Attached files

file filename
EX-32.1 - SECTION 906 CERTIFICATIONS - Federal Home Loan Bank of Atlantadex321.htm
EX-31.2 - SECTION 302 CERTIFICATION OF THE EXECUTIVE VP & CFO - Federal Home Loan Bank of Atlantadex312.htm
EX-31.1 - SECTION 302 CERTIFICATION OF THE INTERIM PRESIDENT & CHIEF EXECUTIVE OFFICER - Federal Home Loan Bank of Atlantadex311.htm
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

For the quarterly period ended March 31, 2010

OR

 

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

Commission File Number: 000-51845

FEDERAL HOME LOAN BANK OF ATLANTA

(Exact name of registrant as specified in its charter)

 

Federally chartered corporation   56-6000442

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1475 Peachtree Street, NE, Atlanta, Ga.   30309
(Address of principal executive offices)   (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days.    x    Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

¨  Yes     ¨  No                            

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨   Accelerated filer  ¨

Non-accelerated filer    x

(Do not check if a smaller reporting company)

  Smaller reporting company  ¨

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

The number of shares outstanding of the registrant’s Class B Stock, par value $100, as of April 30, 2010, was 83,388,076.


Table of Contents

Table of Contents

 

PART I.    FINANCIAL INFORMATION    1
Item 1.    Financial Statements    1
   STATEMENTS OF CONDITION    1
   STATEMENTS OF INCOME    2
   STATEMENTS OF CAPITAL    3
   STATEMENTS OF CASH FLOWS    4
   NOTES TO FINANCIAL STATEMENTS    6
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    35
Item 3.    Quantitative and Qualitative Disclosures About Market Risk    66
Item 4.    Controls and Procedures    69
PART II.    OTHER INFORMATION    70
Item 1.    Legal Proceedings    70
Item 1A.    Risk Factors    70
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    70
Item 3.    Defaults Upon Senior Securities    70
Item 4.    (Removed and Reserved)    70
Item 5.    Other Information    70
Item 6.    Exhibits    71
SIGNATURES    72


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
             March 31, 2010                    December 31, 2009         

ASSETS

 

    

Cash and due from banks

 

       $ 4         $ 465  

Deposit with other FHLBanks

 

     2       3  

Federal funds sold

 

     15,230       10,043  

Trading securities (includes $113 and $137 pledged as collateral as of March 31, 2010 and December 31, 2009, respectively, that may be repledged and includes other FHLBanks’ bonds of $71 and $72 as of March 31, 2010 and December 31, 2009, respectively)

 

     3,358       3,553  

Available-for-sale securities

 

     2,660       2,256  

Held-to-maturity securities, net (fair value of $15,765 and $16,442 as of March 31, 2010 and December 31, 2009, respectively)

 

     16,087       17,085  

Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans of $1 as of March 31, 2010 and December 31, 2009

 

     2,418       2,522  

Advances, net

 

     105,474       114,580  

Accrued interest receivable

 

     465       515  

Premises and equipment, net

 

     34       34  

Derivative assets

 

     23       39  

Other assets

 

     526       216  
            

TOTAL ASSETS

 

       $ 146,281         $ 151,311  
            

LIABILITIES

 

    

Interest-bearing deposits

 

       $ 2,941         $ 2,989  

Loans from other FHLBanks

 

     35       —  

Consolidated obligations, net:

 

    

Discount notes

 

     17,778       17,127  

Bonds

 

     115,492       121,450  
            

Total consolidated obligations, net

     133,270       138,577  
            

Mandatorily redeemable capital stock

 

     481       188  

Accrued interest payable

 

     619       612  

Affordable Housing Program payable

 

     128       125  

Payable to REFCORP

 

     14       21  

Derivative liabilities

 

     469       409  

Other liabilities

 

     225       137  
            

Total liabilities

 

     138,182       143,058  
            

Commitments and contingencies (Note 13)

    

CAPITAL

 

    

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

 

    

Subclass B1 issued and outstanding shares: 15 as of March 31, 2010 and December 31, 2009

 

     1,497       1,520  

Subclass B2 issued and outstanding shares: 63 and 66 as of March 31, 2010 and December 31, 2009, respectively

 

     6,355       6,604  
            

Total capital stock Class B putable

 

     7,852       8,124  

Retained earnings

 

     916       873  

Accumulated other comprehensive loss

 

     (669)       (744)  
            

Total capital

 

     8,099       8,253  
            

TOTAL LIABILITIES AND CAPITAL

       $ 146,281         $ 151,311  
            

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

 

1


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF INCOME

(Unaudited)

(In millions)

 

             Three Months Ended March 31,         
             2010                   2009        

INTEREST INCOME

 

    

Advances

 

       $ 69         $ 432  

Prepayment fees on advances, net

 

     3       3  

Interest-bearing deposits

 

     1       3  

Federal funds sold

 

     5       8  

Trading securities

 

     42       54  

Available-for-sale securities

 

     39       —  

Held-to-maturity securities

 

     172       275  

Mortgage loans held for portfolio

 

     32       42  
            

Total interest income

     363       817  
            

INTEREST EXPENSE

 

    

Consolidated obligations:

 

    

Discount notes

 

     3       163  

Bonds

 

     207       615  

Deposits

 

     —       2  

Mandatorily redeemable capital stock

 

     —       2  
            

Total interest expense

     210       782  
            

NET INTEREST INCOME

     153       35  
            

OTHER INCOME (LOSS)

 

    

Total other-than-temporary impairment losses

 

     (64)       (698)  

Portion of impairment losses recognized in other comprehensive loss

 

     18       609  
            

Net impairment losses recognized in earnings

     (46)       (89)  
            

Net gains (losses) on trading securities

 

     4       (34)  

Net (losses) gains on derivatives and hedging activities

 

     (17)       112  

Other

 

     —       1  
            

Total other loss

     (59)       (10)  
            

OTHER EXPENSE

 

    

Compensation and benefits

 

     14       16  

Other operating expenses

 

     11       8  

Finance Agency

 

     2       2  

Office of Finance

 

     2       1  
            

Total other expense

     29       27  
            

INCOME (LOSS) BEFORE ASSESSMENTS

     65       (2)  
            

Affordable Housing Program

 

     5       —  

REFCORP

     12       —  
            

Total assessments

     17       —  
            

NET INCOME (LOSS)

       $ 48         $ (2)  
            

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

 

2


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF CAPITAL

FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009

(Unaudited)

(In millions)

 

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

BALANCE, DECEMBER 31, 2008

  85         $ 8,463         $ 435         $ (5)         $ 8,893  

Cumulative effect of adjustment to opening balance relating to other-than-temporary impairment guidance

 

  —       —       179       (179)       —  

Issuance of capital stock

 

  7       655       —       —       655  

Repurchase/redemption of capital stock

 

  (11)       (1,062)       —       —       (1,062)  

Net shares reclassified to mandatorily redeemable capital stock

 

  (19)       (1,867)       —       —       (1,867)  

Comprehensive loss:

 

         

Net loss

 

  —       —       (2)       —       (2)  

Other comprehensive loss

 

  —       —       —       (602)       (602)  
             

Total comprehensive loss

 

  —       —       —       —       (604)  
                           

BALANCE, MARCH 31, 2009

  62         $ 6,189         $ 612         $ (786)         $ 6,015  
                           

BALANCE, DECEMBER 31, 2009

 

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

Issuance of capital stock

 

  —       25       —       —       25  

Repurchase/redemption of capital stock

 

  —       (4)       —       —       (4)  

Net shares reclassified to mandatorily redeemable capital stock

 

  (3)       (293)       —       —       (293)  

Comprehensive income:

 

         

Net income

 

  —       —       48       —       48  

Other comprehensive income

 

  —       —       —       75       75  
             

Total comprehensive income

  —       —       —       —       123  
             

Cash dividends on capital stock

 

  —       —       (5)       —       (5)  
                           

BALANCE, MARCH 31, 2010

  78         $ 7,852         $ 916         $ (669)         $ 8,099  
                           

 

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

 

3


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)

 

               Three Months Ended March  31,          
    

 

2010

  

 

2009

OPERATING ACTIVITIES

 

     

Net income (loss)

 

       $ 48          $ (2)  

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

     

Depreciation and amortization

 

     (27)        21  

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

 

     205        37  

Net change in fair value adjustment on trading securities

 

     (4)        60  

Net impairment losses recognized in earnings

 

     46        89  

Net change in:

 

     

Accrued interest receivable

 

     50        132  

Other assets

 

     (311)        (20)  

Affordable Housing Program payable

 

     2        (8)  

Accrued interest payable

 

     7        5  

Payable to REFCORP

 

     (7)        —  

Other liabilities

 

     5        —  
             

Total adjustments

     (34)        316  
             

Net cash provided by operating activities

     14        314  
             

INVESTING ACTIVITIES

 

     

Net change in:

 

     

Interest-bearing deposits

 

     189        849  

Federal funds sold

 

     (5,187)        (976)  

Trading securities:

 

     

Proceeds from sales

 

     —        300  

Proceeds from maturities

 

     200        128  

Available-for-sale securities:

 

     

Proceeds from maturities

 

     95        —  

Held-to-maturity securities:

 

     

Net change in short-term

 

     (355)        —  

Proceeds from maturities

 

     1,449        1,036  

Purchases

 

     (481)        (227)  

Advances:

 

     

Proceeds from principal collected

 

     19,278        37,080  

Made

 

     (10,203)        (20,678)  

Mortgage loans held for portfolio:

 

     

Proceeds from principal collected

 

     104        171  

Purchase of premise, equipment and software

 

     (3)        (1)  
             

Net cash provided by investing activities

     5,086        17,682  
             

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

 

4


Table of Contents
             Three Months Ended March 31,         
     2010    2009

FINANCING ACTIVITIES

     

 

Net change in deposits

     

 

Deposits

     (64)        1,324  

 

Borrowings from other FHLBanks

     35        —  

 

Net payments from derivatives containing a financing element

     (201)        (199)  

 

Proceeds from issuance of consolidated obligations:

     

 

Discount notes

     231,354        54,716  

 

Bonds

     24,696        23,034  

 

Bonds transferred from other FHLBanks

     —        351  

 

Payments for debt issuance costs

     (6)        (10)  

 

Payments for maturing and retiring consolidated obligations:

     

 

Discount notes

     (230,667)        (60,346)  

 

Bonds

     (30,724)        (36,469)  

 

Proceeds from issuance of capital stock

     25        655  

 

Payments for repurchase/redemption of capital stock

     (4)        (1,062)  

 

Payments for repurchase/redemption of mandatorily redeemable capital stock

     —        (10)  

 

Cash dividends paid

     (5)        —  
             

Net cash used in financing activities

     (5,561)        (18,016)  
             

Net decrease in cash and cash equivalents

     (461)        (20)  

 

Cash and cash equivalents at beginning of the period

     465        28  
             

Cash and cash equivalents at end of the period

       $ 4              $ 8  
             

Supplemental disclosures of cash flow information:

     

 

Cash paid for:

     

 

Interest

       $ 209              $ 623  
             

AHP assessments, net

       $ 3              $ 8  
             

REFCORP assessments

       $ 19              $ 3  
             

Noncash investing and financing activities:

     

 

Net shares reclassified to mandatorily redeemable capital stock

       $ 293              $ 1,867  
             

Held-to-maturity securities acquired with accrued liabilities

       $ 84              $ —  
             

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

       $ 409              $ 1,604  
             

Transfers of mortgage loans to real estate owned

       $ 10              $ 1  
             

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

 

5


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

Note 1—Basis of Presentation

The accompanying unaudited interim financial statements of the Federal Home Loan Bank of Atlanta (the “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, 2010, 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, 2009, which are contained in the Bank’s 2009 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 25, 2010 (“Form 10-K”).

A description of the Bank’s significant accounting policies is included in Note 1 to the 2009 audited financial statements contained in the Bank’s Form 10-K. There have been no material changes to these policies as of March 31, 2010.

Note 2—Recently Issued and Adopted Accounting Guidance

Recently Issued Accounting Guidance

Scope Exception Related to Embedded Credit Derivatives. In March 2010, the Financial Accounting Standards Board (“FASB”) issued amended guidance to clarify that the only type of embedded credit derivative feature related to the transfer of credit risk that is exempt from derivative bifurcation requirements is one that is in the form of subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination will need to assess these embedded credit derivatives to determine if bifurcation and separate accounting as a derivative is required. This guidance is effective at the beginning of the first interim reporting period beginning after June 15, 2010 (July 1, 2010 for the Bank). Early adoption is permitted at the beginning of an entity’s first interim reporting period beginning after issuance of this guidance. Bank management does not believe that the adoption of this guidance will have a material effect on the Bank’s financial condition or results of operations.

 

6


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Recently Adopted Accounting Guidance

Fair Value Measurements and Disclosures. In January 2010, the FASB issued guidance that requires new disclosures related to transfers in and out of Level 1 and 2 fair value hierarchy, and activity in Level 3 fair value hierarchy, and clarifies some existing disclosure requirements about fair value measurement. The guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about activity in Level 3 fair value hierarchy. Those disclosures are effective for fiscal years beginning after December 15, 2010 (January 1, 2011 for the Bank), and for interim periods within those fiscal years. Except for the disclosures about activity in Level 3 fair value hierarchy, the Bank adopted this guidance, effective January 1, 2010, which resulted in enhanced fair value disclosures but had no effect on the Bank’s financial condition or results of operation. Bank management does not believe that the adoption of the new disclosures about activity in Level 3 fair value hierarchy will have a material effect on the Bank’s financial condition and results or operations.

Subsequent Events. In February 2010, the FASB amended its guidance on subsequent events to remove the requirement for SEC filers to disclose the date through which an entity has evaluated subsequent events. The amended disclosure requirement was effective upon issuance. The adoption of this guidance modified the Bank’s subsequent events disclosures, but had no effect on the Bank’s financial condition or results of operations.

Accounting for the Consolidation of Variable Interest Entities. In June 2009, the FASB issued guidance to improve financial reporting by enterprises involved with variable interest entities (“VIEs”) and to provide more relevant and reliable information to users of financial statements. This guidance amends the manner in which entities evaluate whether consolidation is required for VIEs. An entity must first perform a qualitative analysis in determining whether it must consolidate a VIE, and if the qualitative analysis is not determinative, the entity must perform a quantitative analysis. The guidance also requires that an entity continually evaluate VIEs for consolidation, rather than making such an assessment based upon the occurrence of triggering events. Additionally, the guidance requires enhanced disclosures about how an entity’s involvement with a VIE affects its financial statements and its exposure to risks. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009. The Bank adopted this guidance effective January 1, 2010. The adoption of this guidance did not have any effect on the Bank’s financial condition or results of operations.

Accounting for Transfers of Financial Assets. In June 2009, the FASB issued guidance to change how entities account for transfers of financial assets by (1) eliminating the concept of a qualifying special-purpose entity; (2) defining the term “participating interest” to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale; (3) clarifying the isolation analysis to ensure that an entity considers all of its continuing involvements with transferred financial assets to determine whether a transfer may be accounted for as a sale; (4) eliminating an exception that currently permits an entity to derecognize certain transferred mortgage loans when that entity has not surrendered control over those loans; and (5) requiring enhanced disclosures about transfers of financial assets and a transferor’s continuing involvement with transfers of financial assets accounted for as sales. This guidance is effective as of the beginning of the first annual reporting period that begins after November 15, 2009. The Bank adopted this guidance effective January 1, 2010. The adoption of this guidance did not have any effect on the Bank’s financial condition or results of operations.

 

7


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Note 3—Trading Securities

Major Security Types. Trading securities were as follows:

 

                 As of March 31, 2010            As of December 31, 2009    

Government-sponsored enterprises debt obligations

       $ 3,277                  $ 3,470  

Other FHLBank’s bond*

     71        72  

State or local housing agency obligations

     10        11  
                 

Total

         $ 3,358                  $ 3,553  
                   

* The Federal Home Loan Bank (“FHLBank”) of Chicago is the primary obligor of this consolidated obligation bond.

Net gains (losses) on trading securities for the three-month periods ended March 31, 2010 and 2009 included net unrealized holding gains (losses) of $5 and $(31), respectively.

Note 4—Available-for-sale Securities

During the three-month periods ended March 31, 2010 and 2009, the Bank transferred certain private-label mortgage-backed securities (“MBS”) from its held-to-maturity portfolio to its available-for-sale portfolio. These securities represent private-label MBS in the Bank’s held-to-maturity portfolio for which the Bank has recorded an other-than-temporary impairment loss. The Bank believes the other-than-temporary impairment 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 dates.

