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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2011

OR

 

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

Commission File Number: 000-51845

 

 

FEDERAL HOME LOAN BANK OF ATLANTA

(Exact name of registrant as specified in its charter)

 

 

 

Federally chartered corporation   56-6000442

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1475 Peachtree Street,

NE, Atlanta, Ga.

  30309
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code:

(404) 888-8000

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ¨  Yes    ¨  No

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

The number of shares outstanding of the registrant’s Class B Stock, par value $100, as of April 30, 2011, was 73,027,137.

 

 

 


Table of Contents

Table of Contents

 

PART I.

  

FINANCIAL INFORMATION

     1   

Item 1.

  

Financial Statements (Unaudited)

     1   
  

STATEMENTS OF CONDITION (Unaudited)

     1   
  

STATEMENTS OF INCOME (Unaudited)

     2   
  

STATEMENTS OF CAPITAL (Unaudited)

     3   
  

STATEMENTS OF CASH FLOWS (Unaudited)

     4   
  

NOTES TO FINANCIAL STATEMENTS (Unaudited)

     6   

Item 2.

  

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

     33   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     64   

Item 4.

  

Controls and Procedures

     67   

PART II.

  

OTHER INFORMATION

     68   

Item 1.

  

Legal Proceedings

     68   

Item 1A.

  

Risk Factors

     68   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     68   

Item 3.

  

Defaults Upon Senior Securities

     68   

Item 4.

  

(Removed and Reserved)

     69   

Item 5.

  

Other Information

     69   

Item 6.

  

Exhibits

     69   

SIGNATURES

     70   


Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF CONDITION

(Unaudited)

(In millions, except par value)

 

     As of  
       March 31, 2011          December 31, 2010    

ASSETS

     

Cash and due from banks

   $ 14       $ 5   

Deposits with other FHLBank

     2         2   

Federal funds sold

     16,663         15,701   

Trading securities (includes $0 and $37 pledged as collateral as of March 31, 2011 and December 31, 2010, respectively, that may be repledged and includes other FHLBank’s bond of $72 and $74 as of March 31, 2011 and December 31, 2010, respectively)

     3,300         3,383   

Available-for-sale securities

     3,466         3,319   

Held-to-maturity securities, net (fair value of $16,517 and $17,511 as of March 31, 2011 and December 31, 2010, respectively)

     16,445         17,474   

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

     1,915         2,039   

Advances, net

     81,257         89,258   

Accrued interest receivable

     357         388   

Premises and equipment, net

     34         35   

Derivative assets

     4         5   

Other assets

     176         189   
                 

TOTAL ASSETS

   $ 123,633       $ 131,798   
                 

LIABILITIES

     

Interest-bearing deposits

   $ 2,955       $ 3,093   

Consolidated obligations, net:

     

Discount notes

     15,700         23,915   

Bonds

     94,854         95,198   
                 

Total consolidated obligations, net

     110,554         119,113   
                 

Mandatorily redeemable capital stock

     531         529   

Accrued interest payable

     394         357   

Affordable Housing Program payable

     127         126   

Payable to REFCORP

     13         20   

Derivative liabilities

     391         455   

Other liabilities

     568         159   
                 

Total liabilities

     115,533         123,852   
                 

Commitments and contingencies (Note 13)

     

CAPITAL

     

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

     

Subclass B1 issued and outstanding shares: 15 as of March 31, 2011 and December 31, 2010

     1,483         1,466   

Subclass B2 issued and outstanding shares: 58 and 57 as of March 31, 2011 and December 31, 2010, respectively

     5,780         5,758   
                 

Total capital stock Class B putable

     7,263         7,224   

Retained earnings

     1,160         1,124   

Accumulated other comprehensive loss

     (323)         (402)   
                 

Total capital

     8,100         7,946   
                 

TOTAL LIABILITIES AND CAPITAL

   $ 123,633       $ 131,798   
                 

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

 

1


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF INCOME

(Unaudited)

(In millions)

 

     Three Months Ended March 31,  
                 2011                               2010               

INTEREST INCOME

     

Advances

   $ 73       $ 69   

Prepayment fees on advances, net

     2         3   

Interest-bearing deposits

     1         1   

Federal funds sold

     8         5   

Trading securities

     41         42   

Available-for-sale securities

     45         39   

Held-to-maturity securities

     113         172   

Mortgage loans held for portfolio

     26         32   
                 

Total interest income

     309         363   
                 

INTEREST EXPENSE

     

Consolidated obligations:

     

Discount notes

     7         3   

Bonds

     169         207   

Deposits

     1           

Mandatorily redeemable capital stock

     1           
                 

Total interest expense

     178         210   
                 

NET INTEREST INCOME

     131         153   
                 

OTHER INCOME (LOSS)

     

Total other-than-temporary impairment losses

     (25)         (64)   

Portion of impairment losses recognized in other comprehensive loss

     (27)         18   
                 

Net impairment losses recognized in earnings

     (52)         (46)   
                 

Net (losses) gains on trading securities

     (34)         4   

Net gains (losses) on derivatives and hedging activities

     46         (17)   

Other

     1           
                 

Total other loss

     (39)         (59)   
                 

OTHER EXPENSE

     

Compensation and benefits

     17         14   

Other operating expenses

     9         11   

Finance Agency

     3         2   

Office of Finance

     2         2   

Other

     (9)           
                 

Total other expense

     22         29   
                 

INCOME BEFORE ASSESSMENTS

     70         65   
                 

Affordable Housing Program

     6         5   

REFCORP

     13         12   
                 

Total assessments

     19         17   
                 

NET INCOME

   $ 51       $ 48   
                 

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 THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(Unaudited)

(In millions)

 

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

BALANCE, DECEMBER 31, 2009

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

Issuance of capital stock

             25                         25   

Repurchase/redemption of capital stock

             (4)                         (4)   

Net shares reclassified to mandatorily redeemable capital stock

     (3)         (293)                         (293)   

Comprehensive income:

              

Net income

                     48                 48   

Other comprehensive income

                             75         75   
                    

Total comprehensive income

                                     123   
                    

Cash dividends on capital stock

                     (5)                 (5)   
                                            

BALANCE, MARCH 31, 2010

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

BALANCE, DECEMBER 31, 2010

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

Issuance of capital stock

     1         41                         41   

Net shares reclassified to mandatorily redeemable capital stock

             (2)                         (2)   

Comprehensive income:

              

Net income

                     51                 51   

Other comprehensive income

                             79         79   
                    

Total comprehensive income

                                     130   
                    

Cash dividends on capital stock

                     (15)                 (15)   
                                            

BALANCE, MARCH 31, 2011

     73       $ 7,263       $ 1,160       $ (323)       $ 8,100   
                                            

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)

 

     Three Months Ended March 31,  
             2011                      2010          

OPERATING ACTIVITIES

     

Net income

   $ 51       $ 48   

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

     

Depreciation and amortization

     (4)         (34)   

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

     44         212   

Net change in fair value adjustment on trading securities

     34         (4)   

Net impairment losses recognized in earnings

     52         46   

Net change in:

     

Accrued interest receivable

     31         50   

Other assets

     15         (311)   

Affordable Housing Program payable

             2   

Accrued interest payable

     37         7   

Payable to REFCORP

     (7)         (7)   

Other liabilities

     (25)         5   
                 

Total adjustments

     177         (34)   
                 

Net cash provided by operating activities

     228         14   
                 

INVESTING ACTIVITIES

     

Net change in:

     

Interest-bearing deposits

     515         189   

Federal funds sold

     (962)         (5,187)   

Trading securities:

     

Proceeds from maturities

     50         200   

Available-for-sale securities:

     

Proceeds from maturities

     204         95   

Held-to-maturity securities:

     

Net change in short-term

     495         (355)   

Proceeds from maturities of long-term

     1,458         1,449   

Purchases of long-term

     (819)         (481)   

Advances:

     

Proceeds from principal collected

     19,070         19,278   

Made

     (11,733)         (10,203)   

Mortgage loans held for portfolio:

     

Proceeds from principal collected

     124         104   

Purchase of premise, equipment and software

             (3)   
                 

Net cash provided by investing activities

     8,402         5,086   
                 

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

 

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Table of Contents
     Three Months Ended March 31,  
             2011                      2010          

FINANCING ACTIVITIES

     

Net change in:

     

Deposits

     (158)         (64)   

Borrowings from other FHLBanks

             35   

Net payments from derivatives containing a financing element

     (137)         (201)   

Proceeds from issuance of consolidated obligations:

     

Discount notes

     258,901         231,354   

Bonds

     15,045         24,696   

Payments for debt issuance costs

     (4)         (6)   

Payments for maturing and retiring consolidated obligations:

     

Discount notes

     (267,115)         (230,667)   

Bonds

     (15,179)         (30,724)   

Proceeds from issuance of capital stock

     41         25   

Payments for repurchase/redemption of capital stock

             (4)   

Cash dividends paid

     (15)         (5)   
                 

Net cash used in financing activities

     (8,621)         (5,561)   
                 

Net increase (decrease) in cash and cash equivalents

     9         (461)   

Cash and cash equivalents at beginning of the period

     5         465   
                 

Cash and cash equivalents at end of the period

   $ 14       $ 4   
                 

Supplemental disclosures of cash flow information:

     

Cash paid for:

     

Interest

   $ 148       $ 209   
                 

AHP assessments, net

   $ 5       $ 3   
                 

REFCORP assessments

   $ 20       $ 19   
                 

Noncash investing and financing activities:

     

Net shares reclassified to mandatorily redeemable capital stock

   $ 2       $ 293   
                 

Held-to-maturity securities acquired with accrued liabilities

   $ 433       $ 84   
                 

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

   $ 302       $ 409   
                 

Transfers of mortgage loans to real estate owned

   $ 4       $ 10   
                 

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

Note 1—Basis of Presentation

The accompanying unaudited interim financial statements of the Federal Home Loan Bank of Atlanta (Bank) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). To prepare the financial statements in conformity with GAAP, management must make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could be different from these estimates. The foregoing interim financial statements are unaudited; however, in the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the results for the interim periods, have been included. The results of operations for interim periods are not necessarily indicative of results to be expected for the year ending December 31, 2011, or for other interim periods. The unaudited interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2010, which are contained in the Bank’s 2010 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 25, 2011 (Form 10-K).

A description of the Bank’s significant accounting policies is included in Note 1 to the 2010 audited financial statements contained in the Bank’s Form 10-K. There have been no material changes to these policies as of March 31, 2011.

Note 2—Recently Issued and Adopted Accounting Guidance

Recently Issued Accounting Guidance

Reconsideration of Effective Control for Repurchase Agreements. In April 2011, the Financial Accounting Standards Board (FASB) issued guidance to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The new guidance removes certain criteria from the assessment of effective control. This guidance is effective for the Bank for interim and annual periods beginning on January 1, 2012. This guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. Bank management does not believe that the adoption of this guidance will have a material effect on the Bank’s financial condition or results of operations.

A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. In April 2011, the FASB issued amended guidance to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring. The amended guidance clarifies whether (1) the creditor has granted a concession and (2) whether the debtor is experiencing financial difficulties, which are the two criteria used to determine whether a modification or restructuring is a troubled debt restructuring. For public entities, this guidance is effective for the first interim or annual period beginning on or after June 15, 2011 (July 1, 2011 for the Bank), and should be applied retrospectively to the beginning of the annual period of adoption. Bank management does not believe that the adoption of this guidance will have a material effect on the Bank’s financial condition or results of operations.

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Recently Adopted Accounting Guidance

Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. In July 2010, the FASB issued amended guidance to enhance disclosures about an entity’s allowance for credit losses and the credit quality of its financing receivables. The amended guidance requires entities with financing receivables, including loans, lease receivables and other long-term receivables, to provide additional disclosure related to the nature of credit risk inherent in financing receivables and how that risk is analyzed and assessed in arriving at the allowance for credit losses. The Bank fully adopted this guidance effective January 1, 2011, which resulted in enhanced disclosure, but had no effect on the Bank’s financial condition or results of operations.

Fair Value Measurements and Disclosures. In January 2010, the FASB issued guidance that requires new disclosures related to transfers in and out of Level 1 and 2 fair value hierarchy, and activity in Level 3 fair value hierarchy, and clarifies some existing disclosure requirements about fair value measurement. The Bank fully adopted this guidance effective January 1, 2011, which resulted in enhanced fair value disclosures, but had no effect on the Bank’s financial condition or results of operation.

Note 3—Trading Securities

Major Security Types. Trading securities were as follows:

 

                                               As of March 31, 2011      As of December 31, 2010  

Government-sponsored enterprises debt obligations

                     $ 3,225       $ 3,306   

Other FHLBank’s bond*

                       72         74   

State or local housing agency debt obligations

                       3         3   
                                   

Total

                     $ 3,300       $ 3,383   
                                   

 

* The Federal Home Loan Bank of Chicago is the primary obligor of this consolidated obligation bond.

Net unrealized and realized gains (losses) on trading securities were as follows:

 

                                                      Three Months Ended March 31,  
                                                              2011                      2010          

Net unrealized (losses) gains on trading securities held at period end

                        $ (33)       $ 5   

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

                          (1)         (1)   
                                      

Net (losses) gains on trading securities

                        $ (34)       $ 4   
                                      

At March 31, 2011 and December 31, 2010, 99.9 percent of the Bank’s fixed-rate trading securities were swapped to a variable rate and all of the Bank’s variable-rate trading securities were swapped to a different variable-rate index.

Note 4—Available-for-sale Securities

During the three-month periods ended March 31, 2011 and 2010, the Bank transferred certain private-label mortgage-backed securities (MBS) from its held-to-maturity portfolio to its available-for-sale portfolio. These securities represent private-label MBS in the Bank’s held-to-maturity portfolio for which

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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.

 

     2011      2010  
     Amortized
           Cost          
     Other-Than-
Temporary
Impairment
Recognized in
Accumulated
Other
Comprehensive
Loss
     Estimated
Fair Value
     Amortized
           Cost          
     Other-Than-
Temporary
Impairment
Recognized in
Accumulated
Other
Comprehensive
Loss
     Estimated
     Fair Value    
 

Transferred at March 31,

   $ 321       $ 19       $ 302       $ 467       $ 58       $ 409   
                                                     

Total

   $ 321       $ 19       $ 302       $ 467       $ 58       $ 409   
                                                     

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

 

     As of March 31, 2011  
     Amortized
          Cost          
     Other-Than-Temporary
Impairment

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

Mortgage-backed securities:

              

Private label

   $ 3,779       $ 319       $ 7       $ 1       $ 3,466   
                                            

Total

   $ 3,779       $ 319       $ 7       $ 1       $ 3,466   
                                            
     As of December 31, 2010  
     Amortized
Cost
     Other-Than-Temporary
Impairment

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

Mortgage-backed securities:

              

Private label

   $ 3,711       $ 396       $ 5       $ 1       $ 3,319   
                                            

Total

   $ 3,711       $ 396       $ 5       $ 1       $ 3,319   
                                            

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

     As of March 31, 2011  
     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

     1       $ 16       $ 1         43       $ 2,707       $ 319         44       $ 2,723       $ 320   
                                                                                

Total

     1       $ 16       $ 1         43       $ 2,707       $ 319         44       $ 2,723       $ 320   
                                                                                
     As of December 31, 2010  
     Less than 12 Months      12 Months or More      Total  
     Number of
Positions
     Fair
Value
     Gross
Unrealized
Losses
     Number of
Positions
     Fair
Value
     Gross
Unrealized
Losses
     Number of
Positions
     Fair
Value
     Gross
Unrealized
Losses
 

Mortgage-backed securities:

                          

Private label

     1       $ 17       $ 1         43       $ 2,976       $ 396         44       $ 2,993       $ 397   
                                                                                

Total

     1       $ 17       $ 1         43       $ 2,976       $ 396         44       $ 2,993       $ 397   
                                                                                

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

 

     As of March 31, 2011  
     Amortized
         Cost        
     Other-Than  Temporary
Impairment Recognized
in Other Accumulated
Comprehensive Loss
     Gross
Unrealized
        Gains        
     Gross
Unrealized
        Losses        
     Estimated
     Fair Value    
 

Bank of America Corporation, Charlotte, NC

   $ 2,237       $ 236       $ 2       $ 1       $ 2,002   
                                            

Total

   $ 2,237       $ 236       $ 2       $ 1       $ 2,002   
                                            
     As of December 31, 2010  
     Amortized
Cost
     Other-Than Temporary
Impairment Recognized
in Other Accumulated
Comprehensive Loss
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 

Bank of America Corporation, Charlotte, NC

   $ 2,128       $ 294       $ 1       $ 1       $ 1,834   
                                            

Total

   $ 2,128       $ 294       $ 1       $ 1       $ 1,834   
                                            

The amortized cost of the Bank’s MBS classified as available-for-sale includes net discounts of $13 and $11 as of March 31, 2011 and December 31, 2010, respectively.

