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EX-31.1 - SECTION 302 CERTIFICATION OF CEO - Federal Home Loan Bank of Atlantadex311.htm
EX-32.1 - SECTION 906 CERTIFICATION OF CFO - Federal Home Loan Bank of Atlantadex321.htm
EX-10.1 - SECOND AMENDED AND RESTATED SERVICES AGREEMENT - Federal Home Loan Bank of Atlantadex101.htm
EX-31.2 - SECTION 302 CERTIFICATION OF CFO - Federal Home Loan Bank of Atlantadex312.htm
EX-10.3 - AGREEMENT AND RELEASE OF ALL CLAIMS, DATED AS OF APRIL 14, 2010 - Federal Home Loan Bank of Atlantadex103.htm
EX-10.2 - INDEMNIFICATION AGREEMENT, DATED AS OF APRIL 1, 2010 - Federal Home Loan Bank of Atlantadex102.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 June 30, 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 July 31, 2010, was 81,077,946.

 

 

 


Table of Contents

Table of Contents

 

PART I.

   FINANCIAL INFORMATION    1

Item 1.

   Financial Statements (Unaudited)    1
   STATEMENTS OF CONDITION (Unaudited)    1
   STATEMENTS OF INCOME (Unaudited)    2
   STATEMENTS OF CAPITAL (Unaudited)    3
   STATEMENTS OF CASH FLOWS (Unaudited)    4
   NOTES TO FINANCIAL STATEMENTS (Unaudited)    6

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    39

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    74

Item 4.

   Controls and Procedures    77

PART II.

   OTHER INFORMATION    78

Item 1.

   Legal Proceedings    78

Item 1A.

   Risk Factors    78

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    78

Item 3.

   Defaults Upon Senior Securities    78

Item 4.

   (Removed and Reserved)    78

Item 5.

   Other Information    78

Item 6.

   Exhibits    79

SIGNATURES

   80


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  
           June 30, 2010             December 31, 2009    

ASSETS

    

Cash and due from banks

   $ 41      $ 465   

Deposit with other FHLBanks

     2        3   

Federal funds sold

     14,840        10,043   

Trading securities (includes $122 and $137 pledged as collateral as of June 30, 2010 and December 31, 2009, respectively, that may be repledged and includes other FHLBanks’ bonds of $79 and $72 as of June 30, 2010 and December 31, 2009, respectively)

     3,436        3,553   

Available-for-sale securities

     3,452        2,256   

Held-to-maturity securities, net (fair value of $15,685 and $16,442 as of June 30, 2010 and December 31, 2009, respectively)

     15,669        17,085   

Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans of $1 as of June 30, 2010 and December 31, 2009

     2,313        2,522   

Advances, net

     100,087        114,580   

Accrued interest receivable

     435        515   

Premises and equipment, net

     34        34   

Derivative assets

     20        39   

Other assets

     262        216   
                

TOTAL ASSETS

   $ 140,591      $ 151,311   
                

LIABILITIES

    

Interest-bearing deposits

   $ 3,171      $ 2,989   

Loans from other FHLBanks

     15          

Consolidated obligations, net:

    

Discount notes

     16,519        17,127   

Bonds

     110,949        121,450   
                

Total consolidated obligations, net

     127,468        138,577   
                

Mandatorily redeemable capital stock

     508        188   

Accrued interest payable

     465        612   

Affordable Housing Program payable

     127        125   

Payable to REFCORP

     19        21   

Derivative liabilities

     448        409   

Other liabilities

     141        137   
                

Total liabilities

     132,362        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 June 30, 2010 and December 31, 2009

     1,495        1,520   

Subclass B2 issued and outstanding shares: 64 and 66 as of June 30, 2010 and December 31, 2009, respectively

     6,361        6,604   
                

Total capital stock Class B putable

     7,856        8,124   

Retained earnings

     985        873   

Accumulated other comprehensive loss

     (612     (744
                

Total capital

     8,229        8,253   
                

TOTAL LIABILITIES AND CAPITAL

   $ 140,591      $ 151,311   
                

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

 

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Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF INCOME

(Unaudited)

(In millions)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
                 2010                              2009                              2010                              2009               

INTEREST INCOME

        

Advances

   $ 79      $ 271      $ 148      $ 703   

Prepayment fees on advances, net

     2        7        5        10   

Interest-bearing deposits

     2        2        3        5   

Federal funds sold

     8        6        13        14   

Trading securities

     41        50        83        104   

Available-for-sale securities

     45        35        84        35   

Held-to-maturity securities

     148        225        320        500   

Mortgage loans held for portfolio

     31        40        63        82   
                                

Total interest income

     356        636        719        1,453   
                                

INTEREST EXPENSE

        

Consolidated obligations:

        

Discount notes

     6        75        9        238   

Bonds

     213        455        420        1,070   

Deposits

     1        1        1        3   

Mandatorily redeemable capital stock

                          2   
                                

Total interest expense

     220        531        430        1,313   
                                

NET INTEREST INCOME

     136        105        289        140   
                                

OTHER INCOME (LOSS)

        

Total other-than-temporary impairment losses

     (131     (404     (195     (1,102

Portion of impairment losses recognized in other comprehensive loss

     59        358        77        967   
                                

Net impairment losses recognized in earnings

     (72     (46     (118     (135
                                

Net gains (losses) on trading securities

     76        (74     80        (108

Net (losses) gains on derivatives and hedging activities

     (58     305        (75     417   

Other

     1        1        1        2   
                                

Total other (loss) income

     (53     186        (112     176   
                                

OTHER EXPENSE

        

Compensation and benefits

     15        15        29        31   

Other operating expenses

     12        12        23        20   

Finance Agency

     2        1        4        3   

Office of Finance

     1        1        3        2   

Reversal of provision for credit losses on receivable

     (49            (49       

Other

            1               1   
                                

Total other expense

     (19     30        10        57   
                                

INCOME BEFORE ASSESSMENTS

     102        261        167        259   
                                

Affordable Housing Program

     8        21        13        21   

REFCORP

     19        48        31        48   
                                

Total assessments

     27        69        44        69   
                                

NET INCOME

   $ 75      $ 192      $ 123      $ 190   
                                

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF CAPITAL

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(Unaudited)

(In millions)

 

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

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

   8        839                      839   

Repurchase/redemption of capital stock

   (11     (1,111                   (1,111

Net shares reclassified to mandatorily redeemable capital stock

   (1     (72                   (72

Comprehensive loss:

          

Net income

                 190               190   

Other comprehensive loss

                        (881     (881
                

Total comprehensive loss

                               (691
                                      

BALANCE, JUNE 30, 2009

   81      $ 8,119      $ 804      $ (1,065   $ 7,858   
                                      

BALANCE, DECEMBER 31, 2009

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

Issuance of capital stock

   1        56                      56   

Repurchase/redemption of capital stock

          (4                   (4

Net shares reclassified to mandatorily redeemable capital stock

   (3     (320                   (320

Comprehensive income:

          

Net income

                 123               123   

Other comprehensive income

                        132        132   
                

Total comprehensive income

                               255   
                

Cash dividends on capital stock

                 (11            (11
                                      

BALANCE, JUNE 30, 2010

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

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

 

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Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)

 

     Six Months Ended June 30,  
             2010                     2009          

OPERATING ACTIVITIES

    

Net income

   $ 123      $ 190   

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

    

Depreciation and amortization

     (31     (119

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

     569        266   

Net change in fair value adjustment on trading securities

     (80     134   

Net impairment losses recognized in earnings

     118        135   

Reversal of provision for credit losses on receivable

     (49       

Net change in:

    

Accrued interest receivable

     80        174   

Other assets

     (6     (5

Affordable Housing Program payable

     1        (2

Accrued interest payable

     (147     (340

Payable to REFCORP

     (2     30   

Other liabilities

     4        (2
                

Total adjustments

     457        271   
                

Net cash provided by operating activities

     580        461   
                

INVESTING ACTIVITIES

    

Net change in:

    

Interest-bearing deposits

     (369     2,154   

Federal funds sold

     (4,797     2,567   

Trading securities:

    

Proceeds from sales

            300   

Proceeds from maturities

     200        228   

Available-for-sale securities:

    

Proceeds from maturities

     214        67   

Held-to-maturity securities:

    

Net change in short-term

     (1,150       

Proceeds from maturities

     2,700        2,534   

Purchases

     (1,530     (476

Advances:

    

Proceeds from principal collected

     35,436        67,116   

Made

     (20,418     (39,322

Mortgage loans held for portfolio:

    

Proceeds from principal collected

     210        419   

Purchase of premise, equipment and software

     (6     (5
                

Net cash provided by investing activities

     10,490        35,582   
                

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

 

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Table of Contents
     Six Months Ended June 30,  
             2010                     2009          

FINANCING ACTIVITIES

    

Net change in:

    

Deposits

     162        600   

Borrowings from other FHLBanks

     15          

Net payments from derivatives containing a financing element

     (400     (474

Proceeds from issuance of consolidated obligations:

    

Discount notes

     500,664        83,390   

Bonds

     49,917        48,912   

Bonds transferred from other FHLBanks

            518   

Payments for debt issuance costs

     (10     (19

Payments for maturing and retiring consolidated obligations:

    

Discount notes

     (501,221     (99,743

Bonds

     (60,662     (68,961

Proceeds from issuance of capital stock

     56        839   

Payments for repurchase/redemption of capital stock

     (4     (1,111

Payments for repurchase/redemption of mandatorily redeemable capital stock

            (10

Cash dividends paid

     (11       
                

Net cash used in financing activities

     (11,494     (36,059
                

Net decrease in cash and cash equivalents

     (424     (16

Cash and cash equivalents at beginning of the period

     465        28   
                

Cash and cash equivalents at end of the period

   $ 41      $ 12   
                

Supplemental disclosures of cash flow information:

    

Cash paid for:

    

Interest

   $ 589      $ 1,407   
                

AHP assessments, net

   $ 11      $ 23   
                

REFCORP assessments

   $ 33      $ 3   
                

Noncash investing and financing activities:

    

Net shares reclassified to mandatorily redeemable capital stock

   $ 320      $ 72   
                

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

   $ 1,220      $ 1,760   
                

Transfers of mortgage loans to real estate owned

   $ 12      $ 2   
                

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

 

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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 June 30, 2010.

Note 2—Recently Issued and Adopted Accounting Guidance

Recently Issued Accounting Guidance

Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. In July 2010, the Financial Accounting Standards Board (“FASB”) issued amended guidance to enhance disclosures about an entity’s allowance for credit losses and the credit quality of its financing receivables. The amended guidance requires all public and nonpublic entities with financing receivables, including loans, lease receivables and other long-term receivables, to provide disclosure of the following: (1) the nature of credit risk inherent in financing receivables, (2) how that risk is analyzed and assessed in arriving at the allowance for credit losses, and (3) the changes and reasons for those changes in the allowance for credit losses. Both new and existing disclosures must be disaggregated by portfolio segment or class of financing receivable. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. Short-term accounts receivable, receivables measured at fair value or at the lower of cost or fair value, and debt securities are exempt from this amended guidance. For public entities, the required disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010 (December 31, 2010 for the Bank). The required disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010 (January 1, 2011 for the Bank). Bank management does not believe that the adoption of this guidance will have any effect on the Bank’s financial condition or results of operations.