 

    2010   2009
  Amortized
Cost
  Other-Than-
Temporary
Impairment
Recognized in
Accumulated Other
Comprehensive
Loss
  Estimated Fair
Value
  Amortized
Cost
  Other-Than-
Temporary
Impairment
Recognized in
Accumulated Other
Comprehensive
Loss
  Estimated
Fair  Value

Transferred at March 31,

      $             467         $ 58         $             409         $             2,386         $ 782         $             1,604  
                                   

Total

      $             467         $ 58         $             409         $             2,386         $ 782         $             1,604  
                                   

 

8


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

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

 

Mortgage-backed securities:

              

 

Private label

         $ 3,324                      $ 664          $ —              $ —          $ 2,660  
                                  

Total

         $ 3,324                      $ 664          $ —              $ —          $ 2,660  
                                  
     As of December 31, 2009
     Amortized
Cost
   Other-Than-Temporary
Impairment
Recognized in
Accumulated Other
Comprehensive Loss
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated
Fair Value

 

Mortgage-backed securities:

              

 

Private label

         $ 2,995                      $ 739          $ —              $ —          $ 2,256  
                                  

Total

         $ 2,995                      $ 739          $ —              $ —          $ 2,256  
                                  

The following table summarizes 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 March 31, 2010
    Less than 12 Months   12 Months or More   Total
      Number of  
Positions
  Fair
  Value  
  Gross
  Unrealized  
Losses

 

  Number
of
  Positions  

 

  Fair
  Value  
  Gross
  Unrealized  
Losses

 

  Number
of
  Positions  

 

  Fair
  Value  
  Gross
  Unrealized  
Losses

 

 

Mortgage-backed securities:

                 

 

Private label

  —       $ —         $ —     37         $ 2,660           $ 664     37         $  2,660         $ 664  
                                               

Total

  —       $ —         $ —     37         $ 2,660           $ 664     37         $  2,660         $ 664  
                                               
    As of December 31, 2009
    Less than 12 Months   12 Months or More   Total
    Number of
Positions

 

  Fair
Value
  Gross
Unrealized
Losses

 

  Number
of
Positions

 

  Fair
Value
  Gross
Unrealized
Losses

 

  Number
of
Positions

 

  Fair
Value
  Gross
Unrealized
Losses

 

 

Mortgage-backed securities:

                 

 

Private label

  —         $ —         $ —     32         $ 2,256       $  739     32         $  2,256           $  739  
                                               

Total

  —         $ —         $ —     32         $ 2,256       $  739     32         $  2,256           $  739  
                                               

 

9


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

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

Bank of America Corporation, Charlotte, NC

 

       $ 2,205              $ 505          $ —          $ —          $ 1,700  
                                  

Total

       $ 2,205              $ 505          $ —          $ —          $ 1,700  
                                  
     As of December 31, 2009
     Amortized
Cost
   Other-Than-Temporary
Impairment Recognized
in Other Accumulated
Comprehensive Loss
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated
Fair Value

Bank of America Corporation, Charlotte, NC

 

       $ 2,259              $ 600          $ —          $ —          $     1,659  
                                  

Total

       $ 2,259              $ 600          $ —          $ —          $     1,659  
                                  

The amortized cost of the Bank’s MBS classified as available-for-sale includes net discounts of $3 and $2 as of March 31, 2010 and December 31, 2009, respectively.

Note 5—Held-to-maturity Securities

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

 

    As of March 31, 2010   As of December 31, 2009
    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

 

      $ 655       $ —         $ —         $ 655       $ 300       $ —         $ —         $ 300

State or local housing agency obligations

 

    111     3     —       114     115     3     —       118

Mortgage-backed securities:

 

               

U.S. agency obligations-guaranteed

 

    739     4     —       743     777     2     1     778

Government-sponsored enterprises

 

    6,376     233     2     6,607     6,598     226     2     6,822

Private label

 

    8,206     16     576     7,646     9,295     9     880     8,424
                                               

 

Total

 

      $     16,087       $ 256       $ 578       $ 15,765       $     17,085       $ 240       $ 883       $ 16,442
                                               

 

10


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

    As of March 31, 2010
    Less than 12 Months   12 Months or More   Total
    Number
of
  Positions  

 

  Fair
  Value  

 

  Gross
  Unrealized  
Losses

 

  Number
of
  Positions  

 

  Fair
  Value  

 

  Gross
  Unrealized  
Losses

 

  Number
of
  Positions  

 

  Fair
  Value  

 

  Gross
  Unrealized  
Losses

 

State or local housing agency obligations

 

  1         $ 17         $ —     —         $ —         $ —     1         $ 17             $ —  

Mortgage-backed securities:

 

                 

U.S. agency obligations-guaranteed

 

  1       144       —     —       —       —     1       144       —  

Government-sponsored enterprises

 

  4       427       2     1       18       —     5       445       2  

Private label

 

  13       448       6     140       5,756       570     153       6,204       576  
                                               

Total

  19         $     1,036         $ 8     141         $     5,774         $ 570     160         $   6,810             $ 578  
                                               
    As of December 31, 2009
    Less than 12 Months   12 Months or More   Total
    Number
of
Positions

 

  Fair
Value

 

  Gross
Unrealized
Losses

 

  Number
of
Positions

 

  Fair
Value

 

  Gross
Unrealized
Losses

 

  Number
of
Positions

 

  Fair
Value

 

  Gross
Unrealized
Losses

 

Mortgage-backed securities:

 

                 

U.S. agency obligations-guaranteed

 

  1         $ 148         $ 1     1         $ 1         $ —     2         $ 149             $ 1  

Government-sponsored enterprises

 

  3       220       2     2       145       —     5       365       2  

Private label

 

  14       492       7     166       7,154       873     180       7,646       880  
                                               

Total

  18         $ 860         $ 10     169         $ 7,300         $ 873     187         $ 8,160             $ 883  
                                               

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

 

    As of March 31, 2010   As of December 31, 2009
        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

 

      $ 2,751         $ 6         $ 176         $     2,581         $     2,982         $ 3         $ 236         $ 2,749  
                                               

Total

      $ 2,751         $ 6         $ 176         $     2,581         $     2,982         $ 3         $ 236         $     2,749  
                                               

 

11


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

     As of March 31, 2010    As of December 31, 2009
           Amortized      
Cost
   Estimated
       Fair Value      
         Amortized      
Cost
   Estimated
       Fair Value      

 

Year of maturity:

           

 

Due in one year or less

       $ 661          $ 662          $ 302          $ 302  

 

Due after one year through five years

     103        105        96        99  

 

Due after 10 years

     2        2        17        17  
                           
     766        769        415        418  

 

Mortgage-backed securities

     15,321        14,996        16,670        16,024  
                           

Total

       $ 16,087          $ 15,765          $ 17,085          $ 16,442  
                           

The amortized cost of the Bank’s MBS classified as held-to-maturity includes net discounts of $48 and $49 as of March 31, 2010 and December 31, 2009, respectively.

Note 6—Other-than-temporary Impairment

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

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

Non-Private-label MBS. The unrealized losses related to U.S. agency MBS and government-sponsored enterprises MBS are caused by interest rate changes and not credit quality. These securities are guaranteed by government agencies or government-sponsored enterprises and Bank management does not expect these securities to be settled at a price less than the amortized cost basis. In addition, the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity. The Bank does not consider these investments to be other-than-temporarily impaired as of March 31, 2010.

 

12


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Private-label MBS. The Bank evaluates its individual private-label MBS holdings for other-than-temporary impairment on a quarterly basis, or more frequently if events or changes in circumstances indicate that these investments may be other-than-temporarily impaired.

To assess whether the entire amortized cost bases of its private-label MBS will be recovered, the Bank performed a cash flow analysis for each of its private-label MBS. In performing the cash flow analysis for each of these securities, the Bank used two third-party models. The first model considers borrower characteristics and the particular attributes of the loans underlying the Bank’s securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas (“CBSAs”), which are based upon an assessment of the individual housing markets. The term CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the United States Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area of 10,000 or more people. The Bank’s housing price forecast assumed current-to-trough home price declines ranging from zero percent to 12 percent over the next six to 12 months (resulting in peak-to-trough home price declines of up to 65 percent). Thereafter, home prices are projected to remain flat for the first six months following the trough, increase by 0.5 percent for the following six months, increase by three percent in the second year and increase by four percent in each subsequent year.

The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults and loss severities, are then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. The model classifies securities, as noted in the below table, based on current characteristics and performance, which may be different from the securities’ classification as determined by the originator at the time of origination.

At each quarter end, the Bank compares the present value of the cash flows expected to be collected with respect to its private-label MBS to the amortized cost basis of the security to determine whether a credit loss exists. For the Bank’s variable rate and hybrid private-label MBS, the Bank uses a forward interest rate curve to project the future estimated cash flows. The Bank then uses the current effective interest rate for the security in determining the present value of the future estimated cash flows. For securities previously identified as other-than-temporarily impaired, the Bank updates its estimate of future estimated cash flows on a quarterly basis.

 

13


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

For those securities for which an other-than-temporary impairment was determined to have occurred during the three-month period ended March 31, 2010 (that is, a determination was made that less than all of the entire amortized cost bases will likely be recovered), the following table represents a summary of the significant inputs used to measure the amount of the credit loss recognized in earnings:

 

    Significant Inputs
   

 

Prepayment Rate

  Default Rates   Loss Severities   Current Credit Enhancement
        Weighted    

 

Average

 

(%)

      Range (%)           Weighted    

 

Average

 

(%)

      Range (%)           Weighted    

 

Average

 

(%)

      Range (%)           Weighted    

 

Average

 

(%)

      Range (%)    

Year of Securitization

               

Prime:

               

2008

  9.4   9.4 to 9.4   27.7   27.7 to 27.7   43.9   43.9 to 43.9   15.8   15.8 to 15.8

2006

  8.3   8.1 to 9.0   12.6   12.2 to 12.7   40.1   39.9 to 40.6   8.3   7.2 to 8.6

2005

  9.9   9.9 to 9.9   14.4   14.4 to 14.4   52.1   52.1 to 52.1   8.0   8.0 to 8.0

Total prime

  9.0   8.1 to 9.9   19.1   12.2 to 27.7   43.2   39.9 to 52.1   11.3   7.2 to 15.8

Alt-A:

               

2007

  10.0   8.2 to 13.3   55.2   51.8 to 59.8   46.3   43.9 to 48.5   15.0   8.1 to 19.4

2006

  9.8   8.9 to 11.7   55.6   52.9 to 58.8   48.6   46.2 to 52.1   10.8   6.7 to 13.0

2005

  11.1   6.7 to 13.8   42.2   24.3 to 69.9   45.7   35.5 to 51.2   9.4   4.5 to 13.3

2004 and prior

  16.0   15.1 to 19.8   27.4   9.6 to 32.5   47.9   41.6 to 49.4   13.3   11.6 to 15.5

Total Alt-A

  10.7   6.7 to 19.8   49.8   9.6 to 69.9   46.7   35.5 to 52.1   12.5   4.5 to 19.4

Total

  10.4   6.7 to 19.8   43.9   9.6 to 69.9   46.0   35.5 to 52.1   12.3   4.5 to 19.4

Based on the Bank’s impairment analysis for the three-month periods ended March 31, 2010 and 2009, the Bank recognized total other-than-temporary impairment losses of $64 and $698, respectively. The credit related portion of $46 and $89, respectively, of these other-than-temporary impairment losses is reported in the Statements of Income as “Net impairment losses recognized in earnings.” The noncredit related portion of $18 and $609, respectively, of the other-than-temporary impairment losses is recorded as a component of other comprehensive loss.

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

 

     Three Months Ended March 31,
    

 

2010

   2009

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

           $ 321            $ 5

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

     3      74

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

     43      15
             

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

           $ 367            $ 94
             

 

14


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

The remainder of the Bank’s private-label MBS that has not been designated as other-than-temporarily impaired has 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. This decline in fair value is considered temporary as the Bank expects to recover the amortized cost bases of the securities, the Bank does not intend to sell the securities and it is not more likely than not that the Bank will be required to sell the securities before the anticipated recovery of the securities’ remaining amortized cost basis, which may be at maturity. The assessment is based on the fact that the Bank has sufficient capital and liquidity to operate its business and has no need to sell these securities, nor has the Bank entered into any contractual constraints that would require the Bank to sell these securities.

Note 7—Advances

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

 

             As of March 31, 2010                    As of December 31, 2009         

Year of contractual maturity:

    

 

Overdrawn demand deposit accounts

               $ 18               $

 

Due in one year or less

     28,407     32,808

 

Due after one year through two years

     19,777     21,565

 

Due after two years through three years

     15,192     14,665

 

Due after three years through four years

     8,836     10,757

 

Due after four years through five years

     5,391     5,910

 

Due after five years

     23,132     24,108
            

Total par value

     100,753     109,813

 

Discount on AHP* advances

     (13)     (13)

 

Discount on EDGE** advances

     (12)     (12)

 

Hedging adjustments

     4,751     4,798

 

Deferred commitment fees

     (5)     (6)
            

 

Total

               $ 105,474               $ 114,580
            

 

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

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

 

             As of March 31, 2010                    As of December 31, 2009         

Year of contractual maturity or next conversion date:

    

 

Overdrawn demand deposit accounts

       $ 18       $

 

Due or convertible in one year or less

     41,613     46,848

 

Due or convertible after one year through two years

     19,015     21,999

 

Due or convertible after two years through three years

     13,340     11,802

 

Due or convertible after three years through four years

     8,471     10,035

 

Due or convertible after four years through five years

     4,748     5,463

 

Due or convertible after five years

     13,548     13,666
            

 

Total par value

       $ 100,753       $ 109,813
            

 

15


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Based on the collateral pledged as security for advances, management’s credit analysis of members’ financial condition, and prior repayment history, no allowance for credit losses on advances was deemed necessary by management as of March 31, 2010 and December 31, 2009, respectively. No advance was past due as of March 31, 2010 or December 31, 2009.

The Bank’s potential credit risk from advances is concentrated in commercial banks, savings institutions and credit unions and further concentrated in certain larger borrowing relationships. As of March 31, 2010 and December 31, 2009, the concentration of the Bank’s advances to its 10 largest borrowers was $68,709 and $75,418, respectively, representing 68.2 percent and 68.7 percent, respectively, of total advances.

Interest-rate Payment Terms. The following table details advances by interest-rate payment type:

 

            As of March 31, 2010                As of December 31, 2009    

Fixed-rate

         $                         89,227            $                         97,743  

 

Variable-rate

 

 

 

 

11,526  

 

 

 

 

12,070  

           

Total par value

         $                         100,753            $                         109,813  
           

Note 8—Consolidated Obligations

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

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

 

             As of March 31, 2010                As of December 31, 2009    

 

Fixed-rate

  

 

      $

 

                                 83,929  

 

 

    $

 

                                 93,441  

 

Simple variable-rate

  

 

 

 

18,127  

 

 

 

 

16,312  

 

Step up/down

  

 

 

 

11,927  

 

 

 

 

10,334  

 

Fixed-rate that converts to variable-rate

  

 

 

 

70  

 

 

 

 

—  

 

Variable-rate capped floater

  

 

 

 

60  

 

 

 

 

60  

 

Variable-rate that converts to fixed-rate

  

 

 

 

25  

 

 

 

 

25  

            

 

Total par value

  

 

      $

 

                                 114,138  

 

 

    $

 

                                 120,172  

            

 

16


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

            As of March 31, 2010                    As of December 31, 2009         
            Amount        

 

      Weighted-    
average
Interest
Rate (%)

 

          Amount        

 

      Weighted-    
average
Interest
Rate (%)

 

Year of contractual maturity:

   

 

Due in one year or less

      $ 47,478     1.34         $ 63,383     1.27  

 

Due after one year through two years

    24,225     1.20       17,743     1.76  

 

Due after two years through three years

    15,908     2.27       11,806     2.39  

 

Due after three years through four years

    8,837     3.51       9,726     3.60  

 

Due after four years through five years

    6,561     3.58       6,016     3.67  

 

Due after five years

    11,129     4.40       11,498     4.43  
               

Total par value

    114,138     2.04       120,172     2.05  

 

Premiums

    110         116    

 

Discounts

    (58)         (60)    

 

Hedging adjustments

    1,302         1,222    
               

Total

      $                 115,492           $                 121,450    
               

The Bank’s consolidated obligation bonds outstanding included:

 

              As of March 31, 2010                   As of December 31, 2009     

Noncallable

              $ 79,053                   $ 86,905  

 

Callable

     35,085        33,267  
             

Total par value

              $                     114,138                   $                     120,172  
             

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

 

                   As of  March 31, 2010              

Year of contractual maturity or next call date:

  

 

Due or callable in one year or less

                    $ 69,741  

 

Due or callable after one year through two years

     19,467  

 

Due or callable after two years through three years

     9,433  

 

Due or callable after three years through four years

     5,612  

 

Due or callable after four years through five years

     2,781  

 

Due or callable after five years

     7,104  
      

Total par value

                    $                         114,138  
      

 

17


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

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

 

As of March 31, 2010

  

 

    $

 

17,778  

  

 

    $

 

17,780  

  

 

0.16  

                  

As of December 31, 2009

        $                     17,127          $                     17,130                          0.38  
                  

Note 9—Capital and Mandatorily Redeemable Capital Stock

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

 

                 As of March 31,  2010                            As of December  31, 2009            
     Required    Actual    Required    Actual

 

Regulatory capital requirements:

           

 

Risk based capital

  

 

    $

 

2,716  

  

 

    $

 

9,249  

  

 

    $

 

3,010  

  

 

    $

 

9,185  

 

Total capital-to-assets ratio

  

 

 

 

4.00%  

  

 

 

 

6.32%  

  

 

 

 

4.00%  

  

 

 

 

6.07%  

 

Total regulatory capital*

  

 

    $

 

5,851  

  

 

    $

 

9,249  

  

 

    $

 

6,052  

  

 

    $

 

9,185  

 

Leverage ratio

  

 

 

 

5.00%  

  

 

 

 

9.48%  

  

 

 

 

5.00%  

  

 

 

 

9.11%  

 

Leverage capital

  

 

    $

 

            7,314  

  

 

    $

 

            13,873  

  

 

    $

 

            7,566  

  

 

    $

 

            13,777  

 

* Mandatorily redeemable capital stock is considered capital for regulatory purposes, and “total regulatory capital” includes the Bank’s $481 and $188 in mandatorily redeemable capital stock at March 31, 2010 and December 31, 2009, respectively.  