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Note 5—Held-to-maturity Securities

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

 

     As of March 31, 2011      As of December 31, 2010  
     Amortized
     Cost    
     Gross
Unrealized
    Gains    
     Gross
Unrealized
    Losses    
     Estimated
  Fair  Value  
     Amortized
     Cost    
     Gross
Unrealized
    Gains    
     Gross
  Unrealized  
    Losses    
     Estimated
  Fair  Value  
 

Certificates of deposit

   $ 695       $       $       $ 695       $ 1,190       $       $       $ 1,190   

State or local housing agency debt obligations

     120         2                 122         108         3                 111   

Government-sponsored enterprises debt obligations

     776                         776         873                 3         870   

Mortgage-backed securities:

                       

U.S. agency obligations-guaranteed

     913         6                 919         960         9                 969   

Government-sponsored enterprises

     9,117         196         20         9,293         8,716         210         14         8,912   

Private label

     4,824         40         152         4,712         5,627         49         217         5,459   
                                                                       

Total

   $ 16,445       $ 244       $ 172       $ 16,517       $ 17,474       $ 271       $ 234       $ 17,511   
                                                                       

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

 

     As of March 31, 2011  
     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       $ 200       $               $       $         1       $ 200       $   

State or local housing agency debt obligations

     2         25                                         2         25           

Government-sponsored enterprises debt obligations

     3         376                                         3         376           

Mortgage-backed securities:

                          

U.S. agency obligations-guaranteed

     1         1                                         1         1           

Government-sponsored enterprises

     25         2,741         20                                 25         2,741         20   

Private label

     16         396         3         73         2,381         149         89         2,777         152   
                                                                                

Total

     48       $ 3,739       $ 23         73       $ 2,381       $ 149         121       $ 6,120       $ 172   
                                                                                
     As of December 31, 2010  
     Less than 12 Months      12 Months or More      Total  
     Number  of
Positions
     Fair
Value
     Gross
Unrealized
Losses
     Number  of
Positions
     Fair
Value
     Gross
Unrealized
Losses
     Number  of
Positions
     Fair
Value
     Gross
Unrealized
Losses
 

Certificates of deposit

     1       $ 125       $               $       $         1       $ 125       $   

State or local housing agency debt obligations

     1         7                                         1         7           

Government-sponsored enterprises debt obligations

     6         870         3                                 6         870         3   

Mortgage-backed securities:

                          

U.S. agency obligations-guaranteed

     1         173                                         1         173           

Government-sponsored enterprises

     25         2,833         14                                 25         2,833         14   

Private label

     16         475         4         80         2,883         213         96         3,358         217   
                                                                                

Total

     50       $ 4,483       $ 21         80       $ 2,883       $ 213         130       $ 7,366       $ 234   
                                                                                

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

    As of March 31, 2011     As of December 31, 2010  
    Amortized
        Cost       
    Gross
Unrealized
      Gains      
    Gross
Unrealized
      Losses      
    Estimated
  Fair  Value  
    Amortized
        Cost       
    Gross
Unrealized
      Gains      
    Gross
Unrealized
      Losses      
     Estimated
  Fair  Value  
 

Bank of America Corporation, Charlotte, NC

  $ 1,631      $ 12      $ 43      $ 1,600      $ 2,035      $ 17      $ 75       $ 1,977   
                                                                

Total

  $ 1,631      $ 12      $ 43      $ 1,600      $ 2,035      $ 17      $ 75       $ 1,977   
                                                                

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

 

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

Year of maturity:

           

Due in one year or less

   $ 700       $ 701       $ 1,191       $ 1,191   

Due after one year through five years

     889         890         978         978   

Due after 10 years

     2         2         2         2   
                                   
     1,591         1,593         2,171         2,171   

Mortgage-backed securities

     14,854         14,924         15,303         15,340   
                                   

Total

   $ 16,445       $ 16,517       $ 17,474       $ 17,511   
                                   

The amortized cost of the Bank’s mortgage-backed securities classified as held-to-maturity includes net discounts of $19 and $24 as of March 31, 2011 and December 31, 2010, 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 and Poor’s Ratings Services (S&P), at purchase date. The “AAA”-rated securities achieved their ratings through credit enhancement, over-collateralization and senior-subordinated shifting interest features; the latter results in subordination of payments by junior classes to ensure cash flows to the senior classes. The ratings on a significant number of the Bank’s private-label MBS have changed since their purchase date.

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Non-private-label MBS. The unrealized losses related to U.S. agency MBS and government-sponsored enterprises MBS are caused by interest rate changes and not credit quality. These securities are guaranteed by government agencies or government-sponsored enterprises and Bank management does not expect these securities to be settled at a price less than the amortized cost basis. In addition, the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity. The Bank does not consider these investments to be other-than-temporarily impaired as of March 31, 2011.

Private-label MBS. To assess whether the entire amortized cost bases of its private-label MBS will be recovered, the Bank performed a cash flow analysis for each of its private-label MBS. In performing the cash flow analysis for each of these securities, the Bank used two third-party models. The first model considers borrower characteristics and the particular attributes of the loans underlying the Bank’s securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas (CBSAs), which are based upon an assessment of the individual housing markets. The term CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the United States Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area of 10,000 or more people. The Bank’s housing price forecast assumed current-to-trough home price declines ranging from zero percent (for those housing markets that are believed to have reached their trough) to 10.0 percent. For those markets for which further home price declines are anticipated, such declines were projected to occur over the next three to nine months beginning January 1, 2011. From the trough, home prices were projected to recover using one of five different recovery paths that vary by housing market. Under those recovery paths, home prices were projected to increase within a range of zero percent to 2.80 percent in the first year, zero percent to 3.00 percent in the second year, 1.50 percent to 4.00 percent in the third year, 2.00 percent to 5.00 percent in the fourth year, 2.00 percent to 6.00 percent in each of the fifth and sixth years, and 2.30 percent to 5.60 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, were then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. The model classifies securities, as noted in the below table, based on current characteristics and performance, which may be different from the securities’ classification as determined by the originator at the time of origination.

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

The following table represents a summary of the significant inputs used to measure the amount of the credit loss recognized in earnings for those securities for which an other-than-temporary impairment was determined to have occurred during the three-month period ended March 31, 2011 (that is, a determination was made that less than all of the entire amortized cost bases will likely be recovered):

 

     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:

                       

2006

     8.67         6.86 to   9.65         23.51         16.13 to 38.28         44.33         42.55 to 47.41         4.96         2.74 to   6.40   

2005

     8.98         5.52 to 10.65         29.79         16.58 to 42.41         36.06         32.32 to 38.72         7.91         4.82 to 10.09   

2004

     11.44         10.93 to 11.73         28.09         27.06 to 29.97         34.01         33.74 to 34.15         9.06         8.95 to   9.27   

Total Prime

     9.37         5.52 to 11.73         27.30         16.13 to 42.41         38.48         32.32 to 47.41         7.13         2.74 to 10.09   

Alt-A:

                       

2007

     10.13         7.59 to 13.25         56.99         50.19 to 64.17         51.66         48.83 to 52.94         9.23         3.95 to 11.71   

2006

     10.32         9.29 to 11.44         55.60         49.87 to 59.49         51.26         46.18 to 57.44         7.11         5.60 to   8.27   

2005

     9.04         6.54 to 12.01         54.61         26.23 to 80.14         50.13         43.29 to 55.81         16.07         3.45 to 43.06   

Total Alt-A

     9.71         6.54 to 13.25         55.72         26.23 to 80.14         50.94         43.29 to 57.44         11.73         3.45 to 43.06   

Total

     9.60         5.52 to 13.25         46.63         16.13 to 80.14         46.95         32.32 to 57.44         10.26         2.74 to 43.06   

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

 

     Three Months Ended
March 31,
 
         2011              2010      

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

   $ 464       $ 321   

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

     6         3   

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

     46         43   
                 

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

   $ 516       $ 367   
                 

Certain other private-label MBS that have not been designated as other-than-temporarily impaired have experienced unrealized losses and decreases in fair value due to interest rate volatility, illiquidity in the marketplace, and general disruption in the U.S. mortgage markets. These declines in fair value are considered temporary as the Bank expects to recover the amortized cost 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.

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Note 7—Advances

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

 

     As of March 31, 2011      As of December 31, 2010  

Year of contractual maturity:

     

Overdrawn demand deposit accounts

   $       $ 1   

Due in one year or less

     23,157         26,628   

Due after one year through two years

     15,162         16,186   

Due after two years through three years

     9,435         10,938   

Due after three years through four years

     6,000         6,369   

Due after four years through five years

     3,256         3,678   

Due after five years

     20,705         21,251   
                 

Total par value

     77,715         85,051   

Discount on AHP* advances

     (13)         (13)   

Discount on EDGE** advances

     (11)         (11)   

Hedging adjustments

     3,572         4,238   

Deferred commitment fees

     (6)         (7)   
                 

Total

   $ 81,257       $ 89,258   
                 

 

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

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

 

     As of March 31, 2011      As of December 31, 2010  

Year of contractual maturity or next conversion date:

     

Overdrawn demand deposit accounts

   $       $ 1   

Due or convertible in one year or less

     30,903         36,487   

Due or convertible after one year through two years

     14,858         14,302   

Due or convertible after two years through three years

     9,849         11,374   

Due or convertible after three years through four years

     5,473         6,065   

Due or convertible after four years through five years

     2,721         3,023   

Due or convertible after five years

     13,911         13,799   
                 

Total par value

   $ 77,715       $ 85,051   
                 

 

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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 interest-rate payment terms for advances:

 

                            As of March 31, 2011     As of December 31, 2010  

Fixed-rate:

           

Due in one year or less

          $ 20,174      $ 24,033   

Due after one year

            47,871        50,907   
                       

Total fixed-rate

            68,045        74,940   
                       

Variable-rate:

           

Due in one year or less

            2,983        2,596   

Due after one year

            6,687        7,515   
                       

Total variable-rate

            9,670        10,111   
                       

Total par value

          $ 77,715      $ 85,051   
                       

At March 31, 2011 and December 31, 2010, 89.9 percent and 87.4 percent, respectively, of the Bank’s fixed-rate advances were swapped and 6.93 percent and 9.42 percent, respectively, of the Bank’s variable-rate advances were swapped.

Based on the collateral pledged as security for advances, management’s credit analysis of members’ financial condition, and prior repayment history, no allowance for credit losses on advances was deemed necessary by management as of March 31, 2011 and December 31, 2010. No advance was past due as of March 31, 2011 and December 31, 2010.

The Bank’s potential credit risk from advances is concentrated in commercial banks, savings institutions and credit unions and further is concentrated in certain larger borrowing relationships. As of March 31, 2011 and December 31, 2010, the concentration of the Bank’s advances was $51,949 and $58,043, respectively, to 10 member institutions, and this represented 66.9 percent and 68.3 percent, respectively, of total advances outstanding.

Note 8—Consolidated Obligations

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

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

 

                                                            As of March 31, 2011                   As of December 31, 2010         

Fixed-rate

                        $ 72,675       $ 73,779   

Simple variable-rate

                          12,532         12,432   

Step up/down

                          8,551         7,686   

Variable-rate capped floater

                          30         30   
                                      

Total par value

                        $ 93,788       $ 93,927   
                                      

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

At March 31, 2011 and December 31, 2010, 79.2 percent and 77.3 percent, respectively, of the Bank’s fixed-rate consolidated obligation bonds were swapped and 1.03 percent and 0.24 percent, respectively, of the Bank’s variable-rate consolidated obligation bonds were swapped.

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

 

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

Year of contractual maturity:

     

Due in one year or less

   $ 44,883         0.70       $ 46,987         0.76   

Due after one year through two years

     15,904         1.82         13,751         1.50   

Due after two years through three years

     11,482         2.62         14,097         2.63   

Due after three years through four years

     5,308         3.45         4,378         3.70   

Due after four years through five years

     5,776         1.84         4,660         1.89   

Due after five years

     10,435         4.09         10,054         4.19   
                       

Total par value

     93,788         1.73         93,927         1.70   

Premiums

     121            127      

Discounts

     (45)            (48)      

Hedging adjustments

     990            1,192      
                       

Total

   $ 94,854          $ 95,198      
                       

The Bank’s consolidated obligation bonds outstanding by type:

 

                 As of March 31,  2011                          As of December 31, 2010           

Noncallable

   $ 70,334       $ 69,248   

Callable

     23,454         24,679   
                 

Total par value

   $ 93,788       $ 93,927   
                 

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

 

     As of March 31, 2011      As of December 31, 2010  

Year of contractual maturity or next call date:

     

Due or callable in one year or less

   $ 64,716       $ 61,505   

Due or callable after one year through two years

     11,532         11,329   

Due or callable after two years through three years

     7,077         10,477   

Due or callable after three years through four years

     2,825         2,685   

Due or callable after four years through five years

     908         1,062   

Due or callable after five years

     6,730         6,869   
                 

Total par value

   $ 93,788       $ 93,927   
                 

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Consolidated Obligation Discount Notes. Consolidated obligation discount notes are issued to raise short-term funds. Consolidated obligation discount notes are consolidated obligations with contractual maturities of up to one year. These consolidated obligation discount notes are issued at less than their face amounts and redeemed at par value when they mature.

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

 

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

As of March 31, 2011

   $ 15,700       $ 15,702         0.13   
                          

As of December 31, 2010

   $ 23,915       $ 23,919         0.14   
                          

At March 31, 2011 and December 31, 2010, 8.24 percent and 5.41 percent, respectively, of the Bank’s fixed-rate consolidated obligation discount notes were swapped to a variable rate.

