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EX-32.1 - EXHIBIT - Federal Home Loan Bank of Atlantafhlb-atlq32014ex321.htm
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EXCEL - IDEA: XBRL DOCUMENT - Federal Home Loan Bank of AtlantaFinancial_Report.xls

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

For the quarterly period ended September 30, 2014
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-51845
 _____________________________________ 
FEDERAL HOME LOAN BANK OF ATLANTA
(Exact name of registrant as specified in its charter)
_____________________________________  

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

Registrant’s telephone number, including area code: (404) 888-8000
_____________________________________  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
x  (Do not check if a smaller reporting company)
Smaller reporting company
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
The number of shares outstanding of the registrant’s Class B Stock, par value $100, as of October 31, 2014 was 46,847,312.



Table of Contents
 





PART I. FINANCIAL INFORMATION.

Item 1. Financial Statements.
FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CONDITION
(Unaudited)
(In millions, except par value)
 
As of September 30, 2014
 
As of December 31, 2013
Assets
 
 
 
Cash and due from banks
$
4,386

 
$
4,374

Interest-bearing deposits (including deposits with another FHLBank of $2 and $1 as of September 30, 2014 and December 31, 2013, respectively)
1,010

 
1,007

Securities purchased under agreements to resell
455

 

Federal funds sold
4,095

 
1,795

Investment securities:
 
 
 
    Trading securities (includes another FHLBank’s bond of $61 and $65 as of September 30, 2014 and December 31, 2013, respectively)
1,428

 
1,667

    Available-for-sale securities
2,073

 
2,299

    Held-to-maturity securities (fair value of $21,141 and $20,146 as of September 30, 2014 and December 31, 2013, respectively)
21,082

 
20,176

Total investment securities
24,583

 
24,142

Advances
88,627

 
89,588

Mortgage loans held for portfolio, net:
 
 
 
Mortgage loans held for portfolio
792

 
929

Allowance for credit losses on mortgage loans
(4
)
 
(11
)
Total mortgage loans held for portfolio, net
788

 
918

Accrued interest receivable
184

 
199

Derivative assets
118

 
53

Premises and equipment, net
26

 
29

Other assets
165

 
211

Total assets
$
124,437

 
$
122,316

Liabilities
 
 
 
Interest-bearing deposits
$
1,271

 
$
1,752

Consolidated obligations, net:
 
 
 
Discount notes
26,055

 
32,202

Bonds
89,670

 
80,728

Total consolidated obligations, net
115,725

 
112,930

Mandatorily redeemable capital stock
19

 
24

Accrued interest payable
202

 
183

Affordable Housing Program payable
69

 
74

Derivative liabilities
180

 
187

Other liabilities
451

 
514

Total liabilities
117,917

 
115,664

Commitments and contingencies (Note 15)

 

Capital
 
 
 
Capital stock Class B putable ($100 par value) issued and outstanding shares:
 
 
 
Subclass B1 issued and outstanding shares: 7 and 10 as of September 30, 2014 and December 31, 2013, respectively
727

 
946

Subclass B2 issued and outstanding shares: 39 as of September 30, 2014 and December 31, 2013
3,927

 
3,937

Total capital stock Class B putable
4,654

 
4,883

Retained earnings:
 
 
 
Restricted
184

 
141

Unrestricted
1,555

 
1,516

Total retained earnings
1,739

 
1,657

Accumulated other comprehensive income
127

 
112

Total capital
6,520

 
6,652

Total liabilities and capital
$
124,437

 
$
122,316


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

3


FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF INCOME
(Unaudited)
(In millions)
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Interest income
 
 
 
 
 
 
 
Advances
$
11

 
$
54

 
$
119

 
$
178

Prepayment fees on advances, net

 
1

 
1

 
2

Interest-bearing deposits
1

 
1

 
3

 
4

Securities purchased under agreements to resell
1

 
1

 
1

 
1

Federal funds sold
2

 
1

 
6

 
7

Trading securities
19

 
26

 
57

 
79

Available-for-sale securities
30

 
33

 
93

 
98

Held-to-maturity securities
58

 
65

 
180

 
188

Mortgage loans
12

 
14

 
38

 
47

Total interest income
134

 
196

 
498

 
604

Interest expense
 
 
 
 
 
 
 
Consolidated obligations:
 
 
 
 
 
 
 
 Discount notes
8

 
5

 
22

 
19

 Bonds
80

 
104

 
247

 
325

Mandatorily redeemable capital stock

 
1

 
1

 
1

Total interest expense
88

 
110

 
270

 
345

Net interest income
46

 
86

 
228

 
259

(Reversal) provision for credit losses
(2
)
 
1

 
(4
)
 
4

Net interest income after (reversal) provision for credit losses
48

 
85

 
232

 
255

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

 

 

 
(1
)
Net amount of impairment losses (reclassified from) recorded in accumulated other comprehensive income
(2
)
 

 
(3
)
 
1

Net impairment losses recognized in earnings
(2
)
 

 
(3
)
 

Net losses on trading securities
(19
)
 
(15
)
 
(46
)
 
(79
)
Net gains on derivatives and hedging activities
77

 
34

 
108

 
151

Gain on early extinguishment of debt

 
2

 
15

 
2

Letters of credit fees
7

 
4

 
20

 
14

Gain on litigation settlements, net
4

 

 
4

 

Other

 

 
2

 
2

Total noninterest income
67

 
25

 
100

 
90

Noninterest expense
 
 
 
 
 
 
 
Compensation and benefits
19

 
16

 
53

 
49

Other operating expenses
10

 
11

 
29

 
32

Finance Agency
2

 
2

 
7

 
6

Office of Finance
1

 
2

 
4

 
5

Other

 

 
2

 

Total noninterest expense
32

 
31

 
95

 
92

Income before assessments
83

 
79

 
237

 
253

Affordable Housing Program assessments
9

 
8

 
24

 
25

Net income
$
74

 
$
71

 
$
213

 
$
228


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

4


FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In millions)
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
74

 
$
71

 
$
213

 
$
228

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

 

 

 
(1
)
Net change in fair value on other-than-temporarily impaired available-for-sale securities
(5
)
 
16

 
11

 
141

Reclassification of noncredit portion of impairment losses included in net income
2

 

 
3

 

Net noncredit portion of other-than-temporary impairment losses on available-for-sale securities
(3
)
 
16

 
14

 
140

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

 

 

