments amounted to 264 percent of total capital plus mandatorily redeemable capital stock; however, these investments amounted to 311 percent of total capital plus mandatorily redeemable capital stock as of September 30, 2013. This percentage was below 300 percent at the time the Bank purchased additional MBS in the third quarter of 2013; however, it increased above 300 percent as a result of a subsequent decrease in total capital due to a decrease in advances.
The Bank will not purchase any additional MBS or asset backed securities until this ratio returns to an amount below 300 percent. The Bank suspended new purchases of private-label MBS beginning in the first quarter of 2008, resulting in a greater percentage of GSE MBS as of September 30, 2013 compared to December 31, 2012. Additionally, recent market conditions have made MBS issued by GSEs more attractive and therefore the Bank has increased new purchases of these securities. Refer to Note 4—Available-for-sale Securities and Note 5—Held-to-maturity Securities to the Bank’s interim financial statements for information on securities with unrealized losses as of September 30, 2013 and December 31, 2012.
The Bank evaluates its individual investment securities for other-than-temporary impairment on at least a quarterly basis, as described in Note 6—Other-than-temporary Impairment to the Bank’s interim financial statements. For a discussion regarding impairment losses recognized in earnings during the reported periods see Management’s Discussion and Analysis—Risk Management—Investments below.

Mortgage Loans Held for Portfolio
The decrease in mortgage loans held for portfolio from December 31, 2012 to September 30, 2013 was primarily due to the maturity and prepayment of these assets during the period. In addition, during the third quarter of 2013, the Bank reclassified its multifamily mortgage loan portfolio from the held-for-portfolio classification to mortgage loans held for sale. Subsequently, in August 2013, these loans were sold which resulted in a gain of less than $1 million. The Bank ceased purchasing new mortgage assets in 2008.
As of September 30, 2013 and December 31, 2012, the Bank’s 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 September 30, 2013
 
As of December 31, 2012
 
Percent of Total
 
Percent of Total
Florida
26.90

 
26.15

South Carolina
24.58

 
24.12

Georgia
14.41

 
14.34

North Carolina
11.02

 
11.48

Virginia
7.94

 
8.34

All other
15.15

 
15.57

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 September 30, 2013, CO issuances financed 92.3 percent of the $112.1 billion in total assets, remaining relatively stable from the financing ratio of 92.7 percent as of December 31, 2012. The decrease in total COs from December 31, 2012 corresponds to a decrease in advances during the period.


38

Consolidated obligation discount notes decreased from December 31, 2012 to September 30, 2013. The Bank issued additional consolidated obligation discount notes during the fourth quarter of 2012 to increase liquidity in preparation to meet the needs of its members pending the result of the potential "fiscal cliff" at the beginning of 2013. The "fiscal cliff” was averted and the Bank's consolidated obligation discount notes balance was reduced accordingly.
As of September 30, 2013 and December 31, 2012, 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 September 30, 2013 and December 31, 2012, 83.2 percent and 81.4 percent, respectively, of the Bank’s fixed-rate CO bonds were swapped and 0.39 percent and 1.57 percent of the Bank’s variable-rate CO bonds were swapped, respectively. As of September 30, 2013 and December 31, 2012 the Bank had no fixed-rate CO discount notes that were swapped to a variable rate.
As of September 30, 2013, callable CO bonds constituted 25.6 percent of the total par value of CO bonds outstanding, compared to 12.2 percent as of December 31, 2012. This increase was due to market conditions during the first nine months of 2013 that favored the issuance of callable CO bonds. The derivatives that the Bank may employ to hedge against the interest-rate risk associated with the Bank’s callable CO bonds are callable by the counterparty; 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. Swap spreads tend to decrease as interest rates decrease, resulting in less favorable funding costs for the Bank. 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 Bank’s deposits may be volatile. Member loan demand, deposit flows, and liquidity management strategies influence the amount and volatility of deposit balances carried with the Bank. Total deposits remained relatively stable as of September 30, 2013 compared to December 31, 2012.

To support its member deposits, the FHLBank Act requires the Bank to have as a reserve an amount equal to or greater than the current deposits received from members. These reserves are required to be invested in obligations of the United States, deposits in eligible banks or trust companies or advances with maturities not exceeding five years. The Bank was in compliance with this depository liquidity requirement as of September 30, 2013.

Capital
The decrease in total capital from December 31, 2012 to September 30, 2013 was primarily due to the repurchase/redemption of $4.0 billion in capital stock and the payment of $84 million in dividends, partially offset by the issuance of $3.4 billion in capital stock and $369 million in comprehensive income during the period. The main components of comprehensive income include $228 million of net income and $140 million net increase in the fair value of the Bank's available-for-sale securities for the nine months ended September 30, 2013.
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 9—Capital and Mandatorily Redeemable Capital Stock to the Bank's interim financial statements.
Finance Agency regulations establish criteria based on the amount and type of capital held by an FHLBank for four capital classifications as follows:
•
Adequately Capitalized - FHLBank meets both risk-based and minimum capital requirements;
•
Undercapitalized - FHLBank does not meet one or both of its risk-based or minimum capital requirements;
•
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.

39

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 September 25, 2013, the Bank received notification from the Director that, based on June 30, 2013 data, the Bank meets the definition of “adequately capitalized.”
As of September 30, 2013 and December 31, 2012, the Bank had $24 million and $40 million, respectively, in capital stock subject to mandatory redemption from 16 members and former members. This decrease was due to the repurchase of $10 million and $12 million of mandatorily redeemable capital stock during the first and second quarter, respectively, of 2013. 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, in its discretion, may repurchase excess capital stock subject to certain limitations and thresholds in the Bank's capital plan.
As previously stated above, the Bank paid $84 million in dividends during the nine month period ended September 30, 2013. The Bank continues to target the payment of dividends each quarter that are consistent with an attractive rate of return on capital to its shareholders relative to an established benchmark, LIBOR, after providing for a prudent level of retained earnings under the Bank's capital management plan. The Bank's dividend rate and its spread to LIBOR may vary in response to changes in LIBOR. Historically, the Bank's dividend rate has increased with increases in LIBOR, while the spread between the dividend rate and LIBOR may shrink. Conversely, the dividend rate may decrease during periods of lower LIBOR, while the spread may increase. The Bank's ability to maintain dividends consistent with its recent trend depends on LIBOR remaining relatively stable and the Bank's actual financial results. The Bank's capital management plan is discussed in more detail in the Bank's Form 10-K, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Capital.

Results of Operations

The following is a discussion and analysis of the Bank's results of operations for the third quarter and first nine months of 2013 and 2012.

Net Income
The following table sets forth the Bank’s significant income items for the third quarter and first nine months of 2013 and 2012, and provides information regarding the changes during the periods (dollars in millions). These items are discussed in more detail below.
 
For the Three Months Ended September 30,
 
Increase (Decrease)    
 
For the Nine Months Ended September 30,
 
Increase (Decrease)    
 
2013
 
2012
 
Amount
 
Percent
 
2013
 
2012
 
Amount
 
Percent
Net interest income
$
86

 
$
91

 
$
(5
)
 
(5.02
)
 
$
259

 
$
279

 
$
(20
)
 
(7.26
)
Provision for credit losses
1

 
1

 
—

 
7.48

 
4

 
4

 
—

 
3.14

Noninterest income
25

 
24

 
1

 
4.25

 
90

 
41

 
49

 
120.57

Noninterest expense
31

 
30

 
1

 
5.47

 
92

 
87

 
5

 
5.01

Affordable Housing Program assessments
8

 
8

 
—

 
(6.27
)
 
25

 
23

 
2

 
9.71

Net income
$
71

 
$
76

 
$
(5
)
 
(6.16
)
 
$
228

 
$
206

 
$
22

 
10.77


Net Interest Income
The primary source of the Bank’s earnings is net interest income. Net interest income equals interest earned on assets (including member advances, mortgage loans, MBS held in portfolio, and other investments), less the interest expense incurred on liabilities (including 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.

40

The decrease in net interest income during the third quarter and first nine months of 2013, compared to the same periods in 2012, is primarily due to a reduction in yield on the Bank's long-term investments and advances, and a reduction in the average balance of the Bank's mortgage loans held for portfolio and federal funds sold during the periods. These reductions were partially offset by a reduction in rates on the Bank's long-term debt.
As discussed above, net interest income 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 Bank’s results of operations, the impact of hedging on interest income was a decrease of $162 million and $241 million for the third quarters of 2013 and 2012, respectively, and a decrease of $469 and $813 million for the first nine months of 2013 and 2012, respectively.