Note 9—Capital and Mandatorily Redeemable Capital Stock

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

 

     As of March 31, 2011      As of December 31, 2010  
         Required              Actual              Required              Actual      

Regulatory capital requirements:

           

Risk based capital

   $ 2,279       $ 8,954       $ 2,377       $ 8,877   

Total capital-to-assets ratio

     4.00%         7.24%         4.00%         6.74%   

Total regulatory capital*

   $ 4,945       $ 8,954       $ 5,272       $ 8,877   

Leverage ratio

     5.00%         10.86%         5.00%         10.10%   

Leverage capital

   $ 6,182       $ 13,431       $ 6,590       $ 13,316   

 

* Mandatorily redeemable capital stock is considered capital for regulatory purposes, and “total regulatory capital” includes the Bank’s $531 and $529 in mandatorily redeemable capital stock at March 31, 2011 and December 31, 2010, respectively.

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

 

     Three Months Ended March 31,  
             2011                      2010          

Balance, beginning of period

   $ 529       $ 188   

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

     

Attainment of nonmember status

     4         293   

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

     (2)           
                 

Balance, end of period

   $ 531       $ 481   
                 

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

                                               As of March 31, 2011      As of December 31, 2010  

Contractual year of redemption:

                       

Due in one year or less

                     $ 8       $   

Due after one year through two years

                       3         8   

Due after two years through three years

                       15         12   

Due after three years through four years

                       375         137   

Due after four years through five years

                       126         366   

Due after five years

                       4         6   
                                   

Total

                     $ 531       $ 529   
                                   

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

Note 10—Accumulated Other Comprehensive Loss

Components comprising other comprehensive income were as follows:

 

                                 Three Months Ended March 31,  
                                 2011      2010  

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

                 

Change in unrealized losses on available-for-sale securities

               $ 49       $ 93   

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

                 47         40   
                             

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

                 96         133   
                             

Change in unrealized gains on available-for-sale securities

                 2           

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

                 (19)         (58)   
                             

Other comprehensive income

               $ 79       $ 75   
                             

Components comprising accumulated other comprehensive loss were as follows:

 

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

Balance, December 31, 2010

            $ (10)       $ 4       $ (396)       $       $                 (402)   

Net change during the period

                      2         96         (19)         79   

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

                              (19)         19           
                                                     

Balance, March 31, 2011

            $ (10)       $ 6       $ (319)       $       $ (323)   
                                                     

The amount shown in the above table as the noncredit portion of other-than-temporary impairment losses does not correspond directly 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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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 its otherwise unhedged assets and funding positions, to achieve the Bank’s risk management objectives, and to act as an intermediary between its members and counterparties. Finance Agency regulations and the Bank’s risk management policy prohibit trading in or the speculative use of these derivative instruments and limit credit risk arising from these instruments. The use of derivatives is an integral part of the Bank’s financial management strategy.

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

protect the value of existing asset or liability positions;

 

   

manage embedded options in assets and liabilities; and

 

   

achieve overall asset/liability management objectives.

Application of Derivatives

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

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

Types of Derivatives

The Bank may use the following derivatives to reduce funding costs and to manage its exposure to interest-rate risks inherent in the normal course of business.

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

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

Interest-Rate Cap and Floor Agreements. In an interest-rate cap agreement, a cash flow is generated if the price or rate of an underlying variable rises above a certain threshold (or cap) price. In an interest-rate floor agreement, a cash flow is generated if the price or rate of an underlying variable falls below a certain threshold (or floor) price. Caps may be used in conjunction with liabilities and floors may be used in conjunction with assets. Caps and floors are designed as protection against the interest rate on a variable-rate asset or liability rising above or falling below a certain level.

Types of Hedged Items

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

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

Mortgage Assets. The Bank has invested in mortgage assets. The prepayment options embedded in mortgage assets may result in extensions or contractions in the expected repayment of these investments, depending on changes in estimated prepayment speeds. The Bank manages the interest-rate and prepayment risk associated with mortgages through a combination of debt issuance and derivatives. The Bank issues both callable and noncallable debt to achieve cash flow patterns and liability durations similar to those expected on the mortgage loans. The Bank may use derivatives to match the expected prepayment characteristics of the mortgages.

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

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

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

The Bank also may manage the risk arising from changing market prices and volatility of investment securities classified as trading by entering into derivatives (non-qualifying hedges) that offset the changes in fair value of the securities.

Managing Credit Risk on Derivatives

The Bank is subject to credit risk due to nonperformance by counterparties to the derivative agreements. The amount of counterparty risk depends on the extent to which master netting arrangements are included in such contracts to mitigate the risk. The Bank manages counterparty credit risk through credit analysis, collateral requirements and adherence to the requirements set forth in Bank policies and Finance Agency regulations. Based on credit analyses and collateral requirements, Bank management presently does not anticipate any credit losses on its existing derivative agreements with counterparties as of March 31, 2011.

The following table presents credit risk exposure on derivative instruments, excluding circumstances where a counterparty’s pledged collateral to the Bank exceeds the Bank’s net position.

 

     As of March 31, 2011      As of December 31, 2010  

Total net exposure at fair value *

   $ 50       $ 71   

Cash collateral held

     46         66   
                 

Net positive exposure after cash collateral

     4         5   

Other collateral

     4         5   
                 

Net exposure after collateral

   $       $   
                 

 

* Includes net accrued interest receivable of $10 and $22 as of March 31, 2011 and December 31, 2010, respectively.

Certain of the Bank’s derivative instruments contain provisions that require the Bank to post additional collateral with its counterparties if there is deterioration in the Bank’s credit rating. If the Bank’s credit rating is lowered by a major credit rating agency, the Bank would be required to deliver additional collateral on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position (before cash collateral and related accrued interest) at March 31, 2011 was $2,971 for which the Bank has posted

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

collateral of $2,580 in the normal course of business. If the Bank’s credit ratings had been lowered from its current rating to the next lower rating that would have triggered additional collateral to be delivered, the Bank would have been required to deliver up to an additional $210 of collateral (at fair value) to its derivative counterparties at March 31, 2011. However, the Bank’s credit rating has not changed during the three-month period ended March 31, 2011.

The Bank transacts most of its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell and distribute consolidated obligations. The Bank is not a derivatives dealer and thus does not trade derivatives for short-term profit.

Financial Statement Effect and Additional Financial Information

Derivative Notional Amounts. The notional amount of derivatives serves as a factor in determining periodic interest payments or cash flows received and paid. However, the notional amount of derivatives represents neither the actual amounts exchanged nor the overall exposure of the Bank to credit and market risk. The risks of derivatives can be measured meaningfully on a portfolio basis that takes into account the derivatives, the item being hedged and any offsets between the two.

The following table summarizes the fair value of derivative instruments. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest.

 

       As of March 31, 2011        As of December 31, 2010  
       Notional
Amount of
Derivatives
       Derivative
Assets
       Derivative
Liabilities
       Notional
Amount of
Derivatives
       Derivative
Assets
     Derivative
Liabilities
 

Derivatives in hedging relationships:

                           

Interest rate swaps

     $     125,527         $     1,310         $     (3,807)         $     126,484         $ 1,466       $     (4,460)   
                                                               

Total derivatives in hedging relationships

       125,527           1,310           (3,807)           126,484           1,466         (4,460)   
                                                               

Derivatives not designated as hedging instruments:

                           

Interest rate swaps

       6,813           23           (471)           7,725           26         (526)   

Interest rate caps or floors

       10,500           72           (49)           8,000           53         (38)   
                                                               

Total derivatives not designated as hedging instruments

       17,313           95           (520)           15,725           79         (564)   
                                                               

Total derivatives before netting and collateral adjustments

     $ 142,840           1,405           (4,327)         $ 142,209           1,545         (5,024)   
                                                               

Netting adjustments

            (1,355)           1,355                (1,473)         1,473   

Cash collateral and related accrued interest

            (46)           2,581                (67)         3,096   
                                                   

Total collateral and netting adjustments *

            (1,401)           3,936                (1,540)         4,569   
                                                   

Derivative assets and derivative liabilities

          $ 4         $ (391)              $ 5       $ (455)   
                                                   

 

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

 

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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 gains (losses) on derivatives and hedging activities as presented in the Statements of Income:

 

                          Three Months Ended March 31,  
                          2011      2010  
                          Amount of Gain (Loss)
Recognized in Net Gains (Losses)
on Derivatives and Hedging
Activities
     Amount of Gain (Loss)
Recognized in Net Gains (Losses)
on Derivatives and Hedging
Activities
 

Derivatives and hedged items in
fair value hedging
relationships:

              

Interest rate swaps

            $                     38       $                     46   
                          

Total net gain related to fair
value hedge ineffectiveness

              38         46   
                          

Derivatives not designated as
hedging instruments:

              

Non-qualifying hedges:

              

Interest rate swaps

              42         (21)   

Interest rate caps or floors

              3         (2)   

Net interest settlements

              (37)         (40)   
                          

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

              8         (63)   
                          

Net gains (losses) on derivatives
and hedging activities

            $ 46       $ (17)   
                          

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

 

     Three Months Ended March 31, 2011  
     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

   $             652       $             (605)       $             47       $             (590)   

Consolidated obligations:

           

Bonds

     (200)         191         (9)         216   

Discount notes

     (1)         1                 1   
                                   

Total

   $ 451       $ (413)       $ 38       $ (373)   
                                   

 

* 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)

 

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

Hedged item type:

           

Advances

   $                     40       $                     23       $                     63       $                     (891)   

Consolidated obligations:

           

Bonds

     82         (96)         (14)         376   

Discount notes

     (7)         4         (3)         7   
                                   

Total

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

 

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

Note 12—Estimated Fair Values

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

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

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

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. As of March 31, 2011, the Bank did not carry any financial assets or liabilities at fair value hierarchy Level 1.

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. As of March 31, 2011, the types of financial assets and liabilities the Bank carried at fair value hierarchy Level 2 included trading securities and derivatives.

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are supported by little or no market activity and reflect the entity’s own assumptions. As of March 31, 2011, the Bank carried available-for-sale securities at fair value hierarchy Level 3.

The Bank utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

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

 

     As of March 31, 2011  
     Fair Value Measurements Using      Netting
Adjustment*
        
         Level 1              Level 2              Level 3                 Total      

Assets

              

Trading securities:

              

Government-sponsored enterprises debt obligations

   $       $ 3,225       $       $       $ 3,225   

Other FHLBank’s bond

             72                         72   

State or local housing agency debt obligations

             3                         3   
                                            

Total trading securities

             3,300                         3,300   
                                            

Available-for-sale securities:

              

Private-label MBS

                     3,466                 3,466   

Derivative assets:

              

Interest-rate related

             1,405                 (1,401)         4   
                                            

Total assets at fair value

   $       $ 4,705       $ 3,466       $ (1,401)       $ 6,770   
                                            

Liabilities

              

Derivative liabilities:

              

Interest-rate related

   $       $ (4,327)       $       $ 3,936       $ (391)   
                                            

Total liabilities at fair value

   $       $ (4,327)       $       $ 3,936       $ (391)   
                                            

 

* Amounts represent the effect of legally enforceable master netting agreements that allow the Bank to settle positive and negative and also cash collateral 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)

 

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

Assets

             

Trading securities:

             

Government-sponsored enterprises debt obligations

   $       $ 3,306       $       $      $ 3,306   

Other FHLBank’s bond

             74                        74   

State or local housing agency debt obligations

             3                        3   
                                           

Total trading securities

             3,383                        3,383   
                                           

Available-for-sale securities:

             

Private-label MBS

                     3,319                3,319   

Derivative assets:

             

Interest-rate related

             1,545                 (1,540     5   
                                           

Total assets at fair value

   $       $ 4,928       $ 3,319       $ (1,540   $ 6,707   
                                           

Liabilities

             

Derivative liabilities:

             

Interest-rate related

   $       $ 5,024       $       $ (4,569   $ 455   
                                           

Total liabilities at fair value

   $       $ 5,024       $       $ (4,569   $ 455   
                                           

 

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

For financial instruments carried at fair value, the Bank reviews the fair value hierarchy classification of financial assets and liabilities on a quarterly basis. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out at fair value as of the beginning of the quarter in which the changes occur. There were no such transfers during the three-month period ended March 31, 2011.

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

 

     Three Months Ended March 31,  
             2011                      2010          

Balance, beginning of period

   $ 3,319       $ 2,256   

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

     302         409   

Total (losses) gains realized and unrealized:*

     

Included in net impairment losses recognized in earnings

     (47)         (43)   

Included in other comprehensive loss

     96         133   

Settlements

     (204)         (95)   
                 

Balance, end of period

   $ 3,466       $ 2,660   
                 

 

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

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

Cash and Due from Banks and Deposits with Other FHLBank. The estimated fair value approximates the recorded carrying value.

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

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

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

As of March 31, 2011, four third-party vendor prices were received for substantially all of the Bank’s investment securities and substantially all of those prices fell within the specified thresholds. The relative proximity of the prices received supports the Bank’s conclusion that the final estimated fair values are reasonable. Based on the current lack of significant market activity for private-label MBS, the fair value measurements for such securities as of March 31, 2011 and December 31, 2010 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.

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

Advances. The Bank determines the estimated fair values of advances by calculating the present value of expected future cash flows from the advances and excluding the amount of the accrued interest receivable. The discount rates used in these calculations are the replacement advance rates based on the market observable LIBOR curve for advances with similar terms as of March 31, 2011 and December 31, 2010, respectively. In accordance with the advances regulations, advances with a maturity or repricing period greater than six months require a prepayment fee sufficient to make the Bank financially indifferent to the borrower’s decision to prepay the advances, thereby removing prepayment risk from the fair value calculation.

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

Derivative Assets and Liabilities. The Bank calculates the fair value of derivatives using a present value of future cash flows discounted by a market observable rate, predominately LIBOR.

Derivative instruments are transacted primarily in the institutional dealer market and priced with observable market assumptions at a mid-market valuation point. The Bank does not provide a credit valuation adjustment based on aggregate exposure by derivative counterparty when measuring the fair value of its derivatives. This is because the collateral provisions pertaining to the Bank’s derivatives obviate the need to provide such a credit valuation adjustment. The fair values of the Bank’s derivatives take into consideration the effects of legally enforceable master netting agreements that allow the Bank to settle positive and negative positions and offset cash collateral with the same counterparty on a net basis. The Bank and each derivative counterparty have bilateral collateral thresholds that take into account both the Bank’s and the counterparty’s credit ratings. As a result of these practices and agreements, the Bank has concluded that the impact of the credit differential between the Bank and its derivative counterparties was mitigated to an immaterial level and no further adjustments were deemed necessary to the recorded fair values of derivative assets and liabilities on the Statements of Condition at March 31, 2011 and December 31, 2010.

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

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

Mandatorily Redeemable Capital Stock. The fair value of mandatorily redeemable capital stock is par value, including estimated dividends earned at the time of reclassification from equity to liabilities, until such amount is paid. Capital stock can be acquired by members only at par value and redeemed by the Bank at par value. Capital stock is not traded and no market mechanism exists for the exchange of capital stock outside the cooperative structure.

The following estimated fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank at March 31, 2011 and December 31, 2010. Although the Bank uses its best judgment in estimating the fair values of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology.