 
(1
)
Reclassification of noncredit portion from held-to-maturity securities to available-for-sale securities

 

 

 
1

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

 

 

 

   Other comprehensive income related to pension and postretirement benefit plans

 

 
1

 
1

Total other comprehensive (loss) income
(3
)
 
16

 
15

 
141

Total comprehensive income
$
71

 
$
87

 
$
228

 
$
369


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

5


FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CAPITAL
(Unaudited)
(In millions)
 
 
Capital Stock Class B Putable
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total Capital    
 
Shares        
 
Par Value
 
Restricted    
 
Unrestricted    
 
Total        
 
Balance, December 31, 2012
49

 
$
4,898

 
$
73

 
$
1,362

 
$
1,435

 
$
(58
)
 
$
6,275

Issuance of capital stock
34

 
3,427

 

 

 

 

 
3,427

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

 

 

 

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

 
(8
)
 

 

 

 

 
(8
)
Comprehensive income

 

 
46

 
182

 
228

 
141

 
369

Cash dividends on capital stock

 

 

 
(84
)
 
(84
)
 

 
(84
)
Balance, September 30, 2013
43

 
$
4,351

 
$
119

 
$
1,460

 
$
1,579

 
$
83

 
$
6,013

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2013
49

 
$
4,883

 
$
141

 
$
1,516

 
$
1,657

 
$
112

 
$
6,652

Issuance of capital stock
34

 
3,415

 

 

 

 

 
3,415

Repurchase/redemption of capital stock
(37
)
 
(3,640
)
 

 

 

 

 
(3,640
)
Net shares reclassified to mandatorily redeemable capital stock

 
(4
)
 

 

 

 

 
(4
)
Comprehensive income

 

 
43

 
170

 
213

 
15

 
228

Cash dividends on capital stock

 

 

 
(131
)
 
(131
)
 

 
(131
)
Balance, September 30, 2014
46

 
$
4,654

 
$
184

 
$
1,555

 
$
1,739

 
$
127

 
$
6,520


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

6


FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
 
 
For the Nine Months Ended September 30,
 
2014
 
2013
Operating activities
 
 
 
Net income
$
213

 
$
228

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization, and accretion
(87
)
 
(64
)
  (Reversal) provision for credit losses
(4
)
 
4

  Loss due to change in net fair value adjustment on derivative and hedging activities
60

 
7

  Net change in fair value adjustment on trading securities
46

 
79

  Net impairment losses recognized in earnings
3

 

  Gain on early extinguishment of debt
(15
)
 
(2
)
Net change in:
 
 
 
  Accrued interest receivable
15

 
26

  Other assets
41

 
(14
)
  Affordable Housing Program payable
(7
)
 
(13
)
  Accrued interest payable
19

 
38

  Other liabilities
(37
)
 
1

  Total adjustments
34

 
62

Net cash provided by operating activities
247

 
290

Investing activities
 
 
 
Net change in:
 
 
 
  Interest-bearing deposits
224

 
968

  Securities purchased under agreements to resell
(455
)
 
(750
)
  Federal funds sold
(2,300
)
 
4,240

Trading securities:
 
 
 
  Proceeds from maturities
200

 
251

Available-for-sale securities:
 
 
 
  Proceeds from maturities
261

 
435

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

 
550

  Proceeds from maturities of long-term
2,091

 
2,897

  Purchases of long-term
(3,022
)
 
(6,042
)
Advances:
 
 
 
  Proceeds from principal collected
131,994

 
127,399

  Made
(131,197
)
 
(119,605
)
Mortgage loans:
 
 
 
  Proceeds from principal collected
119

 
228

     Proceeds from sale of held for sale

 
18

Proceeds from sale of foreclosed assets
19

 
19

Purchase of premise, equipment, and software
(3
)
 
(2
)
Net cash (used in) provided by investing activities
(2,069
)
 
10,606

 
 
 
 
 
 
 
 
 
 
 
 

7


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

 
For the Nine Months Ended September 30,
 
2014
 
2013
Financing activities
 
 
 
Net change in deposits
(491
)
 
(199
)
Net payments on derivatives containing a financing element
(72
)
 
(121
)
Proceeds from issuance of consolidated obligations:
 
 
 
 Discount notes
353,473

 
197,307

 Bonds
64,255

 
62,917

Payments for debt issuance costs
(7
)
 
(6
)
Payments for maturing and retiring consolidated obligations:
 
 
 
 Discount notes
(359,620
)
 
(212,758
)
 Bonds
(55,339
)
 
(57,996
)
Proceeds from issuance of capital stock
3,415

 
3,427

Payments for repurchase/redemption of capital stock
(3,640
)
 
(3,966
)
Payments for repurchase/redemption of mandatorily redeemable capital stock
(9
)
 
(24
)
Cash dividends paid
(131
)
 
(84
)
Net cash provided by (used in) financing activities
1,834

 
(11,503
)
Net increase (decrease) in cash and due from banks
12

 
(607
)
Cash and due from banks at beginning of the period
4,374

 
4,083

Cash and due from banks at end of the period
$
4,386

 
$
3,476

Supplemental disclosures of cash flow information:
 
 
 
 Cash paid for:
 
 
 
Interest
$
261

 
$
327

Affordable Housing Program assessments, net
$
31

 
$
34

 Noncash investing and financing activities:
 
 
 
Net shares reclassified to mandatorily redeemable capital stock
$
4

 
$
8

Held-to-maturity securities acquired with accrued liabilities
$
282

 
$
41

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

 
$
11

Transfers of mortgage loans to real estate owned
$
15

 
$
23


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

 


8


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

Note 1—Basis of Presentation

The accompanying unaudited interim financial statements of the Federal Home Loan Bank of Atlanta (Bank) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). To prepare the financial statements in conformity with GAAP, management must make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could be different from these estimates. The foregoing interim financial statements are unaudited; however, in the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the results for the interim periods, have been included. The results of operations for interim periods are not necessarily indicative of results to be expected for the year ending December 31, 2014, 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, 2013, which are contained in the Bank’s 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 14, 2014 (Form 10-K).

The Bank has certain financial instruments, including derivative instruments and securities purchased under agreements to resell, that are subject to offset under master netting arrangements or by operation of law. Additional information regarding derivative instruments is provided in Note 13Derivatives and Hedging Activities to the Bank’s interim financial statements. The Bank does not have any offsetting liabilities related to its securities purchased under agreements to resell for the periods presented. Based on the fair value of the related securities held as collateral, the securities purchased under agreements to resell were fully collateralized for the periods presented.