The following table presents spreads between the average yield on total interest-earning assets and the average cost of interest-bearing liabilities for the third quarter and first nine months of 2013 and 2012 (dollars in millions). The interest-rate spread is affected by the inclusion or exclusion of net interest income or expense associated with the Bank's derivatives. For example, as discussed above, if the derivatives qualify for fair-value hedge accounting under GAAP, the interest income or expense associated with the derivatives is included in net interest income and in the calculation of interest-rate spread. If the derivatives do not qualify for fair-value hedge accounting under GAAP, the interest income or expense associated with the derivatives is excluded from net interest income and the calculation of the interest-rate spread and recorded in noninterest income (loss) as “Net gain on derivatives and hedging activities.” Amortization associated with some hedging-related basis adjustments is also reflected in net interest income, which affects interest-rate spread.
 
For the Three Months Ended September 30,
 
2013
 
2012
 
Average  Balance
 
Interest
 
Yield/    
Rate
(%)
 
Average  Balance
 
Interest
 
Yield/    
Rate
(%)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (1)
$
2,904

 
$
1

 
0.14
 
$
4,331

 
$
2

 
0.17
Certificates of deposit
225

 
—

 
0.18
 
600

 
1

 
0.30
Securities purchased under agreements to resell
908

 
1

 
0.05
 
172

 
—

 
0.20
Federal funds sold
6,385

 
1

 
0.09
 
8,005

 
4

 
0.18
Long-term investments (2)
22,625

 
124

 
2.16
 
20,774

 
138

 
2.64
Advances
85,190

 
55

 
0.26
 
80,775

 
75

 
0.37
Mortgage loans (3)
1,032

 
14

 
5.52
 
1,389

 
18

 
5.24
Loans to other FHLBanks
2

 
—

 
0.70
 
1

 
—

 
0.15
Total interest-earning assets
119,271

 
196

 
0.65
 
116,047

 
238

 
0.81
Allowance for credit losses on mortgage loans
(11
)
 
 
 
 
 
(9
)
 
 
 
 
Other assets
1,087

 
 
 
 
 
784

 
 
 
 
Total assets
$
120,347

 
 
 
 
 
$
116,822

 
 
 
 
Liabilities and Capital
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (4)
$
2,588

 
—

 
0.01
 
$
2,107

 
—

 
0.05
Short-term borrowings
20,393

 
5

 
0.09
 
18,825

 
6

 
0.14
Long-term debt
88,231

 
104

 
0.47
 
85,501

 
140

 
0.65
Other borrowings
24

 
1

 
2.82
 
80

 
1

 
1.37
Total interest-bearing liabilities
111,236

 
110

 
0.39
 
106,513

 
147

 
0.55
Other liabilities
2,811

 
 
 
 
 
4,290

 
 
 
 
Total capital
6,300

 
 
 
 
 
6,019

 
 
 
 
Total liabilities and capital
$
120,347

 
 
 
 
 
$
116,822

 
 
 
 
Net interest income and net yield on interest-earning assets
 
 
$
86

 
0.29
 
 
 
$
91

 
0.31
Interest rate spread
 
 
 
 
0.26
 
 
 
 
 
0.26
Average interest-earning assets to interest-bearing liabilities
 
 
 
 
107.22
 
 
 
 
 
108.95
____________ 
(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


 
For the Nine Months Ended September 30,
 
2013
 
2012
 
Average        
Balance
 
Interest
 
Yield/    
Rate
(%)
 
Average        
Balance
 
Interest
 
Yield/    
Rate
(%)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (1)
$
3,319

 
$
4

 
0.15
 
$
4,352

 
$
5

 
0.16
Certificates of deposit
293

 
—

 
0.20
 
814

 
2

 
0.31
Securities purchased under agreements to resell
914

 
1

 
0.08
 
58

 
—

 
0.20
Federal funds sold
7,394

 
7

 
0.14
 
11,028

 
14

 
0.17
Long-term investments (2)
21,476

 
365

 
2.27
 
21,532

 
445

 
2.76
Advances
84,332

 
180

 
0.28
 
80,898

 
222

 
0.37
Mortgage loans (3)
1,120

 
47

 
5.63
 
1,484

 
59

 
5.32
Loans to other FHLBanks
1

 
—

 
0.09
 
2

 
—

 
0.12
Total interest-earning assets
118,849

 
604

 
0.68
 
120,168

 
747

 
0.83
Allowance for credit losses on mortgage loans
(12
)
 
 
 
 
 
(8
)
 
 
 
 
Other assets
1,064

 
 
 
 
 
730

 
 
 
 
Total assets
$
119,901

 
 
 
 
 
$
120,890

 
 
 
 
Liabilities and Capital
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (4)
$
2,356

 
—

 
0.03
 
$
2,595

 
1

 
0.04
Short-term borrowings
22,385

 
19

 
0.11
 
20,955

 
15

 
0.10
Long-term debt
85,663

 
325

 
0.51
 
86,511

 
449

 
0.69
Other borrowings
31

 
1

 
2.38
 
191

 
3

 
1.74
Total interest-bearing liabilities
110,435

 
345

 
0.42
 
110,252

 
468

 
0.57
Other liabilities
3,263

 
 
 
 
 
4,253

 
 
 
 
Total capital
6,203

 
 
 
 
 
6,385

 
 
 
 
Total liabilities and capital
$
119,901

 
 
 
 
 
$
120,890

 
 
 
 
Net interest income and net yield on interest-earning assets
 
 
$
259

 
0.29
 
 
 
$
279

 
0.31
Interest rate spread
 
 
 
 
0.26
 
 
 
 
 
0.26
Average interest-earning assets to interest-bearing liabilities
 
 
 
 
107.62
 
 
 
 
 
108.99
____________ 
(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.




















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 Bank’s interest income and interest expense (in millions).
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2013 vs. 2012
 
2013 vs. 2012
 
Volume (1)
 
Rate (1)
 
Increase (Decrease)    
 
Volume (1)
 
Rate (1)
 
Increase (Decrease)    
Increase (decrease) in interest income:
 
 
 
 
 
 
 
 
 
 
 
 Interest-bearing deposits
$
(1
)
 
$
—

 
$
(1
)
 
$
(1
)
 
$
—

 
$
(1
)
 Certificates of deposit
(1
)
 
—

 
(1
)
 
(1
)
 
(1
)
 
(2
)
 Securities purchased under agreements to resell
1

 
—

 
1

 
1

 
—

 
1

 Federal funds sold
(1
)
 
(2
)
 
(3
)
 
(4
)
 
(3
)
 
(7
)
 Long-term investments
12

 
(26
)
 
(14
)
 
(1
)
 
(79
)
 
(80
)
 Advances
4

 
(24
)
 
(20
)
 
9

 
(51
)
 
(42
)
    Mortgage loans
(5
)
 
1

 
(4
)
 
(15
)
 
3

 
(12
)
Total
9

 
(51
)
 
(42
)
 
(12
)
 
(131
)
 
(143
)
Increase (decrease) in interest expense:
 
 
 
 
 
 
 
 
 
 
 
 Interest-bearing deposits
—

 
—

 
—

 
—

 
(1
)
 
(1
)
 Short-term borrowings
1

 
(2
)
 
(1
)
 
2

 
2

 
4

 Long-term debt
4

 
(40
)
 
(36
)
 
(4
)
 
(120
)
 
(124
)
 Other borrowings
—

 
—

 
—

 
(3
)
 
1

 
(2
)
Total
5

 
(42
)
 
(37
)
 
(5
)
 
(118
)
 
(123
)
Increase (decrease) in net interest income
$
4

 
$
(9
)
 
$
(5
)
 
$
(7
)
 
$
(13
)
 
$
(20
)
____________ 
(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):
 
 
For the Three Months Ended September 30,
 
Increase (Decrease)
 
For the Nine Months Ended September 30,
 
Increase (Decrease)
 
2013
 
2012
 
Amount
 
Percent
 
2013
 
2012
 
Amount
 
Percent
Net impairment losses recognized in earnings
$
—

 
$
(1
)
 
$
1

 
100.00

 
$
—

 
$
(16
)
 
$
16

 
99.96

Net losses on trading securities
(15
)
 
(9
)
 
(6
)
 
(72.87
)
 
(79
)
 
(42
)
 
(37
)
 
(88.90
)
Net gains on derivatives and hedging activities
34

 
30

 
4

 
10.43

 
151

 
83

 
68

 
81.54

Letters of credit fees
4

 
5

 
(1
)
 
(5.93
)
 
14

 
14

 
—

 
2.99

Other
2

 
(1
)
 
3

 
915.16

 
4

 
2

 
2

 
80.38

Total noninterest income
$
25

 
$
24

 
$
1

 
4.25

 
$
90

 
$
41

 
$
49

 
120.57

____________ 
* Not meaningful.

Noninterest income remained relatively unchanged during the third quarter of 2013 and 2012. There was a slight increase in net losses on trading securities offset by an increase in net gains on derivatives and hedging activities.