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 March 31, 2011      As of December 31, 2010  
     Carrying
Value
     Estimated
Fair  Value
     Carrying
Value
     Estimated
Fair  Value
 

Financial Instruments

           

Assets:

           

Cash and due from banks

   $ 14       $ 14       $ 5       $ 5   

Deposits with other FHLBank

     2         2         2         2   

Federal funds sold

     16,663         16,663         15,701         15,701   

Trading securities

     3,300         3,300         3,383         3,383   

Available-for-sale securities

     3,466         3,466         3,319         3,319   

Held-to-maturity securities

     16,445         16,517         17,474         17,511   

Mortgage loans held for portfolio, net

     1,915         2,058         2,039         2,189   

Advances, net

     81,257         81,423         89,258         89,330   

Accrued interest receivable

     357         357         388         388   

Derivative assets

     4         4         5         5   

Liabilities:

           

Interest-bearing deposits

     (2,955)         (2,955)         (3,093)         (3,093)   

Consolidated obligations, net:

           

Discount notes

     (15,700)         (15,700)         (23,915)         (23,916)   

Bonds

     (94,854)         (95,609)         (95,198)         (95,993)   

Mandatorily redeemable capital stock

     (531)         (531)         (529)         (529)   

Accrued interest payable

     (394)         (394)         (357)         (357)   

Derivative liabilities

     (391)         (391)         (455)         (455)   

Note 13—Commitments and Contingencies

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

The par value of the FHLBanks’ outstanding consolidated obligations for which the Bank is jointly and severally liable was $656,491 and $678,528 at March 31, 2011 and December 31, 2010, respectively, exclusive of the Bank’s own outstanding consolidated obligations.

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

 

     As of March 31, 2011     As of December 31, 2010  

Outstanding notional

   $ 20,509      $ 22,333   

Original terms

     Less than nine months to 20 years     Less than two months to 20 years

Final expiration year

     2030        2030   

 

* The Bank has issued a standby letter of credit for $3 and less than $1 as of March 31, 2011 and December 31, 2010, respectively, that has no stated maturity date and is subject to renewal on an annual basis.

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

The value of the guarantees related to standby letters of credit is recorded in other liabilities and amounted to $85 and $92 as of March 31, 2011 and December 31, 2010, respectively. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to record any additional liability on these commitments.

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

The Bank did not have any commitments that unconditionally obligate the Bank to purchase closed mortgage loans as of March 31, 2011 and December 31, 2010. Commitments are generally for periods not to exceed 45 days. Such commitments are recorded as derivatives at their fair values.

The Bank executes derivatives with major banks and broker-dealers and generally enters into bilateral collateral agreements. As of March 31, 2011 and December 31, 2010, the Bank had pledged, as collateral to broker-dealers who have market risk exposure from the Bank related to derivatives, securities with a carrying value of $0 and $37, respectively, which can be sold or repledged by those counterparties.

At March 31, 2011, the Bank had committed to the issuance of $1,419 (par value) in consolidated obligation bonds, of which $1,415 were hedged with associated interest rate swaps, and $170 (par value) in consolidated obligation discount notes, none of which were hedged with associated interest rate swaps, that had traded but not yet settled. At December 31, 2010, the Bank had committed to the issuance of $118 (par value) in consolidated obligation bonds, of which $115 were hedged with associated interest rate swaps that had traded but not yet settled.

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

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

The Bank is a cooperative whose member institutions own almost all of the capital stock of the Bank. Former members own the remaining capital stock to support business transactions still carried on the Bank’s Statements of Condition. All holders of the Bank’s capital stock 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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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, N.A., which held 22.0 percent of the Bank’s total regulatory capital stock as of March 31, 2011, was considered a related party. Total advances outstanding to Bank of America, N.A. were $21,740 and $25,040 as of March 31, 2011 and December 31, 2010, respectively. Total deposits held in the name of Bank of America, N.A. were less than $1 at March 31, 2011 and December 31, 2010. No mortgage loans or mortgage-backed securities were acquired from Bank of America, N.A. during the three-month period ended March 31, 2011.

Note 15—Subsequent Events

On April 8, 2011, the Bank repurchased $499 of subclass B1 membership and B2 activity-based excess capital stock based on the shareholders’ total capital stock as of March 31, 2011.

 

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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; and

 

   

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

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

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

The discussion presented below provides an analysis of the Bank’s results of operations and financial condition for the quarters ended March 31, 2011 and 2010. 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, 2010.

 

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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 March 31, 2011, total assets were $123.6 billion, a decrease of $8.2 billion, or 6.20 percent, from December 31, 2010. This decrease was due primarily to a $8.0 billion, or 8.96 percent, decrease in advances. Advances, the largest asset on the Bank’s balance sheet, decreased during the period due primarily to maturing advances and decreased demand for new advances resulting from members’ significant deposit balances and slow loan growth.

As of March 31, 2011, total liabilities were $115.5 billion, a decrease of $8.3 billion, or 6.72 percent, from December 31, 2010. This decrease was due primarily to a $8.6 billion decrease in COs. The decrease in COs corresponds to the decrease in demand for advances by the Bank’s members during the period.

As of March 31, 2011, total capital was $8.1 billion, an increase of $154 million, or 1.94 percent, from December 31, 2010. This increase was due primarily to a $79 million decrease in accumulated other comprehensive loss and the recording of $51 million in net income during the first quarter of 2011, partially offset by the payment of $15 million in dividends. The decrease in accumulated other comprehensive loss was due primarily to improvements in the fair value of the Bank’s securities classified as available-for-sale.

Results of Operations

The Bank recorded net income of $51 million for the first quarter of 2011, an increase of $3 million from net income of $48 million for the first quarter of 2010. The increase in net income was due primarily to a $20 million decrease in other loss and a $7 million decrease in other expense, partially offset by a $22 million decrease in net interest income.

One way in which the Bank analyzes its performance is by comparing its annualized return on equity (ROE) to three-month average LIBOR. The Bank’s ROE was 2.56 percent for the first quarter of 2011, compared to 2.36 percent for the first quarter of 2010. This increase in ROE was due primarily to a $271 million decrease in average total capital during the first quarter of 2011 compared to the first quarter of 2010. ROE spread to three-month average LIBOR increased to 2.25 percent for the first quarter of 2011

 

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compared to 2.10 percent for the first quarter of 2010. This increase was due primarily to a 20 basis point increase in ROE compared to a five basis point increase in LIBOR during the period.

The Bank’s interest rate spread was unchanged at 36 basis points for the first quarters of 2011 and 2010 as a result of interest rates on interest-earning assets and interest-bearing liabilities remaining relatively stable during the periods.

Business Outlook

Advance demand continued to decrease during the first quarter of 2011 as a result of scheduled repayments, prepayments by large borrowers and as a result of member closures, and members’ significant deposit holdings and slow loan growth. The Bank expects this trend to continue for the near future.

The credit related portion of other-than-temporary impairment losses recognized in earnings was higher for the first quarter of 2011 than for the first quarter of 2010, reflecting the continued unevenness of the housing market. However, the Bank continues to see some improvement in fair market values for some of its private-label MBS. For further discussion, see “Risk Management — Credit Risk — Private-label MBS” herein.

The Bank continues to maintain a conservative capital and financial management approach that will protect members’ investment in the Bank and position the Bank for future growth. The board of directors remains focused on supporting repurchases of excess capital stock and payments of dividends.

Selected Financial Data

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

 

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

Statements of Condition (at period end)

          

Total assets

   $     123,633      $     131,798      $     141,492      $     140,591      $     146,281   

Investments (1)

     39,876        39,879        39,126        37,399        37,337   

Mortgage loans held for portfolio

     1,916        2,040        2,195        2,314        2,419   

Allowance for credit losses on mortgage loans

     (1     (1     (1     (1     (1

Advances, net

     81,257        89,258        99,425        100,087        105,474   

Interest-bearing deposits

     2,955        3,093        6,201        3,171        2,941   

Consolidated obligations, net:

          

Discount notes

     15,700        23,915        27,599        16,519        17,778   

Bonds

     94,854        95,198        97,942        110,949        115,492   

Total consolidated obligations, net (2)

     110,554        119,113        125,541        127,468        133,270   

Mandatorily redeemable capital stock

     531        529        492        508        481   

Affordable Housing Program payable

     127        126        127        127        128   

Payable to REFCORP

     13        20        19        19        14   

Capital stock - putable

     7,263        7,224        7,480        7,856        7,852   

Retained earnings

     1,160        1,124        1,051        985        916   

Accumulated other comprehensive loss

     (323     (402     (451     (612     (669

Total capital

     8,100        7,946        8,080        8,229        8,099   

 

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

Statements of Income (for the period ended)

                   

Net interest income

              131        131        138        136        153   

Net impairment losses recognized in earnings

              (52     (11     (14     (72     (46

Net (losses) gains on trading securities

              (34     (87     38        76        4   

Net gains (losses) on derivatives and hedging activities

              46        113        (30     (58     (17

Other income (3)

              1        1        1        1          

Other expenses (4)

              22        37        32        (19     29   

Income before assessments

              70        110        101        102        65   

Assessments

              19        29        27        27        17   

Net income

              51        81        74        75        48   

Performance Ratios (%)

                   

Return on equity (5)

              2.56        3.99        3.71        3.64        2.36   

Return on assets (6)

              0.16        0.23        0.21        0.20        0.13   

Net interest margin (7)

              0.41        0.38        0.39        0.38        0.41   

Regulatory capital ratio (at period end) (8)

              7.24        6.74        6.38        6.65        6.32   

Equity to assets ratio (9)

              6.21        5.84        5.65        5.63        5.43   

Dividend payout ratio (10)

              28.74        9.23        11.51        6.97        11.47   

 

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

 

March 31, 2011

   $ 656,491      

December 31, 2010

     678,528      

September 30, 2010

     682,238      

June 30, 2010

     720,545      

March 31, 2010

     739,010      

 

(3) Other income includes service fees and other.
(4) For the three months ended September 30, 2010 and June 30, 2010, amount includes $2 million and $49 million, respectively, 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.
(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 of debt securities in the form of consolidated obligations by the Office of Finance on the Bank’s behalf.

The following table presents the distribution of the Bank’s total assets, liabilities, and capital by major class as of the dates indicated (dollars in millions). These items are discussed in more detail below.

 

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

Advances, net

   $ 81,257         65.73       $ 89,258         67.72       $ (8,001)         (8.96)   

Long-term investments

     22,516         18.21         22,986         17.44         (470)         (2.04)   

Short-term investments

     17,360         14.04         16,893         12.82         467         2.76   

Mortgage loans, net

     1,915         1.55         2,039         1.55         (124)         (6.07)   

Other assets

     585        0.47         622         0.47         (37)         (6.17)   
                                               

Total assets

   $ 123,633         100.00       $ 131,798         100.00       $ (8,165)         (6.20)   
                                               

Consolidated obligations, net:

                 

Discount notes

   $ 15,700         13.59       $ 23,915         19.31       $ (8,215)         (34.35)   

Bonds

     94,854         82.10         95,198         76.86         (344)         (0.36)   

Deposits

     2,955         2.56         3,093         2.50         (138)         (4.44)   

Other liabilities

     2,024        1.75         1,646         1.33         378         22.87   
                                               

Total liabilities

   $ 115,533         100.00       $ 123,852         100.00       $ (8,319)         (6.72)   
                                               

Capital stock

   $ 7,263         89.67       $ 7,224         90.92       $ 39         0.54   

Retained earnings

     1,160         14.32         1,124         14.14         36         3.21   

Accumulated other comprehensive loss

     (323)        (3.99)         (402)         (5.06)         79         19.68   
                                               

Total capital

   $ 8,100         100.00       $ 7,946         100.00       $ 154         1.94   
                                               

Advances

The decrease in advances from December 31, 2010 to March 31, 2011 was due to maturing advances, prepayments, and decreased demand for new advances resulting from members’ significant deposit balances and slow loan growth. At March 31, 2011, 87.6 percent of the Bank’s advances were fixed-rate. However, the Bank often simultaneously enters into derivatives with the issuance of advances to convert the interest rates on them, in effect, into a short-term variable interest rate, usually based on LIBOR. As of March 31, 2011 and December 31, 2010, 89.9 percent and 87.4 percent, respectively, of the Bank’s fixed-rate advances were swapped and 6.93 percent and 9.42 percent, respectively, of the Bank’s variable-rate advances were swapped. The majority of the Bank’s variable-rate advances were indexed to LIBOR. The Bank also offers variable-rate advances tied to the federal funds rate, prime rate and constant maturity swap rates.

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

 

     As of March 31, 2011      As of December 31, 2010  
     Amount      Percent
of Total
     Amount      Percent
of Total
 

Adjustable or variable-rate indexed

   $ 9,000         11.58       $ 8,852         10.41   

Fixed-rate

     19,908         25.62         23,073         27.13   

Convertible

     11,397         14.67         12,592         14.80   

Hybrid

     36,281         46.68         39,415         46.34   

Amortizing*

     1,129         1.45         1,119         1.32   
                                   

Total par value

   $ 77,715         100.00       $ 85,051         100.00   
                                   

 

* The Bank offers a fixed-rate advance that may be structured with principal amortization in either equal increments or similar to a mortgage.

 

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

 

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

March 31, 2011

   $ 51,949       66.85

December 31, 2010

     58,043       68.25

Investments

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

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

The following table sets forth more detailed information regarding short- and long-term investments held by the Bank (dollars in millions):

 

            Increase (Decrease)  
     As of March 31, 2011      As of December 31, 2010              Amount                      Percent          

Short-term investments:

           

Deposits with other FHLBank

   $ 2       $ 2       $         (1.85)   

Certificates of deposit

     695         1,190         (495)         (41.60)   

Federal funds sold

     16,663         15,701         962         6.13   
                             

Total short-term investments

     17,360         16,893         467         2.76   
                             

Long-term investments:

           

State or local housing agency debt obligations

     123         111         12         10.73   

U.S. government agency debt obligations

     4,073         4,253         (180)         (4.21)   

Mortgage-backed securities:

           

U.S. government agency securities

     10,030         9,676         354         3.66   

Private label

     8,290        8,946         (656)         (7.33)   
                             

Total mortgage-backed securities

     18,320         18,622         (302)         (1.62)   
                             

Total long-term investments

     22,516         22,986         (470)         (2.04)   
                             

Total investments

   $ 39,876       $ 39,879       $ (3)         (0.01)   
                             

The increase in short-term investments from December 31, 2010 to March 31, 2011 was due primarily to an increase in federal funds sold during the period due to the continued availability of these short-term investments at attractive interest rates relative to the Bank’s cost of funds.

 

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The decrease in long-term investments from December 31, 2010 to March 31, 2011 was due primarily to a decrease in private-label MBS during the period due primarily to principal repayments and maturities and no additional purchases by the Bank of private-label MBS.

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 of the FHLBank’s previous month-end total capital, as defined by regulation, plus its mandatorily redeemable capital stock on the day it purchases the securities. These investments amounted to 205 percent and 210 percent of total capital plus mandatorily redeemable capital stock at March 31, 2011 and December 31, 2010, 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 March 31, 2011, the Bank had a total of 44 securities classified as available-for-sale in an unrealized loss position, with total gross unrealized losses of $320 million and a total of 121 securities classified as held-to-maturity in an unrealized loss position, with total gross unrealized losses of $172 million. As of December 31, 2010, the Bank had a total of 44 securities classified as available-for-sale in an unrealized loss position, with total gross unrealized losses of $397 million and a total of 130 securities classified as held-to-maturity in an unrealized loss position, with total gross unrealized losses of $234 million.