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

 

    Three Months Ended March 31,
    2010   2009

 

Balance, beginning of period

 

 

                $

 

188  

 

 

                $

 

44  

 

Capital stock subject to mandatory redemption

   reclassified from equity during the period due to:

   

 

Attainment of nonmember status

 

 

 

 

293  

 

 

 

 

1,867  

 

Withdrawal

 

 

 

 

—  

 

 

 

 

1  

 

Repurchase/redemption of mandatorily redeemable

   capital stock

    —       (10)  

 

Capital stock no longer subject to redemption due to the

  transfer of stock from a nonmember to a member

    —       (1)  
           

 

Balance, end of period

 

 

                $

 

                         481 

 

 

                $

 

                         1,901  

           

The Bank reclassified $1,848 in capital stock held by Countrywide Bank, FSB (“Countrywide”) from capital to mandatorily redeemable capital stock upon termination of its membership with the Bank during the first quarter of 2009. Bank of America Corporation converted Countrywide into a national bank and merged it into Bank of America, National Association, a member of the Bank, on April 27, 2009. Upon the merger, the mandatorily redeemable capital stock of Countrywide became capital stock of Bank of America, National Association under the Bank’s Capital Plan and was reclassified from mandatorily redeemable capital stock to capital stock.

 

18


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

            As of March 31, 2010                    As of December 31, 2009         

Contractual year of redemption:

   

 

Due after one year through two years

          $ 11             $ —  

 

Due after two years through three years

    3       11  

 

Due after three years through four years

    18       10  

 

Due after four years through five years

    431       148  

 

Due after five years

    18       19  
           

Total

          $                 481             $                 188  
           

The Bank is not required to redeem activity-based stock until the later of the expiration of the redemption period, which is five years after notification is received, or until the activity no longer remains outstanding.

Note 10— Accumulated Other Comprehensive Loss

Components comprising other comprehensive income (loss) were as follows:

 

            Three Months Ended March 31,         
    2010  

 

2009

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

   

 

Change in unrealized losses on available-for-sale securities

          $             93             $                 7  

 

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

    40       —  
           

 

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

    133       7  
           

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

    (58)       (609)  
           

 

Other comprehensive income (loss)

          $ 75             $ (602)  
           

Components comprising accumulated other comprehensive loss were as follows:

 

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

Balance, beginning of the period

             $         (5)                $         (739)            $         —            $         (744)  

 

Net change during the period

     —          133        (58)        75  

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

     —          (58)        58        —    
                           

 

Balance, end of the period

             $ (5)                $ (664)            $ —              $ (669)  
                           

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

 

19


Table of Contents

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 funding sources which finance these assets.

The Bank enters into derivatives to manage the interest-rate risk exposures inherent in otherwise unhedged assets and funding positions, to achieve the Bank’s risk management objectives, and to act as an intermediary between its members and counterparties. Finance Agency regulations and the Bank’s risk management policy prohibit trading in or the speculative use of these derivative instruments and limit credit risk arising from these instruments. The Bank may use derivatives only to reduce funding costs for consolidated obligations and to manage its interest-rate risk, mortgage prepayment risk and foreign currency risk positions. Derivatives are an integral part of the Bank’s financial management strategy.

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

 

   

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

 

   

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

 

   

preserve a favorable interest-rate spread between the yield of an asset (e.g., an advance) and the cost of the related liability (e.g., the consolidated obligation bond used to fund the advance);

 

   

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

 

   

protect the value of existing asset or liability positions;

 

   

manage embedded options in assets and liabilities; and

 

   

achieve its overall asset/liability management objectives.

Types of Derivatives

The Bank’s risk management policy establishes guidelines for its use of derivatives. The Bank may enter into interest-rate swaps, swaptions, interest-rate cap and floor agreements, calls, puts and forward contracts (collectively derivatives) to manage its exposure to changes in interest rates. The goal of the Bank’s interest rate risk management strategy 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.

 

20


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

One strategy the Bank uses to manage interest-rate risk is to acquire and maintain a portfolio of assets and liabilities which, together with their associated interest-rate derivatives, are reasonably matched with respect to the expected maturities or repricing of the assets and liabilities. The Bank also may use interest-rate derivatives to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments (such as advances, mortgage loans, MBS, and consolidated obligations) to achieve risk management objectives.

The Bank uses either derivative strategies or embedded options in its funding to minimize hedging costs. Swaps, swaptions, caps and floors are used to manage interest-rate exposure.

Interest-Rate Swaps. An interest-rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be paid and the manner in which the cash flows will be calculated. One of the simplest forms of an interest-rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional principal amount at a predetermined fixed rate for a given period of time. In return for this promise, this party receives cash flows equivalent to the interest on the same notional principal amount at a variable-rate index for the same period of time. The variable rate received by the Bank in most interest-rate swap agreements is LIBOR.

Swaptions. A swaption is an option on a swap that gives the buyer the right to enter into a specified interest-rate swap at a certain time in the future. When used as a hedge, a swaption can protect the Bank when it is planning to lend or borrow funds in the future against future interest rate changes. The Bank purchases both payer swaptions and receiver swaptions. A payer swaption is the option to make fixed interest payments at a later date and a receiver swaption is the option to receive fixed interest payments at a later date.

Interest-Rate Caps and Floors. In a cap agreement, a cash flow is generated if the price or rate of an underlying variable rises above a certain threshold (or “cap”) price. In a floor agreement, a cash flow is generated if the price or rate of an underlying variable falls below a certain threshold (or “floor”) price. Caps and floors are designed as protection against the interest rate on a variable-rate asset or liability rising above or falling below a certain level.

Foreign Currencies. At times, the Bank has issued some consolidated obligations denominated in currencies other than U.S. dollars. The Bank uses forward exchange contracts to hedge currency risk on such consolidated obligations. These contracts exchange different currencies at specified rates on specified dates in the future. These contracts effectively simulate the conversion of consolidated obligations denominated in foreign currencies into ones denominated in U.S. dollars. As of March 31, 2010 and December 31, 2009, there were no outstanding consolidated obligations denominated in foreign currencies.

Application of Derivatives

General. The Bank may use derivatives to, in effect, adjust the maturity, repricing frequency, or option characteristics of financial instruments to achieve risk management objectives. The Bank uses derivatives in three ways: (1) as a fair value hedge of an underlying financial instrument or a firm commitment; (2) as an intermediary transaction; or (3) as a non-qualifying hedge for purposes of asset/liability management. In addition to using derivatives to manage mismatches of interest rates between assets and liabilities, the Bank also uses derivatives to manage embedded options in assets and liabilities, to hedge the market value of existing assets and liabilities, to hedge the duration risk of prepayable instruments, to offset exactly other derivatives executed with members (when the Bank serves as an intermediary) and to reduce funding costs.

 

21


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

Bank management uses derivatives when they are considered to be the most cost-effective alternative to achieve the Bank’s financial and risk management objectives. Accordingly, the Bank may enter into derivatives that do not qualify for hedge accounting (non-qualifying hedges).

Types of Assets and Liabilities Hedged

The Bank documents at inception all relationships between derivatives designated as hedging instruments and hedged items, its risk management objectives and strategies for undertaking various hedge transactions and its method of assessing effectiveness. This process includes linking all derivatives that are designated as fair value hedges to (1) assets and liabilities on the Statements of Condition, or (2) firm commitments. The Bank also formally assesses (both at the hedge’s inception and at least quarterly on an ongoing basis) whether the derivatives that it uses in hedging relationships have been effective in offsetting changes in the fair value of hedged items attributable to the risk being hedged and whether those derivatives may be expected to remain effective in future periods. The Bank uses regression analyses to assess the effectiveness of its hedges.

Consolidated Obligations. While consolidated obligations are the joint and several obligations of the FHLBanks, each FHLBank has consolidated obligations for which it is the primary obligor. The Bank enters into derivatives to hedge the interest-rate risk associated with its specific debt issuances. The Bank manages the risk arising from changing market prices and volatility of a consolidated obligation by matching the cash inflow on the derivative with the cash outflow on the consolidated obligation. In addition, the Bank requires collateral on derivatives at specified levels correlated to counterparty credit ratings. For instance, in a typical transaction, fixed-rate consolidated obligations are issued for the Bank, and the Bank simultaneously enters into a matching derivative in which the counterparty pays fixed cash flows to the Bank designed to mirror in timing and amount the cash outflows the Bank pays on the consolidated obligation. The Bank pays a variable cash flow that closely matches the interest payments it receives on short-term or variable-rate advances (typically one- or three-month LIBOR). These transactions are treated as fair-value hedges. This intermediation between the capital and swap markets permits the Bank to raise funds at lower costs than otherwise would be available through the issuance of simple fixed-rate consolidated obligations in the capital markets.

Advances. The Bank offers a variety of advance structures to meet members’ funding needs. These advances may have maturities of up to 30 years with variable or fixed rates and may include early termination features or options. The Bank may use derivatives to adjust the repricing and/or options characteristics of advances in order to more closely match the characteristics of the Bank’s funding liabilities. In general, whenever a member executes a fixed-rate advance or a variable-rate advance with embedded options, the Bank simultaneously will execute a derivative with terms that offset the terms and embedded options in the advance. For example, the Bank may hedge a fixed-rate advance with an interest-rate swap where the Bank pays a fixed-rate coupon and receives a variable-rate coupon, effectively converting the fixed-rate advance to a variable-rate advance. This type of hedge is treated as a fair-value hedge.

 

22


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Mortgage Assets. The Bank has invested in fixed-rate mortgage assets. The prepayment options embedded in mortgage assets may result in extensions or contractions in the expected repayment of these investments, depending on changes in estimated prepayment speeds. Finance Agency regulation limits this source of interest-rate risk by restricting the types of mortgage assets the Bank may own to those with limited average life changes under certain interest-rate shock scenarios and by establishing limitations on duration of equity and change in market value of equity. The Bank manages prepayment and duration risk by funding some mortgage assets with consolidated obligations that have call features. In addition, the Bank may use derivatives to manage the prepayment and duration variability of mortgage assets. Net income could be reduced if the Bank replaces the mortgages with lower-yielding assets and if the Bank’s higher funding costs are not reduced concomitantly.

The Bank manages the interest-rate and prepayment risk associated with mortgages through a combination of debt issuance and derivatives. The Bank issues both callable and non-callable debt to achieve cash flow patterns and liability durations similar to those expected on the mortgage loans. The Bank may use derivatives to match the expected prepayment characteristics of the mortgages.

Options (interest-rate caps, interest-rate floors and/or options) also may be used to hedge prepayment risk on the mortgages, many of which are not identified to specific mortgages and, therefore, do not receive fair-value or cash-flow hedge accounting treatment. The options are marked-to-market through current-period earnings and presented in the Statements of Income as “Net (losses) gains on derivatives and hedging activities.” The Bank also may purchase interest-rate caps and floors, swaptions, callable swaps, calls, and puts to minimize the prepayment risk embedded in the mortgage loans. Although these derivatives are valid non-qualifying hedges against the prepayment risk of the loans, they do not receive either fair-value or cash-flow hedge accounting. The derivatives are marked-to-market through earnings.

The Bank analyzes the duration, convexity, and earnings risk of the mortgage portfolio on a regular basis under various rate scenarios.

Firm Commitment Strategies. Certain mortgage purchase commitments are considered derivatives. Mortgage purchase commitments are recorded on the balance sheet at fair value, with changes in fair value recognized in current-period earnings. When the mortgage purchase commitment derivative settles, the current market value of the commitment is included with the basis of the mortgage loan and amortized accordingly.

The Bank also may enter into a fair value hedge of a firm commitment for a forward starting advance through the use of an interest-rate swap. In this case, the swap will function as the hedging instrument for both the firm commitment and the subsequent advance. The basis movement associated with the firm commitment will be rolled into the basis of the advance at the time the commitment is terminated and the advance is issued. The basis adjustment will then be amortized into interest income over the life of the advance using the level-yield method.

Investments. The Bank invests in U.S. agency obligations, MBS, and the taxable portion of state or local housing finance agency obligations. The interest-rate and prepayment risks associated with these investment securities are managed through a combination of debt issuance and derivatives. The Bank may manage the prepayment and interest-rate risks by funding investment securities with consolidated obligations that have call features, or by hedging the prepayment risk with caps or floors, or by adjusting the duration of the securities by using derivatives to modify the cash flows of the securities. Investment securities may be classified as trading, available-for-sale or held-to-maturity.

 

23


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

The Bank also may manage the risk arising from changing market prices and volatility of investment securities classified as trading by entering into derivatives (non-qualifying hedges) that offset the changes in fair value of the securities. The market value changes of both the trading securities and the associated derivatives are included in “Other Income (Loss)” in the Statements of Income and presented as part of the “Net gains (losses) on trading securities” and “Net (losses) gains on derivatives and hedging activities.”

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

Managing Credit Risk on Derivatives

The Bank is subject to credit risk due to nonperformance by counterparties to the derivative agreements. The amount of counterparty risk depends on the extent to which master netting arrangements are included in such contracts to mitigate the risk. The Bank manages counterparty credit risk through credit analysis, collateral requirements and adherence to the requirements set forth in Bank policies and regulations. Based on credit analyses and collateral requirements, Bank management presently does not anticipate any credit losses on its existing derivative agreements with counterparties as of March 31, 2010.

The contractual or notional amount of derivatives reflects the involvement of the Bank in the various classes of financial instruments. The notional amount of derivatives does not measure the credit risk exposure of the Bank, and the maximum credit exposure of the Bank is substantially less than the notional amount. The Bank requires collateral agreements that establish collateral delivery thresholds for all derivatives. The maximum credit risk is the estimated cost of replacing interest-rate swaps, forward agreements, mandatory delivery contracts for mortgage loans, and purchased caps and floors that have a net positive market value, if the counterparty defaults and the related collateral, if any, is of no value to the Bank. As of March 31, 2010, the Bank has not sold or repledged any such collateral.

As of March 31, 2010 and December 31, 2009, the Bank’s maximum credit risk, as defined above, was $100 and $117, respectively. These totals include $46 and $88, respectively, of net accrued interest receivable. In determining maximum credit risk, the Bank considers accrued interest receivables and payables, and the legal right to offset derivative assets and liabilities by counterparty. Cash held by the Bank as collateral for derivatives was $77 and $92 as of March 31, 2010 and December 31, 2009, respectively. Additionally, collateral with respect to derivatives with member institutions includes collateral assigned to the Bank, as evidenced by a written security agreement and held by the member institution for the benefit of the Bank.

Certain of the Bank’s derivative instruments contain provisions that require the Bank to post additional collateral with its counterparties if there is deterioration in the Bank’s credit rating. If the Bank’s credit rating is lowered by a major credit rating agency, the Bank would be required to deliver additional collateral on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position (before cash collateral and related accrued interest) at March 31, 2010 was $3,835 for which the Bank has posted collateral of $3,476 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 and the Bank would have been required to deliver up to an additional $180 of collateral (at fair value) to its derivatives counterparties at March 31, 2010. However, the Bank’s credit rating has not changed during the three-month period ended March 31, 2010.

 

24


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

The Bank transacts most of its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell and distribute consolidated obligations. Note 13 discusses assets pledged by the Bank to these counterparties.

Intermediation

To assist its members in meeting their hedging needs, the Bank acts as an intermediary between the members and other counterparties by entering into offsetting derivatives. This intermediation allows smaller members indirect access to the derivatives market.

Derivatives in which the Bank is an intermediary may arise when the Bank: (1) enters into derivatives with members and offsetting derivatives with other counterparties to meet the needs of its members; and (2) enters into derivatives to offset the economic effect of other derivatives that are no longer designated to either advances, investments or consolidated obligations.

Total notional principal of derivatives for the Bank as an intermediary was $2,226 and $2,208 at March 31, 2010 and December 31, 2009, respectively.

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.

The following table summarizes fair value of derivative instruments without effect of netting arrangements or collateral. For purposes of this disclosure, the derivative values include fair value of derivatives and related accrued interest.

 

     As of March 31, 2010    As of December 31, 2009
    

 

Notional
Amount of
  Derivatives  

       Derivative    
Assets
       Derivative    
Liabilities
   Notional
Amount of
    Derivatives    
       Derivative Assets            Derivative    
Liabilities

 

Derivatives in hedging relationships:

                 

 

Interest rate swaps

       $     159,105          $     1,643          $       (4,930)          $       178,532          $         1,661          $         (5,071)  
                                         

 

Total derivatives in hedging relationships

     159,105        1,643        (4,930)        178,532        1,661        (5,071)  
                                         

 

Derivatives not designated as hedging instruments:

                 

 

Interest rate swaps

     7,704        14        (492)        7,997        14        (463)  

 

Interest rate caps or floors

     7,000        62        (33)        5,500        59        (33)  
                                         

Total derivatives not designated as hedging instruments

     14,704        76        (525)        13,497        73        (496)  
                                         

Total derivatives before netting and collateral adjustments

       $ 173,809        1,719        (5,455)          $ 192,029        1,734        (5,567)  
                                         

 

Netting adjustments

        (1,619)        1,619           (1,603)        1,603  

Cash collateral and related accrued interest

        (77)        3,367           (92)        3,555  
                                 

 

Total collateral and netting adjustments *

        (1,696)        4,986           (1,695)        5,158  
                                 

Derivative assets and derivative liabilities

          $ 23          $ (469)             $ 39          $ (409)  
                                 

 

* 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.

 

25


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

The following table presents the components of net (losses) gains on derivatives and hedging activities as presented in the Statements of Income.