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Scope Exception Related to Embedded Credit Derivatives. In March 2010, the 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 any effect on the Bank’s financial condition or results of operations.

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 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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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.

Note 3—Trading Securities

Major Security Types. Trading securities were as follows:

 

           As of June 30, 2010             As of December 31, 2009  

Government-sponsored enterprises debt obligations

   $ 3,347    $ 3,470

Other FHLBank’s bond*

     79      72

State or local housing agency obligations

     10      11
             

Total

   $ 3,436    $ 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- and six-month periods ended June 30, 2010 included net unrealized holding gains (losses) of $75 and $80, respectively, and $(73) and $(103) for the same periods ended June 30, 2009, respectively.

Note 4—Available-for-sale Securities

During the six-month periods ended June 30, 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

Transferred at June 30,

     908      97      811      314      158      156
                                         

Total

   $ 1,375    $ 155    $ 1,220    $ 2,700    $ 940    $ 1,760
                                         

 

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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 June 30, 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

   $ 4,059    $ 607    $    $    $ 3,452
                                  

Total

   $ 4,059    $ 607    $    $    $ 3,452
                                  
     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 tables summarize the available-for-sale securities with unrealized losses. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

 

     As of June 30, 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

      $    $    47    $ 3,452    $ 607    47    $ 3,452    $ 607
                                                        

Total

      $    $    47    $ 3,452    $ 607    47    $ 3,452    $ 607
                                                        
     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
                                                        

 

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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 June 30, 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

   $ 2,271    $ 426    $    $    $ 1,845
                                  

Total

   $ 2,271    $ 426    $    $    $ 1,845
                                  
     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 $10 and $2 as of June 30, 2010 and December 31, 2009, respectively.

Note 5—Held-to-maturity Securities

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

 

     As of June 30, 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

   $ 1,450    $    $    $ 1,450    $ 300    $    $    $ 300

State or local housing agency obligations

     114      3           117      115      3           118

Mortgage-backed securities:

                       

U.S. agency obligations- guaranteed

     891      8           899      777      2      1      778

Government-sponsored enterprises

     6,449      279           6,728      6,598      226      2      6,822

Private label

     6,765      32      306      6,491      9,295      9      880      8,424
                                                       

Total

   $ 15,669    $ 322    $ 306    $ 15,685    $ 17,085    $ 240    $ 883    $ 16,442
                                                       

 

10


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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 June 30, 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    

Certificates of deposit

   1    $ 100    $       $    $    1    $ 100    $

Mortgage-backed securities:

                          

Government-sponsored enterprises

   5      304         1      10         6      314     

Private label

   4      134      1    119      4,461      305    123      4,595      306
                                                        

Total

   10    $ 538    $ 1    120    $ 4,471    $ 305    130    $ 5,009    $ 306
                                                        
     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 June 30, 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

   $ 2,431    $ 11    $ 108    $ 2,334    $ 2,982    $ 3    $ 236    $ 2,749
                                                       

Total

   $ 2,431    $ 11    $ 108    $ 2,334    $ 2,982    $ 3    $ 236    $ 2,749
                                                       

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

     As of June 30, 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

   $ 1,455    $ 1,455    $ 302    $ 302

Due after one year through five years

     107      110      96      99

Due after 10 years

     2      2      17      17
                           
     1,564      1,567      415      418

Mortgage-backed securities

     14,105      14,118      16,670      16,024
                           

Total

   $ 15,669    $ 15,685    $ 17,085    $ 16,442
                           

The amortized cost of the Bank’s MBS classified as held-to-maturity includes net discounts of $42 and $49 as of June 30, 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 June 30, 2010.

 

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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 as of June 30, 2010 assumed current-to-trough home price declines ranging from zero percent to 12 percent over the next three to nine months beginning April 1, 2010 (resulting in peak-to-trough home price declines of up to 64.1 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 (one percent annualized for the six month period), 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.

 

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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 June 30, 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

   8.17    8.17 to 8.17    38.7    38.7 to 38.7    50.7    50.7 to 50.7    15.5    15.5 to 15.6

2007

   7.71    5.70 to 9.07    16.7    12.2 to 21.6    40.7    30.2 to 47.8    7.30    5.45 to 11.2

2006

   7.96    6.62 to 8.73    23.7    16.7 to 42.3    39.9    36.8 to 41.3    7.03    3.49 to 9.08

2005

   10.1    5.98 to 11.8    22.9    10.3 to 28.7    42.7    32.3 to 47.8    8.31    4.44 to 10.4

Total prime

   8.27    5.70 to 11.8    23.5    10.3 to 42.3    42.4    30.2 to 50.7    8.70    3.49 to 15.6

Alt-A:

                       

2007

   10.3    8.42 to 12.1    56.8    51.6 to 64.4    48.3    45.1 to 51.2    13.8    6.56 to 18.7

2006

   10.5    8.40 to 12.9    54.5    47.9 to 57.6    47.7    42.5 to 53.0    9.08    5.58 to 11.8

2005

   12.1    9.93 to 14.3    41.2    22.9 to 59.4    47.7    40.4 to 55.0    9.40    4.20 to 13.0

2004 and prior

   16.7    16.7 to 16.7    14.3    14.3 to 14.3    31.8    31.8 to 31.8    14.9    14.9 to 14.9

Total Alt-A

   10.9    8.40 to 16.7    51.2    14.3 to 64.4    47.8    31.8 to 55.0    11.4    4.20 to 18.7

Total

   9.76    5.70 to 16.7    39.1    10.3 to 64.4    45.5    30.2 to 55.0    10.2    3.49 to 18.7

Based on the Bank’s impairment analysis for the three- and six-month periods ended June 30, 2010, the Bank recognized total other-than-temporary impairment losses of $131 and $195, respectively. The credit related portion of $72 and $118, respectively, of these other-than-temporary impairment losses is reported in the Statements of Income as “Net impairment losses recognized in earnings.” The noncredit related portion of $59 and $77, respectively, of the other-than-temporary impairment losses is recorded as a component of other comprehensive loss.

Based on the Bank’s impairment analysis for the three- and six-month periods ended June 30, 2009, the Bank recognized total other-than-temporary impairment losses of $404 and $1,102, respectively. The credit related portion of $46 and $135, 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 $358 and $967, respectively, of the other-than-temporary impairment losses is recorded as a component of other comprehensive loss.

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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 June 30,    Six Months Ended June 30,
             2010                    2009                    2010                    2009        

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

   $ 367    $ 94    $ 321    $ 5

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

     21      9      38      83

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

     51      37      80      52
                           

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

   $ 439    $ 140    $ 439    $ 140
                           

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 June 30, 2010         As of December 31, 2009  

Year of contractual maturity:

    

Overdrawn demand deposit accounts

   $ 4      $   

Due in one year or less

     29,213        32,808   

Due after one year through two years

     16,743        21,565   

Due after two years through three years

     13,658        14,665   

Due after three years through four years

     8,008        10,757   

Due after four years through five years

     5,695        5,910   

Due after five years

     21,489        24,108   
                

Total par value

     94,810        109,813   

Discount on AHP* advances

     (13     (13

Discount on EDGE** advances

     (12     (12

Hedging adjustments

     5,308        4,798   

Deferred commitment fees

     (6     (6
                

Total

   $ 100,087      $ 114,580   
                

 

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

         As of June 30, 2010        As of December 31, 2009

Year of contractual maturity or next conversion date:

     

Overdrawn demand deposit accounts

   $ 4    $

Due or convertible in one year or less

     41,353      46,848

Due or convertible after one year through two years

     15,601      21,999

Due or convertible after two years through three years

     11,650      11,802

Due or convertible after three years through four years

     8,135      10,035

Due or convertible after four years through five years

     5,227      5,463

Due or convertible after five years

     12,840      13,666
             

Total par value

   $ 94,810    $ 109,813
             

Based on the collateral pledged as security for advances, management’s credit analysis of members’ financial condition, and prior repayment history, no allowance for credit losses on advances was deemed necessary by management as of June 30, 2010 and December 31, 2009. No advance was past due as of June 30, 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 June 30, 2010 and December 31, 2009, the concentration of the Bank’s advances to its 10 largest borrowers was $64,512 and $75,418, respectively, representing 68.0 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 June 30, 2010        As of December 31, 2009

Fixed-rate

   $ 82,689    $ 97,743

Variable-rate

     12,121      12,070
             

Total par value

   $ 94,810    $ 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.

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

           As of June 30, 2010             As of December 31, 2009  

Fixed-rate

   $ 77,735    $ 93,441

Simple variable-rate

     21,367      16,312

Step up/down

     10,237      10,334

Fixed-rate that converts to variable-rate

     30     

Variable-rate that converts to fixed-rate

     25      25

Variable-rate capped floater

     20      60
             

Total par value

   $ 109,414    $ 120,172
             

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

 

     As of June 30, 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

   $ 49,001      1.07    $ 63,383      1.27

Due after one year through two years

     23,341      1.18      17,743      1.76

Due after two years through three years

     14,615      2.28      11,806      2.39

Due after three years through four years

     7,214      3.67      9,726      3.60

Due after four years through five years

     5,731      3.29      6,016      3.67

Due after five years

     9,512      4.58      11,498      4.43
                     

Total par value

     109,414      1.84      120,172      2.05

Premiums

     105           116     

Discounts

     (55        (60  

Hedging adjustments

     1,485           1,222     
                     

Total

   $ 110,949         $ 121,450     
                     

The Bank’s consolidated obligation bonds outstanding included:

 

                  As of June  30, 2010                         As of December 31, 2009         

Noncallable

   $ 78,614    $ 86,905

Callable

     30,800      33,267
             

Total par value

   $ 109,414    $ 120,172
             

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

         As of June 30, 2010        As of December 31, 2009

Year of contractual maturity or next call date:

     

Due or callable in one year or less

   $ 66,660    $ 84,188

Due or callable after one year through two years

     19,038      12,461

Due or callable after two years through three years

     9,465      5,630

Due or callable after three years through four years

     4,994      7,886

Due or callable after four years through five years

     2,184      2,629

Due or callable after five years

     7,073      7,378
             

Total par value

   $ 109,414    $ 120,172
             

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 June 30, 2010

   $ 16,519    $ 16,522    0.13
                  

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 June 30, 2010     As of December 31, 2009  
         Required               Actual               Required               Actual        

Regulatory capital requirements:

        

Risk based capital

   $ 2,220      $ 9,349      $ 3,010      $ 9,185   

Total capital-to-assets ratio

     4.00     6.65     4.00     6.07

Total regulatory capital*

   $ 5,624      $ 9,349      $ 6,052      $ 9,185   

Leverage ratio

     5.00     9.97     5.00     9.11

Leverage capital

   $ 7,030      $ 14,023      $ 7,566      $ 13,777   

 

* Mandatorily redeemable capital stock is considered capital for regulatory purposes, and “total regulatory capital” includes the Bank’s $508 and $188 in mandatorily redeemable capital stock at June 30, 2010 and December 31, 2009, respectively.