The Bank evaluates its individual investment securities for other-than-temporary impairment on a quarterly basis, as described in detail in Note 6 to the Bank’s interim financial statements. Based on that impairment analysis, for the first quarters of 2011 and 2010, the Bank recognized total other-than-temporary impairment losses of $25 million and $64 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 $52 million and $46 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 $(27) million and $18 million, respectively, of the other-than-temporary impairment losses is recorded as a component of other comprehensive loss. When previously impaired securities increase in fair value but experience a subsequent credit loss, the amount of the credit loss is reclassified from other comprehensive loss into earnings. This reclassification may result in negative noncredit losses being presented on the Statements of Income.

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

 

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Mortgage Loans Held for Portfolio

The decrease in mortgage loans held for portfolio from December 31, 2010 to March 31, 2011 was due to the maturity of these assets during the period. In 2006, the Bank ceased purchasing multifamily residential mortgage loans, and in 2008 the Bank ceased purchasing single-family residential mortgage loans. If the Bank does not resume purchasing mortgage loans under these programs, each of the existing mortgage loans held for portfolio will mature according to the terms of its note unless prepaid prior to its scheduled maturity. The Bank purchased loans with maturity dates extending out to 2038.

As of March 31, 2011 and December 31, 2010, the Bank’s conventional mortgage loan portfolio was concentrated in the southeastern United States because those members selling loans to the Bank were located primarily in that region. The following table provides the percentage of unpaid principal balance of conventional single-family residential mortgage loans held for portfolio for the five largest state concentrations.

 

     As of March 31, 2011      As of December 31, 2010  
     Percent of Total      Percent of Total  

South Carolina

     24.41         24.50   

Florida

     21.83         21.07   

Georgia

     14.51         14.42   

North Carolina

     13.82         14.12   

Virginia

     9.05         9.19   

All other

     16.38         16.70   
                 

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. CO issuances financed 89.4 percent of the $123.6 billion in total assets at March 31, 2011, remaining relatively stable from the financing ratio of 90.4 percent as of December 31, 2010.

The decrease in COs from December 31, 2010 to March 31, 2011 corresponds to the decrease in demand for advances by the Bank’s members and the increase in liquidity from maturing advances during the period. COs outstanding at March 31, 2011 and December 31, 2010 were primarily fixed-rate. However, the Bank often simultaneously enters into derivatives with the issuance of CO bonds to convert the interest rates, in effect, into short-term variable interest rates, usually based on LIBOR. As of March 31, 2011 and December 31, 2010, 79.2 percent and 77.3 percent, respectively, of the Bank’s fixed-rate CO bonds were swapped and 1.03 percent and 0.24 percent, respectively, of the Bank’s variable-rate CO bonds were swapped.

As of March 31, 2011, callable CO bonds constituted 25.0 percent of the total par value of CO bonds outstanding, compared to 26.3 percent at December 31, 2010. This decrease was due to market conditions that made the issuance of callable fixed-maturity debt less attractive to the Bank. The derivatives that the Bank may employ to hedge against the interest-rate risk associated with the Bank’s callable CO bonds generally are callable by the counterparty. The Bank generally will call a hedged CO bond if the call feature of the derivative is exercised. These call features could require the Bank to refinance a substantial portion of outstanding liabilities during times of decreasing interest rates. Call options on unhedged callable CO bonds generally are exercised when the bond can be replaced at a lower economic cost.

 

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On April 20, 2011, S&P affirmed the AAA rating on the debt issues of the FHLBank System but revised its outlook on the debt issues from stable to negative. Similarly, S&P revised its outlooks from stable to negative for 10 of the 12 FHLBanks, including the Bank, whose issuer credit ratings are currently constrained by the long-term sovereign rating of the U.S., while affirming their AAA issuer credit ratings. The outlooks on the remaining two FHLBanks were not affected, as they were not rated AAA. The actions reflect S&P’s revision of its outlook on the long-term sovereign credit rating on the U.S. to negative from stable. In the application of S&P’s Government Related Entitites criteria, the ratings of the FHLBank System and the FHLBanks are constrained by the long-term sovereign rating of the U.S. This rating agency action, and any further changes to the U.S. sovereign credit rating, may increase the Bank’s cost of funds, which would adversely impact the Bank’s results of operations and financial condition. As of the date of this report, however, the Bank has not seen a material change in the Bank’s cost of funds as a result of the change in rating agency outlook.

Deposits

The Bank offers demand and overnight deposit programs to members primarily as a liquidity management service. In addition, a member that services mortgage loans may deposit in the Bank funds collected in connection with the mortgage loans, pending disbursement of those funds to the owners of the mortgage loan. For demand deposits, the Bank pays interest at the overnight rate. Most of these deposits represent member liquidity investments, which members may withdraw on demand. Therefore, the total account balance of the Bank’s deposits may be volatile. As a matter of prudence, the Bank typically invests deposit funds in liquid short-term assets. Member loan demand, deposit flows, and liquidity management strategies influence the amount and volatility of deposit balances carried with the Bank. Total deposits were relatively stable at March 31, 2011 compared to December 31, 2010.

To support its member deposits, the FHLBank Act requires the Bank to have as a reserve an amount equal to or greater than the current deposits received from members. These reserves are required to be invested in obligations of the United States, deposits in eligible banks or trust companies, or advances with maturities not exceeding five years. The Bank was in compliance with this depository liquidity requirement as of March 31, 2011.

Capital

The increase in total capital from December 31, 2010 to March 31, 2011 was due primarily to a $79 million decrease in accumulated other comprehensive loss and the recording of $51 million in net income during the first quarter of 2011, partially offset by the payment of $15 million in dividends. The decrease in accumulated other comprehensive loss was due primarily to improvements in the fair value of the Bank’s securities classified as available-for-sale.

The FHLBank Act and Finance Agency regulations specify that each FHLBank must meet certain minimum regulatory capital standards. The Bank was in compliance with these regulatory capital rules and requirements as shown in detail in Note 9 to the Bank’s interim financial statements.

Finance Agency regulations establish criteria based on the amount and type of capital held by an FHLBank for four capital classifications as follows:

 

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Adequately Capitalized - FHLBank meets both risk-based and minimum capital requirements;

 

   

Undercapitalized - FHLBank does not meet one or both of its risk-based or minimum capital requirements;

 

   

Significantly Undercapitalized - FHLBank has less than 75 percent of one or both of its risk-based or minimum capital requirements; and

 

   

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

Under the regulations, the Director of the Finance Agency (Director) will make a capital classification for each FHLBank at least quarterly and notify the FHLBank in writing of any proposed action and provide an opportunity for the FHLBank to submit information relevant to such action. The Director is permitted to make discretionary classifications. An FHLBank must provide written notice to the Finance Agency within 10 days of any event or development that has caused or is likely to cause its permanent or total capital to fall below the level required to maintain its most recent capital classification or reclassification. The regulation delineates the types of prompt corrective actions the Director may order in the event an FHLBank is not adequately capitalized, including submission of a capital restoration plan by the FHLBank and restrictions on its dividends, stock redemptions, executive compensation, new business activities, or any other actions the Director determines will ensure safe and sound operations and capital compliance by the FHLBank. On March 28, 2011, the Bank received notification from the Director that, based on December 31, 2010 data, the Bank meets the definition of “adequately capitalized.”

As of March 31, 2011, the Bank had capital stock subject to mandatory redemption from 60 members and former members, consisting of B1 membership stock and B2 activity-based stock, compared to 63 members and former members as of December 31, 2010, consisting of B1 membership stock and B2 activity-based stock. The Bank is not required to redeem or repurchase such stock until the expiration of the five-year redemption period or, with respect to activity-based stock, until the later of the expiration of the five-year redemption period or the activity no longer remains outstanding. The Bank makes its determination regarding the repurchase of excess capital stock on a quarterly basis.

As of March 31, 2011 and December 31, 2010, the Bank’s outstanding stock included $3.1 billion and $2.7 billion, respectively, of excess shares subject to repurchase by the Bank at its discretion.

As more fully described in the Bank’s Form 10-K, the Bank, together with the other 11 FHLBanks, executed a Joint Capital Enhancement Agreement (Joint Capital Agreement) which provides that upon satisfying the REFCORP obligation, each FHLBank will allocate a portion of its net income to a restricted retained earnings account to be established at each FHLBank (Restricted Retained Earnings Account). The Joint Capital Agreement further requires each FHLBank to submit an application to the Finance Agency for approval to amend its capital plan, consistent with the terms of the Joint Capital Agreement. Under the Joint Capital Agreement, if the FHLBanks’ REFCORP obligation end before the Finance Agency has approved all proposed capital plan amendments, each FHLBank will nevertheless be required to commence the required allocation to its Restricted Retained Earnings Account beginning as of the end of the calendar quarter in which the final payments are made. Depending on the earnings of the FHLBanks, the REFCORP obligations could be satisfied as early as the end of the second quarter of 2011. As of the date of this report, the Bank has been in discussions with the Finance Agency on amending its capital plan to incorporate the terms of the Joint Capital Agreement.

 

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Results of Operations

Net Income

The following table sets forth the Bank’s significant income items for the first quarters of 2011 and 2010, and provides information regarding the changes during the periods (dollars in millions). These items are discussed in more detail below.

 

     Three Months Ended March 31,      Increase (Decrease)  
     2011      2010          Amount              Percent      

Net interest income

   $ 131       $ 153       $ (22)         (14.77)   

Other loss

     (39)         (59)         20         32.38   

Other expense

     22         29         (7)         (24.15)   

Total assessments

     19         17         2         5.74   

Net income

     51         48         3         4.80   

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.

The $22 million decrease in net interest income during the first quarter of 2011, compared to the first quarter of 2010, was due primarily to a decrease in interest earned on the Bank’s long-term investments during the period resulting from a decrease in yield on these investments.

As mentioned above, net interest income includes components of derivatives and hedging activity. When a hedging relationship is discontinued, the cumulative fair value adjustment on the hedged item will be amortized into interest income or expense over the remaining life of the asset or liability. Also, when hedging relationships qualify for hedge accounting, the interest components of the hedging derivatives will be reflected in interest income or expense. As shown in the table summarizing the net effect of derivatives and hedging activity on the Bank’s results of operations, the impact of derivatives and hedging on net interest income was a decrease of $410 million and $561 million for the first quarters of 2011 and 2010, respectively.

The following table presents spreads between the average yield on total interest-earning assets and the average cost of interest-bearing liabilities for the first quarters of 2011 and 2010 (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.

 

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Amortization associated with hedging-related basis adjustments also are reflected in net interest income, which affect interest rate spread.

Spread and Yield Analysis

 

     Three Months Ended March 31,  
     2011      2010  
     Average
     Balance    
         Interest          Yield/
    Rate  (%)    
     Average
     Balance    
         Interest          Yield/
    Rate  (%)    
 

Assets

                 

Federal funds sold

   $ 14,850       $ 8         0.21       $ 11,552       $ 5         0.16   

Interest-bearing deposits (1)

     2,786         1         0.16         3,562         1         0.14   

Certificates of deposit

     800         1         0.26         576                 0.22   

Long-term investments (2)

     22,653         198         3.57         22,488         253         4.56   

Advances

     85,323         75         0.35         111,170         72         0.26   

Mortgage loans held for portfolio (3)

     1,971         26         5.30         2,465         32         5.28   

Loans to other FHLBanks

     4                 0.18         1                 0.13   
                                         

Total interest-earning assets

     128,387         309         0.98         151,814         363         0.97   
                             

Allowance for credit losses on mortgage loans

     (1)               (1)         

Other assets

     952               1,083         
                             

Total assets

   $ 129,338             $ 152,896         
                             

Liabilities and Capital

                 

Deposits (4)

   $ 2,849         1         0.09       $ 2,904                 0.05   

Short-term borrowings

     19,220         7         0.15         15,582         3         0.06   

Long-term debt

     94,465         169         0.73         120,445         207         0.70   

Other borrowings

     531         1         1.21         226                 0.18   
                                         

Total interest-bearing liabilities

     117,065         178         0.62         139,157         210         0.61   
                             

Other liabilities

     4,235               5,430         

Total capital

     8,038               8,309         
                             

Total liabilities and capital

   $ 129,338             $ 152,896         
                             

Net interest income and net yield on interest-earning assets

      $ 131         0.41          $ 153         0.41   
                                         

Interest rate spread

           0.36               0.36   
                             

Average interest-earning assets to interest-bearing liabilities

           109.67               109.10   
                             

 

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

The Bank’s interest-rate spread was unchanged at 36 basis points for the first quarters of 2011 and 2010 as a result of interest rates on interest-earning assets and interest-bearing liabilities remaining relatively stable during the periods.

 

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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 first quarter of 2011, compared to the same period in 2010, was primarily rate related.

Volume and Rate Table*

 

     Three Months Ended March 31,  
     2011 vs. 2010  
         Volume                Rate            Increase
(Decrease)
 

Increase (decrease) in interest income:

        

Federal funds sold

   $ 1       $ 2       $ 3   

Certificates of deposit

     1                 1   

Long-term investments

     1         (56)         (55)   

Advances

     (19)         22         3   

Mortgage loans held for portfolio

     (6)                 (6)   
                          

Total

     (22)         (32)         (54)   
                          

Increase (decrease) in interest expense:

        

Deposits

             1         1   

Short-term borrowings

             4         4   

Long-term debt

     (46)         8         (38)   

Other borrowings

             1         1   
                          

Total

     (46)         14         (32)   
                          

Increase (decrease) in net interest income

   $ 24       $ (46)       $ (22)   
                          

 

* 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.

Other Income (Loss)

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

 

     Three Months Ended March 31,      Increase (Decrease)  
         2011              2010              Amount              Percent      

Other Income (Loss):

           

Net impairment losses recognized in earnings

   $ (52)       $ (46)       $ (6)         (12.75)   

Net (losses) gains on trading securities

     (34)         4         (38)         (958.57)   

Net gains (losses) on derivatives and hedging activities

     46         (17)         63         370.09   

Other

     1                1         42.88  
                             

Total other loss

   $ (39)       $ (59)       $ 20         32.38   
                             

 

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The overall change in other income (loss) for the first quarter of 2011, compared to the first quarter of 2010, was due primarily to adjustments required to report trading securities at fair value, and hedging related adjustments which are reported in net gains (losses) on derivatives and hedging activities (including those related to trading securities). The net losses of $34 million on trading securities during the first quarter of 2011, compared to net gains of $4 million on trading securities during the first quarter of 2010, is due primarily to an increase in long-term interest rates during the period. Substantially all of the Bank’s trading securities are fixed interest-rate securities and 99.9 percent were swapped to a variable rate. The net gains of $46 million on derivatives and hedging activities during the first quarter of 2011, compared net losses of $17 million during the first quarter of 2010, is due primarily to net gains of $42 million on non-qualifying hedges related to the Bank’s trading securities which are reported as part of net gains (losses) on derivatives and hedging activities.

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

 

     Three Months Ended March 31, 2011  
             Advances                  Investments          Consolidated
Obligation

         Bonds        
     Consolidated
Obligation

Discount
        Notes        
     Balance
         Sheet        
             Total          

Net interest income:

                 

Amortization/accretion of hedging activities in net interest income (1)

   $ (48)       $       $ 11       $       $       $ (37)   

Net interest settlements included in net interest income(2)

     (590)                 216         1                 (373)   
                                                     

Total net interest (expense) income

     (638)                 227         1                 (410)   
                                                     

Net gains (losses) on derivatives and hedging activities:

                 

Gains (losses) on fair value hedges

     47                 (9)                         38   

Gains on derivatives not receiving hedge accounting

     1         4                         3         8   
                                                     

Total net gains (losses) on derivatives and hedging activities

     48         4         (9)                 3         46   
                                                     

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

     (590)         4         218         1         3         (364)   
                                                     

Net losses on trading securities(3)

             (34)                                 (34)   
                                                     

Total net effect of derivatives and hedging activities

   $ (590)       $ (30)       $ 218       $ 1       $ 3       $ (398)   
                                                     

 

(1)

Represents the amortization/accretion of hedging fair value adjustments for both open and closed hedge positions.