Noninterest income was $90 million for the first nine months of 2013, a $49 million increase over the same period in 2012. This increase was primarily due to a $68 million increase in net gains on derivatives and hedging activities. This increase occurred as a result of gains on fair value hedges, stand-alone macro hedge derivatives, and the derivatives hedging trading securities. The $68 million increase in net gains on derivatives and hedging actives was partially offset by a $37 million increase in net losses on trading securities, occurring as a result of a decrease in the fair value of the securities.


43

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

 
For the Three Months Ended September 30, 2013
 
Advances
 
Investments
 
Consolidated
Obligation
Bonds
 
Balance Sheet
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
Amortization or accretion of hedging activities in net interest income (1)
$
(58
)
 
$
—

 
$
5

 
$
—

 
$
(53
)
Net interest settlements included in net interest income (2)
(259
)
 
—

 
150

 
—

 
(109
)
Total effect on net interest (expense) income
$
(317
)
 
$
—

 
$
155

 
$
—

 
$
(162
)
Net gains on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
 Gains (losses) on fair value hedges
$
46

 
$
—

 
$
(7
)
 
$
—

 
$
39

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

 
(6
)
 
3

 
(2
)
 
(5
)
Total net gains (losses) on derivatives and hedging activities
46

 
(6
)
 
(4
)
 
(2
)
 
34

Net losses on trading securities (3)
—

 
(16
)
 
—

 
—

 
(16
)
Total effect on noninterest income (loss)
$
46

 
$
(22
)
 
$
(4
)
 
$
(2
)
 
$
18

____________ 
(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.

 
For the Three Months Ended September 30, 2012
 
Advances
 
Investments
 
Consolidated
Obligation
Bonds
 
Balance Sheet
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
Amortization or accretion of hedging activities in net interest income (1)
$
(53
)
 
$
—

 
$
9

 
$
—

 
$
(44
)
Net interest settlements included in net interest income(2)
(337
)
 
—

 
140

 
—

 
(197
)
Total effect on net interest (expense) income
$
(390
)
 
$
—

 
$
149

 
$
—

 
$
(241
)
Net gains on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
  Gains (losses) on fair value hedges
$
62

 
$
—

 
$
(13
)
 
$
—

 
$
49

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

 
(17
)
 
1

 
(3
)
 
(19
)
Total net gains (losses) on derivatives and hedging activities
62

 
(17
)
 
(12
)
 
(3
)
 
30

Net losses on trading securities (3)
—

 
(9
)
 
—

 
—

 
(9
)
Total effect noninterest income (loss)
$
62

 
$
(26
)
 
$
(12
)
 
$
(3
)
 
$
21

____________ 
(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

 
For the Nine Months Ended September 30, 2013
 
Advances
 
Investments
 
Consolidated
Obligation
Bonds
 
Balance Sheet
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
Amortization or accretion of hedging activities in net interest income (1)
$
(162
)
 
$
—

 
$
21

 
$
—

 
$
(141
)
Net interest settlements included in net interest income (2)
(797
)
 
—

 
469

 
—

 
(328
)
Total effect on net interest (expense) income
$
(959
)
 
$
—

 
$
490

 
$
—

 
$
(469
)
Net gains on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
 Gains (losses) on fair value hedges
$
153

 
$
—

 
$
(19
)
 
$
—

 
$
134

 Gains on derivatives not receiving hedge accounting including net interest settlements
4

 
5

 
1

 
7

 
17

Total net gains (losses) on derivatives and hedging activities
157

 
5

 
(18
)
 
7

 
151

Net losses on trading securities (3)
—

 
(79
)
 
—

 
—

 
(79
)
Total effect on noninterest income (loss)
$
157

 
$
(74
)
 
$
(18
)
 
$
7

 
$
72

____________ 
(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.

 
For the Nine Months Ended September 30, 2012
 
Advances
 
Investments
 
Consolidated
Obligation
Bonds
 
Balance Sheet
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
Amortization or accretion of hedging activities in net interest income (1)
$
(181
)
 
$
—

 
$
24

 
$
—

 
$
(157
)
Net interest settlements included in net interest income (2)
(1,085
)
 
—

 
429

 
—

 
(656
)
Total effect on net interest (expense) income
$
(1,266
)
 
$
—

 
$
453

 
$
—

 
$
(813
)
Net gains on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
 Gains (losses) on fair value hedges
$
169

 
$
—

 
$
(33
)
 
$
—

 
$
136

 Gains (losses) on derivatives not receiving hedge accounting including net interest settlements
1

 
(46
)
 
3

 
(11
)
 
(53
)
Total net gains (losses) on derivatives and hedging activities
170

 
(46
)
 
(30
)
 
(11
)
 
83

Net losses on trading securities (3)
—

 
(42
)
 
—

 
—

 
(42
)
Total effect on noninterest income (loss)
$
170

 
$
(88
)
 
$
(30
)
 
$
(11
)
 
$
41

____________ 
(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

Total noninterest expense and Affordable Housing Program assessments remained relatively stable for the third quarter and first nine months of 2013, compared to the same periods in 2012.

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 complies with operational liquidity and contingent liquidity, and other regulatory requirements. The Bank also performs a separate and independent measure of liquidity, the 45-day liquidity measurement, to validate the level of liquidity reserves.
Finance Agency regulations require the Bank to maintain operational liquidity (generally, the ready cash and borrowing capacity available to meet the Bank's intraday needs), and contingent liquidity in an amount sufficient to meet its liquidity needs for five business days if it is unable to access the capital markets. The Bank met these regulatory liquidity requirements throughout the first nine months of 2013. The Finance Agency has also 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.
The Bank has established an internal liquidity measurement separate from the Finance Agency requirements described above. The Bank performs a supplemental analysis to confirm that liquidity reserves are sufficient to service debt obligations for at least 45 days. This analysis assumes no access to debt market issuance and other management assumptions which are completely independent of the operational and contingent liquidity calculation measured above. The Bank met its 45 day internal liquidity goal throughout the first nine months of 2013.
The Bank’s 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 Bank’s ability to access the capital markets at competitive market rates. Although the Bank maintains secured and unsecured lines of credit with money market counterparties, the Bank’s income and liquidity would be 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 pricing and investor appetite tend to favor short-term discount notes during times of 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 Bank’s primary off-balance sheet commitments are as follows:
•
the Bank’s joint and several liability for all FHLBank COs; and
•
the Bank’s outstanding commitments arising from standby letters of credit.
Should an FHLBank be unable to satisfy its payment obligation under a 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 a 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 September 30, 2013 and December 31, 2012. As of September 30, 2013, the FHLBanks had $720.7 billion in aggregate par value of COs issued and outstanding, $103.1 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.

46

As of September 30, 2013, the Bank had outstanding standby letters of credit of $20.0 billion with original terms of one month to 20 years, with the longest final stated expiration in 2030, and 13 outstanding standby letters of credit of $10 million subject to renewal on an annual basis with no stated maturity date (commonly known as evergreen letters of credit). As of December 31, 2012, the Bank had outstanding standby letters of credit of $17.7 billion with original terms of less than four months to 20 years, with the longest final stated expiration in 2030, and five outstanding evergreen letters of credit for a total of $49 million.
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 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. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to have an allowance for credit losses for these unfunded standby letters of credit as of September 30, 2013. Management regularly reviews its standby letter of credit pricing in light of several factors, including the Bank’s potential liquidity needs related to draws on its standby letters of credit.

Contractual Obligations

As of September 30, 2013 there has been no material change outside the ordinary course of business in the Bank’s contractual obligations as reported in the Bank’s Form 10-K.

Legislative and Regulatory Developments
Significant regulatory actions and developments for the period covered by this report are summarized below.