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

     Three Months Ended June 30,     Six Months Ended June 30,  
             2010                     2009                     2010                     2009          

Balance, beginning of period

   $ 481      $ 1,901      $ 188      $ 44   

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

        

Attainment of nonmember status

     42        307        335        2,174   

Withdrawal

                          1   

Other redemptions

            4               4   

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

     (15     (2,106     (15     (2,107
                                

Balance, end of period

   $ 508      $ 106      $ 508      $ 106   
                                

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.

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

 

          As of June 30, 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

     75      10

Due after four years through five years

     407      148

Due after five years

     12      19
             

Total

   $ 508    $ 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.

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Note 10—Accumulated Other Comprehensive Loss

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

 

     Three Months Ended June 30,     Six Months Ended June 30,  
                 2010                              2009                              2010                              2009               

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

        

Change in unrealized losses on available-for-sale securities

   $ 116      $ (158   $ 209      $ (151

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

     39        37        79        37   
                                

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

     155        (121     288        (114
                                

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

     (98     (158     (156     (767
                                

Other comprehensive income (loss)

   $ 57      $ (279   $ 132      $ (881
                                

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, December 31, 2009

   $ (5   $ (739   $      $ (744

Net change during the period

            288        (156     132   

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

            (156     156          
                                

Balance, June 30, 2010

   $ (5   $ (607   $      $ (612
                                

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.

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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.

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 London Interbank Offered Rate (“LIBOR”).

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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 June 30, 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.

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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.

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.

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Options (interest-rate caps, interest-rate floors and/or options) also may be used to hedge prepayment risk on the mortgages, many of which are not identified to specific mortgages and, therefore, do not receive fair-value or cash-flow hedge accounting treatment. The 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.

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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 June 30, 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 June 30, 2010, the Bank has not sold or repledged any such collateral.

As of June 30, 2010 and December 31, 2009, the Bank’s maximum credit risk, as defined above, was $91 and $117, respectively. These totals include $45 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 $72 and $92 as of June 30, 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 June 30, 2010 was $4,371 for which the Bank has posted collateral of $4,042 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 $170 of collateral (at fair value) to its derivatives counterparties at June 30, 2010. However, the Bank’s credit rating has not changed during the six-month period ended June 30, 2010.

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.

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Total notional principal of derivatives for the Bank as an intermediary was $2,126 and $2,208 at June 30, 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 June 30, 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

   $ 142,704    $ 1,702      $ (5,428   $ 178,532    $ 1,661      $ (5,071
                                              

Total derivatives in hedging relationships

     142,704      1,702        (5,428     178,532      1,661        (5,071
                                              

Derivatives not designated as hedging instruments:

              

Interest rate swaps

     6,416      20        (594     7,997      14        (463

Interest rate caps or floors

     7,500      55        (35     5,500      59        (33
                                              

Total derivatives not designated as hedging instruments

     13,916      75        (629     13,497      73        (496
                                              

Total derivatives before netting and collateral adjustments

   $ 156,620      1,777        (6,057   $ 192,029      1,734        (5,567
                                              

Netting adjustments

        (1,685     1,685           (1,603     1,603   

Cash collateral and related accrued interest

        (72     3,924           (92     3,555   
                                      

Total collateral and netting adjustments*

        (1,757     5,609           (1,695     5,158   
                                      

Derivative assets and derivative liabilities

      $ 20      $ (448      $ 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 and related accrued interest held or placed with the same counterparties.

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

     Three Months Ended June 30,
     2010     2009
     Amount of Gain (Loss)
Recognized in Net

(Losses) Gains on
Derivatives and

Hedging Activities
    Amount of Gain (Loss)
Recognized in Net

(Losses) Gains on
Derivatives and

Hedging Activities

Derivatives and hedged items in fair value hedging relationships:

    

Interest rate swaps

   $ 48      $ 197
              

Total net gain related to fair value hedge ineffectiveness

     48        197
              

Derivatives not designated as hedging instruments:

    

Non-qualifying hedges:

    

Interest rate swaps

     (96     106

Interest rate caps or floors

     (10     2
              

Total net gain related to derivatives not designated as hedging

     (106     108
              

Net (losses) gains on derivatives and hedging activities

   $ (58   $ 305
              
     Six Months Ended June 30,
     2010     2009
     Amount of Gain (Loss)
Recognized in Net

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

(Losses) Gains on
Derivatives and
  Hedging Activities  

Derivatives and hedged items in fair value hedging relationships:

    

Interest rate swaps

   $ 94      $ 297
              

Total net gain related to fair value hedge ineffectiveness

     94        297
              

Derivatives not designated as hedging instruments:

    

Non-qualifying hedges:

    

Interest rate swaps

     (158     117

Interest rate caps or floors

     (11     3
              

Total net gain related to derivatives not designated as hedging

     (169     120
              

Net (losses) gains on derivatives and hedging activities

   $ (75   $ 417
              

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

The following tables 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 June 30, 2010  
     Gain/(Loss) on
    Derivative    
    Gain/(Loss) on
  Hedged Item  
    Net Fair Value
Hedge
Ineffectiveness
   Effect of
Derivatives on

Net Interest
     Income*     
 

Hedged item type:

         

Advances

   $ (538   $ 581      $ 43    $ (811

Consolidated Obligations:

         

Bonds

     202        (197     5      319   

Discount notes

     (1     1             1   
                               

Total

   $ (337   $ 385      $ 48    $ (491
                               

 

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

 

     Three Months Ended June 30, 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

   $ 2,188      $ (1,995   $ 193      $ (869

Consolidated Obligations:

        

Bonds

     (560     556        (4     340   

Discount notes

     11        (3     8        31   
                                

Total

   $ 1,639      $ (1,442   $ 197      $ (498
                                

 

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

 

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

Net Interest
     Income*     
 

Hedged item type:

        

Advances

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

Consolidated Obligations:

        

Bonds

     284        (293     (9     695   

Discount notes

     (8     5        (3     8   
                                

Total

   $ (222   $ 316      $ 94      $ (999
                                

 

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

     Six Months Ended June 30, 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

   $ 3,434      $ (3,157   $ 277    $ (1,635

Consolidated Obligations:

         

Bonds

     (869     884        15      705   

Discount notes

     (15     20        5      38   
                               

Total

   $ 2,550      $ (2,253   $ 297    $ (892
                               

 

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

Note 12—Estimated Fair Values

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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 June 30, 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 June 30, 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 June 30, 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.

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

     As of June 30, 2010  
     Fair Value Measurements Using    Netting
Adjustment*
         Total       
         Level 1            Level 2             Level 3         

Assets

            

Trading securities:

            

Government-sponsored enterprises debt obligations

   $    $ 3,347      $    $      $ 3,347   

Other FHLBank’s bonds

          79                    79   

State or local housing agency obligations

          10                    10   
                                      

Total trading securities

          3,436                    3,436   
                                      

Available-for-sale:

            

Private-label MBS

                 3,452             3,452   

Derivative assets:

            

Interest-rate related

          1,777             (1,757     20   
                                      

Total assets at fair value

   $    $ 5,213      $ 3,452    $ (1,757   $ 6,908   
                                      

Liabilities

            

Derivative liabilities:

            

Interest-rate related

   $    $ (6,057   $    $ 5,609      $ (448
                                      

Total liabilities at fair value

   $    $ (6,057   $    $ 5,609      $ (448
                                      

 

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

 

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

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.

 

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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- and six-month periods ended June 30, 2010 and 2009.

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

 

     Three Months Ended June 30,  
             2010                     2009          

Balance, beginning of period

   $ 2,660      $ 1,604   

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

     811        156   

Total gains (losses) realized and unrealized:

    

Included in net impairment losses recognized in earnings

     (51     (37

Included in other comprehensive loss

     32        (186
                

Balance, end of period

   $ 3,452      $ 1,537   
                
     Six Months Ended June 30,  
     2010     2009  

Balance, beginning of period

   $ 2,256      $   

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

     1,220        1,760   

Total gains (losses) realized and unrealized:

    

Included in net impairment losses recognized in earnings

     (94     (37

Included in other comprehensive loss

     70        (186
                

Balance, end of period

   $ 3,452      $ 1,537   
                

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.

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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.

As of June 30, 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 June 30, 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 June 30, 2010 and December 31, 2009. 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.

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.

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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 June 30, 2010 and December 31, 2009.

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 June 30, 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.

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

     As of June 30, 2010     As of December 31, 2009  
     Carrying
Value
    Estimated
Fair  Value
    Carrying
Value
    Estimated
Fair  Value
 

Financial Instruments

        

Assets:

        

Cash and due from banks

   $ 41      $ 41      $ 465      $ 465   

Deposits with other FHLBanks

     2        2        3        3   

Federal funds sold

     14,840        14,840        10,043        10,043   

Trading securities

     3,436        3,436        3,553        3,553   

Available-for-sale securities

     3,452        3,452        2,256        2,256   

Held-to-maturity securities

     15,669        15,685        17,085        16,442   

Mortgage loans held for portfolio, net

     2,313        2,490        2,522        2,633   

Advances, net

     100,087        100,403        114,580        114,572   

Accrued interest receivable

     435        435        515        515   

Derivative assets

     20        20        39        39   

Liabilities:

        

Deposits

     (3,171     (3,171     (2,989     (2,989

Loans from other FHLBanks

     (15     (15              

Consolidated obligations, net:

        

Discount notes

     (16,519     (16,519     (17,127     (17,127

Bonds

     (110,949     (111,982     (121,450     (122,056

Mandatorily redeemable capital stock

     (508     (508     (188     (188

Accrued interest payable

     (465     (465     (612     (612

Derivative liabilities

     (448     (448     (409     (409

 

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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 $720,545 and $793,314 as of June 30, 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 June 30, 2010    As of December 31, 2009

Outstanding notional

   $20,137    $18,909

Original terms

   Less than two months to 20 years    Less than four months to 19 years

Final expiration year

   2030    2025

The value of the guarantees related to standby letters of credit is recorded in other liabilities and amounted to $92 and $91 as of June 30, 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 June 30, 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 June 30, 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 $122 and $137, respectively, which can be sold or repledged by those counterparties.

At June 30, 2010, the Bank had committed to the issuance of $1,323 (par value) in consolidated obligation bonds, all of which were hedged with associated interest rate swaps, and no commitments to issue consolidated obligation discount notes were issued that had traded but not yet settled. At December 31,

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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.

Prior to September 19, 2008, Lehman Brothers Special Financing Inc. (“LBSF”) was a counterparty to the Bank on multiple derivative transactions. On September 19, 2008, the Bank terminated all of its derivative contracts with LBSF and the net amount due to the Bank as a result of excess collateral held by LBSF was approximately $189. The Bank recorded a $189 receivable for the net amount due and a $170 reserve at September 30, 2008 based on management’s estimate of the probable amount that would be realized. During the second quarter of 2010, the Bank and management of the Lehman bankruptcy estate concluded that the agreed-upon amount of the Bank’s claims on the Lehman estate is $175. Based on a financial disclosure report made available by the Lehman bankruptcy estate during the second quarter of 2010 and market prices for the sale of claims on the Lehman bankruptcy estate, Bank management’s estimate of the probable amount that will be realized as of June 30, 2010 is $68. The Bank increased its estimate of the probable amount that will be realized related to the net receivable due from LBSF by $49, with a corresponding reduction to “Other expense.”