 

     Three Months Ended March 31,
     2010   

 

2009

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

 

Derivatives and hedged items in fair value hedging relationships:

     

 

Interest rate swaps

                   $                     46                $                     100  
             

 

Total net gain related to fair value hedge ineffectiveness

     46        100  
             

Derivatives not designated as hedging instruments:

     

 

Non-qualifying hedges:

     

 

Interest rate swaps

     (62)        11  

 

Interest rate caps or floors

     (1)        1  
             

 

Total net (loss) gain related to derivatives not designated as hedging

     (63)        12  
             

 

Net (losses) gains on derivatives and hedging activities

                   $ (17)                $ 112  
             

The following table presents, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Bank’s net interest income.

 

     Three Months Ended March 31, 2010
      
     Gain/(Loss)
    on Derivative    
       Gain/(Loss) on    
Hedged Item
   Net Fair Value
Hedge
    Ineffectiveness    
   Effect of
Derivatives on    
Net Interest
Income *
      

 

Hedged item type:

           

 

Advances

               $       40                  $       23              $             63            $         (891)  

 

Consolidated Obligations:

           

                Bonds

     82        (96)        (14)        376  

                Discount notes

     (7)        4        (3)        7  
                           

Total

               $ 115                  $ (69)              $ 46            $ (508)  
                           

 

* The net interest on derivatives in fair value hedge relationships is presented in the interest income/expense line item of the respective hedged item.
     Three Months Ended March 31, 2009
     Gain/(Loss)
  on Derivative
   Gain/(Loss) on
Hedged Item
   Net Fair Value
Hedge
Ineffectiveness
   Effect of
Derivatives on  
Net Interest
Income *
      

Hedged item type:

           

 

Advances

           $       1,246              $             (1,162)              $         84              $         (766)  

 

Consolidated Obligations:

           

 

        Bonds

     (309)        328        19        365  

 

        Discount notes

     (26)        23        (3)        7  
                           

 

Total

           $ 911              $ (811)              $ 100              $ (394)  
                           

 

* The net interest on derivatives in fair value hedge relationships is presented in the interest income/expense line item of the respective hedged item.

 

26


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Note 12—Estimated Fair Values

The Bank records trading securities, available-for-sale securities and derivative assets and liabilities at fair value. 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.

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 March 31, 2010, the Bank did not carry any financial assets or liabilities 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 March 31, 2010, the types of financial assets and liabilities the Bank carried at fair value hierarchy Level 2 included trading securities and derivatives.

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 March 31, 2010, 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.

 

27


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Fair Value on a Recurring Basis. The following tables present for each fair value hierarchy level, the Bank’s financial assets and financial liabilities that are measured at fair value on a recurring basis on its Statements of Condition:

 

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

Assets

              

 

Trading securities:

              

 

Government-sponsored enterprises debt obligations

 

         $             —              $             3,277            $             —              $         —              $         3,277  

Other FHLBanks’ bonds

     —          71        —          —          71  

 

State or local housing agency obligations

     —          10        —          —          10  
                                  

 

Total trading securities

     —          3,358        —          —          3,358  
                                  

 

Available-for-sale:

              

 

Private-label MBS

     —          —          2,660        —          2,660  

 

Derivative assets:

              

 

Interest-rate related

     —          1,719        —          (1,696)        23  
                                  

 

Total assets at fair value

         $ —              $ 5,077            $ 2,660            $ (1,696)            $ 6,041  
                                  

 

Liabilities

              

 

Derivative liabilities:

              

 

Interest-rate related

         $ —              $ (5,455)            $ —              $ 4,986            $ (469)  
                                  

 

Total liabilities at fair value

         $ —              $ (5,455)            $ —              $ 4,986            $ (469)  
                                  

 

*   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.

     As of December 31, 2009
     Fair Value Measurements Using          
     Level 1    Level 2    Level 3    Netting
Adjustment*
   Total

Assets

              

 

Trading securities:

              

 

Government-sponsored enterprises debt obligations

           $         —                $     3,470            $         —              $     —              $     3,470  

 

Other FHLBanks’ bonds

     —          72        —          —          72  

 

State or local housing agency obligations

     —          11        —          —          11  
                                  

 

Total trading securities

     —          3,553        —          —          3,553  
                                  

 

Available-for-sale:

              

 

Private-label MBS

     —          —          2,256        —          2,256  

 

Derivative assets

     —          1,734        —          (1,695)        39  
                                  

 

Total assets at fair value

           $ —                $ 5,287            $ 2,256            $ (1,695)            $ 5,848  
                                  

 

 

Liabilities

              

 

Derivative liabilities

           $ —                $ (5,567)            $ —              $ 5,158            $ (409)  
                                  

 

Total liabilities at fair value

           $ —                $ (5,567)            $ —              $ 5,158            $ (409)  
                                  

 

* 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.

 

28


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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 and/or out at fair value in the quarter in which the changes occur. Transfers are reported as of the beginning of the period. There were no financial instruments for which the fair value classification changed during the three-month periods ended March 31, 2010 and 2009.

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

 

             Three Months Ended March 31,         
     2010    2009

 

Balance, beginning of period

                     $ 2,256                        $ —  

 

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

     409        1,604  

 

Total gains (losses) realized and unrealized:

     

 

Included in net impairment losses recognized in earnings

     (43)        —  

 

Included in other comprehensive loss

     38        —  
             

Balance, end of period

                     $ 2,660                        $ 1,604  
             

Described below are the Bank’s fair value measurement methodologies for financial assets and liabilities measured or disclosed at fair value. For assets and liabilities measured at fair value, the disclosures below include a summary of the significant inputs used to determine fair value.

Cash and due from banks and interest-bearing deposits. The estimated fair value approximates the recorded book balance.

Investment securities. The estimated fair value of investment securities is determined based on independent market-based prices received from up to four designated third-party pricing vendors, when available. These third-party pricing vendors use methods that generally employ, but are not limited to, benchmark yields, recent trades, dealer estimates, valuation models, benchmarking of like securities, sector groupings, and/or matrix pricing. The Bank establishes a preliminary estimated fair value for each of its investment securities by calculating the median of the prices received. The median price is generally accepted as an appropriate estimate of fair value unless the median price falls outside of certain tolerance thresholds established by the Bank or evidence suggests that using the median price would not be appropriate. If only one third-party price is received or if no third-party price is available, the Bank estimates the fair value of the security using an approved internal discounted cash flow model.

Preliminary estimated fair values that are outside the tolerance thresholds established by the Bank, or those that management believes may not be appropriate based on all available information (including those limited instances in which only one price is received), are subject to further analysis. This further analysis includes, but is not limited to, a comparison of the preliminary fair value estimate to prices of similar securities, a comparison to non-binding dealer estimates, or the use of an internal model.

 

29


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

As of March 31, 2010, four third-party vendor prices were received for substantially all of the Bank’s investment securities and substantially all of those prices fell within the specified thresholds. The relative proximity of the prices received supports the Bank’s conclusion that the final estimated fair values are reasonable. Based on the current lack of significant market activity for private-label MBS, the fair value measurements for such securities as of March 31, 2010 and December 31, 2009 fell within Level 3 of the fair value hierarchy. The inputs to all other investment securities are classified as Level 2 in the fair value hierarchy.

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.

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 March 31, 2010 and December 31, 2009, 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.

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.

Accrued interest receivable and payable. The estimated fair value approximates the recorded book 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, predominately LIBOR. The fair values are based on a AA credit rating, which is maintained through the use of collateral agreements.

Derivative instruments are primarily transacted 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 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 derivative counterparty have bilateral 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 at March 31, 2010 and December 31, 2009.

 

30


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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 rates used in these calculations are based on LIBOR.

Borrowings. The Bank determines the estimated fair value of borrowings by calculating the present value of expected future cash flows from the borrowings and reducing this amount for accrued interest payable. The discount rates used in these calculations are based on market observable rates, predominantly 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 equity 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 at March 31, 2010 and December 31, 2009. 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 table presented below does not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.

 

31


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

     As of March 31, 2010    As of December 31, 2009
             Carrying         
Value
           Estimated         
Fair Value
           Carrying         
Value
           Estimated         
Fair Value

Financial Instruments

           

 

Assets:

           

 

Cash and due from banks

           $ 4            $ 4            $ 465            $ 465

 

Deposits with other FHLBanks

     2      2      3      3

 

Federal funds sold

     15,230      15,230      10,043      10,043

 

Trading securities

     3,358      3,358      3,553      3,553

 

Available-for-sale securities

     2,660      2,660      2,256      2,256

 

Held-to-maturity securities

     16,087      15,765      17,085      16,442

 

Mortgage loans held for portfolio, net

     2,418      2,551      2,522      2,633

 

Advances, net

     105,474      105,292      114,580      114,572

 

Accrued interest receivable

     465      465      515      515

 

Derivative assets

     23      23      39      39

 

Liabilities:

           

 

Deposits

     (2,941)      (2,941)      (2,989)      (2,989)

 

Loans from other FHLBanks

     (35)      (35)          

 

Consolidated obligations, net:

           

 

Discount notes

     (17,778)      (17,777)      (17,127)      (17,127)

 

Bonds

     (115,492)      (116,105)      (121,450)      (122,056)

 

Mandatorily redeemable capital stock

     (481)      (481)      (188)      (188)

 

Accrued interest payable

     (619)      (619)      (612)      (612)

 

Derivative liabilities

     (469)      (469)      (409)      (409)

 

32


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Note 13—Commitments and Contingencies

As described in Note 8, consolidated obligations are backed only by the financial resources of the 12 FHLBanks. The Finance Agency, under 12 CFR Section 966.9(d), may at any time require any FHLBank to make principal or interest payments due on any consolidated obligations, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation. No FHLBank has had to assume or pay the consolidated obligation of another FHLBank.

The par value of the FHLBanks’ outstanding consolidated obligations for which the Bank is jointly and severally liable was $739,010 and $793,314 as of March 31, 2010 and December 31, 2009, respectively, exclusive of the outstanding consolidated obligations for which the Bank is the primary obligor.

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

 

   

As of March 31, 2010

     

As of December 31, 2009

 

Outstanding notional

  $                                     19,785       $                                  18,909  

 

Original terms

  Less than three months to 19 years       Less than four months to 19 years  

 

Final expiration year

  2025       2025  

The value of the guarantees related to standby letters of credit is recorded in other liabilities and amounted to $94 and $91 as of March 31, 2010 and December 31, 2009, respectively. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to record any additional liability on these commitments.

The Bank monitors the creditworthiness of its standby letters of credit based on an evaluation of the guaranteed entity. The Bank has established parameters for the measurement, review, classification, and monitoring of credit risk related to these standby letters of credit that results in an internal credit rating, which focuses primarily on an institution’s overall financial health and takes into account quality of assets, earnings and capital position. In general, borrowers categorized into the higher risk rating categories have more restrictions on the types of collateral they may use to secure standby letters of credit, may be required to maintain higher collateral maintenance levels and deliver loan collateral and may face more stringent collateral reporting requirements.

The Bank did not have any commitments that unconditionally obligate the Bank to purchase closed mortgage loans as of March 31, 2010 and December 31, 2009. Commitments are generally for periods not to exceed 45 days. Such commitments are recorded as derivatives at their fair values.

The Bank executes derivatives with major banks and broker-dealers and generally enters into bilateral collateral agreements. As of March 31, 2010 and December 31, 2009, the Bank had pledged, as collateral to broker-dealers who have market risk exposure from the Bank related to derivatives, securities with a carrying value of $113 and $137, respectively, which can be sold or repledged by those counterparties.

At March 31, 2010, the Bank had committed to the issuance of $3,164 (par value) in consolidated obligation bonds, of which $2,145 were hedged with associated interest rate swaps, and $149 (par value) in consolidated obligation discount notes, none of which were hedged with associated interest rate swaps that had traded but not yet settled. At December 31, 2009, the Bank had committed to the issuance of $2,780 (par value) in consolidated obligation bonds of which $2,775 were hedged with associated interest rate swaps, and $753 (par value) in consolidated obligation discount notes, none of which were hedged with associated interest rate swaps that had traded but not yet settled.

 

33


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

The Bank is subject to legal proceedings arising in the normal course of business. After consultation with legal counsel, management does not anticipate, as of the date of the financial statements, that the ultimate liability, if any, arising out of these matters will have a material effect on the Bank’s financial condition or results of operations.

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

The Bank is a cooperative whose member institutions own almost all of the capital stock of the Bank. Former members own the remaining capital stock to support business transactions still carried on the Bank’s Statements of Condition. All holders of the Bank’s capital stock are able to receive dividends on their investments, to the extent declared by the Bank’s board of directors. All advances are issued to members and eligible “housing associates” under the Federal Home Loan Bank Act of 1932, as amended (“FHLBank Act”), and mortgage loans held for portfolio are purchased from members. The Bank also maintains demand deposit accounts primarily to facilitate settlement activities that are related directly to advances and mortgage loan purchases. All transactions with members are entered into in the ordinary course of the Bank’s business. Transactions with any member that has an officer or director who also is a director of the Bank are subject to the same Bank policies as transactions with other members.

The Bank defines related parties as each of the other FHLBanks and those members with regulatory capital stock outstanding in excess of 10 percent of total regulatory capital stock. Based on this definition, one member institution, Bank of America, National Association, which held 23.0 percent of the Bank’s total regulatory capital stock as of March 31, 2010, was considered a related party. Total advances outstanding to Bank of America, National Association were $37,063 and $37,363 as of March 31, 2010 and December 31, 2009, respectively. Total deposits held in the name of Bank of America, National Association were $2 and less than $1 at March 31, 2010 and December 31, 2009 respectively. No mortgage loans or MBS were acquired from Bank of America, National Association during the three-month periods ended March 31, 2010 and 2009.

 

34


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

Forward-Looking Information

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

 

 

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

 

 

Future performance, including profitability, developments, or market forecasts

 

 

Forward-looking accounting and financial statement effects

 

 

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

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

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

The discussion presented below provides an analysis of the Bank’s results of operations and financial condition for the quarters ended March 31, 2010 and 2009. Management’s discussion and analysis should be read in conjunction with the financial statements and accompanying notes presented elsewhere in the report, as well as the Bank’s audited financial statements for the year ended December 31, 2009.

 

35


Table of Contents

Executive Summary

General Overview

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

Financial Condition

As of March 31, 2010, total assets were $146.3 billion, a decrease of $5.0 billion, or 3.32 percent, from December 31, 2009. This decrease was due primarily to a $9.1 billion, or 7.95 percent, decrease in advances and a $998 million, or 5.84 percent, decrease in held-to-maturity securities, partially offset by a $5.2 billion increase in federal funds sold during the period. Advances, the largest asset on the Bank’s balance sheet, decreased during the period due to maturing advances, prepayments as a result of member failures, and decreased demand for new advances resulting from members’ increased deposit balances, slower loan growth, and access to alternative sources of funding. The decrease in held-to-maturity securities during the period was due primarily to $1.4 billion in proceeds received for principal repayments and maturities, partially offset by the purchase of $481 million in securities classified as held-to-maturity. The increase in federal funds sold during the period was due to the availability of these short-term investments at attractive rates.

As of March 31, 2010, total liabilities were $138.2 billion, a decrease of $4.9 billion, or 3.41 percent, from December 31, 2009. This decrease was due primarily to a $5.3 billion, or 3.83 percent, decrease in COs during the period. The decrease in COs corresponds to the decrease in demand for advances by the Bank’s members during the first quarter of 2010.

Total capital was $8.1 billion at March 31, 2010, a decrease of $154 million, or 1.86 percent, from December 31, 2009. This decrease was due primarily to the reclassification of $293 million in capital stock to mandatorily redeemable capital stock (a liability) as a result of nine member institutions obtaining nonmember status during the period. This decrease was partially offset by a $75 million decrease in accumulated other comprehensive loss, $48 million in net income recorded in retained earnings, and the issuance of $25 million in capital stock during the period.

Results of Operations

The Bank’s net income for the first quarter of 2010 was $48 million, an increase of $50 million from a net loss of $2 million for the first quarter of 2009. The increase in net income was due primarily to a $43 million reduction in credit related other-than-temporary impairment losses recognized in earnings during the first quarter of 2010 compared to the first quarter of 2009.

 

36


Table of Contents

For the first quarters of 2010 and 2009, the Bank recognized total other-than-temporary impairment of $64 million and $698 million, respectively. The credit related portion of $46 million and $89 million, respectively, of these other-than-temporary impairment losses is recognized in earnings. The noncredit related portion of $18 million and $609 million, respectively, of the other-than-temporary impairment losses is recorded as a component of other comprehensive loss.

One way in which the Bank analyzes its performance is by comparing its annualized return on equity (“ROE”) to three-month average LIBOR. The Bank’s ROE was 2.36 percent for the first quarter of 2010 compared to a negative 0.08 percent for the first quarter of 2009. The increase in ROE is due primarily to an increase in net income during the period as discussed above. ROE spread to three-month average LIBOR increased to 2.10 percent for the first quarter of 2010 compared to a negative 1.32 percent for the first quarter of 2009. This increase was due primarily to an increase in ROE and a decrease in LIBOR during the period.

The Bank’s interest rate spread increased by 41 basis points for the first quarter of 2010 compared to the first quarter of 2009. This comparative increase was due primarily to lower yields on advances during the first quarter of 2009 due to the write-off of hedging-related basis adjustments on advances that were prepaid.

Business Outlook

Advance demand decreased during the first quarter of 2010, and the Bank expects this trend to continue throughout 2010. Although the decrease in credit related other-than-temporary impairment losses recognized in earnings during the first quarter of 2010 compared to the first quarter of 2009 and the Bank’s net income for the first quarter of 2010 reflect improvements in the financial markets, overall economic conditions remain uncertain. This continued uncertainty, increasing financial institution failures, and high levels of member liquidity could continue to impact negatively advance demand and the market value of the Bank’s private-label MBS portfolio, which could affect the Bank’s financial condition and results of operations.