Final Rule on Stress Testing. On September 26, 2013, the Finance Agency issued a final rule effective October 28, 2013 which requires each FHLBank to assess the potential impact of certain sets of economic and financial conditions, including baseline, adverse and severely adverse scenarios, on its consolidated earnings, capital, and other related factors, over a nine-quarter forward horizon based on its portfolio as of September 30 of the previous year. The rule provides that the Finance Agency will annually issue guidance on the scenarios and methodologies to be used in conducting the stress test. Each FHLBank must publicly disclose the results of its adverse economic conditions stress test between July 15 and July 30 of each year, on the FHLBank's website or any other form that is reasonably accessible to the public.

Joint Proposed Rule on Credit Risk Retention for Asset-backed Securities. On September 20, 2013, the Finance Agency with other U.S. federal regulators jointly issued a proposed rule requiring asset-backed securities (ABS) sponsors to retain a minimum of five percent economic interest in a portion of the credit risk of the assets collateralizing the ABS, unless all the securitized assets satisfy specified qualifications. The proposed rule revises a 2011 proposed rule on ABS credit risk retention. In general, as with the original proposal, the revised proposed rule specifies criteria for qualified residential mortgage, commercial real estate, auto, and commercial loans that would make them exempt from the risk retention requirement. The criteria for qualified residential mortgages is described in the proposed rulemaking as those underwriting and product features which, based on historical data, are associated with low risk even in periods of decline in housing prices and high unemployment. The proposed rule would exempt agency MBS from the risk-retention requirements so long as the sponsoring agency is operating under the conservatorship or receivership of the Finance Agency and fully guarantees the timely payment of principal and interest on all interests in the issued security. Further, MBS issued by any limited-life regulated entity succeeding to either Fannie Mae or Freddie Mac operating with capital support from the United States would be exempt from the risk-retention requirements. Comments on the proposed rule were due October 30, 2013. At this time, the impact of this rule (if adopted) on the Bank's operations is uncertain.
Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention. In April 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). 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 expects to adopt the adverse classification requirements and the charge-off requirements of AB 2012-02 in separate phases over the course of two years, beginning in 2014. The Bank does not expect the adoption of AB 2012-02 to have a material impact on the Bank's financial condition or results of operations.

47

Basel Committee on Bank Supervision - Proposed Liquidity Coverage Ratio. In October 2013, the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC issued a proposed rule with a comment deadline of January 31, 2014 for a minimum liquidity coverage ratio (the LCR) applicable to all internationally active banking organizations, bank holding companies, systemically important, non-bank financial institutions designated for Federal Reserve supervision, certain savings and loan holding companies, depository institutions with $250 billion or more in total assets or $10 billion or more in on-balance sheet foreign exposure, and to such depository institutions' consolidated subsidiaries that are depository institutions with $10 billion or more in total consolidated assets. A modified and slightly less rigorous LCR would apply to bank holding companies and savings and loan holding companies with $50 billion or more in total assets. Among other things, the proposed rule defines various categories of high quality, liquid assets (HQLAs) that must be held for purposes of satisfying the LCR over a 21- or 30- day period, and these HQLAs are further categorized into Level 1, 2A, or 2B. As proposed, COs would be categorized as Level 2A HQLAs. Level 2A HQLAs are subject to a 15% valuation discount and, with all other Level 2 assets, may not constitute more than 40% of all required HQLAs. At this time, the impact of this rule (if adopted) on the System COs is uncertain.

Risk Management
The Bank’s lending, investment, and funding activities and the use of derivative hedge instruments expose the Bank to a number of risks. A robust risk management framework aligns risk-taking activities with the Bank’s strategies and risk appetite. A risk management framework also balances risks and rewards. The Bank’s risk management framework consists of risk governance, risk appetite, and risk management policies.
The Bank’s board of directors and management recognize that risks are inherent to the Bank’s business model and that the process of establishing a risk appetite does not imply that the Bank seeks to mitigate or eliminate all risk. By defining and managing to a specific risk appetite, the board of directors and management ensure that there is a common understanding of the Bank’s desired risk profile which enhances 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 Bank's 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 Bank's strategic and tactical planning, as described in the Bank's Form 10-K.

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

Credit Risk
The Bank faces credit risk primarily with respect to its advances, investments, derivatives, and mortgage 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 Bank’s credit risk exposure. The Bank uses a risk-focused approach to credit and collateral underwriting. The Bank attempts to reduce credit risk on advances by monitoring the financial condition of borrowers and the quality and value of the assets members pledge as eligible collateral.
The Bank utilizes a credit risk rating system for its members, which focuses primarily on an institution’s overall financial health and takes into account quality of assets, earnings, and capital position. The Bank assigns each borrower that is an insured depository institution or an insurance company 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 the Bank's assessment of the borrower and its collateral.

48

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 September 30, 2013
 
As of December 31, 2012
Rating                 
 
Number of Borrowers
 
Outstanding Advances
 
Number of Borrowers
 
Outstanding Advances
1-9
 
512

 
$
74,791

 
527

 
$
82,152

10
 
54

 
931

 
65

 
1,403


The Bank establishes a credit limit for each borrower. The credit limit is not a committed line of credit, but rather an indication of the borrower’s general borrowing capacity with the Bank. The Bank determines the credit limit in its sole and absolute discretion, by evaluating a wide variety of factors indicating the borrower’s overall creditworthiness. The credit limit generally is expressed as a percentage equal to the ratio of the borrower’s total liabilities to the Bank (including the face amount of outstanding letters of credit, the principal amount of outstanding advances and the total exposure of the Bank to the borrower under any derivative contract) to the borrower’s total assets. Generally, borrowers are held to a credit limit of no more than 30 percent. However, the Bank’s board of directors, or a relevant committee thereof, may approve a higher limit at its discretion, and such borrowers may be subject to certain additional collateral reporting and maintenance requirements. As of September 30, 2013, eight borrowers have been approved for a credit limit higher than 30 percent.
Each borrower must maintain an amount of qualifying collateral that, when discounted to the lendable collateral value (LCV), is equal to at least 100 percent of the outstanding principal amount of all advances and other liabilities of the borrower to the Bank. The LCV is the value that the Bank assigns to each type of qualifying collateral for purposes of determining the amount of credit that such qualifying collateral will support. For each type of qualifying collateral, the Bank discounts the 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 Bank’s advances (dollars in millions).

 
Total Par 
Value of
Outstanding Advances
 
LCV of 
Collateral 
Pledged by Members
 
First Mortgage 
Collateral (%)
 
Securities 
Collateral (%)
 
Other Real Estate Related Collateral (%)
As of September 30, 2013
$
76,080

 
$
223,965

 
67.52
 
8.52
 
23.96
As of December 31, 2012
83,870

 
217,935

 
69.78
 
7.09
 
23.13
For purposes of determining each member's LCV, the Bank estimates the current market value of all residential first mortgage loans, multifamily and commercial real estate loans, and home equity loans and lines of credit pledged as collateral based on information provided by the member on individual loans or its loan portfolio through the regular collateral reporting process. The estimated market value is discounted to account for the price volatility of loans as well as estimated liquidation and servicing costs in the event of the member's default. Market values, and thus LCVs, change monthly. The use of this market-based valuation methodology allows the Bank to establish its collateral discounts with greater precision and provides 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.

 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
FHLBank Atlanta members
1

 
4

 
5

 
18

Non-FHLBank Atlanta members
5

 
8

 
17

 
25

Total FDIC-insured
6

 
12

 
22

 
43


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 fewer member institution failures going forward as capital levels, asset quality, and the overall financial condition of member institutions continue to 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

49

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.
In its history, the Bank has never experienced a credit loss on an advance. In consideration of this, and the Bank’s policies and practices detailed above, the Bank has not established an allowance for credit losses on advances as of September 30, 2013 and December 31, 2012.