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 22.9 percent of the Bank’s total regulatory capital stock as of June 30, 2010, was considered a related party. Total advances outstanding to Bank of America, National Association were $32,863 and $37,363 as of June 30, 2010 and December 31, 2009, respectively. Total deposits held in the name of Bank of America, National Association were less than $1 at June 30, 2010 and December 31, 2009. No mortgage loans or MBS were acquired from Bank of America, National Association during the six-month period ended June 30, 2010 and 2009.

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Note 15—Subsequent Events

On July 15, 2010, the Bank repurchased $272 of subclass B2 activity-based excess capital stock based on the shareholders’ total capital stock as of April 30, 2010.

On July 29, 2010, the Bank sent a notice to each current shareholder of the Bank announcing that it will repurchase up to $300 subclass B2 activity-based excess capital stock on August 17, 2010. The amount of activity-based excess stock to be repurchased from any individual shareholder will be based on the shareholder’s total capital stock as of August 9, 2010.

On July 29, 2010, the Bank’s board of directors declared a cash dividend for the second quarter of 2010 in the amount of $9. The Bank paid the second quarter 2010 dividend on July 30, 2010.

 

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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 second quarter and the first six months ended June 30, 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.

 

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Executive Summary

General Overview

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

Financial Condition

As of June 30, 2010, total assets were $140.6 billion, a decrease of $10.7 billion, or 7.08 percent, from December 31, 2009. This decrease was due primarily to a $14.5 billion, or 12.7 percent, decrease in advances, partially offset by a $4.5 billion increase in total investments 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 increase in total investments was due primarily to a $4.8 billion increase in federal funds sold during the period due to the availability of these short-term investments at attractive interest rates.

As of June 30, 2010, total liabilities were $132.4 billion, a decrease of $10.7 billion, or 7.48 percent, from December 31, 2009. This decrease was due primarily to a $11.1 billion, or 8.02 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 period.

Total capital was $8.2 billion at June 30, 2010, a decrease of $24 million, or 0.29 percent, from December 31, 2009. This decrease was due primarily to the reclassification of $320 million in capital stock to mandatorily redeemable capital stock (a liability) as a result of 10 member institutions obtaining nonmember status and the payment of $11 million in dividends during the period. This decrease was partially offset by a $132 million decrease in accumulated other comprehensive loss, $123 million in net income recorded in retained earnings, and the issuance of $56 million in capital stock during the period.

Results of Operations

The Bank recorded net income of $75 million for the second quarter of 2010, a decrease of $117 million, or 61.2 percent, from net income of $192 million for the second quarter of 2009. Although net interest income (interest earned on assets less interest expense incurred on liabilities) increased by $31 million from the second quarter of 2009, this increase was offset by a larger decrease in other income (loss), as explained in more detail in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Other Income (Loss).” In addition, during the second quarter of 2010, compared to the second quarter of 2009, the Bank recorded a $26 million increase in net impairment losses recognized in earnings, and a $42 million decrease in total assessments. During the

 

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second quarter of 2010, the Bank increased its estimate of the probable amount that will be realized related to the net receivable due from LBSF by $49 million, with a corresponding reduction to other expense. For further discussion of the net receivable due from LBSF, see Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Non-interest Expense.”

The Bank recorded net income of $123 million for the first six months of 2010, a decrease of $67 million, or 35.4 percent, from net income of $190 million for the same period in 2009. Although net interest income increased by $149 million from the first six months of 2009, the increase was offset by a larger decrease in other income (loss), as explained in more detail herein. Net impairment losses recognized in earnings decreased by $17 million from the first six months of 2009, and total assessments decreased by $25 million. The decrease in net income from the first six months of 2009 to the first six months of 2010 was offset by the Bank’s increased estimate of the probable amount that will be realized related to the net receivable due from LBSF as discussed above.

For the second quarter and the first six months of 2010, the Bank recognized total other-than-temporary impairment losses of $131 million and $195 million, respectively. The credit related portion of $72 million and $118 million, respectively, of these other-than-temporary impairment losses is reported in the Statements of Income as “Net impairment losses recognized in earnings.” The noncredit related portion of $59 million and $77 million, respectively, of the other-than-temporary impairment losses is recorded as a component of other comprehensive loss. For the second quarter and the first six months of 2009, the Bank recognized total other-than-temporary impairment losses of $404 million and $1.1 billion, respectively. The credit related portion of $46 million and $135 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 $358 million and $967 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 3.64 percent for the second quarter of 2010, compared to 10.3 percent for the second quarter of 2009. This decrease in ROE was due primarily to a decrease in net income during the period as discussed above. ROE spread to three-month average LIBOR decreased to 3.20 percent for the second quarter of 2010 as compared to 9.50 percent for the second quarter of 2009. The decrease in this spread was due primarily to a decrease in net income during the period.

The Bank’s ROE was 3.00 percent for the first six months of 2010, compared to 4.97 percent for the same period in 2009. ROE spread to three-month average LIBOR decreased between the periods, equaling 2.65 percent for the first six months of 2010 as compared to 3.93 percent for the same period in 2009. The decrease in this spread was due primarily to a decrease in net income during the period.

The Bank’s interest rate spread increased by 19 basis points and 31 basis points for the second quarter and the first six months of 2010, respectively, compared to the same periods in 2009. The increase in interest rate spread during these periods was due primarily to lower yields on advances during the second quarter and first six months of 2009 due to the write-off of hedging-related basis adjustments on advances that were prepaid.

 

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Business Outlook

Overall economic conditions remain uncertain, despite some intermittent signs of improvements in the financial markets during parts of the second quarter of 2010. This continued uncertainty, together with 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 continues to follow a conservative capital and financial management approach in light of this ongoing market uncertainty.

Advances decreased during the second quarter of 2010 as member institutions continue to experience high levels of deposits and low levels of loan activity, and the number of member failures continues to increase. On May 3, 2010, the Federal Deposit Insurance Corporation (the “FDIC”) proposed a new regulation that would establish new risk-based assessment rates for large FDIC-insured institutions, and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was signed into law on July 21, 2010, requires the FDIC to base deposit insurance assessments on an insured depository institution’s average consolidated total assets minus its average tangible equity, rather than on its deposit base. The change in how assessments are calculated could have the effect of encouraging such institutions to favor deposits over advances as a funding source. Further, on June 28, 2010, the FDIC published a final rule extending the Transaction Account Guarantee (“TAG”) program, providing FDIC insurance for all funds held at participating banks in qualifying non-interest bearing transaction accounts through December 31, 2010. The Dodd-Frank Act expanded TAG coverage to certain accounts that were previously excluded under the FDIC rule and statutorily extended TAG through December 31, 2012. These FDIC actions may increase the already high level of deposits at member institutions. Despite the existing high levels of member liquidity and ongoing member failures, the Bank saw some tentative stabilization of advances at certain points during the second quarter of 2010 as the Bank was able to maintain competitive advances pricing. However, the Bank expects advances to continue to decrease in the near future.

Although the credit related portion of other-than-temporary impairment losses recognized in earnings decreased during the second quarter of 2010 compared to the second quarter of 2009, market values for private-label MBS remain uncertain and the Bank expects credit related losses from other-than-temporarily impaired private-label MBS to continue to impact negatively net income throughout 2010. These losses were offset partially during the second quarter of 2010 by a $49 million increase in the Bank’s estimate of the probable amount that will be realized related to the net receivable due from LBSF, with a corresponding reduction to other expense.

The board of directors approved a repurchase of $272 million of excess activity-based stock based on the shareholders’ total capital stock as of April 30, 2010, which repurchase occurred on July 15, 2010. On July 29, 2010, the Bank sent a notice to each current shareholder of the Bank announcing that it will repurchase up to $300 million of subclass B2 activity-based excess capital stock on August 17, 2010. The amount of activity-based excess stock to be repurchased from any individual shareholder will be based on the shareholder’s total capital stock as of August 9, 2010.

On July 29, 2010, the Bank’s board of directors declared a cash dividend for the second quarter of 2010 in the amount of $9 million. The Bank paid the second quarter 2010 dividend on July 30, 2010. The Bank’s capital ratios remain higher than in previous years. A discussion of the board of directors’ recent capital management and dividend decisions is contained in the Bank’s Form 10-K.

 

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

Statements of Condition (at period end)

          

Total assets

   $ 140,591      $ 146,281      $ 151,311      $ 163,410      $ 170,206   

Investments (1)

     37,399        37,337        32,940        34,165        32,016   

Mortgage loans

     2,314        2,419        2,523        2,645        2,834   

Allowance for loan losses

     (1     (1     (1     (1     (1

Advances, net

     100,087        105,474        114,580        125,823        134,503   

Deposits

     3,171        2,941        2,989        3,353        4,148   

Consolidated obligations, net:

          

Discount notes

     16,519        17,778        17,127        28,418        38,672   

Bonds

     110,949        115,492        121,450        121,777        117,756   

Total consolidated obligations, net (2)

     127,468        133,270        138,577        150,195        156,428   

Mandatorily redeemable capital stock

     508        481        188        130        106   

Affordable Housing Program payable

     127        128        125        123        138   

Payable to REFCORP

     19        14        21        1        30   

Capital stock - putable

     7,856        7,852        8,124        8,156        8,119   

Retained earnings

     985        916        873        799        804   

Accumulated other comprehensive loss

     (612     (669     (744     (791     (1,065

Total capital

     8,229        8,099        8,253        8,164        7,858   

Statements of Income

          

Net interest income

     136        153        162        102        105   

Net impairment losses recognized in earnings

     (72     (46     (52     (129     (46

Net gains (losses) on trading securities

     76        4        (52     25        (74

Net (losses) gains on derivatives and hedging activities

     (58     (17     81        45        305   

Other income (loss) (3)

     1                      1        1   

Other expenses (4)

     (19     29        27        29        30   

Income before assessments

     102        65        112        15        261   

Assessments

     27        17        30        4        69   

Net income

     75        48        82        11        192   

Performance Ratios

          

Return on equity (5)

     3.64     2.36     3.95     0.55     10.3

Return on assets (6)

     0.20     0.13     0.20     0.03     0.41

Net interest margin (7)

     0.38     0.41     0.40     0.24     0.23

Regulatory capital ratio (at period end) (8)

     6.65     6.32     6.07     5.56     5.30

Equity to assets ratio (9)

     5.63     5.43     5.07     4.65     3.98

Dividend payout ratio (10)

     6.97     11.5     10.2     142.1     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 on consolidated obligations outstanding. The par values of the FHLBanks’ outstanding consolidated obligations for which the Bank is jointly and severally liable were as follows (in millions):

 

June 30, 2010

   $ 720,545

March 31, 2010

     739,010

December 31, 2009

     793,314

September 30, 2009

     825,080

June 30, 2009

     900,968

 

(3) Other income (loss) includes service fees and other.