The Bank maintained significantly higher capital ratios during the first quarter of 2010 compared to previous years. The board of directors continues to consider repurchasing excess activity-based stock on a quarterly basis. A discussion of the board of directors’ recent capital management and dividend decisions is contained in the Bank’s Form 10-K.

 

37


Table of Contents

Summary of 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
         March 31,    
2010
       December 31,    
2009
       September 30,    
2009
       June 30,    
2009
       March 31,    
2009

Statements of Condition (at period end)

 

              

Total assets

 

       $ 146,281          $ 151,311          $ 163,410          $ 170,206          $ 189,445  

Investments (1)

 

     37,337        32,940        34,165        32,016        37,368  

Mortgage loans

 

     2,419        2,523        2,645        2,834        3,081  

Allowance for loan losses

 

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

Advances, net

 

     105,474        114,580        125,823        134,503        148,090  

REFCORP prepayment

 

     —        —        —        —        17  

Deposits

 

     2,941        2,989        3,353        4,148        4,896  

Consolidated obligations, net :

 

              

Discount notes

 

     17,778        17,127        28,418        38,672        49,523  

Bonds

 

     115,492        121,450        121,777        117,756        124,780  

Total consolidated obligations, net (2)

 

     133,270        138,577        150,195        156,428        174,303  

Mandatorily redeemable capital stock

 

     481        188        130        106        1,901  

Affordable Housing Program payable

 

     128        125        123        138        132  

Payable to REFCORP

 

     14        21        1        30        —  

Capital stock - putable

 

     7,852        8,124        8,156        8,119        6,189  

Retained earnings

 

     916        873        799        804        612  

Accumulated other comprehensive loss

 

     (669)        (744)        (791)        (1,065)        (786)  

Total capital

 

     8,099        8,253        8,164        7,858        6,015  

Statements of Income

              

 

Net interest income

 

     153        162        102        105        35  

Net impairment losses recognized in earnings

 

     (46)        (52)        (129)        (46)        (89)  

Net gains (losses) on trading securities

 

     4        (52)        25        (74)        (34)  

Net (losses) gains on derivatives and hedging activities

 

     (17)        81        45        305        112  

Other income (loss) (3)

 

     —        —        1        1        1  

Other expenses

 

     29        27        29        30        27  

Income (loss) before assessments

 

     65        112        15        261        (2)  

Assessments

 

     17        30        4        69        —  

Net income (loss)

 

     48        82        11        192        (2)  

Return on equity (4)

 

     2.36%        3.95%        0.55%        10.3%        (0.08)%  

Return on assets (5)

 

     0.13%        0.20%        0.03%        0.41%        0.00%  

Net interest margin (6)

 

     0.41%        0.40%        0.24%        0.23%        0.07%  

Regulatory capital ratio (at period end) (7)

 

     6.32%        6.07%        5.56%        5.30%        4.59%  

Equity to assets ratio (8)

 

     5.43%        5.07%        4.65%        3.98%        3.82%  

Dividend payout ratio (9)

     11.5%        10.2%        142.1%        0.00%        0.00%  

 

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

 

      March 31, 2010

       $         739,010   

      December 31, 2009

     793,314   

      September 30, 2009

     825,080   

      June 30, 2009

     900,968   

      March 31, 2009

     963,100   

 

(3) Other income (loss) includes service fees and other.
(4) Calculated as net income divided by average total equity.

 

38


Table of Contents
(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 divided by net income.

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 by the Office of Finance on the Bank’s behalf of debt securities in the form of COs.

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 March 31, 2010                       As of December 31, 2009                        Increase/(Decrease)           
            Amount          

 

        Percent of        
Total

          Amount                   Percent of        
Total
          Amount                   Percent        

 

Advances, net

 

               $           105,474     72.11                  $           114,580     75.72                   $           (9,106)     (7.95)  

Long-term investments

 

    21,450     14.66       22,594     14.93       (1,144)     (5.06)  

Short-term investments

 

    15,887     10.86       10,346     6.84       5,541     53.56  

Mortgage loans, net

 

    2,418     1.65       2,522     1.67       (104)     (4.12)  

Other assets

 

    1,052     0.72       1,269     0.84       (217)     (17.08)  
                           

Total assets

 

               $           146,281     100.00                  $ 151,311     100.00                    $ (5,030)     (3.32)  
                           

Consolidated obligations, net:

 

           

  Discount notes

                 $ 17,778     12.87                   $ 17,127     11.97                   $ 651     3.80  

  Bonds

    115,492     83.57       121,450     84.90       (5,958)     (4.91)  

Loans from other FHLBanks

 

    35     0.03       —     —       35     (NM)  

Deposits

 

    2,941     2.13       2,989     2.09       (48)     (1.62)  

Other liabilities

 

    1,936     1.40       1,492     1.04       444     29.79  
                           

Total liabilities

 

               $ 138,182     100.00                   $ 143,058     100.00                   $ (4,876)     (3.41)  
                           

Capital stock

 

                 $ 7,852     96.95                  $ 8,124     98.44                    $ (272)     (3.34)  

Retained earnings

 

    916     11.30       873     10.58       43     4.90  

Accumulated other comprehensive loss

 

    (669)     (8.25)       (744)     (9.02)       75     10.13  
                           

Total capital

                 $ 8,099     100.00                  $ 8,253     100.00                   $ (154)     (1.86)  
                           

 

(NM)-Not meaningful

Advances

Advances were $105.5 billion at March 31, 2010, a decrease of $9.1 billion, or 7.95 percent, from December 31, 2009. This decrease was due to maturing advances, prepayments as a result of member failures and decreased demand for new advances resulting from members’ increased deposit balances, slower loan growth, and access to alternative sources of funding. At March 31, 2010, 88.6 percent of the Bank’s advances were fixed-rate. However, the Bank often simultaneously enters into derivatives with the issuance of advances to convert the rates on them, in effect, into a short-term variable interest rate, usually based on LIBOR. Of the par value of $100.8 billion of advances outstanding as of March 31, 2010, $84.2 billion, or 83.6 percent, had their terms reconfigured through the use of interest rate exchange agreements. Of the par value of $109.8 billion of advances outstanding at December 31, 2009, $91.1 billion, or 82.9 percent, had their terms reconfigured through the use of interest-rate exchange agreements. 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 CMS (constant maturity swap) rates.

 

39


Table of Contents

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

 

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

March 31, 2010

                   $ 68,709                    68.2

December 31, 2009

     75,418                    68.7

Investments

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

The Bank’s short-term investments consist of overnight and term federal funds, certificates of deposit and interest-bearing deposits. The Bank’s long-term investments consist of MBS issued by government-sponsored mortgage agencies or private securities that, at purchase, carried the highest rating from Moody’s or S&P, securities issued by the U.S. government or U.S. government agencies, state and local housing agency obligations, and consolidated obligations issued by other FHLBanks. The long-term investment portfolio generally provides the Bank with higher returns than those available in the short-term money markets. 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 March 31, 2010                     As of December 31, 2009                     Amount           

 

        Percent        

Short-term investments:

 

           

Deposits with other FHLBanks

 

       $ 2          $ 3          $ (1)      (3.75)  

Held-to-maturity-Certificates of deposit

 

     655        300        355      118.33  

Federal funds sold

 

       15,230        10,043        5,187      51.64  
                       

Total short-term investments

 

       15,887        10,346        5,541      53.56  
                       

Long-term investments:

 

           

State or local housing agency obligations

 

     121        126        (5)      (3.36)  

U.S. government agency securities

 

     3,348        3,542        (194)      (5.49)  

Mortgage-backed securities:

 

           

U.S. government agency securities

 

     7,115        7,375        (260)      (3.52)  

Private label

 

       10,866        11,551        (685)      (5.93)  
                       

Total mortgage-backed securities

 

       17,981        18,926        (945)      (4.99)  
                       

Total long-term investments

 

       21,450        22,594        (1,144)      (5.06)  
                       

Total investments

 

       $   37,337          $ 32,940          $ 4,397      13.35  
                       

 

40


Table of Contents

Short-term investments were $15.9 billion at March 31, 2010, an increase of $5.5 billion, or 53.6 percent, from December 31, 2009. The increase in short-term investments was due primarily to a $5.3 billion increase in overnight federal funds available at attractive rates and a $355 million increase in certificates of deposit during the period.

Long-term investments were $21.5 billion at March 31, 2010, a decrease of $1.1 billion, or 5.06 percent, from December 31, 2009. The decrease in long-term investments was due primarily to principal repayments and maturities during the period and the lack of quality MBS at attractive prices. In addition, during the first quarter of 2010, the Bank recorded total other-than-temporary impairment losses of $64 million related to its private-label MBS, of which $46 million was recognized in earnings.

The Finance Agency limits an FHLBank’s investment in MBS and asset-backed securities by requiring that the total book value of MBS owned by the FHLBank generally may not exceed 300 percent, or in certain circumstances 600 percent, of the FHLBank’s previous month-end capital plus its mandatorily redeemable capital stock on the day it purchases the securities. In light of current market conditions, the Bank attempts to maintain this ratio between 250 percent and 275 percent to help maximize and stabilize earnings. These investments amounted to 210 percent and 224 percent of total capital plus mandatorily redeemable capital stock at March 31, 2010 and December 31, 2009, respectively. The Bank was below its target range at March 31, 2010 due to the lack of quality MBS at attractive prices.

As of March 31, 2010, the Bank had a total of 37 securities classified as available-for-sale in an unrealized loss position, with total gross unrealized losses of $664 million and a total of 160 securities classified as held-to-maturity in an unrealized loss position, with total gross unrealized losses of $578 million. As of December 31, 2009, the Bank had a total of 32 securities classified as available-for-sale in an unrealized loss position, with total gross unrealized losses of $739 million, and a total of 187 securities classified as held-to-maturity in an unrealized loss position, with total gross unrealized losses of $883 million.

The Bank evaluates its individual investment securities holdings for other-than-temporary impairment on a quarterly basis, or more frequently if events or changes in circumstances indicate that these investments may be other-than-temporarily impaired. The Bank recognizes an other-than-temporary impairment loss when the Bank determines it will not recover the entire amortized cost basis of a security. Securities in the Bank’s private-label MBS portfolio are evaluated by estimating the present value of cash flows the Bank expects to collect based on the structure of the security and certain economic environment assumptions, such as delinquency and default rates, loss severity, home price appreciation, interest rates, and securities prepayment speeds, while factoring in underlying collateral and credit enhancement.

Based on the impairment analysis described above, for the first quarters of 2010 and 2009, the Bank recognized total other-than-temporary impairment losses of $64 million and $698 million, respectively, related to private-label MBS in its investment securities portfolio. The total amount of other-than-temporary impairment is calculated as the difference between the security’s amortized cost basis and its fair value. The credit related portion of $46 million and $89 million, respectively, of these other-than-temporary impairment losses is reported in the Statements of Income as “Net impairment losses recognized in earnings.” The noncredit related portion of $18 million and $609 million, respectively, of the other-than-temporary impairment losses is recorded as a component of other comprehensive loss.

The remainder of the Bank’s investment securities portfolio that has not been designated as other-than-temporarily impaired has experienced unrealized losses and decreases in fair value due to interest-rate volatility, illiquidity in the marketplace, and credit deterioration in the U.S. mortgage markets. This decline in fair value is considered temporary as the Bank presently expects to collect all contractual cash flows and the Bank does not intend to sell the securities and it is not more likely than not that the Bank will be required to sell the security before the anticipated recovery of its remaining amortized cost basis, which may be at maturity. This assessment is based on the determination that the Bank has sufficient capital and liquidity to operate its business and has no need to sell these securities, nor has the Bank entered into any contractual constraints that would require the Bank to sell these securities.

 

41


Table of Contents

Mortgage Loans Held for Portfolio

Mortgage loans held for portfolio were $2.4 billion at March 31, 2010, a decrease of $104 million, or 4.12 percent, from December 31, 2009. The decrease in mortgage loans held was due to the maturity of these assets during the period. In 2006, the Bank ceased purchasing assets under the Affordable Multifamily Participation Program, and in 2008 the Bank ceased purchasing assets under the Mortgage Partnership Finance Program (“MPF Program) and suspended acquisitions of mortgage loans under the Mortgage Purchase Program (“MPP”). If the Bank does not resume purchasing mortgage loans under these programs, each of the existing mortgage loans held for portfolio will mature according to the terms of its note. The Bank purchased loans with maturity dates extending out to 2038.

As of March 31, 2010 and December 31, 2009, the Bank’s 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 MPF Program and MPP loans held for portfolio for the five largest state concentrations.

 

                          As of March 31, 2010                                             As of December 31, 2009                    
    

 

        Percent of Total        

           Percent of Total        

South Carolina

 

   22.8      23.0  

Florida

 

   18.8      19.0  

North Carolina

 

   15.5      16.0  

Georgia

 

   14.8      15.0  

Virginia

 

   9.7      10.0  

All other

 

   18.4      17.0  
         

Total

   100.0      100.0  
         

Consolidated Obligations

The Bank funds its assets primarily through the issuance of consolidated obligation bonds and, to a lesser extent, consolidated obligation discount notes. Consolidated obligation issuances financed 91.1 percent of the $146.3 billion in total assets at March 31, 2010, remaining relatively stable from the financing ratio of 91.6 percent as of December 31, 2009.

Consolidated obligation bonds were $115.5 billion at March 31, 2010, a decrease of $6.0 billion, or 4.91 percent, from December 31, 2009. Consolidated obligation discount notes were $17.8 billion at March 31, 2010, an increase of $651 million, or 3.80 percent, from December 31, 2009. The net decrease in consolidated obligations corresponds to the decrease in demand for advances by the Bank’s members during the first quarter of 2010 and the increase in liquidity from advance prepayments as a result of member failures. Consolidated obligation bonds outstanding at March 31, 2010 and December 31, 2009 were primarily fixed-rate. However, the Bank often simultaneously enters into derivatives with the issuance of consolidated obligation bonds to convert the rates on them, in effect, into short-term variable interest rates, usually based on LIBOR. Of the par value of $114.1 billion of consolidated obligation bonds outstanding at March 31, 2010, $76.8 billion, or 67.3 percent, had their terms reconfigured through the use of interest-rate exchange agreements. The comparable notional amount of such outstanding derivatives at December 31, 2009 was $85.2 billion, or 70.9 percent, of the par value of consolidated obligation bonds.

 

42


Table of Contents

As of March 31, 2010, callable consolidated obligation bonds constituted 30.7 percent of the total par value of consolidated obligation bonds outstanding, compared to 27.7 percent at December 31, 2009. This increase was due to market conditions that made the issuance of callable fixed maturity debt more attractive to the Bank. The derivatives that the Bank may employ to hedge against the interest-rate risk associated with the Bank’s consolidated obligation bonds generally are callable by the counterparty. The Bank generally would call the hedged consolidated obligation bond if the call features of the derivatives were exercised. These call features could require the Bank to refinance a substantial portion of outstanding liabilities during times of decreasing interest rates. Call options on unhedged callable consolidated obligation 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. As a matter of prudence, the Bank typically invests deposit funds in liquid short-term assets. Member loan demand, deposit flows, and liquidity management strategies influence the amount and volatility of deposit balances carried with the Bank. Deposits totaled $2.9 billion as of March 31, 2010, compared to $3.0 billion as of December 31, 2009.

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 March 31, 2010.

Capital

Total capital was $8.1 billion at March 31, 2010, a decrease of $154 million, or 1.86 percent, from December 31, 2009. This decrease was due primarily to the reclassification of $293 million in capital stock to mandatorily redeemable capital stock (a liability) as a result of nine member institutions obtaining nonmember status during the period. Members obtain nonmember status as a result of a merger into, or acquisition of all or substantially all of the member’s assets and liabilities by, a nonmember, or through transfer by the FDIC of a failed member’s assets and liabilities to a nonmember purchaser. This decrease was partially offset by a $75 million decrease in accumulated other comprehensive loss, $48 million in net income recorded in earnings, and the issuance of $25 million in capital stock during the period.

 

43


Table of Contents

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 the following table (dollars in millions):

 

     As of March 31, 2010    As of December 31, 2009
             Required                    Actual                    Required           

 

        Actual        

  Regulatory capital requirements:

 

           

  Risk based capital

 

       $ 2,716          $ 9,249          $ 3,010          $ 9,185  

  Total capital-to-assets ratio

 

     4.00%        6.32%        4.00%        6.07%  

  Total regulatory capital*

 

       $ 5,851          $ 9,249          $ 6,052          $ 9,185  

  Leverage ratio

 

     5.00%        9.48%        5.00%        9.11%  

  Leverage capital

       $ 7,314          $ 13,873          $ 7,566          $ 13,777  

 

* Mandatorily redeemable capital stock is considered capital for regulatory purposes, and “total regulatory capital” includes the Bank’s $481 million and $188 million in mandatorily redeemable capital stock at March 31, 2010 and December 31, 2009, respectively.

On August 4, 2009, the Finance Agency issued a final rule that established 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

 

   

Critically Undercapitalized - FHLBank total capital is two percent or less of total assets.

The regulation provides that the Director will make a capital classification for each FHLBank at least quarterly and delineates the types of prompt corrective actions the Director may order in the event an FHLBank is not adequately capitalized. On March 31, 2010, the Bank received notification from the Director that, based on December 31, 2009 data, the Bank meets the definition of “adequately capitalized.”

As of March 31, 2010, the Bank had capital stock subject to mandatory redemption from 54 members and former members, consisting of B1 membership stock and B2 activity-based stock, compared to 45 members and former members as of December 31, 2009. The Bank is not required to redeem or repurchase such stock until the expiration of the five-year redemption period or, with respect to activity-based stock, until the later of the expiration of the five-year redemption period or the activity no longer remains outstanding.