(2)

Represents interest income/expense on derivatives included in net interest income.

(3)

Includes only those gains or losses on trading securities that have an economic derivative “assigned,” therefore, this line may not agree to the income statement.

 

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     Three Months Ended March 31, 2010  
             Advances                 Investments          Consolidated
Obligation
        Bonds         
     Consolidated
Obligation

Discount
        Notes        
     Balance
         Sheet        
             Total          

Net interest income:

                

Amortization/accretion of hedging activities in net interest income (1)

   $ (69   $       $ 16       $       $       $ (53

Net interest settlements included in net interest income(2)

     (891)                376         7                 (508)   
                                                    

Total net interest (expense) income

     (960)                392         7                 (561)   
                                                    

Net gains (losses) on derivatives and hedging activities:

                

Gains (losses) on fair value hedges

     63                (14)         (3)                 46   

(Losses) gains on derivatives not receiving hedge accounting

            (62)         1                 (2)         (63)   
                                                    

Total net gains (losses) on derivatives and hedging activities

     63        (62)         (13)         (3)         (2)         (17)   
                                                    

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

     (897)        (62)         379         4         (2)         (578)   
                                                    

Net gains on trading securities(3)

            4                                 4   
                                                    

Total net effect of derivatives and hedging activities

   $ (897)      $ (58)       $ 379       $ 4       $ (2)       $ (574)   
                                                    

 

(1)

Represents the amortization/accretion of hedging fair value adjustments for both open and closed hedge positions.

(2)

Represents interest income/expense on derivatives included in net interest income.

(3)

Includes only those gains or losses on trading securities that have an economic derivative “assigned,” therefore, this line may not agree to the income statement.

Non-interest Expense

Non-interest expense was $41 million and $46 million for the first quarters of 2011 and 2010, respectively. The $5 million decrease was due primarily to the discontinuation of the Bank’s Economic Development and Growth Enhancement Program (EDGE) during the first quarter of 2011. The EDGE was a selective program that provided subsidized advances to member financial institutions for specific community economic development projects; however, EDGE experienced low utilization by members. The Bank had a $9 million liability related to uncommitted funds as of the date the EDGE was discontinued, which was reduced to zero with a corresponding reduction to other expense during the period. This reduction to other expense was partially offset by a $3 million increase in compensation and benefit expense and a $2 million increase in total assessments.

Liquidity and Capital Resources

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

Finance Agency regulations require the Bank to maintain contingent liquidity in an amount sufficient to meet its liquidity needs for five business days if it is unable to access the capital markets. The Bank met this regulatory liquidity requirement during the first quarter of 2011. During the recent financial crisis, the Finance Agency provided liquidity guidance to the FHLBanks generally to provide ranges of days within which each FHLBank should maintain positive cash balances based upon different assumptions and scenarios. The Bank has operated within these ranges since the Finance Agency issued this guidance.

 

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In addition, the Bank strives to maintain sufficient liquidity to service debt obligations for at least 45 days, assuming restricted debt market access. The Bank’s 45-day debt service goal is closely aligned with those recommended by the Finance Agency and reflects the Bank’s practice of not committing to consolidated obligation settlements beyond 30 days. The Bank met its internal liquidity goal during the first quarter of 2011.

The Bank’s principal source of liquidity is consolidated obligation debt instruments. To provide liquidity, the Bank also may use other short-term borrowings, such as federal funds purchased, securities sold under agreements to repurchase, and loans from other FHLBanks. These funding sources depend on the Bank’s ability to access the capital markets at competitive market rates. Although the Bank maintains secured and unsecured lines of credit with money market counterparties, the Bank’s income and liquidity would be affected adversely if it were not able to access the capital markets at competitive rates for an extended period. Historically, the FHLBanks have had excellent capital market access, although the FHLBanks experienced a decrease in investor demand for consolidated obligation bonds during part of the recent financial crisis and therefore incresed 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. As discussed above under “Financial Condition – Consolidated Obligations,” on April 20, 2011, S&P affirmed the AAA rating on the debt issues of the FHLBank System but revised its outlook from stable to negative. Similarly, S&P revised its outlook from stable to negative for 10 of the 12 FHLBanks, including the Bank, whose issuer credit ratings are currently constrained by long-term sovereign rating of the U.S. Further changes to the U.S. sovereign rating could result in disruptions in the capital markets which may impact the Bank’s access to the capital markets and/or increase the Bank’s cost of funds.

Contingency plans are in place that prioritize the allocation of liquidity resources in the event of operational disruptions at the Bank or the Office of Finance, as well as systemic Federal Reserve wire transfer system disruptions. Additionally, the FHLBank Act authorizes the Secretary of the U.S. Department of the Treasury (Treasury), at his or her discretion, to purchase COs up to an aggregate amount of $4.0 billion. No borrowings under this authority have been outstanding since 1977. If the statutory limit on the total amount of U.S. debt is reached and the U. S. Congress does not increase the debt limit, Treasury may be unable to exercise this FHLBank Act authority to purchase COs, which could have a negative impact on the Bank’s liquidity and financial condition.

Off-balance Sheet Commitments

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

 

   

the Bank’s joint and several liability for all FHLBank COs; and

 

   

the Bank’s outstanding commitments arising from standby letters of credit.

Should an FHLBank be unable to satisfy its payment obligation under a consolidated obligation for which it is the primary obligor, any of the other FHLBanks, including the Bank, could be called upon to repay all or any part of such payment obligation, as determined or approved by the Finance Agency. The Bank considers the joint and several liability to be a related-party guarantee. These related-party guarantees meet the scope exception under GAAP. Accordingly, the Bank has not recognized a liability for its joint and several obligations related to other FHLBanks’ COs at March 31, 2011 and December 31, 2010. As of March 31, 2011, the FHLBanks had $766.0 billion in aggregate par value of COs issued and outstanding,

 

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$109.5 billion of which was attributable to the Bank. No FHLBank ever has defaulted on its principal or interest payments under any consolidated obligation, and the Bank has never been required to make payments under any CO as a result of the failure of another FHLBank to meet its obligations.

As of March 31, 2011, the Bank had outstanding standby letters of credit of $20.5 billion with original terms of less than nine months to 20 years, with the longest final expiration in 2030. As of December 31, 2010, the Bank had outstanding standby letters of credit of $22.3 billion with original terms of less than two months to 20 years, with the longest final expiration in 2030. This decrease was due primarily to the issuance of a single short-term standby letter of credit prior to December 31, 2010 that expired in accordance with its terms prior to March 31, 2011. Notwithstanding this quarter over quarter decrease, the Bank expects its overall standby letter of credit activity to remain stable for the near future. The Bank generally requires standby letters of credit to contain language permitting the Bank, upon annual renewal dates and prior notice to the beneficiary, to choose not to renew the standby letter of credit, which effectively terminates the standby letter of credit prior to its scheduled final expiration date. The Bank may issue standby letters of credit for terms of longer than one year without annual renewals or for open-ended terms with annual renewals (commonly known as evergreen letters of credit) based on the creditworthiness of the member applicant.

Commitments to extend credit, including standby letters of credit, are agreements to lend. The Bank issues a standby letter of credit for the account of a member in exchange for a fee. A member may use these standby letters of credit to facilitate a financing arrangement. The Bank requires its borrowers, upon the effective date of the letter of credit through its expiration, to collateralize fully the face amount of any letter of credit issued by the Bank, as if such face amount were an advance to the borrower. Standby letters of credit are not subject to activity-based capital stock purchase requirements. If the Bank is required to make payment for a beneficiary’s draw, the Bank in its discretion may convert such paid amount to an advance to the member and will require a corresponding activity-based capital stock purchase. The Bank’s underwriting and collateral requirements for standby letters of credit are the same as those requirements for advances. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to have an allowance for credit losses for these unfunded standby letters of credit as of March 31, 2011. Management regularly reviews its standby letter of credit pricing in light of several factors, including the Bank’s potential liquidity needs related to draws on its standby letters of credit.

Contractual Obligations

As of March 31, 2011, there has been no material change outside the ordinary course of business in the Bank’s contractual obligations as reported in the Bank’s Form 10-K.

Legislative and Regulatory Developments

The legislative and regulatory environment for the Bank continues to change rapidly as financial regulators issue proposed and/or final rules to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) enacted July 2010.

 

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Dodd-Frank Act

The Dodd-Frank Act, among other things: (1) creates an interagency oversight council (the 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. Certain regulatory actions resulting from the Dodd-Frank Act that may have a material impact on the Bank are summarized below; however, the actual effects of the Dodd-Frank Act will be known only after implementing regulations are finalized and certain determinations under the Dodd-Frank Act are made.

Derivatives Transactions. The Dodd-Frank Act provides for new statutory and regulatory requirements for derivative transactions, including those utilized by the Bank to hedge its interest rate and other risks. As a result of these requirements, certain derivative transactions will be required to be cleared through a third-party central clearinghouse and traded on regulated exchanges or new swap execution facilities. Further discussion of these new requirements for derivative transactions is contained in the Bank’s Form 10-K.

The Commodity Futures Trading Commission (CFTC) has issued a proposed rule requiring that collateral posted by swaps customers to a clearinghouse in connection with cleared swaps be legally segregated on a customer basis. However, in connection with this proposed rule the CFTC has left open the possibility that customer collateral would not have to be legally segregated but could instead be commingled with all collateral posted by other customers of the clearing member. Such commingling could put the Bank’s collateral at risk in the event of a default by another customer of the Bank’s clearing member. To the extent that the CFTC’s final rule places the Bank’s posted collateral at greater risk of loss in the clearing structure than under the current over-the-counter market structure, the Bank may be adversely impacted.

The CFTC and the SEC have issued joint proposed rules further defining the term “swap” under the Dodd-Frank Act. These proposed rules and accompanying interpretive guidance clarify that certain products will be regulated as “swaps.” However, it is still unknown at this time the extent to which certain of the Bank’s advances products will be treated as “swaps.”

Federal Deposit Insurance Corporation (FDIC) Final Rule on Assessment System. On February 25, 2011, the FDIC issued a final rule to revise the assessment system applicable to FDIC insured financial institutions. Among other things, the rule redefines the assessment base used for calculating deposit insurance assessments. Specifically, the rule changes the assessment base for most institutions from adjusted domestic deposits to average consolidated total assets minus average tangible equity. This rule became effective on April 1, 2011, so FHLBank advances are now included in our members’ assessment base. The rule also eliminates an adjustment to the base assessment rate paid for secured liabilities, including FHLBank advances, in excess of 25 percent of an institution’s domestic deposits since these are now part of the assessment base. To the extent that increased assessments increase the cost of advances for some members, it may negatively impact demand for advances.

Joint Regulatory Actions

Proposed Rule on Incentive-based Compensation Arrangements. On April 14, 2011, seven federal financial regulators, including the Finance Agency, published a proposed rule that would prohibit “covered financial institutions” from entering into incentive-based compensation arrangements with “covered

 

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persons” that encourage inappropriate risks by the covered financial institution (a) through the payment of excessive compensation or (b) that could lead to material financial loss to the covered financial institution.

The Finance Agency proposes to include the FHLBanks and the Office of Finance as covered financial institutions subject to the rule. Specifically for the FHLBanks and the Office of Finance, “covered persons” would mean the president, the chief financial officer and the three other most highly compensated officers (collectively, “executive officers”), any employee, director, or principal shareholder of the FHLBanks or Office of Finance, and any other officer as identified by the Director. The FHLBanks and the Office of Finance would be subject to a mandatory 50 percent deferral of incentive-based compensation over a minimum period of three years for executive officers and board oversight of incentive-based compensation for certain employees identified as having the ability to expose the FHLBank or Office of Finance to possible substantial losses.

The proposed rule establishes three key risk management principles related to the design and governance of incentive-based compensation: balanced design, independent risk management controls and strong governance. Covered financial institutions would be required to maintain policies and procedures for incentive-based compensation that incorporate these risk management principles and submit annual reports to their respective financial regulator that describes the structure of the covered financial institution’s incentive-based compensation arrangements for covered persons.

Comments on the proposed rule are due on May 31, 2011.

Proposed Rule on Credit Risk Retention for Asset-Backed Securities. On March 31, 2011, the Federal banking agencies, the Finance Agency, the Department of Housing and Urban Development and the SEC jointly issued a notice of proposed rulemaking, which proposes regulations requiring sponsors of asset-backed securities to retain a minimum of five percent economic interest in a portion of the credit risk of the assets collateralizing asset-backed securities, unless all the assets securitized satisfy specified qualifications.

The proposed rule specifies criteria for qualified residential mortgage, commercial real estate, auto and commercial loans that would make them exempt from the risk retention requirement. The criteria for qualified residential mortgages is described in the proposed rulemaking as those underwriting and product features which, based on historical data, are associated with low risk even in periods of decline of housing prices and high unemployment.

Key issues in the proposed rule include: (1) the appropriate terms for treatment as a qualified residential mortgage; (2) the extent to which Fannie Mae and Freddie Mac related securitizations will be exempt from the risk retention rules; and (3) the possibility of creating a category of high quality non-qualified residential mortgage loans that would have less than a five percent risk retention requirement.

Comments on this proposed rule are due on June 10, 2011.

 

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Risk Management

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

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

Credit Risk

The Bank faces credit risk 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 category 10 may have more restrictions on the types of collateral they may use to secure advances, may be required to maintain higher collateral maintenance levels and deliver loan collateral, may be restricted from obtaining further advances and may face more stringent collateral reporting requirements. At times, the Bank may place more restrictive requirements on a borrower than those generally applicable to borrowers with the same rating based upon management’s assessment of the borrower and its collateral.

 

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The following table sets forth the number of borrowers and the par amount of advances outstanding to borrowers with the specified ratings as of the specified dates (dollars in millions).

 

     As of March 31, 2011      As of December 31, 2010  

          Rating          

   Number of
          Borrowers           
     Outstanding
          Advances           
     Number of
          Borrowers           
     Outstanding
          Advances           
 

1-9

     557       $ 72,025         569       $ 79,170   

10

     155         4,579         157         4,815   

The Bank establishes a credit limit for each borrower. The credit limit is not a committed line of credit, but rather an indication of the borrower’s general borrowing capacity with the Bank. The Bank determines the credit limit in its sole and absolute discretion, by evaluating a wide variety of factors indicating the borrower’s overall creditworthiness. The credit limit 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 March 31, 2011, 11 borrowers have been approved for a credit limit higher than 30 percent.