 

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(4) Includes $49 million which represents the reversal of a portion of the provision for credit losses established on a receivable due from a past derivative counterparty with the Bank. See Note 13 to the interim financial statements for additional information.
(5) Calculated as net income divided by average total equity.
(6) Calculated as net income divided by average total assets.
(7) Net interest margin is net interest income as a percentage of average earning assets.
(8) Regulatory capital ratio is regulatory capital stock plus retained earnings as a percentage of total assets at period end.
(9) Calculated as average equity divided by average total assets.
(10) Calculated as dividends declared during the period divided by net income during the period.

Financial Condition

The Bank’s principal assets consist of advances, short- and long-term investments, and mortgage loans held for portfolio. The Bank obtains funding to support its business primarily through the issuance 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 June 30, 2010     As of December 31, 2009     Increase/(Decrease)  
         Amount         Percent
    of Total    
        Amount         Percent
    of Total    
        Amount             Percent      

Advances, net

   $ 100,087      71.20      $ 114,580      75.72      $ (14,493   (12.65

Long-term investments

     21,107      15.01        22,594      14.93        (1,487   (6.59

Short-term investments

     16,292      11.59        10,346      6.84        5,946      57.47   

Mortgage loans, net

     2,313      1.64        2,522      1.67        (209   (8.31

Other assets

     792      0.56        1,269      0.84        (477   (37.48
                                      

Total assets

   $ 140,591      100.00      $ 151,311      100.00      $ (10,720   (7.08
                                      

Consolidated obligations, net:

            

Discount notes

   $ 16,519      12.48      $ 17,127      11.97      $ (608   (3.55

Bonds

     110,949      83.82        121,450      84.90        (10,501   (8.65

Loans from other FHLBanks

     15      0.01                    15      NM   

Deposits

     3,171      2.40        2,989      2.09        182      6.08   

Other liabilities

     1,708      1.29        1,492      1.04        216      14.52   
                                      

Total liabilities

   $ 132,362      100.00      $ 143,058      100.00      $ (10,696   (7.48
                                      

Capital stock

   $ 7,856      95.47      $ 8,124      98.44      $ (268   (3.30

Retained earnings

     985      11.97        873      10.58        112      12.84   

Accumulated other comprehensive loss

     (612   (7.44     (744   (9.02     132      17.71   
                                      

Total capital

   $ 8,229      100.00      $ 8,253      100.00      $ (24   (0.29
                                      

 

(NM)- Not meaningful

Advances

Advances were $100.1 billion at June 30, 2010, a decrease of $14.5 billion, or 12.7 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.

 

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At June 30, 2010, 87.2 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 $94.8 billion of advances outstanding as of June 30, 2010, $76.7 billion, or 80.9 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 constant maturity swap rates.

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

 

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

June 30, 2010

   $ 64,512    68.0

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):

 

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         As of June 30, 2010        As of December 31, 2009    Increase/(Decrease)  
                 Amount                     Percent          

Short-term investments:

          

Deposits with other FHLBanks

   $ 2    $ 3    $ (1   (8.72

Certificates of deposit

     1,450      300      1,150      383.33   

Federal funds sold

     14,840      10,043      4,797      47.75   
                        

Total short-term investments

     16,292      10,346      5,946      57.47   
                        

Long-term investments:

          

State or local housing agency obligations

     124      126      (2   (1.18

U.S. government agency securities

     3,426      3,542      (116   (3.30

Mortgage-backed securities:

          

U.S. government agency securities

     7,340      7,375      (35   (0.48

Private label

     10,217      11,551      (1,334   (11.55
                        

Total mortgage-backed securities

     17,557      18,926      (1,369   (7.24
                        

Total long-term investments

     21,107      22,594      (1,487   (6.59
                        

Total investments

   $ 37,399    $ 32,940    $ 4,459      13.53   
                        

Short-term investments were $16.3 billion at June 30, 2010, an increase of $5.9 billion, or 57.5 percent, from December 31, 2009. The increase in short-term investments was due to a $1.2 billion increase in certificates of deposit and a $4.8 billion increase in federal funds sold available at attractive interest rates during the period.

Long-term investments were $21.1 billion at June 30, 2010, a decrease of $1.5 billion, or 6.59 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 six months of 2010, the Bank recorded total other-than-temporary impairment losses of $195 million related to its private-label MBS, of which $118 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. These investments amounted to 201 percent and 224 percent of total capital plus mandatorily redeemable capital stock at June 30, 2010 and December 31, 2009, respectively. The Bank has been below its target range of 250 percent to 275 percent due to a lack of quality MBS at attractive prices during recent market conditions.

As of June 30, 2010, the Bank had a total of 47 securities classified as available-for-sale in an unrealized loss position, with total gross unrealized losses of $607 million and a total of 130 securities classified as held-to-maturity in an unrealized loss position, with total gross unrealized losses of $306 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

 

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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 second quarter and first six months of 2010, the Bank recognized total other-than-temporary impairment losses of $131 million and $195 million, respectively, related to private-label MBS in its investment securities portfolio. The 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 $72 million and $118 million, respectively, of these other-than-temporary impairment losses is reported in the Statements of Income as “Net impairment losses recognized in earnings.” The noncredit related portion of $59 million and $77 million, respectively, of the other-than-temporary impairment losses is recorded as a component of other comprehensive loss. For the second quarter and first six months of 2009, the Bank recognized total other-than-temporary impairment losses of $404 million and $1.1 billion, respectively, related to private-label MBS in its investment securities portfolio. The credit related portion of $46 million and $135 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 $358 million and $967 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.

Mortgage Loans Held for Portfolio

Mortgage loans held for portfolio were $2.3 billion at June 30, 2010, a decrease of $209 million, or 8.31 percent, from December 31, 2009. The decrease in mortgage loans held was due primarily 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 to 2038.

 

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As of June 30, 2010 and December 31, 2009, the Bank’s conventional mortgage loan portfolio was concentrated in the southeastern United States because those members selling loans to the Bank were located primarily in that region. The following table provides the percentage of unpaid principal balance of conventional MPF Program and MPP loans held for portfolio for the five largest state concentrations.

 

     As of June 30, 2010    As of December 31, 2009
           Percent of Total          Percent of Total

South Carolina

   24.64    24.49

Florida

   19.71    19.16

North Carolina

   14.79    15.13

Georgia

   14.60    14.47

Virginia

   9.22    9.26

All other

   17.04    17.49
         

Total

   100.00    100.00
         

Consolidated Obligations

The Bank funds its assets primarily through the issuance of consolidated obligation bonds and, to a lesser extent, consolidated obligation discount notes. Consolidated obligation issuances financed 90.7 percent of the $140.6 billion in total assets at June 30, 2010, remaining relatively stable from the financing ratio of 91.6 percent as of December 31, 2009.

Consolidated obligation bonds were $110.9 billion at June 30, 2010, a decrease of $10.5 billion, or 8.65 percent, from December 31, 2009. Consolidated obligation discount notes were $16.5 billion at June 30, 2010, a decrease of $608 million, or 3.55 percent, from December 31, 2009. The decrease in consolidated obligations corresponds to the decrease in demand for advances by the Bank’s members during the first six months of 2010 and the increase in liquidity from advance prepayments as a result of member failures. Consolidated obligation bonds outstanding at June 30, 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 interest rates on them, in effect, into short-term variable interest rates, usually based on LIBOR. Of the par value of $109.4 billion of consolidated obligation bonds outstanding at June 30, 2010, $69.0 billion, or 63.0 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.

As of June 30, 2010, callable consolidated obligation bonds constituted 28.2 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 will call a hedged consolidated obligation bond if the call feature of the derivative is exercised. These call features could require the Bank to refinance a substantial portion of outstanding liabilities during times of decreasing interest rates. Call options on unhedged callable consolidated obligation bonds generally are exercised when the bond can be replaced at a lower economic cost.

 

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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 $3.2 billion as of June 30, 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 June 30, 2010.

Capital

Total capital was $8.2 billion at June 30, 2010, a decrease of $24 million, or 0.29 percent, from December 31, 2009. This decrease was due primarily to the reclassification of $320 million in capital stock to mandatorily redeemable capital stock (a liability) as a result of 10 member institutions obtaining nonmember status and the payment of $11 million in dividends 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 though transfer by the FDIC of a failed member’s assets and liabilities to a nonmember purchaser. This decrease was partially offset by a $132 million decrease in accumulated other comprehensive loss, $123 million in net income recorded in retained earnings, and the issuance of $56 million in capital stock during the period.

The FHLBank Act and Finance Agency regulations specify that each FHLBank must meet certain minimum regulatory capital standards. The Bank was in compliance with these regulatory capital rules and requirements as shown in the following table (dollars in millions):

 

     As of June 30, 2010     As of December 31, 2009  
         Required               Actual               Required               Actual        

Regulatory capital requirements:

        

Risk based capital

   $ 2,220      $ 9,349      $ 3,010      $ 9,185   

Total capital-to-assets ratio

     4.00     6.65     4.00     6.07

Total regulatory capital*

   $ 5,624      $ 9,349      $ 6,052      $ 9,185   

Leverage ratio

     5.00     9.97     5.00     9.11

Leverage capital

   $ 7,030      $ 14,023      $ 7,566      $ 13,777   

 

* Mandatorily redeemable capital stock is considered capital for regulatory purposes, and “total regulatory capital” includes the Bank’s $508 million and $188 million in mandatorily redeemable capital stock at June 30, 2010 and December 31, 2009, respectively.

 

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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 of the Finance Agency (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 June 28, 2010, the Bank received notification from the Director that, based on March 31, 2010 data, the Bank meets the definition of “adequately capitalized.”

As of June 30, 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 date on which the activity no longer remains outstanding.

As of June 30, 2010 and December 31, 2009, the Bank’s activity-based stock included $2.9 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. On July 15, 2010, the Bank repurchased $272 million of B2 activity-based excess capital stock based on the shareholders’ total capital stock as of April 30, 2010.

Results of Operations

Net Income

The following table sets forth the Bank’s significant income items for the second quarter and first six months of 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 June 30,    Increase/ (Decrease)     Six Months Ended June 30,    Increase/ (Decrease)  
     2010     2009        Amount             Percent             2010              2009             Amount             Percent      

Net interest income

   $ 136      $ 105    $ 31      31.1      $ 289      $ 140    $ 149      107.2   

Other (loss) income

     (53     186      (239   (128.7     (112     176      (288   (163.7

Other expense

     (19     30      (49   (163.2     10        57      (47   (82.1

Total assessments

     27        69      (42   (61.1     44        69      (25   (35.6

Net income

     75        192      (117   (61.2     123        190      (67   (35.4

 

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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.

For the second quarter and first six months of 2010, the Bank recorded net interest income of $136 million and $289 million, respectively, an increase of $31 million and $149 million, respectively, compared to the same periods in 2009. The increase in net interest income during the periods is due primarily to the write-off of hedging-related basis adjustments on advances that were prepaid as well as other hedging-related adjustments that decreased net interest income during the second quarter and first six months of 2009.

The following tables present spreads between the average yield on total interest-earning assets and the average cost of interest-bearing liabilities for the second quarter and first six months 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 second quarter and first six months of 2010, compared to the same periods in 2009, the interest rate spread increased by 19 basis points and 31 basis points, respectively. The increase in interest rate spread during the periods is due primarily to the write-off of hedging-related basis adjustments on advances that were prepaid as well as other hedging-related adjustments during the second quarter and first six months of 2009.