Investments
The Bank is subject to credit risk on unsecured investments, such as 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 Bank’s mortgage purchase programs; (2) certain investments targeted to low-income people or communities; (3) certain marketable direct obligations of state, local, or tribal government units or agencies having at least the second highest credit rating from a NRSRO; (4) MBS or asset-backed securities backed by manufactured housing loans or home equity loans; and (5) certain foreign housing loans authorized under section 12(b) of the FHLBank Act;
•
interest-only or principal-only stripped MBS, collateralized mortgage obligations (CMOs), collateralized debt obligations, and real estate mortgage investment conduits (REMICs);
•
residual-interest or interest-accrual classes of CMOs and REMICs;
•
fixed-rate or variable-rate MBS, CMOs, and REMICs that on the trade date are at rates equal to their contractual cap and that have average lives that vary by more than six years under an assumed instantaneous interest-rate change of 300 basis points; and
•
non-U.S. dollar denominated securities.
The Bank monitors the financial condition of investment counterparties to ensure that they are in compliance with the Bank's Risk Management Policy (RMP) and Finance Agency regulations. Unsecured credit exposure to any counterparty is limited by the credit quality and capital of the counterparty and by the capital of the Bank. On a regular basis, management produces financial monitoring reports detailing the financial condition of the Bank’s counterparties. These reports are reviewed by the Bank’s board of directors. 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 distribution of counterparty exposure, and may reduce the Bank’s overall short-term investment opportunities.

50

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 counterparty’s parent entity is located in another country. The tables below represent the Bank’s gross exposure, by instrument type, according to the location of the parent company of the counterparty (in millions):
 
As of September 30, 2013
 
Federal Funds Sold         
 
Interest-bearing  
Deposits
 
Net Derivative Exposure (1)    
 
Total 
Germany
$
—

 
$
—

 
$
94

 
$
94

Sweden
1,110

 
—

 
—

 
1,110

United Kingdom
1,000

 
—

 
1

 
1,001

United States of America
885

 
1,007

 
—

 
1,892

Total
$
2,995

 
$
1,007

 
$
95

 
$
4,097

____________ 
(1) 
Amounts do not reflect collateral; see the table under Risk Management–Credit Risk–Derivatives below for a breakdown of the credit ratings of and the Bank’s credit exposure to derivative counterparties, including net exposure after collateral.
 
As of December 31, 2012
 
Federal Funds Sold         
 
Interest-bearing  
Deposits
 
Certificates of Deposit      
 
Net Derivative Exposure (1)    
 
Total 
Australia
$
1,550

 
$
—

 
$
—

 
$
—

 
$
1,550

Canada
2,315

 
—

 
—

 
1

 
2,316

Germany
—

 
—

 
—

 
91

 
91

Japan
—

 
—

 
550

 
—

 
550

Sweden
2,215

 
—

 
—

 
—

 
2,215

United Kingdom
850

 
—

 
—

 
—

 
850

United States of America
305

 
1,005

 
—

 
—

 
1,310

Total
$
7,235

 
$
1,005

 
$
550

 
$
92

 
$
8,882

____________ 
(1) 
Amounts do not reflect collateral; see the table under Risk Management–Credit Risk–Derivatives below for a breakdown of the credit ratings of and the Bank’s credit exposure to derivative counterparties, including net exposure after collateral.
The Bank experienced a decrease in unsecured credit exposure in its investment portfolio related to non-U.S. government and non-U.S. government agency counterparties from $8.8 billion as of December 31, 2012 to $4.0 billion as of September 30, 2013. There were three such counterparties, Branch Banking and Trust, Barclays Bank PLC, and Skandinaviska Enskilda Banken, that each represented greater than 10 percent, and collectively represented 77.9 percent of the total unsecured credit exposure to non-U.S. government or non-U.S. government agencies counterparties. As reported in the Bank's Form 10-K, Branch Banking and Trust was one of the Bank's top 10 advances borrowers as of December 31, 2012. As of September 30, 2013, the Bank’s unsecured credit portfolio consisted entirely of securities with overnight maturities and was comprised primarily of federal funds sold.
The Bank’s RMP permits the Bank to invest in U.S. agency (Fannie Mae, Freddie Mac and Ginnie Mae) obligations, including CMOs and REMICS backed by such securities, and other MBS, CMOs, and REMICS rated AAA by S&P or Aaa by Moody’s at the time of purchase. The private-label MBS purchased by the Bank originally attained their triple-A ratings through credit enhancements, which primarily consisted of the subordination of the claims of the other tranches of these securities.
The tables below provide information on the credit ratings of the Bank’s investments held as of September 30, 2013 and December 31, 2012, based on their credit ratings as of September 30, 2013 and December 31, 2012 (in millions), respectively.

51

The credit ratings reflect the lowest long-term credit rating as reported by an NRSRO.
 
 
 
As of September 30, 2013
 
 
 
 
 
Carrying Value (1)
 
 
 
 
 
Investment Grade
 
Below Investment Grade
 
 
 
AAA
 
AA
 
A
 
BBB
 
BB
 
B
 
CCC
 
CC
 
C
 
D
 
Unrated
 
Total
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
$
—

 
$
1

 
$
1,006

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,007

Securities purchased under agreements to resell
—

 
—

 
—

 
1,000

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1,000

Federal funds sold
—

 
—

 
2,445

 
550

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2,995

Total short-term investments
—

 
1

 
3,451

 
1,550

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
5,002

Long-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State or local housing agency debt obligations
—

 
96

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
96

U.S. government agency debt obligations
—

 
5,283

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
5,283

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency securities
—

 
494

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
494

Government-sponsored enterprises
137

 
13,502

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
13,639

Private-label
—

 
82

 
143

 
546

 
584

 
830

 
672

 
340

 
167

 
1,106

 
7

 
4,477

Total mortgage-backed securities
137

 
14,078

 
143

 
546

 
584

 
830

 
672

 
340

 
167

 
1,106

 
7

 
18,610

Total long-term investments
137

 
19,457

 
143

 
546

 
584

 
830

 
672

 
340

 
167

 
1,106

 
7

 
23,989

Total investments
$
137

 
$
19,458

 
$
3,594

 
$
2,096

 
$
584

 
$
830

 
$
672

 
$
340

 
$
167

 
$
1,106

 
$
7

 
$
28,991

____________
(1) 
Investment amounts noted in the above table represent the carrying value and do not include related accrued interest receivable of $59 million as of September 30, 2013.

52

 
As of December 31, 2012
 
 
 
Carrying Value (1)
 
 
 
Investment Grade
 
Below Investment Grade
 
 
 
AAA
 
AA
 
A
 
BBB
 
BB
 
B
 
CCC
 
CC
 
C
 
D
 
Total
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Interest-bearing deposits
$
—

 
$
1

 
$
1,004

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,005

  Certificates of deposit
—

 
—

 
550

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
550

Securities purchased under agreements to resell
—

 
—

 
250

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
250

  Federal funds sold
—

 
2,755

 
4,480

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
7,235

Total short-term investments
—

 
2,756

 
6,284

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
9,040

Long-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

State or local housing agency debt obligations
—

 
108

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
108

U.S. government agency debt obligations
—

 
4,501

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
4,501

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

U.S. government agency securities
—

 
622

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
622

Government-sponsored
enterprises
—

 
10,763

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
10,763

Private-label
1

 
206

 
390

 
536

 
745

 
980

 
1,018

 
369

 
383

 
792

 
5,420

Total mortgage-backed securities
1

 
11,591

 
390

 
536

 
745

 
980

 
1,018

 
369

 
383

 
792

 
16,805

Total long-term investments
1

 
16,200

 
390

 
536

 
745

 
980

 
1,018

 
369

 
383

 
792

 
21,414

Total investments
$
1

 
$
18,956

 
$
6,674

 
$
536

 
$
745

 
$
980

 
$
1,018

 
$
369

 
$
383

 
$
792

 
$
30,454

____________
(1) 
Investment amounts noted in the above table represent the carrying value and do not include related accrued interest receivable of $59 million as of December 31, 2012.

Securities Purchased Under Agreements to Resell

Securities purchased under agreements to resell are considered collateralized financing arrangements and effectively represent short-term secured loans with investment-grade counterparties. The Bank is inherently exposed to credit risk associated with the risk of default by, or insolvency of, any counterparty it conducts business with; however, based upon the collateral held as security and the investment-grade of the related counterparties, the Bank considers its credit exposure related to these investments to be minimal.
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 GSEs, it is expected that these securities would not be settled at a price less than the amortized cost basis. The Bank does not consider these investments to be other-than-temporarily impaired as of September 30, 2013 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.