Each borrower must maintain an amount of qualifying collateral that, when discounted to the lendable collateral value (LCV), is equal to at least 100 percent of the outstanding principal amount of all advances and other liabilities of the borrower to the Bank. The LCV is the value that the Bank assigns to each type of qualifying collateral for purposes of determining the amount of credit that such qualifying collateral will support. For each type of qualifying collateral, the Bank discounts the unpaid principal balance, market value, or other value of the qualifying collateral, to calculate the LCV. The Bank regularly reevaluates the appropriate level of discounting. The following table provides information about the types of collateral held for the Bank’s advances (dollars in millions):

 

    Total Par Value of
Outstanding
Advances
    LCV of
Collateral
Pledged by
Members
    First Mortgage
Collateral (%)
    Securities
Collateral (%)
    Other Real
Estate Related
Collateral (%)
 

As of March 31, 2011

  $ 77,715      $ 184,801        67.10        10.09        22.81   

As of December 31, 2010

    85,051        188,212        67.43        10.19        22.38   

As of February 1, 2010, for purposes of determining each member’s LCV, the Bank estimates the current market value of all residential first mortgage loans pledged as collateral based on information provided by the member on individual loans or its loan portfolio through the regular collateral reporting process. The estimated market value is discounted to account for the price volatility of loans as well as estimated liquidation and servicing costs in the event of the member’s default. Beginning December 1, 2010, LCVs for home equity loans and lines of credit pledged as collateral are similarly based on market values. Market values, and thus LCVs change monthly. The Bank believes that this shift to a market-based valuation methodology allows the Bank to establish its collateral discounts with greater precision. These changes are part of a broader effort to provide greater transparency with respect to the valuation of collateral pledged for advances and other credit products offered by the Bank. In 2011, the Bank expects to expand this market-based valuation methodology to multifamily and commercial real estate collateral.

 

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

 

                                                             Three Months Ended March 31,  
                                                             2011      2010  

FHLBank Atlanta members

                             10         13   

Non-FHLBank Atlanta members

                             16         28   
                                         

Total FDIC-insured

                             26         41   
                                         

All outstanding advances to those member institutions placed into FDIC receivership were either paid in full or assumed by another member or non-member institution under purchase and assumption agreements between the assuming institution and the FDIC.

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

In its history, the Bank has never experienced a credit loss on an advance. In consideration of this, and the Bank’s policies and practices detailed above, the Bank has not established an allowance for credit losses on advances as of March 31, 2011 and December 31, 2010.

Investments

While the Bank faces what it believes to be minimal credit risk on advances to members, it is subject to credit risk on certain unsecured investments, including certificates of deposits, 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 a NRSRO; (4)

 

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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; and

 

   

non-U.S. dollar denominated securities.

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

 

   

interest-only or principal-only stripped MBS, collateralized mortgage obligations (CMOs), collateralized debt obligations (CDOs), and real estate mortgage investment conduits (REMICs);

 

   

residual-interest or interest-accrual classes of CMOs and REMICs; and

 

   

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. On a monthly basis, management produces financial monitoring reports detailing the financial condition of the Bank’s counterparties. These reports are reviewed by the Bank’s board of directors.

The Bank experienced an increase in unsecured credit exposure in its investment portfolio related to non-U.S. government or non-U.S. government agency counterparties from $17.4 billion as of December 31, 2010 to $17.8 billion as of March 31, 2011. There were five such counterparties that represented 53.3 percent, and two such counterparties that each represented greater than 10 percent, of the total unsecured credit exposure to non-U.S. government or non-U.S. government agencies counterparties. The Bank’s unsecured credit exposure is comprised primarily of federal funds sold.

The Bank’s RMP permits the Bank to invest in U.S. agency (Fannie Mae, Freddie Mac and Ginnie Mae) obligations, including CMOs and REMICS backed by such securities, and other MBS, CMOs and REMICS rated AAA by S&P or Aaa by Moody’s at the time of purchase. The MBS purchased by the Bank attain their triple-A ratings through credit enhancements, which primarily consist of the subordination of the claims of the other tranches of these securities. As of March 31, 2011, the Bank’s long-term investment portfolio included $8.3 billion of private-label MBS, which represented 36.8 percent of the carrying value of the Bank’s long-term investment portfolio.

The tables below provide information on the credit ratings of the Bank’s investments held at March 31, 2011 and December 31, 2010, based on their credit ratings as of March 31, 2011 and December 31, 2010 (in millions). The credit ratings reflect the lowest long-term credit rating as reported by an NRSRO.

 

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As of March 31, 2011

Carrying Value (1)

 

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

Short-term investments:

                          

Deposits with other FHLBank

   $         —       $         2       $         —       $         —       $         —       $         —       $         —       $         —       $         —   

Certificates of deposit

                     695                                                   

Federal funds sold

             6,555         10,108                                                   
                                                                                

Total short-term investments

             6,557         10,803                                                   
                                                                                

Long-term investments:

                          

State or local housing agency debt obligations

     123                                                                   

U.S. government agency debt obligations

     4,073                                                                   

Mortgage-backed securities:

                          

U.S. government agency securities

     10,030                                                                   

Private label

     1,975         458         938         539         634         1,281         1,676         585         204   
                                                                                

Total mortgage-backed securities

     12,005         458         938         539         634         1,281         1,676         585         204   
                                                                                

Total long-term investments

     16,201         458         938         539         634         1,281         1,676         585         204   
                                                                                

Total investments

   $ 16,201       $ 7,015       $ 11,741       $ 539       $ 634       $ 1,281       $ 1,676       $ 585       $ 204   
                                                                                

 

(1)    Investment amounts noted in the above table represent the carrying value and do not include related accrued interest receivable of $94 million at March 31, 2011.

 

As of December 31, 2010

Carrying Value (1)

 

       

  

  

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

Short-term investments:

                          

Deposits with other FHLBank

   $       $ 2       $       $       $       $       $       $       $   

Certificates of deposit

                     1,190                                                   

Federal funds sold

             7,016         8,685                                                   
                                                                                

Total short-term investments

             7,018         9,875                                                   
                                                                                

Long-term investments:

                          

State or local housing agency debt obligations

     111                                                                   

U.S. government agency debt obligations

     4,253                                                                   

Mortgage-backed securities:

                          

U.S. government agency securities

     9,676                                                                   

Private label

     2,766         455         1,084         355         712         1,049         1,708         608         209   
                                                                                

Total mortgage-backed securities

     12,442         455         1,084         355         712         1,049         1,708         608         209   
                                                                                

Total long-term investments

     16,806         455         1,084         355         712         1,049         1,708         608         209   
                                                                                

Total investments

   $ 16,806       $ 7,473       $ 10,959       $ 355       $ 712       $ 1,049       $ 1,708       $ 608       $ 209   
                                                                                

 

(1) Investment amounts noted in the above table represent the carrying value and do not include related accrued interest receivable of $104 million at December 31, 2010.

 

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Subsequent to March 31, 2011, $1.1 billion, or 2.85 percent, of the Bank’s investments have been downgraded as of April 30, 2011 as outlined in the below table (in millions):

 

     Downgrades - Balances Based on
Values at March 31, 2011
 
Investment Ratings   
At March 31, 2011    At April 30, 2011    Private-label MBS  
From    To    Carrying Value      Fair Value  
AAA    AA    $ 50       $ 51   
   A      383         381   
   BBB      82         83   
   BB      43         44   
AA    A      63         61   
   BB      114         110   
A    BBB      86         81   
   BB      103         98   
   B      211         209   
                    
Total       $ 1,135       $ 1,118   
                    

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

 

                                        On Negative Watch - Balances Based
on Values at March 31, 2011
 
                                        Private-label MBS  
                                        Carrying Value      Fair Value  

Investment Ratings:

                    

AAA

                  $ 207       $ 207   

A

                    115         109   

B

                    146         146   
                                

Total

                  $ 468       $ 462   
                                

Private-label MBS

For disclosure purposes, the Bank classifies private-label MBS as either prime or Alt-A based upon the overall credit quality of the underlying loans as determined by the originator at the time of origination. Although there is no universally accepted definition of Alt-A, generally loans with credit characteristics that range between prime and subprime are classified as Alt-A. Participants in the mortgage market have used the Alt-A classification principally to describe loans for which the underwriting process has been streamlined in order to reduce the documentation requirements of the borrower or allow alternative documentation. At March 31, 2011, based on the classification by the originator at the time of origination, approximately 87.9 percent of the underlying mortgages collateralizing the Bank’s private-label MBS were considered prime and the remaining underlying mortgages collateralizing these securities were considered Alt-A.

 

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The tables below provide additional information, including changes in ratings since the original purchase date, on the Bank’s private-label MBS by year of securitization at March 31, 2011 (dollars in millions).

 

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

Investment Ratings:

                 

AAA

   $         —       $         —       $         —       $         33       $         1,832       $         1,865   

AA

             36                 113         270         419   

A

                             278         532         810   

BBB

                             93         193         286   

BB

             168         133         328         18         647   

B

     160         138         73         644         221         1,236   

CCC

     63         726         486         522         39         1,836   

CC

             408         273         78                 759   

C

             76         108         16                 200   
                                                     

Total unpaid principal balance

   $         223       $ 1,552       $ 1,073       $ 2,105       $ 3,105       $ 8,058   
                                                     

Amortized cost

   $         206       $ 1,335       $ 938       $ 1,991       $ 3,084       $ 7,554   
                                                     

Gross unrealized losses

   $         (3)       $ (68)       $ (56)       $ (135)       $ (100)       $ (362)   
                                                     

Fair value

   $         203       $ 1,274       $ 885       $ 1,855       $ 3,019       $ 7,236   
                                                     

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

                 

Credit-related losses

   $         —       $ (9)       $ (9)       $ (22)       $ (4)       $ (44)   

Non-credit-related losses

             (9)         (9)         (20)         19         (19)   
                                                     

Total other-than-temporary impairment

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

Weighted average percentage of fair value to unpaid principal balance

     90.98%         82.07%         82.51%         88.12%         97.22%         89.79%   

Original weighted average credit support

     15.72%         12.96%         9.68%         6.59%         3.10%         7.13%   

Weighted average credit support

     14.30%         8.95%         5.90%         8.15%         7.57%         7.95%   

Weighted average collateral delinquency

     15.89%         22.49%         18.95%         12.96%         6.30%         13.11%   

 

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

Investment Ratings:

                 

AAA

   $         —       $         —       $         —       $         —       $         124       $         124   

AA

                                     42         42   

A

                                     161         161   

BBB

                                     253         253   

B

                                     93         93   

CCC

                             370                 370   

C

             66                                 66   
                                                     

Total unpaid principal balance

   $         —       $ 66       $       $ 370       $ 673       $ 1,109   
                                                     

Amortized cost

   $         —       $ 52       $       $ 324       $ 673       $ 1,049   
                                                     

Gross unrealized losses

   $         —       $ (3)       $       $ (100)       $ (7)       $ (110)   
                                                     

Fair value

   $         —       $ 49       $       $ 224       $ 669       $ 942   
                                                     

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

                 

Credit-related losses

   $         —       $ (1)       $       $ (7)       $       $ (8)   

Non-credit-related losses

             (1)                 (7)                 (8)   
                                                     

Total other-than-temporary impairment

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

 

Weighted average percentage of fair value to unpaid principal balance

     0.00%         74.04%         0.00%         60.56%         99.55%         85.00%   

Original weighted average credit support

     0.00%         12.29%         0.00%         26.74%         6.90%         13.85%   

Weighted average credit support

     0.00%         5.72%         0.00%         24.35%         11.23%         15.28%   

Weighted average collateral delinquency

     0.00%         34.09%         0.00%         39.76%         6.62%         19.33%   

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

Private-label MBS:

                 

Prime

   $ 1,424       $ 6,634       $ 8,058       $ 1,649       $ 7,041       $ 8,690   

Alt-A

     540         569         1,109         574         587         1,161   
                                                     

Total unpaid principal balance

   $ 1,964       $ 7,203       $ 9,167       $ 2,223       $ 7,628       $ 9,851   
                                                     

To assess whether the entire amortized cost basis of its private-label MBS will be recovered, the Bank performs a cash flow analysis for each of its private-label MBS. In performing the cash flow analysis for each of these securities, the Bank 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 first quarter of 2011, the current and forecasted economic trends included continued high unemployment, ongoing pressure on housing prices, limited refinancing opportunities for borrowers whose houses are now worth less than the balance of their mortgages, a slower-than-expected recovery, and an uncertain outlook.

 

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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 Bank’s housing price forecast assumed current-to-trough home price declines ranging from zero percent (for those housing markets that are believed to have reached their trough) to 10.0 percent. For those markets for which further home price declines are anticipated, such declines were projected to occur over the next three to nine months beginning January 1, 2011. From the trough, home prices were projected to recover using one of five different recovery paths that vary by housing market. Under those recovery paths, home prices were projected to increase within a range of zero percent to 2.80 percent in the first year, zero percent to 3.00 percent in the second year, 1.50 percent to 4.00 percent in the third year, 2.00 percent to 5.00 percent in the fourth year, 2.00 percent to 6.00 percent in each of the fifth and sixth years, and 2.30 percent to 5.60 percent in each subsequent year.

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

 

     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

     8.01         8.01 to   8.01         43.65         43.65 to 43.65         43.26         43.26 to 43.26         14.30         14.19 to 14.55   

2007

     8.53         5.36 to 16.29         14.65         0.78 to 22.26         34.03         27.04 to 39.34         5.64         2.82 to   9.15   

2006

     8.38         6.29 to   9.65         22.34         14.63 to 38.28         42.19         29.12 to 47.41         5.71         2.74 to   8.45   

2005

     11.24         5.52 to 15.03         14.03         0.88 to 42.41         30.48         19.31 to 41.52         7.63         4.82 to 14.98   

2004

     18.06         5.09 to 59.58         7.70         0.00 to 40.68         22.17         0.00 to 58.13         7.26         2.17 to 69.57   

Total Prime

     13.95         5.09 to 59.58         12.89         0.00 to 43.65         28.35         0.00 to 58.13         7.31         2.17 to 69.57   

Alt-A:

                       

2007

     10.10         7.59 to 13.25         57.80         50.19 to 65.36         51.82         48.83 to 53.94         10.57         2.04 to 16.38   

2006

     10.14         9.29 to 11.44         54.71         49.87 to 59.49         51.87         46.18 to 57.44         6.13         2.67 to   8.27   

2005

     9.07         6.54 to 12.01         54.19         26.23 to 80.14         50.09         43.29 to 55.81         15.97         3.45 to 43.06   

2004

     12.55         9.88 to 18.17         9.43         0.95 to 40.06         29.84         17.75 to 54.18         11.63         3.34 to 39.54   

Total Alt-A

     10.46         6.54 to 18.17         43.87         0.95 to 80.14         45.68         17.75 to 57.44         11.64         2.04 to 43.06   

Total

     12.72         5.09 to 59.58         23.85         0.00 to 80.14         34.48         0.00 to 58.13         8.84         2.04 to 69.57   

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 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 these securities for which an other-than-temporary impairment was determined to have occurred during the first quarter of 2011 (that is, a determination was made that the entire amortized cost bases will likely not be recovered), a summary of

 

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the significant inputs used to measure the amount of the credit loss recognized in earnings is contained in Note 6 to the Bank’s interim financial statements.

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

 

     Three Months Ended March 31, 2011      Three Months Ended March 31, 2010  
     Credit
Losses
     Net
Noncredit
Losses
     Total
Losses
     Credit
Losses
     Net
Noncredit
Losses
     Total
Losses
 

Securities newly impaired during the period

   $ (6)       $ 19       $ (25)       $ (3)       $ 58       $ (61)   

Securities previously impaired prior to current period*

     (46)         (46)                 (43)         (40)         (3)   
                                                     

Total

   $ (52)       $ (27)       $ (25)       $ (46)       $ 18       $ (64)   
                                                     

 

* For the three months ended March 31, 2011 and 2010, “Securities previously impaired prior to current period” represents all securities that were also previously impaired prior to January 1, 2011 and 2010, respectively.