As of March 31, 2010 and December 31, 2009, the Bank’s activity-based stock included $2.6 billion and $1.9 billion, respectively, of excess shares subject to repurchase by the Bank at its discretion. The Bank’s board of directors determines on a quarterly basis any discretionary repurchases of excess shares.

 

44


Table of Contents

Results of Operations

Net Income

The following table sets forth the Bank’s significant income items for the first quarters of 2010 and 2009, and provides information regarding the changes during the periods (dollars in millions). These items are discussed in more detail below.

 

          Three Months Ended March 31,          Increase/
       (Decrease)      
  Increase/
     (Decrease) %    
    2010   2009    

  Net interest income

      $                 153         $                 35         $                 118     328.80  

  Other loss

    (59)       (10)       (49)     (485.55)  

  Other expense

    29       27       2     3.75  

  Total assessments

    17       –       17     (NM)  

  Net income (loss)

    48       (2)       50     (NM)  

 

  (NM)-Not meaningful

Net Interest Income

A primary source of the Bank’s earnings is net interest income. Net interest income equals interest earned on assets (including member advances, mortgage loans, MBS held in portfolio, and other investments), less the interest expense incurred on consolidated obligations, deposits, and other borrowings. Also included in net interest income are miscellaneous related items such as prepayment fees earned and the amortization of debt issuance discounts, concession fees and derivative instruments and hedging activities related adjustments.

Net interest income was $153 million for the first quarter of 2010, an increase of $118 million compared to the first quarter of 2009. The increase in net interest income was due primarily to the accelerated write-off of hedging-related basis adjustments due to the prepayment of advances as well as other hedging related adjustments that decreased net interest income during the first quarter of 2009.

The following table presents spreads between the average yield on total interest-earning assets and the average cost of interest-bearing liabilities for the first quarters of 2010 and 2009 (dollars in millions). The interest rate spread is affected by the inclusion or exclusion of net interest income/expense associated with the Bank’s derivatives. For example, if the derivatives qualify for fair-value hedge accounting under GAAP, the net interest income/expense associated with the derivative 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 net interest income/expense associated with the derivatives is excluded from net interest income and the calculation of the interest rate spread. Amortization associated with hedging-related basis adjustments also are reflected in net interest income, which affect interest rate spread. As noted in the below tables, during the first quarter of 2010, compared to the first quarter of 2009, the interest rate spread increased by 41 basis points. The increase in interest rate spread during the periods is due primarily to large write-offs of basis adjustments associated with hedging on prepaid advances reducing interest income as well as other hedging-related adjustments during the first quarter of 2009.

 

45


Table of Contents

Spread and Yield Analysis

 

     Three Months Ended March 31,
     2010    2009
     Average         Yield/    Average         Yield/
                 Balance                         Interest                Rate (%)                    Balance                             Interest                     Rate (%)    

Assets

                 

Federal funds sold

         $ 11,552              $ 5        0.16              $ 15,833              $ 8        0.21    

Interest-bearing deposits (1)

     3,562          1        0.14          5,408          3        0.19    

Certificates of deposit

     576          —        0.22          —          —        —    

Long-term investments (2)

     22,488          253        4.56          26,774          329        4.99    

Advances

     111,170          72        0.26          155,402          435        1.13    

Mortgage loans held for portfolio (3)

     2,465          32        5.28          3,181          42        5.41    

Loans to other FHLBanks

     1          —        0.13          1          —        0.29    
                                 

Total interest-earning assets

     151,814          363        0.97          206,599          817        1.60    
                         

Allowance for credit losses on mortgage loans

     (1)                (1)          

Other assets

     1,083                2,408          
                         

Total assets

         $ 152,896                    $             209,006          
                         

Liabilities and Capital

                 

Demand and overnight deposits

         $ 2,814          —        0.05              $ 4,345          2        0.14    

Other interest-bearing deposits (4)

     90          —        0.14          66          —        0.20    

Short-term borrowings

     15,582          3        0.06          53,136          163        1.25    

Long-term debt

     120,445          207        0.70          134,060          615        1.86    

Other borrowings

     226          —        0.18          600          2        1.16    
                                 

Total interest-bearing liabilities

     139,157          210        0.61          192,207          782        1.65    
                         

Other liabilities

     5,430                8,809          

Total capital

     8,309                7,990          
                         

Total liabilities and capital

         $ 152,896                    $ 209,006          
                         

Net interest income and net yield on interest-earning assets

            $             153        0.41                 $                 35        0.07    
                             

Interest rate spread

         0.36              (0.05)    
                     

Average interest-earning assets to interest-bearing liabilities

         109.10              107.49    
                     

 

  Notes

 

  (1)     Includes amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative counterparties.
  (2)     Includes trading securities at fair value and available-for-sale securities at amortized cost.
  (3)     Nonperforming loans are included in average balances used to determine average rate.
  (4)     Includes amounts recognized for the right to return cash collateral received under master netting agreements with derivative counterparties.

 

46


Table of Contents

Net interest income for the periods presented was affected by changes in average balances (volume change) and changes in average rates (rate change) of interest-earning assets and interest-bearing liabilities. The following table presents the extent to which volume changes and rate changes affected the Bank’s interest income and interest expense (in millions). As noted in the table, the overall change in net interest income during the first quarter of 2010, compared to the first quarter of 2009, was primarily rate related.

 

          Volume and Rate Table*
    Three Months Ended March 31,
    2010 vs. 2009
                    Volume                                    Rate                            Increase (Decrease)         

  Increase (decrease) in interest income:

   

  Federal funds sold

        $ (2)             $ (1)             $ (3)    

  Interest-bearing deposits

    (1)         (1)         (2)    

  Long-term investments

    (50)         (26)         (76)    

  Advances

    (98)         (265)         (363)    

  Mortgage loans held for portfolio

    (9)         (1)         (10)    
                 

  Total

    (160)         (294)         (454)    
                 

  Increase (decrease) in interest expense:

     

  Demand and overnight deposits

    —         (2)         (2)    

  Short-term borrowings

    (69)         (91)         (160)    

  Long-term debt

    (57)         (351)         (408)    

  Other borrowings

    (1)         (1)         (2)    
                 

  Total

    (127)         (445)         (572)    
                 

  (Decrease) increase in net interest income

        $ (33)             $ 151             $ 118    
                 

 

     

* 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.

Management generally uses derivative instruments to hedge net interest income, with a primary goal of stabilizing the interest-rate spread over time and mitigating interest-rate risk and cash-flow variability. The table below outlines the overall effect of derivatives and hedging activities on net interest income and other income (loss) related results (in millions). For a description regarding the individual interest components discussed below, see the Bank’s Form 10-K.

 

                 Three Months Ended  March 31,            
    

 

2010

  

 

2009

Net interest income

  

 

      $

 

                153    

  

 

      $

 

                35    

             

Interest components of hedging activities included in net interest income:

     

Hedging advances

         $ (891)              $ (767)    

Hedging consolidated obligations

     383          373    

Hedging related amortization

     (46)          (159)    
             

Net decrease in net interest income

  

 

      $

 

(554)    

  

 

      $

 

(553)    

             

Interest components of 8rivative activity included in other income (loss):

     

Purchased options

         $ 1              $ 9    

Synthetic macro funding

     (1)          (11)    

Trading securities

     (39)          (33)    
             

Net decrease in other income (loss)

  

 

      $

 

(39)    

  

 

      $

 

(35)    

             

 

47


Table of Contents

Other Income (Loss)

The Bank’s other income (loss) is composed primarily of net impairment losses recognized in earnings, net gains (losses) on trading securities and net (losses) gains on derivatives and hedging activities. The following table presents the components of other income (loss) (in millions):

 

                Three Months Ended  March 31,                
   

 

2010

 

 

2009

 

 

    Increase (Decrease)    

    Other Income (Loss):

     

    Net impairment losses recognized in earnings

        $                 (46)           $                 (89)             $ 43    

    Net gains (losses) on trading securities

    4         (34)         38    

    Net (losses) gains on derivatives and hedging activities

    (17)         112         (129)    

    Other

    —         1         (1)    
                 

    Total other loss

      $ (59)           $ (10)           $ (49)    
                 

The overall changes in other income (loss) for the first quarter of 2010, compared to the first quarter of 2009, was due primarily to adjustments required to report trading securities at fair value, as required by GAAP, and hedging-related adjustments, which are reported in the overall hedging activities (including those related to trading securities). The Bank hedges trading securities with derivative transactions, and the income effect of the market-value change for these securities was offset by market-value changes in the related derivatives. In addition, during the first quarters of 2010 and 2009, the Bank recorded $46 million and $89 million, respectively, of net impairment losses recognized in earnings as part of other income (loss).

The Bank also records all gains or losses, comprising changes in fair value and interest paid or received, of non-qualifying hedges in the net (losses) gains on derivatives and hedging activities classification. The following tables detail each of the components of net (losses) gains on derivatives and hedging activities (in millions):

 

          Advances         Purchased
Options,

Macro
     Hedging and    
Synthetic

Macro
Funding
        Investments                 Consolidated        
Obligations
Bonds
  Consolidated
Obligations
      Discount Notes      
              Total             

Three Months Ended March 31, 2010

           

Interest-related

      $ —           $ —           $ (39)           $ —           $ —                   $ (39)    

Qualifying fair value hedges

    63         —         —         (14)         (3)         46    

Non-qualifying hedges and other

    —         —         (24)         —         —         (24)    
                                   

Total gains (losses)

        $             63           $             —           $             (63)             $                 (14)             $ (3)           $ (17)    
                                   

Three Months Ended March 31, 2009

           

Interest-related

        $ —             $ (2)             $ (33)             $ —           $ —                   $ (35)    

Qualifying fair value hedges

    84         —         —         19         (3)         100    

Non-qualifying hedges and other

    —         5         42         —         —         47    
                                   

Total gains (losses)

         $ 84             $ 3             $ 9              $ 19             $ (3)                    $ 112    
                                   

 

48


Table of Contents

Non-interest Expense

Non-interest expense increased by $19 million during the first quarter of 2010, compared to the first quarter of 2009, due primarily to a $17 million increase in total assessments due to an increase in income during the period.

Liquidity and Capital Resources

Liquidity is necessary to satisfy members’ borrowing needs on a timely basis, repay maturing and called consolidated obligations, and meet other obligations and operating requirements. Many members rely on the Bank as a source of standby liquidity, and the Bank attempts to be in a position to meet member funding needs on a timely basis.

Finance Agency regulations require the Bank to maintain contingent liquidity in an amount sufficient to meet its liquidity needs for five business days if it is unable to access the capital markets. The Bank met this regulatory liquidity requirement during the first quarter of 2010. In light of stress and instability in domestic and international credit markets, the Finance Agency provided liquidity guidance to each FHLBank in September 2008 and March 2009, generally to provide ranges of days within which each FHLBank should maintain positive cash balances based upon different assumptions and scenarios. The Bank has operated within these ranges since the Finance Agency issued this guidance.

In addition, the Bank attempts to maintain sufficient liquidity to service debt obligations for at least 45 days, assuming restricted debt market access. The Bank implemented this 45-day debt service goal effective January 28, 2010; prior to that, the Bank’s goal was to maintain sufficient liquidity for 90 days. The Bank determined that changing the Bank’s liquidity goal from 90 days to 45 days would more closely align the Bank’s internal measures with those recommended by the Finance Agency and would more accurately reflect the Bank’s practice of not committing to consolidated obligation settlements beyond 30 days. The Bank has been in compliance with its internal liquidity goal during the first quarter of 2010 and as of April 30, 2010.

The Bank’s principal source of liquidity is consolidated obligation debt instruments, which are rated Aaa/P-1 by Moody’s and AAA/A-1+ by S&P. To provide liquidity, the Bank also may use other short-term borrowings, such as federal funds purchased, securities sold under agreements to repurchase, and loans from other FHLBanks. These funding sources depend on the Bank’s ability to access the capital markets at competitive market rates. Although the Bank maintains secured and unsecured lines of credit with money market counterparties, the Bank’s income and liquidity would be affected adversely if it were not able to access the capital markets at competitive rates for an extended period. Historically, the FHLBanks have had excellent capital market access, although the FHLBanks experienced a decrease in investor demand for consolidated obligation bonds beginning in mid-July 2008 and continuing through the first half of 2009. During that time, the Bank increased its issuance of short-term discount notes as an alternative source of funding. The Bank’s funding costs and ability to issue longer-term and structured debt generally have returned to pre-2008 levels, but continue to reflect some market volatility.

Contingency plans are in place that prioritize the allocation of liquidity resources in the event of operational disruptions at the Bank or the Office of Finance, as well as systemic Federal Reserve wire transfer system disruptions. The FHLBank Act authorizes the Secretary of Treasury, at his or her discretion, to purchase COs up to an aggregate principal amount of $4 billion. No borrowings under this authority have been outstanding since 1977.

 

49


Table of Contents

Off-balance Sheet Commitments

The Bank’s primary off-balance sheet commitments are as follows:

 

 

  The Bank has joint and several liability for all FHLBank COs

 

 

  The Bank has outstanding commitments arising from standby letters of credit.

Should an FHLBank be unable to satisfy its payment obligation under a consolidated obligation for which it is the primary obligor, any of the other FHLBanks, including the Bank, could be called upon to repay all or any part of such payment obligation, as determined or approved by the Finance Agency. The Bank considers the joint and several liability as a related party guarantee. These related party guarantees meet the scope exceptions under GAAP. Accordingly, the Bank has not recognized a liability for its joint and several obligations related to other FHLBanks’ COs at March 31, 2010 or December 31, 2009. As of March 31, 2010, the FHLBanks had $870.9 billion in aggregate par value of COs issued and outstanding, $131.9 billion of which was attributable to the Bank.

As of March 31, 2010, the Bank had outstanding standby letters of credit of approximately $19.8 billion with original terms of less than three months to 19 years, with the longest final expiration in 2025. As of December 31, 2009, the Bank had outstanding standby letters of credit of approximately $18.9 billion with original terms of less than four months to 19 years, with the longest final expiration in 2025. 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. Outstanding standby letters of credit have increased due to increased acceptance of standby letters of credit by public unit depositors as collateral for public deposits, a decrease in the credit ratings of other standby letter of credit issuers, a decrease in the number of financial institutions providing standby letters of credit or alternative forms of credit enhancement, and provisions of the Housing Act which permitted the use of FHLBank standby letters of credit as credit enhancement for tax-exempt bonds. The Housing Act provisions apply only to tax-exempt bonds issued or refunded from July 30, 2008 through December 31, 2010. It is uncertain at this time whether the Housing Act provisions related to FHLBank standby letters of credit will be extended. The Bank expects its standby letter of credit activity to continue to grow for the near future, but improvement in the financial markets and expiration of the Housing Act authority could result in a decrease in future standby letter of credit activity.

Commitments to extend credit, including standby letters of credit, are agreements to lend. The Bank issues a standby letter of credit for the account of a member in exchange for a fee. A member may use these standby letters of credit to facilitate a financing arrangement. The Bank requires its borrowers, upon the effective date of the letter of credit through its expiration, to collateralize fully the face amount of any letter of credit issued by the Bank, as if such face amount were an advance to the borrower. If the Bank is required to make payment for a beneficiary’s draw, the Bank may convert such paid amount to an advance to the member. The Bank’s underwriting and collateral requirements for standby letters of credit are the same as those requirements for advances. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to have an allowance for credit losses for these unfunded letters of credit as of March 31, 2010. 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.

 

50


Table of Contents

Contractual Obligations

As of March 31, 2010, 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

Director Eligibility, Elections, Compensation and Expenses

On April 5, 2010, the Finance Agency issued a final rule implementing two separate proposed rules on director elections and director compensation, respectively. Under the final rule, the redesignation of a directorship to a new state prior to the end of the term as a result of the annual designation of FHLBank directorships causes the original directorship to terminate and creates a new directorship that will be filled by an election of the members. The final rule also repeals the statutory caps on the annual compensation that can be paid to FHLBank directors and allows each FHLBank to pay its directors reasonable compensation and expenses, subject to the authority of the Director of the Finance Agency to object to, and to prohibit prospectively, compensation and/or expenses that the Director determines are not reasonable. The final rule became effective May 5, 2010.

Board of Directors of the Office of Finance

On May 3, 2010, the Finance Agency published a final rule regarding the board of directors of the Office of Finance. The final rule will expand the Office of Finance board of directors from three members to 17 members, including the president of each of the 12 FHLBanks and five independent directors. The five independent directors will serve as the Office of Finance’s audit committee and the rule gives the audit committee increased authority over the form and content of the information that the FHLBanks provide to the Office of Finance for use in the combined financial reports. The rule becomes effective June 2, 2010.

FHLBank Investments

On May 4, 2010, the Finance Agency published a notice of proposed rulemaking regarding FHLBank investments. Among other things, the proposed rule would: (1) move the existing investment regulations from 12 C.F.R. Part 956 to 12 C.F.R. Part 1267, and (2) incorporate the current limitations on the level of an FHLBank’s MBS investments that are applicable to an FHLBank as a matter of Finance Agency financial management policy and order (including without limitation the provision limiting the amount of an FHLBank’s MBS investments to no more than 300 percent of an FHLBank’s capital). The proposal also requests comment on whether additional limitations on an FHLBank’s MBS investments, including its private-label MBS investments, should be adopted as part of a final regulation and whether with respect to private-label MBS investments such limitations should be based on the amount of an FHLBank’s retained earnings. Comments on the proposed rule are due by July 6, 2010.