Private-label MBS
For disclosure purposes, the Bank classifies private-label MBS as either prime or Alt-A based upon the overall credit quality of the underlying loans as determined by the originator at the time of origination. Although there is no universally accepted definition of Alt-A, generally loans with credit characteristics that range between prime and subprime are classified as Alt-A. Participants in the mortgage market have used the Alt-A classification principally to describe loans for which the underwriting process has been streamlined in order to reduce the documentation requirements of the borrower or allow alternative documentation. As of September 30, 2013, based on the classification by the originator at the time of origination, approximately 86.6 percent of the underlying mortgages collateralizing the Bank’s private-label MBS were considered prime, of which 93.5 percent were variable-rate, and the remaining underlying mortgages collateralizing these securities were considered Alt-A, of which 61.5 percent were variable-rate.

53

The table below provides information on the interest-rate payment terms of the Bank’s private-label MBS backed by prime and Alt-A loans (in millions).
 
As of September 30, 2013
 
As of December 31, 2012
 
Fixed-Rate      
 
Variable-Rate    
 
Total        
 
Fixed-Rate      
 
Variable-Rate    
 
Total        
Prime
$
275

 
$
3,966

 
$
4,241

 
$
494

 
$
4,760

 
$
5,254

Alt-A
254

 
405

 
659

 
336

 
458

 
794

Total unpaid principal balance
$
529

 
$
4,371

 
$
4,900

 
$
830

 
$
5,218

 
$
6,048

The tables below provide additional information, including changes in ratings since the original purchase date, on the Bank’s private-label MBS by year of securitization as of September 30, 2013 (dollars in millions).
 
Year of Securitization - Prime
 
2008
 
2007
 
2006
 
2005
 
2004 and  
Prior
 
Total      
Investment Ratings:
 
 
 
 
 
 
 
 
 
 
 
AA
$
—

 
$
—

 
$
—

 
$
—

 
$
82

 
$
82

A
—

 
—

 
—

 
12

 
130

 
142

BBB
—

 
—

 
—

 
126

 
349

 
475

BB
—

 
15

 
—

 
145

 
285

 
445

B
—

 
17

 
—

 
362

 
351

 
730

CCC
36

 
158

 
41

 
271

 
118

 
624

CC
89

 
162

 
92

 
33

 
—

 
376

C
—

 
14

 
26

 
149

 
—

 
189

D
—

 
530

 
456

 
185

 
—

 
1,171

Unrated
—

 
—

 
—

 
—

 
7

 
7

Total unpaid principal balance
$
125

 
$
896

 
$
615

 
$
1,283

 
$
1,322

 
$
4,241

Amortized cost
$
107

 
$
694

 
$
499

 
$
1,180

 
$
1,307

 
$
3,787

Gross unrealized losses
$
—

 
$
(4
)
 
$
(1
)
 
$
(9
)
 
$
(18
)
 
$
(32
)
Fair value
$
115

 
$
755

 
$
534

 
$
1,194

 
$
1,299

 
$
3,897

Other-than-temporary impairment (Year-to-date):
 
 
 
 
 
 
 
 
 
 
 
 Credit-related losses
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 Non-credit-related losses
—

 
—

 
—

 
—

 
—

 
—

Total other-than-temporary impairment losses
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Weighted average percentage of fair value to unpaid principal balance
91.63
%
 
84.27
%
 
86.72
%
 
93.06
%
 
98.29
%
 
91.87
%
Original weighted average credit support
15.72
%
 
14.14
%
 
10.38
%
 
6.87
%
 
3.63
%
 
8.17
%
Weighted average credit support
4.36
%
 
1.14
%
 
0.92
%
 
4.66
%
 
9.37
%
 
4.83
%
Weighted average collateral delinquency
13.61
%
 
21.36
%
 
18.95
%
 
10.66
%
 
8.25
%
 
13.46
%

54

 
Year of Securitization – Alt-A
 
2008
 
2007
 
2006
 
2005
 
2004 and  
Prior
 
Total      
Investment Ratings:
 
 
 
 
 
 
 
 
 
 
 
AA
$
—

 
$
—

 
$
—

 
$
—

 
$
1

 
$
1

A
—

 
—

 
—

 
—

 
3

 
3

BBB
—

 
—

 
—

 
—

 
74

 
74

BB
—

 
—

 
—

 
—

 
141

 
141

B
—

 
—

 
—

 
—

 
105

 
105

CCC
—

 
—

 
—

 
154

 
4

 
158

   D
—

 
44

 
—

 
133

 
—

 
177

Total unpaid principal balance
$
—

 
$
44

 
$
—

 
$
287

 
$
328

 
$
659

Amortized cost
$
—

 
$
32

 
$
—

 
$
231

 
$
328

 
$
591

Gross unrealized losses
$
—

 
$
—

 
$
—

 
$
(22
)
 
$
(2
)
 
$
(24
)
Fair value
$
—

 
$
36

 
$
—

 
$
209

 
$
331

 
$
576

Other-than-temporary impairment (Year-to-date):
 
 
 
 
 
 
 
 
 
 
 
 Credit-related losses
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 Non-credit-related losses
—

 
—

 
—

 
—

 
1

 
1

Total other-than-temporary impairment losses
$
—

 
$
—

 
$
—

 
$
—

 
$
(1
)
 
$
(1
)
Weighted average percentage of fair value to unpaid principal balance
0.00
%
 
83.18
%
 
0.00
%
 
72.74
%
 
100.86
%
 
87.42
%
Original weighted average credit support
0.00
%
 
12.29
%
 
0.00
%
 
27.14
%
 
7.80
%
 
16.53
%
Weighted average credit support
0.00
%
 
0.00
%
 
0.00
%
 
11.09
%
 
12.05
%
 
10.83
%
Weighted average collateral delinquency
0.00
%
 
31.29
%
 
0.00
%
 
28.99
%
 
8.63
%
 
19.02
%

The following table represents a summary of the significant inputs used to evaluate each of the Bank’s private-label MBS for other-than-temporary impairment:
 
 
 
Significant Inputs
 
 
 
Prepayment Rate
 
Default Rates
 
Loss Severities
 
Current Credit Enhancement
Year of
Securitization
 
Weighted    
Average
(%)
 
Weighted    
Average
(%)
 
Weighted    
Average
(%)
 
Weighted    
Average
(%)
Prime:
 
 
 
 
 
 
 
 
2008
 
11.85
 
18.01
 
39.79
 
4.36
2007
 
12.79
 
13.97
 
37.90
 
3.30
2006
 
10.63
 
19.47
 
38.49
 
1.33
2005
 
14.02
 
6.07
 
32.73
 
6.14
2004 and prior
 
14.12
 
4.79
 
32.48
 
9.15
Total Prime
 
13.50
 
8.16
 
34.00
 
6.60
Alt-A:
 
 
 
 
 
 
 
 
2007
 
11.52
 
33.64
 
44.71
 
0.00
2006
 
11.74
 
35.00
 
45.83
 
0.00
2005
 
9.11
 
30.57
 
44.38
 
5.09
2004 and prior
 
11.48
 
9.51
 
33.93
 
12.28
Total Alt-A
 
10.81
 
27.96
 
42.57
 
4.00
Total
 
12.36
 
16.51
 
37.61
 
5.51

There were no securities for which an other-than-temporary impairment was determined to have occurred during the third quarter of 2013.

55

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

 
For the Three Months Ended September 30,
 
2013
 
2012
 
Credit
Losses
 
Net
Noncredit
Losses
 
Total
Losses
 
Credit
Losses
 
Net
Noncredit
Losses
 
Total
Losses
Securities previously impaired prior to current period (1)
$
—

 
$
—

 
$
—

 
$
(1
)
 
$
(1
)
 
$
—

Total
$
—

 
$
—

 
$
—

 
$
(1
)
 
$
(1
)
 
$
—

____________ 
(1)
For the three months ended September 30, 2013 and 2012, “Securities previously impaired prior to current period” represents all securities that were also previously impaired prior to July 1, 2013 and 2012, respectively.

 
For the Nine Months Ended September 30,
 
2013
 
2012
 
Credit
Losses
 
Net
Noncredit
Losses
 
Total
Losses
 
Credit
Losses
 
Net
Noncredit
Losses
 
Total
Losses
Securities newly impaired during the period
$
—

 
$
1

 
$
(1
)
 
$
—

 
$
—

 
$
—

Securities previously impaired prior to current period (1)
—

 
—

 
—

 
(16
)
 
(16
)
 
—

Total
$
—

 
$
1

 
$
(1
)
 
$
(16
)
 
$
(16
)
 
$
—

____________ 
(1)
For the nine months ended September 30, 2013 and 2012, “Securities previously impaired prior to current period” represents all securities that were also previously impaired prior to January 1, 2013 and 2012, respectively.
In addition to the cash flow analysis of the Bank’s private-label MBS under a base case (best estimate) housing price scenario as described in Note 6—Other-than-temporary Impairment to the Bank’s 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). This more stressful scenario was based on a short-term housing price forecast that was decreased five percentage points followed by a recovery path that is 33.0 percent lower than the base case. There were no other-than-temporary impairment credit losses under either the base case or the adverse case housing price scenarios for the three months ended September 30, 2013.