 

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Spread and Yield Analysis

 

     Three Months Ended June 30,
     2010    2009
     Average
     Balance    
        Interest        Yield/
    Rate  (%)    
   Average
     Balance    
        Interest        Yield/
    Rate  (%)    

Assets

               

Federal funds sold

   $ 13,708      $ 8    0.26    $ 10,673      $ 6    0.20

Interest-bearing deposits (1)

     3,407        2    0.20      4,475        2    0.18

Certificates of deposit

     848        1    0.41               

Long-term investments (2)

     21,456        233    4.34      25,359        310    4.90

Advances

     102,961        81    0.32      141,841        278    0.79

Mortgage loans held for portfolio (3)

     2,366        31    5.25      2,953        40    5.33

Loans to other FHLBanks

                    2           0.19
                                   

Total interest-earning assets

     144,746        356    0.99      185,303        636    1.37
                       

Allowance for credit losses on mortgage loans

     (1           (1     

Other assets

     1,035              1,396        
                           

Total assets

   $ 145,780            $ 186,698        
                           

Liabilities and Capital

               

Deposits (4)

   $ 2,958        1    0.06    $ 4,627        1    0.10

Short-term borrowings

     15,507        6    0.15      45,172        75    0.66

Long-term debt

     113,521        213    0.75      121,197        455    1.51

Other borrowings

     503           0.26      622           0.06
                                   

Total interest-bearing liabilities

     132,489        220    0.67      171,618        531    1.24
                       

Other liabilities

     5,085              7,643        

Total capital

     8,206              7,437        
                           

Total liabilities and capital

   $ 145,780            $ 186,698        
                           

Net interest income and net yield on interest-earning assets

     $ 136    0.38      $ 105    0.23
                           

Interest rate spread

        0.32         0.13
                   

Average interest-earning assets to interest-bearing liabilities

        109.25         107.97
                   

 

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.

 

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     Six Months Ended June 30,
     2010    2009
     Average
    Balance    
        Interest        Yield/
    Rate (%)    
   Average
    Balance    
        Interest            Yield/
    Rate (%)    

Assets

               

Federal funds sold

   $ 12,636      $ 13    0.21    $ 13,238      $ 14    0.21

Interest-bearing deposits (1)

     3,484        3    0.17      4,939        5    0.19

Certificates of deposit

     713        1    0.33               

Long-term investments (2)

     21,969        486    4.46      26,189        639    4.92

Advances

     107,043        153    0.29      148,584        713    0.97

Mortgage loans held for portfolio (3)

     2,415        63    5.27      3,066        82    5.37

Loans to other FHLBanks

     1           0.13      2           0.22
                                   

Total interest-earning assets

     148,261        719    0.98      196,018        1,453    1.49
                       

Allowance for credit losses on mortgage loans

     (1           (1     

Other assets

     1,058              1,774        
                           

Total assets

   $ 149,318            $ 197,791        
                           

Liabilities and Capital

               

Deposits (4)

   $ 2,931        1    0.06    $ 4,520        3    0.12

Short-term borrowings

     15,544        9    0.11      49,132        238    0.98

Long-term debt

     116,964        420    0.72      127,593        1,070    1.69

Other borrowings

     366           0.23      611        2    0.60
                                   

Total interest-bearing liabilities

     135,805        430    0.64      181,856        1,313    1.46
                       

Other liabilities

     5,256              8,223        

Total capital

     8,257              7,712        
                           

Total liabilities and capital

   $ 149,318            $ 197,791        
                           

Net interest income and net yield on interest-earning assets

     $ 289    0.39      $ 140    0.14
                           

Interest rate spread

        0.34         0.03
                   

Average interest-earning assets to interest-bearing liabilities

        109.17         107.79
                   

 

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.

 

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

Volume and Rate Table*

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2010 vs. 2009     2010 vs. 2009  
         Volume               Rate           Increase/
 (Decrease) 
        Volume               Rate           Increase/
 (Decrease) 
 

Increase (decrease) in interest income:

  

         

Federal funds sold

   $ 1      $ 1      $ 2      $ (1   $      $ (1

Interest-bearing deposits

                          (1     (1     (2

Certificates of deposit

            1        1               1        1   

Long-term investments

     (44     (33     (77     (97     (56     (153

Advances

     (62     (135     (197     (160     (400     (560

Mortgage loans held for portfolio

     (8     (1     (9     (17     (2     (19

Loans to other FHLBanks

                                          
                                                

Total

     (113     (167     (280     (276     (458     (734
                                                

Increase (decrease) in interest expense:

            

Deposits

                          (1     (1     (2

Short-term borrowings

     (32     (37     (69     (100     (129     (229

Long-term debt

     (27     (215     (242     (83     (567     (650

Other borrowings

                          (1     (1     (2
                                                

Total

     (59     (252     (311     (185     (698     (883
                                                

(Decrease) increase in net interest income

   $ (54   $ 85      $ 31      $ (91   $ 240      $ 149   
                                                

 

* 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.

 

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     Three Months Ended June 30,     Six Months Ended June 30,  
         2010             2009                 2010                     2009          

Net interest income

   $ 136      $ 105      $ 289      $ 140   
                                

Interest components of hedging activities included in net interest income:

        

Hedging advances

   $ (811   $ (868   $ (1,702   $ (1,635

Hedging consolidated obligations

     320        370        703        743   

Hedging related amortization

     (44     (137     (90     (296
                                

Net decrease in net interest income

   $ (535   $ (635   $ (1,089   $ (1,188
                                

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

        

Purchased options

   $ 2      $ 11      $ 3      $ 20   

Synthetic macro funding

     (1     (8     (2     (19

Trading securities

     (38     (37     (77     (70
                                

Net decrease in other income (loss)

   $ (37   $ (34   $ (76   $ (69
                                

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 June 30,     Increase/
 (Decrease) 
    Six Months Ended June 30,     Increase/
 (Decrease) 
 
         2010             2009               2010             2009        

Other Income (Loss):

            

Net impairment losses recognized in earnings

   $ (72   $ (46   $ (26   $ (118   $ (135   $ 17   

Net gains (losses) on trading securities

     76        (74     150        80        (108     188   

Net (losses) gains on derivatives and hedging activities

     (58     305        (363     (75     417        (492

Other

     1        1               1        2        (1
                                                

Total other (loss) income

   $ (53   $ 186      $ (239   $ (112   $ 176      $ (288
                                                

The overall changes in other income (loss) for the second quarter and first six months of 2010, compared to the same periods in 2009, were due primarily to net impairment losses recognized in earnings, 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).

During the first six months of 2010 and 2009, including the second quarter of 2010 and 2009, the Bank held approximately $3 billion of debt securities classified as trading that were in non-qualifying hedging relationships using interest rate swaps. Gains and losses on the securities and derivatives are recorded on different lines within the other income (loss) section of the income statement. During the second quarter of 2010, the Bank recorded securities gains of $76 million, which were partially offset by derivative losses of $62 million. For the second quarter of 2009, the trading securities loss was $74 million, which was offset by derivative gains of $131 million. In addition, gains from ineffective hedges, primarily caused by changes in LIBOR, net of related amortizations primarily associated with re-designations, were $48 million during the second quarter of 2010 as compared to gains of $197 million for the second quarter of 2009. The amortizations were offset by amortizations associated with de-designated hedges that are recorded in interest income. These items comprise the majority of the $58 million of derivative losses recorded during the second quarter of 2010 and $305 million of derivative gains recorded during the second quarter of 2009.

 

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During the first six months of 2010, the Bank recorded securities gains of $80 million, which were partially offset by derivative losses of $85 million. For the first six months of 2009, the trading securities loss was $108 million, which was offset by derivative gains of $174 million. In addition, gains from ineffective hedges, primarily caused by changes in LIBOR, net of related amortization primarily associated with re-designations, were $94 million during 2010 as compared to gains of $297 million for the first six months of 2009. The amortizations were offset by amortizations associated with de-designated hedges that are recorded in interest income. These items comprise the majority of the $75 million of derivative losses recorded during 2010 and $417 million of derivative gains recorded during the first six months of 2009.

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):

Net (Losses) Gains on Derivatives and Hedging Activities

 

           Advances          Purchased
Options, Macro
Hedging and
Synthetic Macro
Funding
        Investments         Consolidated
Obligations
        Bonds         
    Consolidated
Obligations
Discount
        Notes         
            Total          

Three Months Ended June 30, 2010

             

Interest-related

   $    $ 1      $ (38   $      $      $ (37

Qualifying fair value hedges

     43                    5               48   

Non-qualifying hedges and other

          (7     (62                   (69
                                               

Total gains (losses)

   $ 43    $ (6   $ (100   $ 5      $      $ (58
                                               

Three Months Ended June 30, 2009

             

Interest-related

   $    $ 3      $ (37   $      $      $ (34

Qualifying fair value hedges

     192                    (3     8        197   

Non-qualifying hedges and other

          11        131                      142   
                                               

Total gains (losses)

   $ 192    $ 14      $ 94      $ (3   $ 8      $ 305   
                                               

Six Months Ended June 30, 2010

             

Interest-related

   $    $ 1      $ (77   $      $      $ (76

Qualifying fair value hedges

     106                    (9     (3     94   

Non-qualifying hedges and other

          (7     (86                   (93
                                               

Total gains (losses)

   $ 106    $ (6   $ (163   $ (9   $ (3   $ (75
                                               

Six Months Ended June 30, 2009

             

Interest-related

   $    $ 1      $ (70   $      $      $ (69

Qualifying fair value hedges

     276                    16        5        297   

Non-qualifying hedges and other

          16        173                      189   
                                               

Total gains

   $ 276    $ 17      $ 103      $ 16      $ 5      $ 417   
                                               

 

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Non-interest Expense

Non-interest expense decreased by $91 million and $72 million during the second quarter and the first six months of 2010, respectively, compared to the same periods in 2009. The decrease in non-interest expense is due to a decrease in total assessments resulting from a decrease in income during the periods and a $49 million increase in the Bank’s estimate of the probable amount that will be realized related to the net receivable due from LBSF, with a corresponding reduction to other expense.

Prior to September 19, 2008, LBSF was a counterparty to the Bank on multiple derivative transactions. On September 19, 2008, the Bank terminated all of its derivative contracts with LBSF and the net amount due to the Bank as a result of excess collateral held by LBSF was approximately $189 million. The Bank recorded a $189 million receivable for the net amount due and a $170 million reserve at September 30, 2008 based on management’s estimate of the probable amount that would be realized. During the second quarter of 2010, the Bank and management of the Lehman bankruptcy estate concluded that the agreed-upon amount of the Bank’s claims on the Lehman estate is $175 million. Based on a financial disclosure report made available by the Lehman bankruptcy estate during the second quarter of 2010 and market prices for the sale of claims on the Lehman bankruptcy estate, Bank management’s estimate of the probable amount that will be realized as of June 30, 2010 is $68 million. The Bank increased its estimate of the probable amount that will be realized related to the net receivable due from LBSF by $49 million, with a corresponding reduction to other expense.