During the three-month period ended March 31, 2014, the Bank made certain enhancements to its allowance for credit loss calculation related to the Bank’s conventional single-family residential mortgage loan portfolio.  The allowance for conventional single-family residential mortgage loans is determined by an analysis (performed at least quarterly) that includes segregating the portfolio into various aging groups.  For loans that are 60 days or less past due, the Bank calculates a loss severity, default rate, and the expected loss based on individual loan characteristics.  For loans that are more than 60 days past due, the allowance is determined using an automated valuation model.  Inherent in the Bank’s evaluation of loan performance is an analysis of various credit enhancements at the individual master commitment level to determine the credit enhancement available to recover losses on conventional single-family residential mortgage loans under each individual master commitment. 

Additionally, during the three-month period ended March 31, 2014, the Bank began to classify as a loss and charge-off the portion of outstanding conventional single-family residential mortgage loan balances in excess of the fair value of the underlying property, less costs to sell and adjusted for any available credit enhancements, once the loans are 180 days delinquent. These changes did not have a material effect on the Bank's financial condition or results of operations.

A description of all of the Bank’s significant accounting policies is included in Note 2Summary of Significant Accounting Policies to the 2013 audited financial statements contained in the Bank’s Form 10-K. There have been no material changes to these policies as of September 30, 2014.

Revision

During the three-month period ended September 30, 2014, the Bank identified a classification error in its previously reported Statements of Cash Flows for the three-month period ended March 31, 2014 and the six-month period ended June 30, 2014, contained in the previously filed Quarterly Reports on Form 10-Q for those periods. After evaluating the quantitative and qualitative aspects of the classification error, the Bank determined that the error was not material to the previously issued Statements of Cash Flows. Accordingly, the classification error has been corrected in this Quarterly Report on Form 10-Q. The correction had no impact on the Bank’s financial condition or results of operations for any period.








9

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


The following table summarizes the revisions made to the Bank’s Statement of Cash Flows for the three-month period ended March 31, 2014 and the six-month period ended June 30, 2014:

 
For the Three Months Ended March 31, 2014
 
For the Six Months Ended June 30, 2014
 
As Originally Reported
 
As Revised
 
As Originally Reported
 
As Revised
Operating activities
 
 
 
 
 
 
 
Net change in:
 
 
 
 
 
 
 
Other liabilities
$
(320
)
 
$
(11
)
 
$
(322
)
 
$
(13
)
Total adjustments
(304
)
 
5

 
(304
)
 
5

Net cash (used in) provided by operating activities
(227
)
 
82

 
(165
)
 
144

 
 
 
 
 
 
 
 
Investing activities
 
 
 
 
 
 
 
Held-to-maturity securities:
 
 
 
 
 
 
 
Purchases of long-term
(1,436
)
 
(1,745
)
 
(1,664
)
 
(1,973
)
Net cash provided by (used in) investing activities
331

 
22

 
(9,201
)
 
(9,510
)

Note 2—Recently Issued and Adopted Accounting Guidance

Recently Issued Accounting Guidance

Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. In August 2014, the Financial Accounting Standards Board (FASB) issued guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This guidance requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year after the date the financial statements are issued. The guidance becomes effective for the Bank for the interim and annual periods ending after December 15, 2016, and early application is permitted. The adoption of this guidance will have no effect on the Bank's financial condition or results of operations.

Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. In August 2014, the FASB issued amended guidance related to the classification and measurement of certain government-guaranteed mortgage loans upon foreclosure. The amendments in this guidance require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. This guidance becomes effective for the Bank for the interim and annual periods beginning after December 15, 2014, and may be adopted using either the modified retrospective transition method or the prospective transition method. The adoption of this guidance is not expected to materially effect the Bank’s financial condition or results of operations.

Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. In June 2014, the FASB issued amended guidance for repurchase-to-maturity transactions and repurchase agreements executed as repurchase financings. Specifically, this guidance requires entities to account for (1) repurchase-to-maturity transactions as secured borrowings rather than as sales with forward repurchase agreements; and (2) repurchase agreements executed contemporaneously with the initial transfer of the underlying financial asset with the same counterparty as separate transactions only. In addition, this guidance requires a transferor to disclose additional information about certain transactions, including those in which it retains substantially all of the exposure to the economic returns of the underlying transferred asset over the transaction’s term. This guidance becomes effective for the Bank for the first interim or annual period beginning after December 15, 2014. The changes in accounting for transactions outstanding on the effective date are required to be presented on a cumulative-effect approach. The adoption of this guidance is not expected to materially effect the Bank’s financial condition or results of operations.

Revenue from Contracts with Customers. In May 2014, the FASB issued guidance on the recognition of revenue from contracts with customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for public entities for annual reporting periods beginning after December

10

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


15, 2016, including interim periods within that reporting period, and will be applied retrospectively either to each prior reporting period or with a cumulative effect recognized at the date of initial application. The Bank is in the process of evaluating this guidance, but its effect on the Bank’s financial condition or results of operations is not expected to be material.

Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. In January 2014, the FASB issued guidance intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. The guidance clarifies that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. This guidance is effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2014. The adoption of this guidance will result in increased disclosures, but is not expected to materially affect the Bank’s financial condition or results of operations.

Recently Adopted Accounting Guidance

Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date. In February 2013, the FASB issued guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. This guidance requires an entity to measure these obligations as the sum of (1) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (2) any additional amount the reporting entity expects to pay on behalf of its co-obligors. The Bank adopted this guidance effective January 1, 2014. The adoption of this guidance did not have any effect on the Bank's financial condition or results of operations.

Note 3—Trading Securities

Major Security Types. Trading securities were as follows:
 
 
As of September 30, 2014
 
As of December 31, 2013
Government-sponsored enterprises debt obligations
$
1,366

 
$
1,601

Another FHLBank’s bond (1)
61

 
65

State or local housing agency debt obligations
1

 
1

Total
$
1,428

 
$
1,667

 ____________
(1) 
The Federal Home Loan Bank of Chicago is the primary obligor of this consolidated obligation bond.
Net losses on trading securities were as follows:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net losses on trading securities held at period end
$
(19
)
 
$
(15
)
 
$
(46
)
 
$
(77
)
Net losses on trading securities sold or matured during the period

 

 

 
(2
)
Net losses on trading securities
$
(19
)
 
$
(15
)
 
$
(46
)
 
$
(79
)







11

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


Note 4—Available-for-sale Securities

The Bank transferred a private-label residential mortgaged-backed security (MBS) from its held-to-maturity portfolio to its available-for-sale portfolio on March 31, 2013. This security represents a private-label residential MBS in the Bank’s held-to-maturity portfolio for which the Bank has recorded an other-than-temporary impairment loss. The Bank believes the other-than-temporary impairment loss constitutes evidence of a significant deterioration in the issuer’s creditworthiness. The Bank has no current plans to sell this security nor is the Bank under any requirement to sell this security.
The following table presents information on the private-label residential MBS transferred. The amounts below represent the value as of the transfer date.
 