Certain other private-label MBS in the Bank’s investment portfolio that have not been designated as other-than-temporarily impaired have experienced unrealized losses and decreases in fair value due to interest rate volatility, illiquidity in the marketplace, and credit weaknesses in the U.S. mortgage markets. These declines in fair value are considered temporary as the Bank expects to recover the amortized cost 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 bases, which may be at maturity. The assessment is based on the fact that the Bank has sufficient capital and liquidity to operate its business and has no need to sell these securities, nor has the Bank entered into any contractual constraints that would require the Bank to sell these securities.

In addition to the cash flow analysis of the Bank’s private-label MBS under a base case (best estimate) housing price scenario, a cash flow analysis also was performed based on a housing price scenario that is more adverse than the base case (adverse case housing price scenario). The adverse case housing price scenario was based on a housing price forecast that was five percentage points lower at the trough than the base case scenario, followed by a flatter recovery path. Under this scenario, current-to-trough home price declines were projected to range from 5.00 percent to 15.0 percent over the next three to nine months beginning January 1, 2011. Thereafter, home prices were projected to increase within a range of zero percent to 1.90 percent in the first year, zero percent to 2.00 percent in the second year, 1.00 percent to 2.70 percent in the third year, 1.30 percent to 3.40 percent in the fourth year, 1.30 percent to 4.00 percent in each of the fifth and sixth years, and 1.50 percent to 3.80 percent in each subsequent year. The adverse case housing price scenario and associated results do not represent the Bank’s current expectations, and therefore should not be construed as a prediction of the Bank’s future results, market conditions or the actual performance of these securities. Rather, the results from this hypothetical adverse case housing price scenario provide a measure of the credit losses the Bank might incur if home price declines (and subsequent recoveries) are more adverse than those projected in the Bank’s base case assessment.

 

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

 

     Three Months Ended March 31, 2011  
     Housing Price Scenario  
     Base Case **     Adverse Case  
     Number of
Securities
     Unpaid
Principal
balance
     Other-Than-
Temporary
Impairment
Related to
Credit Loss
    Number of
Securities
     Unpaid
Principal
balance
     Other-Than-
Temporary
Impairment
Related to
Credit Loss
 

Private-label MBS

                

Prime*

     33       $ 2,539       $ (44     46       $ 3,214       $ (122

Alt-A*

     3         437         (8     3         437         (26
                                                    

Total

     36       $ 2,976       $ (52)        49       $ 3,651       $ (148)   
                                                    

 

* Based on the originator’s classification of collateral at the time of origination or based on classification of collateral by an NRSRO upon issuance of the MBS.

 

** Represents securities and related other-than-temporary impairment credit losses for the three months ended March 31, 2011.

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

Non-Private-label MBS. The unrealized losses related to U.S. agency MBS are caused by interest rate changes. Because these securities are guaranteed by government agencies or government-sponsored enterprises, it is expected that these securities would not be settled at a price less than the amortized cost basis. The Bank does not consider these investments to be other-than-temporarily impaired as of March 31, 2011 because the decline in fair value is attributable to changes in interest rates and not credit quality, the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity.

Derivatives

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

 

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As of March 31, 2011, the Bank had $142.8 billion in total notional amount of derivatives outstanding compared to $142.2 billion at December 31, 2010. The notional amount serves as a factor in determining periodic interest payments or cash flows received and paid. It does not represent actual amounts exchanged or the Bank’s exposure to credit and market risk. The amount potentially subject to credit loss is based upon the counterparty’s net payment obligations. The credit risk of derivatives is measured on a portfolio basis by netting the market values of all outstanding transactions for each counterparty.

As of March 31, 2011, 99.2 percent of the total notional amount of outstanding derivatives was represented by 20 counterparties with a credit rating of A or better. Of these counterparties, there were two, Deutsche Bank AG, and Goldman Sachs Group, Inc., that each represented more than 10 percent of the Bank’s total notional amount, and there were no counterparties that represented more than 10 percent of the Bank’s net exposure. As of December 31, 2010, 99.2 percent of the total notional amount of outstanding derivatives was represented by 20 counterparties with a credit rating of A or better. Of these counterparties, there were three, JP Morgan Chase Bank, N.A., Deutsche Bank AG, and Goldman Sachs Group, Inc., that each represented more than 10 percent of the Bank’s total notional amount, and there were no counterparties that represented more than 10 percent of the Bank’s net exposure.

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

 

     As of March 31, 2011  
     Notional
Amount
     Total Net
Exposure
at Fair Value
     Total Net
Exposure
Collateralized
     Net Exposure
After
Collateral
 

Credit Rating:

           

AA

   $ 40,479       $       $       $   

A

     101,210         46         46           

BBB

     106                           

Member institutions*

     1,045         4         4           
                                   

Total derivatives

   $     142,840       $ 50       $ 50       $   
                                   

 

* 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.

 

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

Credit Rating:

           

AA

   $ 42,689       $       $       $   

A

     98,353         66         66           

BBB

     121                           

Member institutions*

     1,046         5         5           
                                   

Total derivatives

   $ 142,209       $ 71       $ 71       $   
                                   

 

* Collateral held with respect to 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

 

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market value, if the counterparty defaults and the related collateral pledged to the Bank, if any, is of no value to the Bank.

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

Mortgage Loan Programs

In 2008, the Bank ceased purchasing assets under the Mortgage Partnership Finance ® Program (MPF ® Program or MPF) and the Mortgage Purchase Program (MPP), and in 2006 the Bank ceased purchasing assets under the Affordable Multifamily Participation Program. The Bank maintains its existing portfolio of mortgage loans, which eventually will be reduced to zero in the ordinary course of the maturities of the assets.

The Bank seeks to manage the credit risk associated with MPP and the MPF Program by maintaining underwriting and eligibility standards and structuring possible losses into several layers, consisting of borrower equity, primary and/or supplemental mortgage insurance, loss accounts funded by the PFI, and other forms of credit enhancement provided by the PFI. These loss layers are discussed in further detail in the Bank’s Form 10-K. Given the amount of loans, the aggregate credit enhancement available, and the historical performance of the MPF and MPP loans, the Bank believes its credit exposure under MPF and MPP was not significant as of March 31, 2011.

Critical Accounting Policies and Estimates

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

Recently Issued and Adopted Accounting Guidance

See Note 2 to the Bank’s interim financial statements for a discussion of recently issued and adopted accounting guidance.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

 

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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.

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

 

               As of March 31, 2011      As of December 31, 2010  

Hedged Item / Hedging Instrument

  

Hedging Objective

  

Hedge Accounting
Designation

   Notional Amount      Notional Amount  

Advances

           
Pay fixed, receive variable interest rate swap (without options)    Converts the advance’s fixed rate to a variable rate index.   

Fair value hedges

Non-qualifying hedges

   $ 13,437       $ 13,632   
           100         100   
Pay fixed, receive variable interest rate swap (with options)    Converts the advance’s fixed rate to a variable rate index and offsets option risk in the advance.   

Fair value hedges

Non-qualifying hedges

     46,470         50,519   
           1,241         1,241   
Pay variable with embedded features, receive variable interest rate swap (non-callable)    Reduces interest rate sensitivity and repricing gaps by converting the advance’s variable rate to a different variable rate index and/or offsets embedded option risk in the advance.    Fair value hedges      313         413   
Pay variable with embedded features, receive variable interest rate swap (callable)    Reduces interest rate sensitivity and repricing gaps by converting the advance’s variable rate to a different variable rate index and/or offsets embedded option risk in the advance.    Fair value hedges              323   
Pay variable, receive variable basis swap    Reduces interest rate sensitivity and repricing gaps by converting the advance’s variable rate to a different variable rate index.    Non-qualifying hedges      357         216   
                       
      Total      61,918         66,444   
                       

Investments

           
Pay fixed, receive variable interest rate swap    Converts the investment’s fixed rate to a variable rate index.    Non-qualifying hedges      2,900         2,950   
Pay variable, receive variable interest rate swap    Converts the investment’s variable rate to a different variable rate index.    Non-qualifying hedges      50         50   
                       
      Total      2,950         3,000   
                       

Consolidated Obligation Bonds

           
Receive fixed, pay variable interest rate swap (without options)    Converts the bond’s fixed rate to a variable rate index.   

Fair value hedges

Non-qualifying hedges

     42,070         38,310   
           1,800         2,850   
Receive fixed, pay variable interest rate swap (with options)    Converts the bond’s fixed rate to a variable rate index and offsets option risk in the bond.    Fair value hedges      21,912         21,962   
Receive variable with embedded features, pay variable interest rate swap (callable)    Reduces interest rate sensitivity and repricing gaps by converting the bond’s variable rate to a different variable rate index and/or offsets embedded option risk in the bond.    Fair value hedges      30         30   
Receive variable, pay variable basis swap    Reduces interest rate sensitivity and repricing gaps by converting the bond’s variable rate to a different variable rate index.    Non-qualifying hedges      100           
                       
      Total      65,912         63,152   
                       

 

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               As of March 31, 2011      As of December 31, 2010  

Hedged Item / Hedging Instrument

  

Hedging Objective

  

Hedge Accounting
Designation

   Notional Amount      Notional Amount  

Consolidated Obligation Discount Notes

           
Receive fixed, pay variable interest rate swap    Converts the discount note’s fixed rate to a variable rate index.    Fair value hedges      1,295         1,295   
                       
      Total      1,295         1,295   
                       

Balance Sheet

           
Pay fixed, receive variable interest rate swap    Converts the asset or liability fixed rate to a variable rate index.    Non-qualifying hedges      175         225   

Interest rate cap or floor

   Protects against changes in income of certain assets due to changes in interest rates.    Non-qualifying hedges      8,500         6,000   
                       
      Total      8,675         6,225   
                       

Intermediary Positions and Other

           

Pay fixed, receive fixed interest rate swap

   To offset interest rate swaps executed with members by executing interest rate swaps with derivatives counterparties.    Non-qualifying hedges              1   
Pay fixed, receive variable interest rate swap, and receive-fixed, pay variable interest rate swap    To offset interest rate swaps executed with members by executing interest rate swaps with derivatives counterparties.    Non-qualifying hedges      90         92   

Interest rate cap or floor

   To offset interest rate caps or floors executed with members by executing interest rate caps or floors with derivatives counterparties.    Non-qualifying hedges      2,000         2,000   
                       
      Total      2,090         2,093   
                       

Total notional amount

         $ 142,840       $ 142,209   
                       

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

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

Effective Duration Exposure

(In years)

 

     As of March 31, 2011     As of December 31, 2010  
     Up 200 Basis Points          Current         Down 200  Basis
Points*
    Up 200 Basis Points          Current         Down 200 Basis
Points*
 

Assets

     0.69         0.47        (0.07     0.67         0.46        0.01   

Liabilities

     0.50         0.57        0.23        0.50         0.57        0.23   

Equity

     3.01         (0.75     (3.84     2.95         (0.97     (2.89

Effective duration gap

     0.19         (0.10     (0.30     0.17         (0.11     (0.22

 

* The “down 200 basis points” scenarios shown above are considered to be “constrained shocks”, intended to prevent the possibility of negative interest rates when a designated low rate environment exists.

 

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The Bank also analyzes its interest-rate risk and market exposure by evaluating the theoretical market value of equity. The market value of equity represents the net result of the present value of future cash flows discounted to arrive at the theoretical market value of each balance sheet item. By using the discounted present value of future cash flows, the Bank is able to factor in the various maturities of assets and liabilities, similar to the effective duration analysis discussed above. The Bank determines the theoretical market value of assets and liabilities utilizing a Level 3 pricing approach as more fully described in Note 12 to the Bank’s interim financial statements. The difference between the market value of total assets and the market value of total liabilities is the market value of equity. A more volatile market value of equity under different shock scenarios tends to result in a higher effective duration of equity, indicating increased sensitivity to interest rate changes. Although the Bank’s total capital increased by $154 million from December 31, 2010 to March 31, 2011, the market value of equity increased by $270 million during this same period due primarily to an increase in MBS prices.

Market Value of Equity

(In millions)

 

     As of March 31, 2011      As of December 31, 2010  
     Up 200 Basis Points          Current          Down 200 Basis
Points*
     Up 200 Basis Points          Current          Down 200 Basis
Points*
 

Assets

   $ 118,655       $ 120,141       $ 120,870       $ 125,891       $ 127,451       $ 128,219   

Liabilities

     110,577         111,758         112,527         118,095         119,338         120,156   

Equity

     8,078         8,383         8,343         7,796         8,113         8,063   

 

* The “down 200 basis points” scenarios shown above are considered to be “constrained shocks”, intended to prevent the possibility of negative interest rates when a designated low rate environment exists.

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

As of March 31, 2011, the Bank’s Certifying Officers have evaluated the effectiveness of the design and operation of its disclosure controls and procedures. Based on that evaluation, they have concluded that the Bank’s disclosure controls and procedures (as defined in Rules 13a-15(a) and 15d-15(e) under the Exchange Act) were effective to provide reasonable assurance that information required to be disclosed by the Bank in the reports that it files or submits under the Exchange Act (1) is accumulated and communicated to the Certifying Officers, as appropriate, to allow timely decisions regarding required disclosure; and (2) is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.

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

 

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Changes in Internal Control Over Financial Reporting

During the first quarter of 2011, there were no changes in the Bank’s internal control over financial reporting that have affected materially, or are reasonably likely to affect materially, the Bank’s internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

On January 18, 2011, the Bank filed a complaint in the State Court of Fulton County, Georgia relating to material misrepresentations in the offering documents of thirty private-label MBS sold to the Bank. The Bank’s complaint is an action for monetary damages and other relief and alleges violations of the Georgia RICO (Racketeer Influenced and Corrupt Organizations) Act, fraud and negligent misrepresentation in violation of Georgia law. On February 17, 2011, certain of the defendants filed a Notice of Removal to remove the case from the State Court of Fulton County, Georgia to the United States District Court for the Northern District of Georgia, Atlanta Division (Case No. 1:11-cv-00489). On March 11, 2011, the Bank filed a motion to remand the case to the State Court of Fulton County, and on April 22, 2011, the United States District Court for the Northern District of Georgia, Atlanta Division granted the Bank’s motion to remand the case to state court. For a discussion of this litigation, see “Part I. Item 3. Legal Proceedings” in the Bank’s Form 10-K.

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

 

Item 1A. Risk Factors

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

 

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

Not applicable.

 

Item 3. Defaults Upon Senior Securities

None.

 

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Item 4. (Removed and Reserved)

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

  3.1    Restated Organization Certificate of the Federal Home Loan Bank of Atlanta (1)
  3.2    Bylaws of the Federal Home Loan Bank of Atlanta (Revised and Restated) (2)
  4.1    Capital Plan of the Federal Home Loan Bank of Atlanta (3)
10.1    General and ADEA Release, effective as of April 1, 2011, between the Federal Home Loan Bank of Atlanta and Jill Spencer +
31.1    Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +
31.2    Certification of the Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +
32.1    Certification of the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +

 

(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: May 12, 2011   By:   /s/ W. Wesley McMullan
  Name:   W. Wesley McMullan
  Title:   President and Chief Executive Officer
  By:   /s/ Kirk R. Malmberg
  Name:   Kirk R. Malmberg
  Title:   Executive Vice President and
Chief Financial Officer

 

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