Liquidity and Capital Resources

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

Finance Agency regulations require the Bank to maintain contingent liquidity in an amount sufficient to meet its liquidity needs for five business days if it is unable to access the capital markets. The Bank met this regulatory liquidity requirement during the second quarter and first six months 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 second quarter and first six months of 2010 and as of July 31, 2010.

The Bank’s principal source of liquidity is consolidated obligation debt instruments. To provide liquidity, the Bank also may use other short-term borrowings, such as federal funds purchased, securities sold under agreements to repurchase, and loans from other FHLBanks. These funding sources depend on the Bank’s

 

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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.

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 June 30, 2010 or December 31, 2009. As of June 30, 2010, the FHLBanks had $846.5 billion in aggregate par value of COs issued and outstanding, $125.9 billion of which was attributable to the Bank.

As of June 30, 2010, the Bank had outstanding standby letters of credit of approximately $20.1 billion with original terms of less than two months to 20 years, with the longest final expiration in 2030. 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 and Economic Recovery Act of 2008 (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, as any extension must be implemented by statute. The Bank expects its standby

 

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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 June 30, 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.

Contractual Obligations

As of June 30, 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

Finance Agency Conservatorship and Receivership

On July 9, 2010, the Finance Agency issued a notice of proposed rulemaking to establish a framework for conservatorship and receivership operations for Fannie Mae and Freddie Mac, both of which are currently in conservatorship, and the FHLBanks, which are subject to the conservatorship and receivership authority of the Finance Agency (collectively, the “GSEs”). The proposed rule includes provisions that describe the basic authorities of the Finance Agency when acting as conservator or receiver, including the enforcement and repudiation of contracts and the priorities of claims for contract parties and other claimants, largely in parallel to the conservator and receivership rules applicable to the Federal Deposit Insurance Corporation. Comments on the proposed rule are due by September 7, 2010.

Financial Reform

On July 21, 2010, the Dodd-Frank Act was enacted into law. The Dodd-Frank Act, among other things: (1) creates an inter-agency oversight council that will identify and regulate systemically important financial institutions, (2) regulates the over-the-counter derivatives market, and (3) establishes new requirements, including a risk-retention requirement, for MBS. The Bank’s business operations, funding costs, rights, and obligations, and the manner in which the Bank carries out its housing finance mission may be affected by the Dodd-Frank Act. The Bank is reviewing the Dodd-Frank Act; however, the Bank is unable to predict at this time the actual effects of the Dodd-Frank Act until implementing regulations are issued and certain determinations under the Dodd-Frank Act are made.

 

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Housing Finance Reform

On April 14, 2010, the U.S. Department of the Treasury (“Treasury”) and the U.S. Department of Housing and Urban Development (“HUD”) issued a series of questions for public comment regarding the future of housing finance policy in the United States. Treasury and HUD will consider such public comments as they develop recommendations regarding the future of the housing GSEs, including the FHLBanks.

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.

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

 

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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 June 30, 2010    As of December 31, 2009

Rating

   Number of
        Borrowers         
   Outstanding
        Advances         
   Number of
        Borrowers         
   Outstanding
        Advances         

1-4

   81    $ 11,165    93    $ 3,969

5-7

   195      19,374    255      31,059

8

   140      45,616    151      56,880

9

   193      11,609    212      12,358

10

   173      6,023    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 percent. However, the Bank’s board of directors, or a relevant committee thereof, may approve a higher limit at its discretion. As of June 30, 2010, 13 borrowers have been approved for a credit limit higher than 30 percent.

Each borrower must maintain an amount of qualifying collateral that, when discounted to the lendable collateral value (“LCV”), is equal to at least 100 percent of the outstanding principal amount of all advances and other liabilities of the borrower to the Bank. 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 June 30, 2010

   $ 94,810    $ 193,141    65.36    10.27    24.37

As of December 31, 2009

     109,813      216,032    63.00    11.50    25.50

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

 

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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 second quarter of 2010, 45 FDIC-insured institutions were closed and the FDIC was named receiver, compared to 24 FDIC-insured institutions that were closed during the second quarter of 2009. Of the 45 FDIC-insured institutions that were closed during the second quarter of 2010, 11 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 June 30, 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

 

   

Non-U.S. dollar denominated securities.

 

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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 (“non-U.S. government counterparties”) from $10.8 billion at December 31, 2009 to $16.8 billion as of June 30, 2010. The Bank’s unsecured credit exposure comprises primarily federal funds sold. There were nine non-U.S. government counterparties that represented in excess of five percent but less than 10 percent, and zero non-U.S. government counterparties that represented greater than 10 percent, of the total unsecured credit exposure to non-U.S. government counterparties.

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 June 30, 2010 included $10.2 billion of private-label MBS, which represented a substantial portion, or 48.4 percent of the carrying value, of the Bank’s long-term investment portfolio.

 

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

 

     As of June 30, 2010
           Amortized Cost          Estimated Fair Value

Investment Ratings:

     

AAA

   $ 3,624    $ 3,583

AA

     499      483

A

     1,157      1,058

BBB

     302      278

BB

     1,042      981

B

     1,067      948

CCC

     2,826      2,339

CC

     153      138

C

     154      135
             

Total

   $ 10,824    $ 9,943
             
     As of July 31, 2010
           Amortized Cost          Estimated Fair Value

Investment Ratings

     

AAA

   $ 3,543    $ 3,503

AA

     454      438

A

     1,191      1,093

BBB

     394      368

BB

     1,042      981

B

     1,067      948

CCC

     2,685      2,218

CC

     278      247

C

     170      147
             

Total

   $ 10,824    $ 9,943
             

 

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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
           Amortized Cost          Estimated Fair Value

Investment Ratings:

     

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 32.7 percent, was rated AAA as of July 31, 2010 and 18.8 percent were rated AA to BBB as of July 31, 2010. Subsequent to June 30, 2010, $156 million or 1.44 percent, of the Bank’s private-label MBS has been downgraded as of July 31, 2010 as outlined in the below table (in millions):

 

     Rating Agency Actions as of July 31, 2010
     Downgraded and Stable
       To Double A        To Single A      To Triple BBB

Private-label MBS

   $ 30    $ 34    $ 92
                    

Total amortized cost

   $ 30    $ 34    $ 92
                    

For disclosure purposes, the Bank classifies private-label MBS as either prime or Alt-A based upon the overall credit quality of the underlying loans as determined by the originator at the time of origination. Although there is no universally accepted definition of Alt-A, generally, loans with credit characteristics that range between prime and subprime are classified as Alt-A. Participants in the mortgage market have used the Alt-A classification principally to describe loans for which the underwriting process has been streamlined in order to reduce the documentation requirements of the borrower or allow alternative documentation. At June 30, 2010, based on the classification by the originator at the time of origination, approximately 88.7 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.

 

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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 June 30, 2010
     Unpaid Principal
Balance
    Amortized Cost     Gross Unrealized
Losses
    Collateral
Delinquency (%)

Investment Rating:

          

AAA

   $ 3,015    $ 2,993    $ (50   1.97

AA

     392      388      (13   4.43

A

     1,103      1,099      (95   10.28

BBB

     302      302      (24   10.24

Below investment grade

     5,226      4,813      (558   16.06
                        

Total

   $ 10,038    $ 9,595    $ (740   10.56
                        
     Credit Ratings of Private-label MBS Backed by Alt-A  Loans
As of June 30, 2010
     Unpaid Principal
Balance
   Amortized Cost    Gross Unrealized
Losses
    Collateral
Delinquency (%)

Investment Rating:

          

AAA

   $ 629    $ 631    $ (23   5.84

AA

     111      111      (4   5.34

A

     58      58      (4   5.55

Below investment grade

     477      429      (142   33.68
                        

Total

   $ 1,275    $ 1,229    $ (173   16.20
                        

 

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

 

     As of June 30, 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:

                    

2008

   $    $      $    $      $    $      $    $   

2007

                 46      (1                        

2006

                                                

2005

     113      (7     100      (3     305      (16     118      (6

2004 and prior

     2,902      (43     246      (9     798      (79     184      (18
                                                            

Total prime

     3,015      (50     392      (13     1,103      (95     302      (24
                                                            

Alt-A- Year of Issuance:

                    

2007

                                                

2005

                                                

2004 and prior

     629      (23     111      (4     58      (4            
                                                            

Total Alt-A

     629      (23     111      (4     58      (4            
                                                            

Total

   $ 3,644    $ (73   $ 503    $ (17   $ 1,161    $ (99   $ 302    $ (24
                                                            

 

        As of June 30, 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:

                  

2008

    $ 272    $ (26    $ 272    $ (26    15.72    15.50

2007

      1,818      (182      1,864      (183    12.38    10.62

2006

      1,259      (136      1,259      (136    9.49    8.08

2005

      1,826      (209      2,462      (241    6.47    8.36

2004 and prior

      51      (5      4,181      (154    2.97    6.77
                                      

Total prime

      5,226      (558      10,038      (740    6.74    8.28
                                      

Alt-A- Year of Issuance:

                  

2007

      75      (11      75      (11    12.29    8.25

2005

      390      (130      390      (130    26.64    25.63

2004 and prior

      12      (1      810      (32    6.79    10.88
                                      

Total Alt-A

      477      (142      1,275      (173    13.18    15.23
                                      

Total

    $ 5,703    $ (700    $ 11,313    $ (913    7.46    9.06
                                      

 

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Fair Value as a Percentage of Unpaid Principal Balance

By Year of Issuance

 

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

Private-label MBS by Year of Issuance:

              

Prime:

              

2008

   84    89    82    74    77

2007

   80    77    75    73    64

2006

   80    77    74    71    63

2005

   86    85    82    81    74

2004 and earlier

   96    95    94    93    89

Weighted-average of all prime

   89    87    85    83    78

Alt-A:

              

2007

   70    69    72    73    63

2005

   57    54    53    49    44

2004 and earlier

   96    94    92    91    88

Weighted-average of all Alt-A

   83    80    79    78    74

Weighted-average of all private-label MBS

   88    86    84    83    77

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

 

     As of June 30, 2010    As of December 31, 2009
       Fixed-Rate      Variable-Rate          Total            Fixed-Rate      Variable-Rate          Total      

Private-label MBS:

                 

Prime

   $ 2,148    $ 7,890    $ 10,038    $ 2,517    $ 8,765    $ 11,282

Alt-A

     649      626      1,275      723      658      1,381
                                         

Total unpaid principal balance

   $ 2,797    $ 8,516    $ 11,313    $ 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.

Each quarter, the Bank updates the input assumptions for the first model to reflect the most current actual loan performance information and the most current housing market assumptions. During the second quarter of 2010, this update process resulted in more pessimistic input assumptions based on current and forecasted economic trends, including continued high unemployment, ongoing pressure on housing prices, and limited refinancing opportunities for borrowers whose houses are now worth less than the balance of their mortgages. Input assumptions for investments with underlying prime collateral had the most severe adjustments.