Amortized    
Cost
 
Other-than-temporary
Impairment
Recognized in
Accumulated Other
Comprehensive Income
 
Estimated
Fair Value
Transferred at March 31, 2013
$
12

 
$
1

 
$
11


Major Security Types. Private-label residential MBS were as follows:
 
 
Amortized    
Cost
 
Other-than-temporary
Impairment
Recognized in
Accumulated Other
Comprehensive Income
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair Value
As of September 30, 2014
$
1,934

 
$
17

 
$
156

 
$

 
$
2,073

As of December 31, 2013
$
2,174

 
$
27

 
$
152

 
$

 
$
2,299


The following tables summarize the private-label residential MBS 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.
 
 
Less than 12 Months
 
12 Months or More
 
Total
 
  Number of  
Positions
 
Estimated
  Fair  Value  
 
Gross
  Unrealized  
Losses
 
  Number of  
Positions
 
Estimated
  Fair  Value  
 
Gross
  Unrealized  
Losses
 
  Number of  
Positions
 
Estimated
  Fair  Value  
 
Gross
  Unrealized  
Losses
As of September 30, 2014
3

 
$
135

 
$
1

 
9

 
$
202

 
$
16

 
12

 
$
337

 
$
17

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2013
6

 
$
137

 
$
1

 
10

 
$
243

 
$
26

 
16

 
$
380

 
$
27


A summary of available-for-sale MBS issued by members or affiliates of members, Bank of America Corporation, Charlotte, NC, follows:
 
 
Amortized  
Cost
 
Other-than-temporary  
Impairment
Recognized in
 Accumulated Other
Comprehensive Income
 
Gross
  Unrealized  
Gains
 
Gross
  Unrealized  
Losses
 
Estimated
  Fair  Value  
As of September 30, 2014
$
1,250

 
$
16

 
$
103

 
$

 
$
1,337

 
 
 
 
 
 
 
 
 
 
As of December 31, 2013
$
1,390

 
$
26

 
$
98

 
$

 
$
1,462



12

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


Note 5—Held-to-maturity Securities

Major Security Types. Held-to-maturity securities were as follows:
 
 
As of September 30, 2014
 
As of December 31, 2013
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair  Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair  Value
State or local housing agency debt obligations
$
84

 
$
1

 
$

 
$
85

 
$
92

 
$
1

 
$

 
$
93

Government-sponsored enterprises debt obligations
4,913

 
2

 
16

 
4,899

 
3,738

 

 
24

 
3,714

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency obligations-guaranteed residential
388

 
5

 

 
393

 
465

 
7

 

 
472

Government-sponsored enterprises residential
14,104

 
126

 
62

 
14,168

 
13,952

 
109

 
115

 
13,946

Private-label residential
1,593

 
13

 
10

 
1,596

 
1,929

 
12

 
20

 
1,921

Total
$
21,082

 
$
147

 
$
88

 
$
21,141

 
$
20,176

 
$
129

 
$
159

 
$
20,146


The following tables summarize the held-to-maturity securities with unrealized losses. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
 
 
As of September 30, 2014
 
Less than 12 Months
 
12 Months or More
 
Total
 
Number of
Positions
 
Estimated
Fair  Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair  Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair  Value
 
Gross
Unrealized
Losses
Government-sponsored enterprises debt obligations
4

 
$
399

 
$
1

 
5

 
$
1,129

 
$
15

 
9

 
$
1,528

 
$
16

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises residential
8

 
298

 
2

 
47

 
3,248

 
60

 
55

 
3,546

 
62

Private-label residential
15

 
176

 
1

 
31

 
434

 
9

 
46

 
610

 
10

Total
27

 
$
873

 
$
4

 
83

 
$
4,811

 
$
84

 
110

 
$
5,684

 
$
88

 
 
As of December 31, 2013
 
Less than 12 Months
 
12 Months or More
 
Total
 
Number of
Positions
 
Estimated
Fair  Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair  Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair  Value
 
Gross
Unrealized
Losses
Government-sponsored enterprises debt obligations
9

 
$
1,970

 
$
24

 

 
$

 
$

 
9

 
$
1,970

 
$
24

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises residential
65

 
3,932

 
108

 
1

 
147

 
7

 
66

 
4,079

 
115

Private-label residential
40

 
817

 
12

 
18

 
241

 
8

 
58

 
1,058

 
20

Total
114

 
$
6,719

 
$
144

 
19

 
$
388

 
$
15

 
133

 
$
7,107

 
$
159



13

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


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

 
As of September 30, 2014
 
As of December 31, 2013
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Non-mortgage-backed securities:
 
 
 
 
 
 
 
Due in one year or less
$
568

 
$
568

 
$
430

 
$
430

Due after one year through five years
4,429

 
4,416

 
3,400

 
3,377

Total non-mortgage-backed securities
4,997

 
4,984

 
3,830

 
3,807

Mortgage-backed securities
16,085

 
16,157

 
16,346

 
16,339

Total
$
21,082

 
$
21,141

 
$
20,176

 
$
20,146


A summary of held-to-maturity MBS issued by members or affiliates of members, Bank of America Corporation, Charlotte, NC, follows:
 
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
As of September 30, 2014
 
$
490

 
$
3

 
$
4

 
$
489

 
 
 
 
 
 
 
 
 
As of December 31, 2013
 
$
619

 
$
4

 
$
8

 
$
615


Note 6—Other-than-temporary Impairment

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

14

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


intend to sell these investments and it is not more likely than not that the Bank will be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. The Bank does not consider these investments to be other-than-temporarily impaired as of September 30, 2014.
Private-label MBS. To assess whether the entire amortized cost basis of its private-label MBS will be recovered, the Bank performs a cash flow analysis for each of its private-label MBS. In performing the cash flow analysis for each of these securities, the Bank uses two third-party models. The first model considers borrower characteristics and the particular attributes of the loans underlying the Bank’s securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults, and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas (CBSAs), which are based upon an assessment of the individual housing markets. The term CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the United States Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area of 10,000 or more people. The Bank’s housing price forecast as of September 30, 2014 included a short-term housing price forecast with projected changes ranging from a decrease of three percent to an increase of nine percent over the 12 month period beginning July 1, 2014. For the vast majority of markets, the projected short-term housing price changes range from zero percent to an increase of six percent. Thereafter, a unique path is projected for each geographic area based on an internally developed framework derived from historical data.