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

Derivatives

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

For bilateral derivative transactions, the Bank is subject to nonperformance by counterparties to its bilateral derivative transactions. The Bank generally requires collateral on bilateral derivative transactions. The amount of net unsecured credit exposure that is permissible with respect to each counterparty depends on the credit rating of that counterparty. A counterparty must deliver collateral to the Bank if the total market value of the Bank's exposure to that counterparty rises above a specific

56

trigger point. As a result of these risk mitigation initiatives, the Bank does not anticipate any credit losses on its bilateral derivative transactions as of September 30, 2013.

For cleared derivatives, the Bank is subject to credit risk due to nonperformance by the Clearinghouse and clearing agent. The requirement that the Bank post initial and variation margin through the clearing agent, to the Clearinghouse, exposes the Bank to institutional credit risk in the event that the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives mitigates credit risk exposure because a central counterparty is substituted for individual counterparties and collateral is posted daily for changes in the value of cleared derivatives through a clearing agent. The Bank does not anticipate any credit losses on its cleared derivatives as of September 30, 2013.

The contractual or notional amount of derivatives transactions reflects the involvement of the Bank in the various classes of financial instruments; however, the maximum credit risk of the Bank with respect to derivative transactions is the estimated cost of replacing the derivative transactions if there is default, minus the value of any related collateral, including initial and variation margin. In determining maximum credit risk, the Bank considers, accrued interest receivables and payables as well as the netting requirements to net assets and liabilities.
The tables below provide information on the credit ratings of, and the Bank’s credit exposure to, its derivative counterparties (in millions). The credit ratings reflect the lowest long-term credit rating by an NRSRO.
 
 
As of September 30, 2013
 
 
Notional Amount
 
Derivatives Fair Value Before Collateral
 
Cash Collateral Pledged To (From) Counterparties
 
Other Collateral Pledged To (From) Counterparties
 
Net Credit Exposure to Counterparties
Non-member counterparties:
 
 
 
 
 
 
 
 
 
 
  Asset positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
      Single-A
 
$
18,538

 
$
95

 
$
(92
)
 
$
—

 
$
3

      Cleared derivatives
 
2,055

 
—

 
5

 
—

 
5

  Liability positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
      Single-A
 
11,576

 
(227
)
 
230

 
—

 
3

      Cleared derivatives
 
8,874

 
(17
)
 
47

 
—

 
30

Total derivative positions with non-member counterparties to which the Bank had credit exposure
 
41,043

 
(149
)
 
190

 
—

 
41

Member institutions (1)
 
14

 
—

 
—

 
—

 
—

Total
 
$
41,057

 
$
(149
)
 
$
190

 
$
—

 
$
41

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

57

 
 
As of December 31, 2012
 
 
Notional Amount
 
Derivatives Fair Value Before Collateral
 
Cash Collateral Pledged To (From) Counterparties
 
Other Collateral Pledged To (From) Counterparties
 
Net Credit Exposure to Counterparties
Non-member counterparties:
 
 
 
 
 
 
 
 
 
 
  Asset positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
      Single-A
 
$
15,241

 
$
92

 
$
(88
)
 
$
—

 
$
4

  Liability positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
      Single-A
 
14,691

 
(434
)
 
442

 
—

 
8

Total derivative positions with non-member counterparties to which the Bank had credit exposure
 
29,932

 
(342
)
 
354

 
—

 
12

Member institutions (1)
 
4

 
1

 
—

 
(1
)
 
—

Total
 
$
29,936

 
$
(341
)
 
$
354

 
$
(1
)
 
$
12

____________ 
(1) Collateral held with respect to derivatives with member institutions where the Bank is acting as an intermediary represents the amount of eligible collateral physically held by or on behalf of the Bank or collateral assigned to the Bank, as evidenced by a written security agreement, and held by the member institution for the benefit of the Bank.
If the Bank’s credit ratings had been lowered from its current rating to the next lower rating that would have triggered additional collateral to be delivered, the Bank would have been required to deliver up to an additional $127 million of collateral (at fair value) to its derivative counterparties as of September 30, 2013.
The net exposure after collateral is treated as unsecured credit consistent with the Bank's RMP and Finance Agency regulations if the counterparty has an NRSRO rating. If the counterparty does not have an NRSRO rating, the Bank requires collateral for the full amount of the exposure.

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 institutions. 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 Bank has a retained interest. As of September 30, 2013, all of the Bank’s mortgage insurance providers have been rated below "A" 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 September 30, 2013 and December 31, 2012, the allowance for credit losses on MPF loans was $11 million and $10 million, respectively. The increased loan loss reserve was due to the increase in the Bank’s loss severity estimates and additions to the loan loss reserve for defaulted troubled debt restructurings. The loss severity rate used in the loan loss reserve methodology for MPF loans increased to 43.1 percent as of September 30, 2013 from 42.2 percent as of December 31, 2012. The Bank uses actual loss claim data from its MPF loans to estimate incurred losses. The loss severity rate does not reflect the application of any credit enhancement that may be available on a given pool.









____________
* Mortgage Partnership Finance” and “MPF” are registered trademarks of FHLBank Chicago.

58

Critical Accounting Policies and Estimates

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

Recently Issued and Adopted Accounting Guidance

See Note 2–Recently Issued and Adopted Accounting Guidance to the Bank’s interim financial statements for a discussion of recently issued and adopted accounting guidance.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

Changes in interest rates and spreads can have a direct effect on the value of the Bank’s assets and liabilities. As a result of the volume of the Bank’s interest-earning assets and interest-bearing liabilities, the component of market risk having the greatest effect on the Bank’s financial condition and results of operations is interest-rate risk. A description of the Bank’s management of interest-rate risk is contained in the Bank’s Form 10-K.

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




59

The following table summarizes the notional amounts of derivative financial instruments (in millions). The category “Fair value hedges” represents hedge strategies for which hedge accounting is achieved. The category “non-qualifying hedges” represents hedge strategies for which the derivatives are not in designated hedge relationships that formally meet the hedge accounting requirements under GAAP.

 
 
 
 
 
 
As of September 30, 2013
 
As of December 31, 2012
Hedged Item / Hedging Instrument
 
Hedging Objective
 
Hedge
Accounting
Designation
 
Notional Amount
 
Notional Amount
Advances
 
 
 
 
 
 
 
 
Pay fixed, receive variable interest rate swap (without options)
 
Converts the advance’s fixed rate to a variable rate index.
 
Fair value
hedges
 
$
7,175

 
$
7,427

Non-qualifying
hedges
 
—

 
4

Pay fixed, receive variable interest rate swap (with options)
 
Converts the advance’s fixed rate to a variable rate index and offsets option risk in the advance.
 
Fair value
hedges
 
25,712

 
29,711

Non-qualifying
hedges
 
740

 
740

Pay variable with embedded features, receive variable interest rate swap (non-callable)
 
Reduces interest rate sensitivity and repricing gaps by converting the advance’s variable rate to a different variable rate index and/or offsets embedded option risk in the advance.
 
Fair value
hedges
 
3,522

 
3,278

Pay variable, receive variable basis swap
 
Reduces interest rate sensitivity and repricing gaps by converting the advance’s variable rate to a different variable rate index.
 
Non-qualifying
hedges
 
180

 
222

 
 
 
 
Total
 
37,329

 
41,382

Investments
 
 
 
 
 
 
 
 
Pay fixed, receive variable interest rate swap
 
Converts the investment’s fixed rate to a variable rate index.
 
Non-qualifying
hedges
 
1,740

 
1,990

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

 
50

 
 
 
 
Total
 
1,790

 
2,040

Consolidated Obligation Bonds
 
 
 
 
 
 
 
 
Receive fixed, pay variable interest rate swap (without options)
 
Converts the bond’s fixed rate to a variable rate index.
 