 

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As discussed above, 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 housing price forecast as of June 30, 2010 assumed current-to-trough home price declines ranging from zero percent to 12 percent over the next three to nine months beginning April 1, 2010 (resulting in peak-to-trough home price declines of up to 64.1 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 (one percent annualized for the six month period), 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. For those securities for which an other-than-temporary impairment was determined to have occurred during the second 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

   8.17    8.17 to 8.17    38.7    38.7 to 38.7    50.7    50.7 to 50.7    15.5    15.5 to 15.6

2007

   7.71    5.70 to 9.07    16.7    12.2 to 21.6    40.7    30.2 to 47.8    7.30    5.45 to 11.2

2006

   7.96    6.62 to 8.73    23.7    16.7 to 42.3    39.9    36.8 to 41.3    7.03    3.49 to 9.08

2005

   10.1    5.98 to 11.8    22.9    10.3 to 28.7    42.7    32.3 to 47.8    8.31    4.44 to 10.4

Total prime

   8.27    5.70 to 11.8    23.5    10.3 to 42.3    42.4    30.2 to 50.7    8.70    3.49 to 15.6

Alt-A:

                       

2007

   10.3    8.42 to 12.1    56.8    51.6 to 64.4    48.3    45.1 to 51.2    13.8    6.56 to 18.7

2006

   10.5    8.40 to 12.9    54.5    47.9 to 57.6    47.7    42.5 to 53.0    9.08    5.58 to 11.8

2005

   12.1    9.93 to 14.3    41.2    22.9 to 59.4    47.7    40.4 to 55.0    9.40    4.20 to 13.0

2004 and prior

   16.7    16.7 to 16.7    14.3    14.3 to 14.3    31.8    31.8 to 31.8    14.9    14.9 to 14.9

Total Alt-A

   10.9    8.40 to 16.7    51.2    14.3 to 64.4    47.8    31.8 to 55.0    11.4    4.20 to 18.7

Total

   9.76    5.70 to 16.7    39.1    10.3 to 64.4    45.5    30.2 to 55.0    10.2    3.49 to 18.7

As previously discussed, based on the Bank’s impairment analysis for the second quarter and first six months of 2010, the Bank recognized total other-than-temporary impairment losses of $131 million and $195 million, respectively. The credit related portion of $72 million and $118 million, respectively, of these

 

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other-than-temporary impairment losses is reported in the Statements of Income as “Net impairment losses recognized in earnings.” The noncredit related portion of $59 million and $77 million, respectively, of the other-than-temporary impairment losses is recorded as a component of other comprehensive loss. Based on the Bank’s impairment analysis for the second quarter and first six months of 2009, the Bank recognized total other-than-temporary impairment losses of $404 million and $1.1 billion, respectively. The credit related portion of $46 million and $135 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 $358 million and $967 million, respectively, of the other-than-temporary impairment losses is recorded as a component of other comprehensive loss.

The tables below summarize 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):

 

     Three Months Ended June 30, 2010
     Gross Unrealized Loss Position
     Less than 12 Months    12 Months or more                Total             

Private-label MBS backed by:

        

Prime loans

   $    $ 131    $ 131

Alt-A

              
                    

Total

   $    $ 131    $ 131
                    
     Three Months Ended June 30, 2009
     Gross Unrealized Loss Position
     Less than 12 Months    12 Months or more                Total             

Private-label MBS backed by:

        

Prime loans

   $    $ 273    $ 273

Alt-A

          131      131
                    

Total

   $    $ 404    $ 404
                    
     Six Months Ended June 30, 2010
     Gross Unrealized Loss Position
     Less than 12 Months    12 Months or more    Total

Private-label MBS backed by:

        

Prime loans

   $    $ 193    $ 193

Alt-A

          2      2
                    

Total

   $    $ 195    $ 195
                    
     Six Months Ended June 30, 2009
     Gross Unrealized Loss Position
     Less than 12 Months    12 Months or more    Total

Private-label MBS backed by:

        

Prime loans

   $    $ 971    $ 971

Alt-A

          131      131
                    

Total

   $    $ 1,102    $ 1,102
                    

 

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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.

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 five percent to 17 percent over the next three to nine months beginning April 1, 2010. 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.

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 June 30, 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

   $ 1,695    $ (43   $ 88      $ 2,637    $ (83   $ 67   

Alt-A

     2,205      (29     (29     2,063      (157     (150
                                              

Total

   $ 3,900    $ (72   $ 59      $ 4,700    $ (240   $ (83
                                              

The Bank continues to actively monitor the credit quality of its private-label MBS investments. It is not possible to predict the magnitude of additional other-than-temporary impairment charges in future periods because that prediction depends on the actual performance of the underlying loan collateral as well as the Bank’s future modeling assumptions. Many factors could influence the Bank’s future modeling assumptions, including economic, financial market and housing market conditions. If performance of the underlying loan collateral deteriorates and/or the Bank’s modeling assumptions become more pessimistic, the Bank could experience further losses on its investment portfolio.

Non-Private-label MBS. The unrealized losses related to U.S. agency MBS are caused by interest rate changes. Because these securities are guaranteed by government agencies or government-sponsored enterprises, it is expected that these securities would not be settled at a price less than the amortized cost

 

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basis. The Bank does not consider these investments to be other-than-temporarily impaired as of June 30, 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 June 30, 2010, the Bank had $156.6 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.

As of June 30, 2010, 99.2 percent of the total notional amount of outstanding derivatives was represented by 19 counterparties with a credit rating of A or better. Of these counterparties, there were three, JP Morgan Chase Bank, N.A., Deutsche Bank AG, and Goldman Sachs Group, Inc., that each represented more than 10 percent of the Bank’s total notional amount, and two counterparties, Rabobank Nederland and Crédit Agricole S.A. that each 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 each 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 each represented more than 10 percent of the Bank’s net exposure.

 

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

Derivative Counterparty Credit Exposure

As of June 30, 2010

 

     Notional
    Amount    
   Total Net
Exposure
at Fair Value
   Collateral
        Held         
   Net Exposure
After
Collateral

Credit Rating:

           

AAA

   $ 2,479    $    $    $

AA

     49,534      12           12

A

     103,318      73      72      1

BBB

     226               

Member institutions*

     1,063      6          
                           

Total derivatives

   $ 156,620    $ 91    $ 72    $ 13
                           

 

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

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.

 

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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 Program 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 June 30, 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 June 30, 2010.

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.

 

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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 June 30, 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

   $ 75,145    $ (5,161   $ 89,316    $ (4,677

Firm commitments

     15                    

Non-qualifying hedges

     1,537      (124     1,763      (72
                              

Total

     76,697      (5,285     91,079      (4,749
                              

Investments:

          

Non-qualifying hedges

     3,000      (374     3,218      (289
                              

Total

     3,000      (374     3,218      (289
                              

Consolidated obligation bonds:

          

Fair value hedges

     67,520      1,423        82,706      1,133   

Non-qualifying hedges

     1,457      9        2,512      6   
                              

Total

     68,977      1,432        85,218      1,139   
                              

Consolidated obligation discount notes:

          

Fair value hedges

     24             6,510      8   
                              

Total

     24             6,510      8   
                              

Balance sheet:

          

Non-qualifying hedges

     5,796      10        3,796      10   
                              

Total

     5,796      10        3,796      10   
                              

Intermediary positions:

          

Intermediaries

     2,126             2,208        
                              

Total

     2,126             2,208        
                              

Total notional and fair value

   $ 156,620    $ (4,217   $ 192,029    $ (3,881
                              

Total derivatives excluding accrued interest

      $ (4,217      $ (3,881

Accrued interest

        (63        48   

Cash collateral held by counterparty - assets

        3,924           3,555   

Cash collateral held from counterparty - liabilities

        (72        (92
                      

Net derivative balance

      $ (428      $ (370
                      

Net derivative assets balance

      $ 20         $ 39   

Net derivative liabilities balance

        (448        (409
                      

Net derivative balance

      $ (428      $ (370
                      

 

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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 June 30, 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

   0.62    0.39      0.11      0.68    0.50      0.27   

Liabilities

   0.52    0.53      0.23      0.52    0.56      0.51   

Equity

   1.96    (1.34   (1.50   3.05    (0.31   (3.57

Effective duration gap

   0.10    (0.14   (0.12   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 June 30, 2010.

Additional Duration Exposure Scenarios

(In years)

 

     As of June 30, 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

   0.58    0.53    0.46      0.39      0.24      (0.10   0.23   

Liabilities

   0.53    0.53    0.53      0.53      0.34      0.30      0.27   

Equity

   1.25    0.44    (0.44   (1.34   (1.06   (5.33   (0.27

Effective duration gap

   0.05       (0.07   (0.14   (0.10   (0.40   (0.04

 

* 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

 

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decreased by $24 million from December 31, 2009 to June 30, 2010, the market value of equity increased by $1.0 billion during this same period due primarily to an increase in MBS prices relative to other fixed-income securities.

Market Value of Equity

(In millions)

 

     As of June 30, 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

   $ 133,618    $ 135,350    $ 136,310    $ 143,481    $ 145,582    $ 146,820

Liabilities

     125,690      127,033      127,862      136,815      138,291      139,221

Equity

     7,928      8,317      8,448      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 second 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.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

On October 9, 2008, the Bank filed a report on Form 8-K describing the termination of all outstanding interest rate swap transactions with LBSF under an International Swap Dealers Association, Inc. master agreement (the “ISDA Master Agreement”) and the Bank’s suit in New York state court against LBSF for remittance of the posted collateral and accrued interest held by LBSF under the ISDA Master Agreement in an amount of approximately $179 million (which amount the Bank subsequently estimated as $189 million). The Bank’s action was stayed pending the LBSF bankruptcy proceedings. During the second quarter of 2010, the Bank and management of the Lehman bankruptcy estate agreed that the Bank shall have a single aggregate nonpriority general unsecured claim against LBSF, as the primary obligor, and against Lehman Brothers Holdings Inc., as guarantor under the ISDA Master Agreement. The agreed-upon amount was confirmed in a written agreement dated as of July 16, 2010. On July 23, 2010 the Bank filed a unilateral notice of discontinuance in the Supreme Court of the State of New York, County of New York, dismissing without prejudice any and all claims asserted in its lawsuit against LBSF. For further discussion of the financial impact of the agreed-upon receivable amount and the Bank’s reduction of the related reserve, see Note 13 to the interim financial statements and Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Non-interest Expense.”

The Bank may be subject to various other legal proceedings arising in the normal course of business. After consultation with legal counsel, management is not aware of any 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.

 

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Item 6. Exhibits

 

  3.1    Restated Organization Certificate of the Federal Home Loan Bank of Atlanta (1)
  3.2    Bylaws of the Federal Home Loan Bank of Atlanta (Revised and Restated) (2)
  4.1    Capital Plan of the Federal Home Loan Bank of Atlanta (3)
10.1    Second Amended and Restated Services Agreement, dated as of April 1, 2010, between the Federal Home Loan Bank of Atlanta and SJG Financial Consultants, LLC +
10.2    Indemnification Agreement, dated as of April 1, 2010, among the Federal Home Loan Bank of Atlanta, SJG Financial Consultants, LLC, and Steven J. Goldstein +
10.3    Agreement and Release of All Claims, dated as of April 14, 2010, between the Federal Home Loan Bank of Atlanta and Richard A. Dorfman +
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.

 

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SIGNATURES

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

 

  Federal Home Loan Bank of Atlanta
Date: August 10, 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

 

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