The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults, and loss severities, were then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. The model classifies securities based on current characteristics and performance, which may be different from the securities’ classification as determined by the originator at the time of origination.
At each quarter end, the Bank compares the present value of the cash flows (discounted at the securities' effective yield) expected to be collected with respect to its private-label MBS to the amortized cost basis of the security to determine whether a credit loss exists. For the Bank’s variable rate and hybrid private-label MBS, the Bank uses a forward interest rate curve to project the future estimated cash flows. The Bank then uses the effective interest rate for the security prior to impairment for determining the present value of the future estimated cash flows. For securities previously identified as other-than-temporarily impaired, the Bank updates its estimate of future estimated cash flows on a quarterly basis.
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 September 30, 2014, as well as related current credit enhancement:
 
 
Significant Inputs
 
 
 
Prepayment Rate
 
Default Rates
 
Loss Severities
 
Current Credit Enhancement
Year of
Securitization
 
Weighted    
Average
(%)
 
Weighted    
Average
(%)
 
Weighted    
Average
(%)
 
Weighted    
Average
(%)
Prime:
 
 
 
 
 
 
 
 
2005
 
15.79
 
7.96
 
32.82
 
0.16
Alt-A:
 
 
 
 
 
 
 
 
2007
 
13.49
 
26.94
 
40.27
 
0.00


15

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


The following table presents a roll-forward of the amount of credit losses on the Bank’s investment securities recognized in earnings during the life of the securities for which a portion of the other-than-temporary loss was recognized in accumulated other comprehensive income:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Balance, beginning of period
$
559

 
$
584

 
$
574

 
$
586

Amount related to credit loss for which an other-than-temporary impairment was previously recognized
2

 

 
3

 

Increase in cash flows expected to be collected, recognized over the remaining life of the securities
(9
)
 
(4
)
 
(25
)
 
(6
)
Balance, end of period
$
552

 
$
580

 
$
552

 
$
580


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

Note 7—Advances

Redemption Terms. The Bank had advances outstanding, as summarized below.  
 
As of September 30, 2014
 
As of December 31, 2013
Overdrawn demand deposit accounts
$

 
$
2

Due in one year or less
47,104

 
51,331

Due after one year through two years
11,049

 
5,366

Due after two years through three years
9,554

 
6,136

Due after three years through four years
6,241

 
8,495

Due after four years through five years
2,868

 
5,088

Due after five years
10,268

 
11,464

Total par value
87,084

 
87,882

Discount on AHP (1) advances
(7
)
 
(8
)
Discount on EDGE (2) advances
(6
)
 
(7
)
Hedging adjustments
1,560

 
1,726

Deferred commitment fees
(4
)
 
(5
)
Total
$
88,627

 
$
89,588

___________
(1) The Affordable Housing Program
(2) The Economic Development and Growth Enhancement program


16

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


The following table summarizes advances by year of contractual maturity or, for convertible advances, next conversion date:
 
 
As of September 30, 2014
 
As of December 31, 2013
Overdrawn demand deposit accounts
$

 
$
2

Due or convertible in one year or less
50,223

 
54,522

Due or convertible after one year through two years
10,886

 
5,414

Due or convertible after two years through three years
8,203

 
5,867

Due or convertible after three years through four years
4,872

 
6,643

Due or convertible after four years through five years
2,787

 
4,168

Due or convertible after five years
10,113

 
11,266

Total par value
$
87,084

 
$
87,882


Interest-rate Payment Terms. The following table details interest-rate payment terms for advances:
 
 
As of September 30, 2014
 
As of December 31, 2013
Fixed-rate:
 
 
 
 Due in one year or less
$
34,599

 
$
46,343

 Due after one year
29,691

 
28,535

Total fixed-rate
64,290

 
74,878

Variable-rate:
 
 
 
 Due in one year or less
12,505

 
4,990

 Due after one year
10,289

 
8,014

Total variable-rate
22,794

 
13,004

Total par value
$
87,084

 
$
87,882


Credit Risk. The Bank’s potential credit risk from advances is concentrated in commercial banks, thrifts, and credit unions and further is concentrated in certain larger borrowing relationships. As of September 30, 2014 and December 31, 2013, the concentration of the Bank’s advances was $62,761 and $65,472, respectively, to 10 member institutions, representing 72.1 percent and 74.5 percent, respectively, of total advances outstanding.
Based on the collateral pledged as security for advances, the Bank's credit analysis of members’ financial condition, and prior repayment history, no allowance for credit losses on advances was deemed necessary by the Bank as of September 30, 2014 and December 31, 2013. No advance was past due as of September 30, 2014 and December 31, 2013.

Note 8—Mortgage Loans Held for Portfolio

The following table presents information on mortgage loans held for portfolio by contractual maturity at the time of purchase:
 
 
As of September 30, 2014
 
As of December 31, 2013
Fixed-rate medium-term (1) single-family residential mortgage loans
 
$
113

 
$
150

Fixed-rate long-term single-family residential mortgage loans
 
680

 
781

Total unpaid principal balance
 
793

 
931

Premiums
 
3

 
3

Discounts
 
(4
)
 
(5
)
Total
 
$
792

 
$
929

____________
(1) Medium-term is defined as a term of 15 years or less.


17

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


The following table details the unpaid principal balance of mortgage loans held for portfolio by collateral or guarantee type:
 
 
As of September 30, 2014
 
As of December 31, 2013
Conventional loans
 
$
737

 
$
864

Government-guaranteed or insured loans
 
56

 
67

Total unpaid principal balance
 
$
793

 
$
931


For information related to the Bank's credit risk on mortgage loans and allowance for credit losses, see Note 9Allowance for Credit Losses to the Bank’s interim financial statements.