 

51


Table of Contents

Financial Reform

Financial regulatory reform legislation being considered by Congress could have substantial direct and indirect effects on the Bank. The proposed legislation provides for the identification of systemically significant institutions and subjects the identified financial institutions to heightened supervision and regulatory requirements. If the legislation were to become law and the Bank were so identified, the Bank might become subject to new capital requirements, liquidity requirements, assessment obligations, and concentration limits, as well as a new resolution framework. Possible concentration limits may include limiting the Bank from lending an amount that exceeds 25 percent of capital stock and surplus to a member financial institution, which could have a negative effect on the Bank’s aggregate amount of advances. The proposed legislation also may impose significant changes on the Bank’s use of over-the-counter derivatives products. Depending on whether the proposed legislation is approved by Congress and signed into law and on the final content of any such legislation, the Bank’s business operations, funding costs, rights, obligations, and the manner in which the Bank carries out its housing-finance mission may be impacted. Since final passage and the scope of the legislation’s application are undetermined, it is impossible to predict the actual effects of this proposed legislation on the Bank at this time.

Risk Management

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

 

 

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

 

 

Liquidity risk, which is the risk that the Bank will be unable to meet its obligations as they come due or meet the credit needs of its members and associates in a timely and cost-efficient manner

 

 

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

 

 

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

 

 

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

A detailed discussion of the Bank’s management of these risks is contained in the Bank’s Form 10-K and under “Item 3. Quantitative and Qualitative Disclosure About Market Risk” below.

Credit Risk

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

Advances

Secured advances to member financial institutions account for the largest category of Bank assets; thus, advances are the Bank’s principal source of credit risk exposure. The Bank uses a risk-focused approach to credit and collateral underwriting. The Bank attempts to reduce credit risk on advances by monitoring the financial condition of borrowers and the quality and value of the assets members pledge as eligible collateral.

 

52


Table of Contents

The Bank utilizes a credit risk rating system for its members, which focuses primarily on an institution’s overall financial health and takes into account quality of assets, earnings, and capital position. The Bank assigns each borrower that is an insured depository institution a credit risk rating from one to 10 according to the relative amount of credit risk such borrower poses to the Bank (one being the least amount of credit risk and 10 the greatest amount of credit risk). In general, borrowers in categories nine and 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 convertible advances and may face more stringent collateral reporting requirements. At times, the Bank may place more restrictive requirements on a borrower than those generally applicable to borrowers with the same rating based upon management’s assessment of the borrower and its collateral.

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 March 31, 2010

  

As of December 31, 2009

            Rating             

  

 

            Number of             

            Borrowers             

  

 

        Outstanding        

Advances

  

 

Number of
          Borrowers          

  

 

Outstanding
Advances

1-4    85          $                    4,364        93        $                    3,969    
5-7    219          27,221        255        31,059    
8    149          50,731        151        56,880    
9    207          12,078        212        12,358    
10    163          5,484        134        4,788    

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 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 30.0 percent. However, the Bank’s board of directors, or a relevant committee thereof, may approve a higher limit at its discretion. As of March 31, 2010, no borrowers have been approved for a credit limit higher than 30.0 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. Borrowers with a credit risk rating of nine or 10 currently must maintain higher collateral balances. The LCV is the value that the Bank assigns to each type of qualifying collateral for purposes of determining the amount of credit that such qualifying collateral will support. For each type of qualifying collateral, the Bank discounts the unpaid principal balance, market value, or other value of the qualifying collateral, to calculate the LCV. The 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 March 31, 2010

      $ 100,753           $ 203,388         65.6   10.6   23.8

As of December 31, 2009

    109,813         216,032         63.0   11.5   25.5

 

53


Table of Contents

As of February 1, 2010, for purposes of determining each member’s LCV, the Bank estimates the current market value of all residential first mortgage loans pledged as collateral based on information provided by the member on individual loans or its loan portfolio through the regular collateral reporting process. The estimated market value is discounted to account for the price volatility of loans as well as estimated liquidation and servicing costs in the event of the member’s default.

According to the FDIC, during the first quarter of 2010, 41 FDIC-insured institutions were closed and the FDIC was named receiver, compared to 21 FDIC-institutions that were closed during the first quarter of 2009. Of the 41 FDIC-insured institutions that were closed during the first quarter of 2010, 13 were members of the Bank. All outstanding advances to those institutions placed into FDIC receivership were either paid in full or assumed by another member institution under purchase and assumption agreements between the assuming institution and the FDIC.

The FHLBank Act affords any security interest granted to the Bank by any member of the Bank, or any affiliate of any such member, priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor), other than claims and rights that (1) would be entitled to priority under otherwise applicable law and (2) are held by actual bona fide purchasers for value or by actual secured parties that are secured by actual perfected security interests.

In its history, the Bank has never experienced a credit loss on an advance. In consideration of this, and the Bank’s policies and practices detailed above, the Bank has not established an allowance for credit losses on advances as of March 31, 2010 and December 31, 2009.

Investments

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

The Bank follows guidelines approved by its board of directors regarding unsecured extensions of credit, in addition to Finance Agency regulations with respect to term limits and eligible counterparties.

Finance Agency regulations prohibit the Bank from investing in any of the following securities:

 

   

Instruments such as common stock that represent an ownership interest in an entity, other than stock in small business investment companies or certain investments targeted to low-income people or communities

 

   

Instruments issued by non-United States entities, other than those issued by United States branches and agency offices of foreign commercial banks

 

   

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

 

   

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 an 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

 

54


Table of Contents
   

Non-U.S. dollar denominated securities.

In addition, Finance Agency regulations prohibit the Bank from taking a position in any commodity or foreign currency, other than participating in consolidated obligations denominated in a foreign currency or linked to equity or commodity prices. Further, the Finance Agency prohibits the Bank from purchasing any of the following:

 

   

Interest-only or principal-only stripped MBS, collateralized mortgage obligations (“CMOs”), collateralized debt obligations (“CDOs”), and real estate mortgage-investment conduits (“REMICS”)

 

   

Residual-interest or interest-accrual classes of CMOs and REMICs

 

   

Fixed-rate or variable-rate MBS, CMOs, and REMICs that on the trade date are at rates equal to their contractual cap and that have average lives that vary by more than six years under an assumed instantaneous interest-rate change of 300 basis points.

Consistent with its practice with respect to members, the Bank monitors the financial condition of investment counterparties to ensure that they are in compliance with the Bank’s Risk Management Policy (“RMP”) and Finance Agency regulations. Unsecured credit exposure to any counterparty is limited by the credit quality and capital of the counterparty and by the capital of the Bank.

The Bank experienced an increase in unsecured credit exposure in its investment portfolio related to counterparties other than the U.S. government or U.S. government agencies and instrumentalities from $10.8 billion at December 31, 2009 to $16.4 billion as of March 31, 2010. As of March 31, 2010, the Bank had unsecured credit exposure to three non-U.S. government counterparties that was greater than 10 percent of total unsecured credit exposure. Additionally, the Bank had unsecured credit exposure to one non-U.S. counterparty in excess of five percent but less than 10 percent of total unsecured credit exposure.

Mortgage–backed Securities

The Bank’s RMP permits the Bank to invest in U.S. agency (Fannie Mae, Freddie Mac and Ginnie Mae) obligations, including CMOs and REMICS backed by such securities, and other MBS, CMOs and REMICS rated AAA by S&P or Aaa by Moody’s at the time of purchase. The MBS purchased by the Bank attain their triple-A ratings through credit enhancements, which primarily consist of the subordination of the claims of the other tranches of these securities. The Bank’s long-term investment portfolio as of March 31, 2010 included $10.9 billion of private-label MBS, which represented a substantial portion, or 50.7 percent of the carrying value, of the Bank’s long-term investment portfolio.

 

55


Table of Contents

The tables below provide information on the credit ratings of the Bank’s private-label MBS held at March 31, 2010, based on their credit ratings as of March 31, 2010 and April 30, 2010 (in millions). The credit ratings reflect the lowest rating as reported by an NRSRO.

 

     As of March 31, 2010
Investment Ratings:   

 

            Amortized Cost             

               Estimated Fair Value             

AAA

         $ 4,069            $ 3,960  

AA

     621        589  

A

     1,945        1,740  

BBB

     351        321  

BB

     814        718  

B

     930        797  

CCC

     2,495        1,927  

CC

     141        121  

C

     164        133  
             

Total

  

 

      $

 

11,530  

  

 

      $

 

10,306  

             
     As of April 30, 2010
Investment Ratings:   

 

Amortized Cost

   Estimated Fair Value

AAA

         $ 4,069            $ 3,960  

AA

     539        512  

A

     1,802        1,620  

BBB

     336        308  

BB

     798        706  

B

     680        604  

CCC

     2,983        2,327  

CC

     159        136  

C

     164        133  
             

Total

  

 

      $

 

11,530  

  

 

      $

 

10,306  

             

 

56


Table of Contents

The table below provides information on the credit ratings of the Bank’s private-label MBS held at December 31, 2009 (in millions). The credit ratings reflect the lowest rating as reported by an NRSRO.

 

     As of December 31, 2009
Investment Rating:                Amortized Cost                             Estimated Fair Value             

AAA

                 $ 4,477                            $ 4,291  

AA

     741        684  

A

     2,070        1,781  

BBB

     302        268  

BB

     889        757  

B

     1,247        1,004  

CCC

     2,240        1,635  

CC

     148        123  

C

     176        137  
             

Total

                 $ 12,290                            $ 10,680  
             

A portion of the Bank’s private-label MBS, or 35.3 percent, was rated AAA as of April 30, 2010 and 23.2 percent were rated AA to BBB as of April 30, 2010. Subsequent to March 31, 2010, $2.6 billion or 22.4 percent, of the Bank’s private-label MBS has been downgraded or placed on negative watch as of April 30, 2010 as outlined in the below table (in millions):

 

     Rating Agency Actions as of April 30, 2010
              Downgraded and Stable    Negative Watch/No Downgrade
              To Below Investment    
Grade
       Rated Triple    
A
   Rated
    Double A    
   Rated
    Single A    
     Rated Triple  
B
   To Below
    Investment    
Grade

Private-label MBS

            $ 240        $ 1,344        $ 266        $ 667        $ 40          $ 23  
                                            

Total amortized cost

            $ 240        $ 1,344        $ 266        $ 667        $ 40          $ 23  
                                            

For disclosure purposes, the Bank classifies private-label MBS as either prime or Alt-A based upon the overall credit quality of the underlying loans as determined by the originator at the time of origination. Although there is no universally accepted definition of Alt-A, generally, loans with credit characteristics that range between prime and subprime are classified as Alt-A. Participants in the mortgage market have used the Alt-A classification principally to describe loans for which the underwriting process has been streamlined in order to reduce the documentation requirements of the borrower or allow alternative documentation. At March 31, 2010, based on the classification by the originator at the time of origination, approximately 88.9 percent of the underlying mortgages collateralizing the Bank’s private-label MBS were considered prime and the remaining underlying mortgages collateralizing these securities were considered Alt-A. None of the underlying mortgages collateralizing the private-label MBS portfolio is considered subprime.

 

57


Table of Contents

The tables below provide additional information on the credit rating of the Bank’s private-label MBS backed by prime and Alt-A loans (dollars in millions).

 

     Credit Ratings of Private-label MBS Backed by Prime Loans
     As of March 31, 2010
    

 

Unpaid
Principal
        Balance        

           Amortized      
Cost
  

 

  Gross Unrealized  
Losses

  

 

Collateral
      Delinquency      
(%)

Investment Rating:

           

AAA

       $ 3,431          $ 3,406          $ (80)      1.70  

AA

     509        504        (27)      3.88  

A

     1,887        1,884        (200)      8.64  

BBB

     356        351        (30)      9.85  

Below investment grade

     4,437        4,103        (684)      17.90  
                       

Total

       $ 10,620          $ 10,248          $ (1,021)      10.08  
                       
     Credit Ratings of Private-label MBS Backed by Alt-A Loans
     As of March 31, 2010
    

 

Unpaid
Principal
        Balance        

       Amortized Cost     

 

Gross Unrealized
Losses

  

 

Collateral
      Delinquency      
(%)

Investment Rating:

           

AAA

       $ 661            $ 663            $ (45)      5.43  

AA

     117        117        (6)      4.64  

A

     61        61        (5)      6.53  

Below investment grade

     487        441        (163)      34.62  
                       

Total

       $ 1,326            $ 1,282            $ (219)      16.13  
                       

 

58


Table of Contents

The tables below provide additional information on the Bank’s private-label MBS by year of issuance (dollars in millions).

 

     As of March 31, 2010

 

    

 

AAA

 

   AA

 

   A

 

   BBB

 

    

 

Unpaid
    Principal    
Balance

 

  

 

Gross
    Unrealized    
Losses

 

  

 

Unpaid
    Principal    
Balance

 

  

 

Gross
    Unrealized    
Losses

 

  

 

Unpaid
    Principal    
Balance

 

  

 

Gross
    Unrealized    
Losses

 

  

 

    Unpaid Principal    
Balance

 

 

  

 

Gross
    Unrealized    
Losses

 

Prime - Year of Issuance:

                       

2004 and prior

           $ 3,140              $ (66)              $ 264              $ (14)              $ 842              $ (93)          $ 190          $ (22)  

2005

     122        (10)        172        (12)        962        (93)        35        (4)  

2006

     —        —        18        —        —        —        33        (4)  

2007

     169        (4)        55        (1)        —        —        98        —  

2008

     —        —        —        —        83        (14)        —        —  
                                                       

Total prime

     3,431        (80)        509        (27)        1,887        (200)        356        (30)  
                                                       

Alt-A- Year of Issuance:

                       

2004 and prior

     661        (45)        117        (6)        61        (5)        —        —  

2005

     —        —        —        —        —        —        —        —  

2007

     —        —        —        —        —        —        —        —  
                                                       

Total Alt-A

     661        (45)        117        (6)        61        (5)        —        —  
                                                       

Total

           $       4,092              $     (125)              $ 626              $     (33)              $ 1,948              $ (205)          $ 356          $ (30)  
                                                       

 

     As of March 31, 2010

 

     Below Investment Grade

 

    Total

 

    

Unpaid

    Principal    

Balance

   Gross
    Unrealized    
Losses
    Unpaid
    Principal    
Balance
  

Gross
    Unrealized    

Losses

    Original Credit
   Enhancement   
(%)
  

Weighted
Average

Credit
   Support (%)   

                                       

Prime - Year of Issuance:

               

2004 and prior

       $ 53          $ (8 )          $ 4,489          $ (203 )      3.0      6.6  

2005

     1,295        (189 )        2,586        (308 )      6.4      8.5  

2006

     1,260        (199 )        1,311        (203 )      9.5      8.7  

2007

     1,630        (273 )        1,952        (278 )      12.3      11.1  

2008

     199        (15 )        282        (29 )      15.7      15.8  
                                   

Total prime

     4,437        (684 )        10,620        (1,021 )      6.7      8.4  
                                   

Alt-A- Year of Issuance:

               

2004 and prior

     13        (1 )        852        (57 )      6.8      10.7  

2005

     395        (149 )        395        (149 )      26.7      26.2  

2007

     79        (13 )        79        (13 )      12.3      8.1  
                                   

Total Alt-A

     487        (163 )        1,326        (219 )      13.0      15.2  
                                   

Total

       $ 4,924          $ (847 )          $ 11,946          $ (1,240 )      7.4      9.2  
                                   

 

59


Table of Contents
     Fair Value as a Percentage of Unpaid Principal Balance
    

 

By Year of Issuance

         March 31,    
2010
       December 31,    
2009
       September 30,    
2009
       June 30,    
2009
       March 31,    
2009

Private-label MBS by Year of Issuance:

              

Prime:

              

2008

   89      82      74      77      54  

2007

   77      75      73      64      73  

2006

   77      74      71      63      57  

2005

   85      82      81      74      66  

2004 and earlier

   95      94      93      89      86  

Weighted-average of all prime

   87      85      83      78      75  

Alt-A:

              

2007

   69      72      73      63      72  

2005

   54      53      49      44      44  

2004 and earlier

   94      92      91      88      89  

Weighted-average of all Alt-A

   80      79      78      74      76  

Weighted-average of all private-label MBS

   86      84      83      77      75  

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

 

     As of March 31, 2010    As of December 31, 2009
    

 

 

  Fixed-Rate  

     Variable-Rate            Total            Fixed-Rate        Variable-Rate      Total

Private-label MBS:

                 

Prime

       $         2,318          $         8,302          $         10,620          $ 2,517          $ 8,765          $       11,282  

Alt-A

     683        643        1,326        723        658        1,381  
                                         

Total unpaid principal balance

       $         3,001          $         8,945          $         11,946          $       3,240          $       9,423          $       12,663  
                                         

To assess whether the entire amortized cost bases of its private-label MBS will be recovered, the Bank performed a cash flow analysis for each of its private-label MBS. In performing the cash flow analysis for each of these securities, the Bank used two third party models. The first model considers borrower characteristics and the particular attributes of the loans underlying the Bank’s securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas (“CBSAs”), which are based upon an assessment of the individual housing markets. (The term CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the United States Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area of 10,000 or more people.) The Bank’s housing price forecast assumed current-to-trough home price declines ranging from zero percent to 12 percent over the next six to 12 months (resulting in peak-to-trough home price declines of up to 65 percent). Thereafter, home prices are projected to remain flat for the first six months following the trough, increase by 0.5 percent for the following six months, increase by three percent in the second year and increase by four percent in each subsequent year.