Fair value
hedges
 
36,684

 
49,544

Non-qualifying
hedges
 
3,936

 
6,125

Receive fixed, pay variable interest rate swap (with options)
 
Converts the bond’s fixed rate to a variable rate index and offsets option risk in the bond.
 
Fair value
hedges
 
22,152

 
12,680

Non-qualifying
hedges
 
15

 
305

Receive variable with embedded features, pay variable interest rate swap (callable)
 
Reduces interest rate sensitivity and repricing gaps by converting the bond’s variable rate to a different variable rate index and/or offsets embedded option risk in the bond.
 
Fair value
hedges
 
20

 
20

Receive variable, pay variable basis swap
 
Reduces interest rate sensitivity and repricing gaps by converting the bond’s variable rate to a different variable rate index.
 
Non-qualifying
hedges
 
25

 
—

 
 
 
 
Total
 
62,832

 
68,674


60

 
 
 
 
 
 
As of September 30, 2013
 
As of December 31, 2012
Hedged Item / Hedging Instrument
 
Hedging Objective
 
Hedge
Accounting
Designation
 
Notional Amount
 
Notional Amount
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
 
28

 
9

 
 
 
 
Total
 
28

 
9

Total notional amount
 
 
 
 
 
$
114,604

 
$
124,730



61

Interest-rate Risk Exposure Measurement

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

Bank policy requires the Bank to maintain its effective duration of equity within a range of +5 years to -5 years, assuming current interest rates, and within a range of +7 years to -7 years, assuming an instantaneous parallel increase or decrease in market interest rates of 200 basis points.

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 credit concerns and lack of liquidity in the private-label MBS market beginning in 2009, however, market prices were influenced more by credit and liquidity than interest rates, resulting in very low prices and very high option adjusted spreads which distorted the effective duration impact. Thus, in the third quarter of 2009, the Bank changed its method of calculating effective duration to use the option adjusted spread of a date prior to the market disruptions at that time. To capture interest-rate changes, the Bank further adjusted its option adjusted spread by adding a spread to reflect option adjusted spread changes in callable debt instruments with effective duration characteristics. The Bank referred to this model as the Adjusted Fair Value (AFV) approach and believed this approach provided effective duration values that more accurately reflected the Bank's interest-rate risk during market disruptions, but could 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 FRB; factors such as these are difficult to reduce to quantitative model inputs). Given this limitation, the Bank viewed its effective duration gap exposure calculations as approximate, rather than absolute, values. During the second quarter of 2013, the Bank ceased using the AFV approach and returned to the option adjusted spread based on market price. As the percentage of private-label MBS within the Bank's investment portfolio has continued to decline, the option adjusted spread based on market price now produces similar results to those obtained by using the AFV approach.

The table below reflects the Bank’s effective duration exposure measurements as calculated in accordance with Bank policy (in years). The changes in the Bank's effective duration exposure between December 31, 2012 and September 30, 2013 in the table below are based upon the option adjusted spread based on market price. Using the AFV approach, the Bank estimates that its effective duration of equity would have been calculated at negative 1.45 years and the effective duration gap would have been calculated at negative 0.11 years as of September 30, 2013.
 
As of September 30, 2013
 
As of December 31, 2012
 
Up 200 Basis Points    
 
Current    
 
Down 200 Basis
 Points (1)    
 
Up 200 Basis Points    
 
Current
 
Down 200 Basis 
Points (1)    
Assets
0.65

 
0.49

 
0.29

 
0.48

 
0.31

 
0.24

Liabilities
0.42

 
0.58

 
0.35

 
0.38

 
0.43

 
0.33

Equity
4.93

 
(1.08
)
 
(0.76
)
 
2.17

 
(1.65
)
 
(1.26
)
Effective duration gap
0.23

 
(0.09
)
 
(0.06
)
 
0.10

 
(0.12
)
 
(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 12—Estimated Fair Values to the Bank's 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.


62

The table below reflects the Bank’s market value of equity measurements as calculated in accordance with Bank policy (in millions). 
 
As of September 30, 2013
 
As of December 31, 2012
 
Up 200 Basis Points    
 
Current
 
Down 200 Basis Points (1)    
 
Up 200 Basis Points    
 
Current
 
Down 200 Basis Points (1)  
Assets
$
108,291

 
$
109,539

 
$
110,236

 
$
119,465

 
$
120,498

 
$
120,813

Liabilities
102,646

 
103,654

 
104,296

 
113,123

 
114,045

 
114,319

Equity
5,645

 
5,885

 
5,940

 
6,342

 
6,453

 
6,494

____________ 
(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.

Item 4. Controls and Procedures.
Disclosure Controls and Procedures

The Bank's President and Chief Executive Officer and the Bank's Executive Vice President and Chief Financial Officer (Certifying Officers) are responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.

As of September 30, 2013, the Bank's management, with the participation of the Certifying Officers has evaluated the effectiveness of the design and operation of its disclosure controls and procedures. Based on that evaluation, the Certifying Officers have concluded that the Bank's disclosure controls and procedures (as defined in Rules 13a-15(a) and 15d-15(e) under the Exchange Act) were effective to provide reasonable assurance that information required to be disclosed by the Bank in the reports that it files or submits under the Exchange Act (1) is accumulated and communicated to the Certifying Officers, as appropriate, to allow timely decisions regarding required disclosure; and (2) is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.

In designing and evaluating the Bank's disclosure controls and procedures, the Bank's Certifying Officers recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Changes in Internal Control Over Financial Reporting

During the third quarter of 2013, there were no changes in the Bank's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Bank's internal control over financial reporting.


63

PART II. OTHER INFORMATION.

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 Bank’s claims arise from material misrepresentations in the offering documents of thirty private-label MBS sold to the Bank. The Bank’s 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 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 May 19, 2011, the defendants filed a joint motion to dismiss; the Bank filed its opposition on July 8, 2011. No order has been issued by the court in response to this motion. On February 14, 2013, the court denied a separate motion to dismiss filed by UBS Securities, LLC. The original action is styled Federal Home Loan Bank of Atlanta v. Countrywide Financial Corp. et al., Civil Action File No. 11EV011779-01G. On March 1, 2012, the court granted a motion to sever the Bank’s claims against the J.P. Morgan entities so that these claims will proceed in a separate action. The severed action is styled Federal Home Loan Bank of Atlanta v. J.P. Morgan Securities, LLC, et al., Civil Action File No. 11EV011779-02G. Fact discovery is proceeding in both cases. The Bank expects fact and expert discovery to conclude in 2014 and that the original and the severed actions will be scheduled for separate trials in 2015.
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. A hearing on the proposed settlement is ongoing in the Supreme Court of the State of New York, County of New York. 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.
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 Bank’s 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 Bank’s Form 10-K, should be carefully considered as they could materially affect the Bank’s business, financial condition or future results. The risks described in the Bank’s Form 10-K are not the only risks facing the Bank. Additional risks and uncertainties not currently known to the Bank or that the Bank currently deems to be immaterial also may materially adversely affect the Bank’s business, financial condition, and/or operating results.


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

Not applicable.



64

Item 3. Defaults Upon Senior Securities.
None.

Item 4. Mine Safety Disclosure.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit No.
Description
 
 
3.1
Amended and Restated Organization Certificate of the Federal Home Loan Bank of Atlanta1
 
 
3.2
Bylaws of the Federal Home Loan Bank of Atlanta (Revised and Restated through October 25, 2012)1
 
 
4.1
Capital Plan of the Federal Home Loan Bank of Atlanta2
 
 
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 Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
101
Unaudited financial statements from the Quarterly Report on Form 10-Q of Federal Home Loan Bank of Atlanta for the quarter ended September 30, 2013, filed on November 8, 2013, formatted in XBRL: (i) the Statements of Condition, (ii) Statements of Income, (iii) the Statements of Capital, (iv) the Statements of Cash Flows and (v) the Notes to Financial Statements.
 
 
 
 
1
Filed on October 26, 2012 with the SEC in the Bank's Form 8-K and incorporated herein by reference.
2
Filed on August 5, 2011 with the SEC in the Bank's Form 8-K and incorporated herein by reference.
 


65

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
Federal Home Loan Bank of Atlanta
 
 
 
Date:
November 8, 2013
By/s/ W. Wesley McMullan
 
 
    Name: W. Wesley McMullan
    Title: President and Chief Executive Officer
Date:
November 8, 2013
By/s/Kirk R. Malmberg
 
 
    Name: Kirk R. Malmberg
    Title: Executive Vice President and Chief Financial Officer



66