Note 9—Allowance for Credit Losses

The activity in the allowance for credit losses was as follows:

 
 
For the Three Months Ended September 30,
 
 
2014
 
2013
 
 
Conventional Single-family Residential Mortgage Loans
 
Conventional Single-family Residential Mortgage Loans
 
Multifamily Residential Mortgage Loans
 
Total
Balance, beginning of period
 
$
6

 
$
11

 
$
1

 
$
12

(Reversal) provision for credit losses
 
(2
)
 
1

 

 
1

Charge-offs
 

 
(1
)
 

 
(1
)
Mortgage loans transferred to held for sale
 

 

 
(1
)
 
(1
)
Balance, end of period
 
$
4

 
$
11

 
$

 
$
11


 
 
For the Nine Months Ended September 30,
 
 
2014
 
2013
 
 
Conventional Single-family Residential Mortgage Loans
 
Conventional Single-family Residential Mortgage Loans
 
Multifamily Residential Mortgage Loans
 
Total
Balance, beginning of period
 
$
11

 
$
10

 
$
1

 
$
11

(Reversal) provision for credit losses
 
(4
)
 
4

 

 
4

Charge-offs
 
(3
)
 
(3
)
 

 
(3
)
Mortgage loans transferred to held for sale
 

 

 
(1
)
 
(1
)
Balance, end of period
 
$
4

 
$
11

 
$

 
$
11


18

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



The recorded investment in conventional single-family residential mortgage loans by impairment methodology was as follows:
 
 
As of September 30, 2014
 
As of December 31, 2013
Allowance for credit losses:
 
 
 
 
   Individually evaluated for impairment
 
$
1

 
$
2

   Collectively evaluated for impairment
 
3

 
9

Total allowance for credit losses
 
$
4

 
$
11

Recorded investment:
 
 
 
 
   Individually evaluated for impairment
 
$
15

 
$
15

   Collectively evaluated for impairment
 
724

 
851

Total recorded investment
 
$
739

 
$
866


Key credit quality indicators for mortgage loans include the migration of past due loans, nonaccrual loans, loans in process of foreclosure, and impaired loans. The tables below summarize the Bank's recorded investment in mortgage loans by these key credit quality indicators:
 
As of September 30, 2014
 
Conventional Single-family Residential Mortgage Loans
 
Government-guaranteed or Insured Single-family Residential Mortgage Loans
 
Total
Past due 30-59 days
$
21

 
$
6

 
$
27

Past due 60-89 days
7

 
2

 
9

Past due 90 days or more
35

 
5

 
40

Total past due mortgage loans
63

 
13

 
76

Total current mortgage loans
676

 
43

 
719

Total mortgage loans (1)
$
739

 
$
56

 
$
795

Other delinquency statistics:
 
 
 
 
 
  In process of foreclosure (2)
$
21

 
$
2

 
$
23

  Seriously delinquent rate (3)
4.65
%
 
9.27
%
 
4.98
%
  Past due 90 days or more and still accruing interest (4)
$

 
$
5

 
$
5

  Loans on nonaccrual status (5)
$
34

 
$

 
$
34

____________
(1) The difference between the recorded investment and the carrying value of total mortgage loans of $3 relates to accrued interest.
(2) Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in lieu has been reported. Loans in the process of foreclosure are included in past due or current loans depending on their delinquency status.
(3) Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total loan portfolio segment.
(4) Mortgage loans insured or guaranteed by the Federal Housing Administration or the Department of Veterans Affairs.
(5) Represents mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest.


19

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


 
As of December 31, 2013
 
Conventional Single-family Residential Mortgage Loans
 
Government-guaranteed or Insured Single-family Residential Mortgage Loans
 
Total
Past due 30-59 days
$
30

 
$
7

 
$
37

Past due 60-89 days
9

 
3

 
12

Past due 90 days or more
51

 
9

 
60

Total past due mortgage loans
90

 
19

 
109

Total current mortgage loans
776

 
48

 
824

Total mortgage loans (1)
$
866

 
$
67

 
$
933

Other delinquency statistics:
 
 
 
 
 
  In process of foreclosure (2)
$
38

 
$
3

 
$
41

  Seriously delinquent rate (3)
5.90
%
 
13.13
%
 
6.42
%
Past due 90 days or more and still accruing interest (4)
$

 
$
9

 
$
9

  Loans on nonaccrual status (5)
$
51

 
$

 
$
51

____________
(1) The difference between the recorded investment and the carrying value of total mortgage loans of $4 relates to accrued interest.
(2) Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in lieu has been reported. Loans in the process of foreclosure are included in past due or current loans depending on their delinquency status.
(3) Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total loan portfolio segment.
(4) Mortgage loans insured or guaranteed by the Federal Housing Administration or the Department of Veterans Affairs.
(5) Represents mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest.

A troubled debt restructuring is considered to have occurred when a concession is granted to a borrower for economic or legal reasons related to the borrower's financial difficulties and that concession would not have been considered otherwise. The Bank has granted a concession when it does not expect to collect all amounts due under the original contract as a result of the restructuring. The Bank's conventional single-family residential mortgage loan troubled debt restructurings primarily involve modifying the borrower's monthly payment for a period of up to 36 months to achieve a target housing expense ratio of 31.0 percent of their qualifying monthly income. The outstanding principal balance is first re-amortized to reflect a principal and interest payment for a term not to exceed 40 years. This would result in a balloon payment at the original maturity date of the loan as the maturity date and number of remaining monthly payments are not adjusted. If the 31.0 percent housing expense ratio is not achieved through re-amortization, the interest rate is reduced in 0.125 percent increments below the original note rate, to a floor rate of 3.00 percent, resulting in reduced principal and interest payments, for the temporary payment modification period of up to 36 months, until the target 31.0 percent housing expense ratio is met. A conventional single-family residential mortgage loan in which the borrower filed for Chapter 7 bankruptcy and the bankruptcy court discharged the borrower's obligation to the Bank is considered a troubled debt restructuring.

The table below presents the Bank's recorded investment balance in troubled debt restructured loans as of September 30, 2014 and December 31, 2013:
 
 
 
Performing
 
Non-performing
 
Total
Conventional single-family residential loans
 
 
$
11

 
$
4

 
$
15


Due to the minimal change in terms of modified loans (i.e., no write-offs of principal), the Bank's pre-modification recorded investment was not materially different than the post-modification recorded investment in troubled debt restructuring during the three and nine months ended September 30, 2014 and 2013.