 

60


Table of Contents

The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults and loss severities, are then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. The model classifies securities, as noted in the below table, based on current characteristics and performance, which may be different from the securities’ classification as determined by the originator at the time of origination. For those securities for which an other-than-temporary impairment was determined to have occurred during the first quarter of 2010 (that is, a determination was made that the entire amortized cost bases will not likely be recovered), the following table represents a summary of the significant inputs used to measure the amount of the credit loss recognized in earnings:

 

     Significant Inputs
    

 

 

Prepayment Rate

   Default Rates    Loss Severities    Current Credit Enhancement
    

 

 

    Weighted    

 

Average

 

(%)

       Range (%)       

 

    Weighted    

 

Average

 

(%)

       Range (%)       

 

    Weighted    

 

Average

 

(%)

       Range (%)       

 

    Weighted    

 

Average

 

(%)

       Range (%)    

Year of Securitization

                    

Prime:

                       

2008

   9.4      9.4 to 9.4      27.7      27.7 to 27.7      43.9      43.9 to 43.9      15.8      15.8 to 15.8  

2006

   8.3      8.1 to 9.0      12.6      12.2 to 12.7      40.1      39.9 to 40.6      8.3      7.2 to 8.6  

2005

   9.9      9.9 to 9.9      14.4      14.4 to 14.4      52.1      52.1 to 52.1      8.0      8.0 to 8.0  

Total prime

   9.0      8.1 to 9.9      19.1      12.2 to 27.7      43.2      39.9 to 52.1      11.3      7.2 to 15.8  

Alt-A:

                       

2007

   10.0      8.2 to 13.3      55.2      51.8 to 59.8      46.3      43.9 to 48.5      15.0      8.1 to 19.4  

2006

   9.8      8.9 to 11.7      55.6      52.9 to 58.8      48.6      46.2 to 52.1      10.8      6.7 to 13.0  

2005

   11.1      6.7 to 13.8      42.2      24.3 to 69.9      45.7      35.5 to 51.2      9.4      4.5 to 13.3  

2004 and prior

   16.0      15.1 to 19.8      27.4      9.6 to 32.5      47.9      41.6 to 49.4      13.3      11.6 to 15.5  

Total Alt-A

   10.7      6.7 to 19.8      49.8      9.6 to 69.9      46.7      35.5 to 52.1      12.5      4.5 to 19.4  

Total

   10.4      6.7 to 19.8      43.9      9.6 to 69.9      46.0      35.5 to 52.1      12.3      4.5 to 19.4  

In addition to the cash flow analysis of the Bank’s private-label MBS under a base case (best estimate) housing price scenario, a cash flow analysis also was performed based on a housing price scenario that is more adverse than the base case (adverse case housing price scenario). The adverse case housing price scenario was based on a projection of housing prices that was five percentage points lower at the trough compared to the base case scenario, had a flatter recovery path, and had housing prices increase at a long-term annual rate of three percent compared to four percent in the base case. Under the adverse case housing price scenario, current-to-trough housing price declines were projected to range from 5 percent to 17 percent over the next six to 12 months. Thereafter, home prices were projected to increase zero percent in the first year, one percent in the second year, two percent in the third and fourth years, and three percent in each subsequent year.

 

61


Table of Contents

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

 

     Three Months Ended March 31, 2010
     Housing Price Scenario
     Base Case    Adverse Case
     Unpaid
    Principal    
Balance
   Other-Than-
Temporary
    Impairment    
Related to
Credit Loss
  

 

Other-Than-
Temporary
    Impairment    
Related to All
Other Factors

   Unpaid
    Principal    
Balance
   Other-Than-
Temporary
    Impairment    
Related to
Credit Loss
   Other-Than-
Temporary
    Impairment    
Related to All
Other Factors

Other-than-temporary impaired private-label MBS model classification:

                 

Prime

       $ 1,482          $ 24          $ 23          $ 2,763          $ 93          $ 43  

Alt-A

     1,024        22        (5)        1,409        89        (53)  
                                         

Total

       $ 2,506          $ 46          $ 18          $ 4,172          $ 182          $ (10)  
                                         

As previously discussed, based on the Bank’s impairment analysis for the first quarters of 2010 and 2009, the Bank recognized total other-than-temporary impairment losses of $64 million and $698 million, respectively. The credit related portion of $46 million and $89 million, respectively, of these other-than-temporary impairment losses is reported in the Statements of Income as “Net impairment losses recognized in earnings.” The noncredit related portion of $18 million and $609 million, respectively, of the other-than-temporary impairment losses is recorded as a component of other comprehensive loss.

The table below summarizes the total other-than-temporary impairment loss recorded during the periods by classification and by the duration of the unrealized loss prior to impairment (in millions):

 

     As of March 31, 2010
     Gross Unrealized Loss Position
         Less than 12 Months            12 Months or more        Total

Private-label MBS backed by:

        

Prime loans

           $ —              $ 62          $         62  

Alt-A

     —        2        2  
                    

Total

           $ —              $ 64          $ 64  
                    
     As of March 31, 2009
     Gross Unrealized Loss Position
     Less than 12 Months   

 

12 Months or more

   Total

Private-label MBS backed by:

        

Prime loans

           $ —              $ 698          $         698  
                    

Total

           $ —              $ 698          $ 698  
                    

The remainder of the Bank’s private-label MBS that has not been designated as other-than-temporarily impaired has experienced significant unrealized losses and decreases in fair value due to interest rate volatility, illiquidity in the marketplace, and credit deterioration in the U.S. mortgage markets. This decline in fair value is considered temporary as the Bank expects to recover the amortized cost basis of these securities, the Bank does not intend to sell the securities, and it is not more likely than not that the Bank will be required to sell the securities before the anticipated recovery of the securities’ remaining amortized cost basis, which may be at maturity.

 

62


Table of Contents

Given the current market conditions and the significant judgments involved, there is a continuing risk that further declines in fair value may occur and that the Bank may record material other-than-temporary impairment losses in future periods, which could affect the Bank’s financial condition and results of operations.

Non-Private-label MBS. The unrealized losses related to U.S. agency MBS are caused by interest rate changes. Because these securities are guaranteed by government agencies or government-sponsored enterprises, it is expected that these securities would not be settled at a price less than the amortized cost basis. The Bank does not consider these investments to be other-than-temporarily impaired as of March 31, 2010 because the decline in fair value is attributable to changes in interest rates and not credit quality, the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity.

Derivatives

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

As of March 31, 2010, the Bank had $173.8 billion in total notional amount of derivatives outstanding compared to $192.0 billion at December 31, 2009. The notional amount serves as a factor in determining periodic interest payments or cash flows received and paid. It does not represent actual amounts exchanged or the Bank’s exposure to credit and market risk. The amount potentially subject to credit loss is based upon the counterparty’s net payment obligations. The credit risk of derivatives is measured on a portfolio basis by netting the market values of all outstanding transactions for each counterparty.

 

63


Table of Contents

As of March 31, 2010, 98.9 percent of the total notional amount of outstanding derivatives was represented by 20 counterparties with a credit rating of A or better. Of these counterparties, there were three, Barclays Bank Plc, Deutsche Bank AG and Goldman Sachs Group, Inc., that represented more than 10 percent of the Bank’s total notional amount, and three counterparties, Rabobank Nederland, Royal Bank of Canada, and Bank of America, National Association, that represented more than 10 percent of the Bank’s net exposure. As of December 31, 2009, 99.4 percent of the total notional amount of outstanding derivatives was represented by 20 counterparties with a credit rating of A or better. Of these counterparties, there were three, JP Morgan Chase Bank, N.A., Deutsche Bank AG, and Goldman Sachs Group, Inc., that represented more than 10 percent of the Bank’s total notional amount, and four counterparties, Bank of America, National Association, BNP Paribas, Rabobank Nederland and Royal Bank of Canada, that represented more than 10 percent of the Bank’s net exposure.

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

 

    

Derivative Counterparty Credit Exposure

As of March 31, 2010

                      Notional                

 

Amount

   Total Net

 

Exposure

 

        at Fair Value        

               Collateral             

 

Held

           Net Exposure         

 

After

 

Collateral

           
           

Credit Rating:

           

AAA

               $ 2,630                  $ —                  $ —                  $ —  

AA

     55,074        12        —        12  

A

     114,131        84        77        7  

BBB

     861        —        —        —  

Member institutions*

     1,113        4        —        —  
                           

Total derivatives

               $ 173,809                    $ 100                    $ 77                    $ 19  
                           

 

 

* Collateral held with respect to derivative financial instruments with member institutions represents either collateral physically held by or on behalf of the Bank or collateral assigned to the Bank, as evidenced by a written security agreement, and held by the member institution for the benefit of the Bank.

 

64


Table of Contents
    

Derivative Counterparty Credit Exposure

 

As of December 31, 2009

                      Notional                

 

Amount

   Total Net

 

Exposure

 

        at Fair Value        

               Collateral             

 

Held

           Net Exposure         

 

After

 

Collateral

           
           

Credit Rating:

           

AAA

               $ 3,002              $ —              $ —              $ —  

AA

     55,489        16        —        16  

A

     132,409        97        92      5  

BBB

     25        —        —        —  

Member institutions*

     1,104        4        —        —  
                           

Total derivatives

               $ 192,029                $ 117                $ 92              $ 21  
                           

 

* Collateral held with respect to derivative financial instruments with member institutions represents either collateral physically held by or on behalf of the Bank or collateral assigned to the Bank, as evidenced by a written security agreement, and held by the member institution for the benefit of the Bank.

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

The net exposure after collateral is treated as unsecured credit consistent with the Bank’s RMP and the Finance Agency regulations if the counterparty has an NRSRO rating. If the counterparty does not have an NRSRO rating, the Bank requires collateral for the full amount of the exposure.

Mortgage Loan Programs

In 2008, the Bank suspended new acquisitions of mortgage loans under the MPP and ceased purchasing assets under the MPF Program.

The Bank seeks to manage the credit risk associated with MPP and the MPF Program by maintaining underwriting and eligibility standards and structuring possible losses into several layers to be shared with the participating financial institution. These risk management practices are described in detail in the Bank’s Form 10-K. 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 March 31, 2010, all of the Bank’s mortgage insurance providers have been rated below AA by one or more NRSROs for their claims paying ability or insurer financial strength. Ratings downgrades imply an increased risk that these mortgage insurers may be unable to fulfill their obligations to pay claims that may be made under the insurance policies. Given the amount of loans covered by this insurance, the other credit enhancements and the historical performance of those loans, the Bank believes its credit exposure to these companies, both individually and in the aggregate, was not significant as of March 31, 2010.

 

65


Table of Contents

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 to the interim financial statements for a discussion of recently issued and adopted accounting guidance.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

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

 

66


Table of Contents

The following table summarizes the fair-value amounts of derivative financial instruments, excluding accrued interest, by product type (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.

 

     Derivative Financial Instruments Excluding Accrued Interest/By Product

 

    

 

As of March 31, 2010

  

 

As of December 31, 2009

     Total
             Notional            
   Estimated
Fair Value
Gain /(Loss)
(excludes
accrued
                 interest)                
   Total
             Notional            
   Estimated
Fair Value
Gain /(Loss)
(excludes
accrued
                 interest)                

Advances:

           

Fair value hedges

               $ 82,581                    $ (4,622)                  $ 89,316                  $ (4,677)  

Firm commitments

     3        —        —        —  

Non-qualifying hedges

     1,644        (85)        1,763        (72)  
                           

Total

     84,228        (4,707)        91,079        (4,749)  
                           

Investments:

           

Non-qualifying hedges

     3,000        (312)        3,218        (289)  
                           

Total

     3,000        (312)        3,218        (289)  
                           

Consolidated obligation bonds:

           

Fair value hedges

     74,232        1,217        82,706        1,133  

Non-qualifying hedges

     2,537        5        2,512        6  
                           

Total

     76,769        1,222        85,218        1,139  
                           

Consolidated obligation discount notes:

           

Fair value hedges

     2,289        1        6,510        8  
                           

Total

     2,289        1        6,510        8  
                           

Balance sheet:

           

Non-qualifying hedges

     5,297        16        3,796        10  
                           

Total

     5,297        16        3,796        10  
                           

Intermediary positions:

           

Intermediaries

     2,226        —        2,208        —  
                           

Total

     2,226        —        2,208        —  
                           

Total notional and fair value

               $ 173,809                    $ (3,780)              $ 192,029                  $ (3,881)  
                           

Total derivatives excluding accrued interest

                    $ (3,780)                     $ (3,881)  

Accrued interest

        44           48  

Cash collateral held by counterparty -assets

        3,367           3,555  

Cash collateral held from counterparty - liabilities

        (77)           (92)  
                   

Net derivative balance

                    $ (446)                     $ (370)  
                   

Net derivative assets balance

                    $ 23                     $ 39  

Net derivative liabilities balance

        (469)           (409)  
                   

Net derivative balance

                    $ (446)                     $ (370)  
                   

 

67


Table of Contents

The Bank measures interest-rate risk exposure by various methods, including calculating the effective duration 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-earning assets and interest-bearing liabilities to changes in interest rates. As effective duration lengthens, market-value changes become more sensitive to interest-rate changes. The Bank employs sophisticated modeling systems to measure effective duration.

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

 

   Effective Duration Exposure

 

(In years)

     As of March 31, 2010    As of December 31, 2009
     Up 200
Basis
         Points        
           Current                Down 200 Basis    
Points*
   Up 200 Basis
            Points             
           Current                    Down 200        
Basis

Points*

Assets

   0.65      0.45      0.25      0.68      0.50      0.27  

Liabilities

   0.53      0.57      0.29      0.52      0.56      0.51  

Equity

   2.26      (1.30)      (0.32)      3.05      (0.31)      (3.57)  

Effective duration gap

   0.12      (0.12)      (0.04)      0.16      (0.06)      (0.24)  

 

* 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.

Management also considers interest-rate movements of a lesser magnitude than +/-200 basis point shifts required by the Bank’s RMP. The table below shows effective duration exposure to increases and decreases in interest rates in 50 basis-point increments as of March 31, 2010.

 

   Additional Duration Exposure Scenarios

 

(In years)

     As of March 31, 2010
     Up 150
Basis
       Points      
   Up 100
Basis
       Points      
   Up 50
Basis
      Points      
         Current          Down 50
Basis
       Points *      
   Down 100
Basis
       Points *      
   Down 150
Basis
       Points *      

Assets

   0.62      0.58      0.52      0.45      0.24      0.04      0.05  

Liabilities

   0.55      0.56      0.56      0.57      0.42      0.38      0.31  

Equity

   1.65      0.87      (0.07)      (1.30)      (2.39)      (4.89)      (3.88)  

Effective duration gap

   0.07      0.02      (0.04)      (0.12)      (0.18)      (0.34)      (0.26)  

 

* The “down” 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 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. Although the Bank’s total capital decreased by $154 million from December 31, 2009 to March 31, 2010, the market value of equity increased by $299 million during this same period due primarily to an increase in MBS prices relative to other fixed-income securities.

 

68


Table of Contents
    

Market Value of Equity

 

(In millions)

      
     As of March 31, 2010    As of December 31, 2009
     Up 200
    Basis Points    
               Current                       Down 200      
Basis

Points*
       Up 200 Basis    
Points
               Current                       Down 200      
Basis

Points*

  Assets

       $ 138,891                  $ 140,771          $ 141,916          $ 143,481                $ 145,582          $ 146,820  

  Liabilities

     131,715        133,181        134,216        136,815        138,291        139,221  

  Equity

     7,176        7,590        7,700        6,666        7,291        7,599  

 

* 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 senior management is 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 Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. The Bank’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Bank’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the Bank’s disclosure controls and procedures, the Bank’s management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Bank’s management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of controls and procedures.

Management of the Bank has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with the participation of the interim president and chief executive officer and chief financial officer as of the end of the period covered by this report. Based on that evaluation, the Bank’s interim president and chief executive officer and chief financial officer have concluded that the Bank’s disclosure controls and procedures were effective at a reasonable assurance level as of the end of the fiscal quarter covered by this report.

Changes in Internal Control Over Financial Reporting

During the first quarter of 2010, there were no changes in the Bank’s internal control over financial reporting that have affected materially, or are reasonably likely to affect materially, the Bank’s internal control over financial reporting.

 

69


Table of Contents

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

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

 

Item 1A. Risk Factors

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

 

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

Not applicable.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. (Removed and Reserved)

 

Item 5. Other Information

None.

 

70


Table of Contents
Item 6. Exhibits

 

3.1      Restated Organization Certificate of the Federal Home Loan Bank of Atlanta (1)
3.2      Bylaws of the Federal Home Loan Bank of Atlanta (Revised and Restated) (2)
4.1      Capital Plan of the Federal Home Loan Bank of Atlanta (3)
31.1      Certification of the Interim 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 Interim President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +

 

(1) Filed on March 17, 2006 with the Securities and Exchange Commission in the Bank’s Form 10 Registration Statement and incorporated herein by reference.
(2) Filed on March 25, 2010 with the Securities and Exchange Commission in the Bank’s Form 10-K and incorporated herein by reference.
(3) Filed on March 30, 2009 with the Securities and Exchange Commission in the Bank’s Form 10-K and incorporated herein by reference.
(+) Furnished herewith.

 

71


Table of Contents

SIGNATURES

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

 

  Federal Home Loan Bank of Atlanta  
Date: May 11, 2010   By: /s/ Jill Spencer  
      Name:   Jill Spencer  
 

    Title: Interim President and
            Chief Executive Officer

 
  By: /s/ Steven J. Goldstein  
      Name: Steven J. Goldstein  
 

    Title: Executive Vice President and
          Chief Financial Officer

 

 

72