20

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


The following table shows troubled debt restructurings from the previous 12 months that subsequently defaulted during the periods presented. A payment default on a troubled debt restructuring is considered to have occurred if the contractually due principal or interest is 60 days or more past due at any time during the periods presented.

 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Conventional single-family residential loans (1)
 
$

 
$

 
$
2

 
$
1

____________
(1) For purposes of this disclosure, only the initial default was included; however, a loan can experience another payment default in a subsequent period.

The following tables summarize the recorded investment, unpaid principal balance, and related allowance for credit losses for impaired loans as of September 30, 2014 and December 31, 2013, and the average recorded investment on these loans during the three and nine months ended September 30, 2014 and 2013. Related interest income recognized on these loans during the three and nine months ended September 30, 2014 and 2013 was less than $1.

 
 
As of September 30, 2014
 
As of December 31, 2013
 
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
With no related allowance
 
 
 
 
 
 
 
 
 
 
 
 
Conventional single-family residential loans
 
$
8

 
$
8

 
$

 
$

 
$

 
$

With an allowance
 
 
 
 
 
 
 
 
 
 
 
 
Conventional single-family residential loans
 
7

 
7

 
1

 
15

 
15

 
2

Total
 
$
15

 
$
15

 
$
1

 
$
15

 
$
15

 
$
2


 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
With no related allowance
 
 
 
 
 
 
 
 
Conventional single-family residential loans:
 
 
 
 
 
 
 
 
Average recorded investment
 
$
8

 
$

 
$
9

 
$

With an allowance
 
 
 
 
 
 
 
 
Conventional single-family residential loans:
 
 
 
 
 
 
 
 
Average recorded investment
 
7

 
13

 
7

 
13


Note 10—Consolidated Obligations

Consolidated obligations, consisting of consolidated obligation bonds and discount notes, are the joint and several obligations of the 12 Federal Home Loan Banks (FHLBanks) and are backed only by the financial resources of the FHLBanks. The Federal Home Loan Banks Office of Finance (Office of Finance) tracks the amount of debt issued on behalf of each FHLBank. In addition, the Bank separately tracks and records as a liability its specific portion of consolidated obligations for which it is the primary obligor.

21

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


Interest-rate Payment Terms. The following table details the Bank’s consolidated obligation bonds by interest-rate payment type: 
 
As of September 30, 2014
 
As of December 31, 2013
Fixed-rate
$
76,029

 
$
59,885

Step up/down
6,776

 
7,617

Simple variable-rate
6,575

 
13,005

Variable-rate capped floater
35

 
45

Fixed-rate that converts to variable-rate
10

 

Total par value
$
89,425

 
$
80,552


Redemption Terms. The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding, by year of contractual maturity:
 
 
As of September 30, 2014
 
As of December 31, 2013
 
Amount
 
Weighted-
average
Interest Rate (%)    
 
Amount
 
Weighted-
average
Interest Rate (%)    
Due in one year or less
$
50,245

 
0.20
 
$
41,725

 
0.50
Due after one year through two years
14,529

 
1.22
 
9,485

 
0.67
Due after two years through three years
9,418

 
2.21
 
7,503

 
2.21
Due after three years through four years
5,197

 
2.10
 
6,355

 
2.81
Due after four years through five years
3,116

 
1.53
 
5,150

 
1.67
Due after five years
6,920

 
2.02
 
10,334

 
1.92
Total par value
89,425

 
0.87
 
80,552

 
1.13
Premiums
75

 
 
 
82

 
 
Discounts
(23
)
 
 
 
(24
)
 
 
Hedging adjustments
193

 
 
 
118

 
 
Total
$
89,670

 
 
 
$
80,728

 
 

The following table presents the Bank’s consolidated obligation bonds outstanding by call feature:
 
 
As of September 30, 2014
 
As of December 31, 2013
Noncallable
$
66,566

 
$
56,569

Callable
22,859

 
23,983

Total par value
$
89,425

 
$
80,552



22

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


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

 
As of September 30, 2014
 
As of December 31, 2013
Due or callable in one year or less
$
67,589

 
$
59,458

Due or callable after one year through two years
10,399

 
7,795

Due or callable after two years through three years
7,138

 
4,491

Due or callable after three years through four years
2,696

 
6,095

Due or callable after four years through five years
871

 
1,571

Due or callable after five years
732

 
1,142

Total par value
$
89,425

 
$
80,552


Consolidated Obligation Discount Notes. Consolidated obligation discount notes are issued to raise short-term funds. Consolidated obligation discount notes are consolidated obligations with original contractual maturities of up to one year. These consolidated obligation discount notes are issued at less than their face amounts and redeemed at par value when they mature.
The Bank’s participation in consolidated obligation discount notes was as follows:
 
 
Book Value
 
Par Value
 
Weighted-average
Interest Rate (%)
As of September 30, 2014
$
26,055

 
$
26,062

 
0.09
As of December 31, 2013
$
32,202

 
$
32,208

 
0.11

Note 11—Capital and Mandatorily Redeemable Capital Stock

Capital. The Bank was in compliance with the Federal Housing Finance Agency's (Finance Agency) regulatory capital rules and requirements as shown in the following table:
 
 
As of September 30, 2014
 
As of December 31, 2013
 
Required    
 
Actual        
 
Required    
 
Actual        
Risk based capital
$
1,789

 
$
6,412

 
$
2,246

 
$
6,563

Total capital-to-assets ratio
4.00
%
 
5.15
%
 
4.00
%
 
5.37
%
Total regulatory capital (1)
$
4,977

 
$
6,412

 
$
4,893

 
$
6,563

Leverage ratio
5.00
%
 
7.73
%
 
5.00
%
 
8.05
%
Leverage capital
$
6,222

 
$
9,618

 
$
6,116

 
$
9,845

___________
(1) 
Mandatorily redeemable capital stock is considered capital for regulatory purposes, and “total regulatory capital” includes the Bank’s $19 and $24 in mandatorily redeemable capital stock as of September 30, 2014 and December 31, 2013, respectively.


23

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


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

 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Balance, beginning of period
$
21

 
$
25

 
$
24

 
$
40

Capital stock subject to mandatory redemption reclassified from equity during the period due to:
 
 
 
 
 
 
 
  Attainment of non-member status
3

 
1

 
5

 
8

Repurchase/redemption of mandatorily redeemable capital stock
(5
)
 
(2
)
 
(9
)
 
(24
)
Capital stock previously subject to mandatory redemption reclassified to capital stock

 

 
(1
)
 

Balance, end of period
$
19

 
$
24

 
$
19


$
24


The following table shows the amount of mandatorily redeemable capital stock by year of redemption. The year of redemption in the table is the end of the five-year redemption period, or with respect to activity-based stock, the later of the expiration of the five-year redemption period or the activity’s maturity date.
 
 
As of September 30, 2014
 
As of December 31, 2013
Due in one year or less
$
4

 
$
5

Due after one year through two years
8

 
9

Due after two years through three years
6

 
8

Due after three years through four years

 
1

Due after four years through five years
1

 

Due after five years

 
1

Total
$
19

 
$
24


Note 12—Accumulated Other Comprehensive Income

Components comprising accumulated other comprehensive income were as follows:
 
Pension and
Postretirement
Benefits
 
Noncredit Portion
of Other-than-
temporary
Impairment  Losses
on Available-for-
sale Securities
 
Noncredit Portion of Other-than-temporary Impairment Losses on Held-to-maturity Securities
 
Total  Accumulated
Other
Comprehensive
Income
Balance, June 30, 2013
$
(16
)
 
$
83

 
$

 
$
67

Other comprehensive income before reclassifications:
 
 
 
 
 
 
 
     Net change in fair value

 
16

 

 
16

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

 
$

 
$
83

 
 
 
 
 
 
 
 
Balance, June 30, 2014
$
(12
)
 
$
142

 
$

 
$
130

Other comprehensive income before reclassifications:
 
 
 
 
 
 
 
     Net change in fair value

 
(5
)
 

 
(5
)
Reclassification from accumulated other comprehensive income (loss) to net income:
 
 
 
 
 
 
 
     Noncredit other-than-temporary impairment losses

 
2

 

 
2

Net current period other comprehensive loss

 
(3
)
 

 
(3
)
Balance, September 30, 2014
$
(12
)
 
$
139

 
$

 
$
127



24

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


 
Pension and
Postretirement
Benefits
 
Noncredit Portion
of Other-than-
temporary
Impairment  Losses
on Available-for-
sale Securities
 
Noncredit Portion of Other-than-temporary Impairment Losses on Held-to-maturity Securities
 
Total  Accumulated
Other
Comprehensive
Income
Balance, December 31, 2012
$
(17
)
 
$
(41
)
 
$

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

 

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

 
(1
)
 
1

 

     Net change in fair value

 
141

 

 
141

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

 

 

 
1

Net current period other comprehensive income
1

 
140

 

 
141

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

 
$

 
$
83

 
 
 
 
 
 
 
 
Balance, December 31, 2013
$
(13
)
 
$
125

 
$

 
$
112

Other comprehensive income before reclassifications:
 
 
 
 
 
 
 
     Net change in fair value

 
11

 

 
11

Reclassification from accumulated other comprehensive income (loss) to net income:
 
 
 
 
 
 
 
     Noncredit other-than-temporary impairment losses

 
3

 

 
3

     Amortization of pension and postretirement (1)
1

 

 

 
1

Net current period other comprehensive income
1

 
14

 

 
15

Balance, September 30, 2014
$
(12
)
 
$
139

 
$

 
$
127

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

Note 13—Derivatives and Hedging Activities

Nature of Business Activity
The Bank is exposed to interest-rate risk primarily from the effect of interest rate changes on its interest-earning assets and its funding sources that finance these assets. The goal of the Bank’s interest-rate risk management strategies is not to eliminate interest-rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, the Bank has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes it is willing to accept. In addition, the Bank monitors the risk to its interest income, net interest margin, and average maturity of interest-earning assets and funding sources. The Bank enters into derivatives to manage the interest-rate risk exposure inherent in its otherwise unhedged assets and funding sources, to achieve the Bank's risk management objectives, and to act as an intermediary between its members and counterparties. For additional information on the Bank’s derivatives and hedging activities, see Note 18—Derivatives and Hedging Activities to the 2013 audited financial statements contained in the Bank’s Form 10-K.

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

Once a derivative transaction has been accepted for clearing by a Derivative Clearing Organization (Clearinghouse), the derivative transaction is novated and the executing counterparty is replaced with the Clearinghouse. The Clearinghouse notifies the clearing agent of the required initial and variation margin and the clearing agent notifies the Bank of the required initial and variation margin. The Bank is not a derivative dealer and does not trade derivatives for short-term profit.
Financial Statement Effect and Additional Financial Information
Derivative Notional Amounts. The notional amount of derivatives serves as a factor in determining periodic interest payments or cash flows received and paid. However, the notional amount of derivatives represents neither the actual amounts exchanged

25

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


nor the overall exposure of the Bank to credit and market risk; the overall risk is much smaller. The risks of derivatives can be measured meaningfully on a portfolio basis that takes into account the counterparties, the types of derivatives, the items being hedged, and any offsets between the derivatives and the items being hedged.
The following table summarizes the fair value of derivative instruments, including the effect of netting adjustments and cash collateral. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest.
 
 
As of September 30, 2014
 
As of December 31, 2013
 
Notional
Amount of Derivatives    
 
Derivative Assets    
 
Derivative Liabilities    
 
Notional
Amount of Derivatives    
 
Derivative Assets    
 
Derivative Liabilities    
Derivatives in hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
  Interest rate swaps
$
97,053

 
$
549

 
$
(1,897
)
 
$
84,740

 
$
800

 
$
(2,336
)
Total derivatives in hedging relationships
97,053

 
549

 
(1,897
)
 
84,740

 
800

 
(2,336
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
  Interest rate swaps
9,961

 
13

 
(199
)
 
4,414

 
14

 
(309
)
  Interest rate swaptions
40

 

 

 
40

 
1

 
(1
)
  Interest rate caps or floors
16,500

 
24

 
(16
)
 
12,500

 
44

 
(28
)
Total derivatives not designated as hedging instruments
26,501

 
37

 
(215
)
 
16,954

 
59

 
(338
)
Total derivatives before netting and collateral adjustments
$
123,554

 
586

 
(2,112
)
 
$
101,694

 
859

 
(2,674
)
Netting adjustments
 
 
(404
)
 
404

 
 
 
(741
)
 
741

Cash collateral and related accrued interest
 
 
(64
)
 
1,528

 
 
 
(65
)
 
1,746

Total collateral and netting adjustments (1)
 
 
(468
)
 
1,932

 
 
 
(806
)
 
2,487

Derivative assets and derivative liabilities
 
 
$
118

 
$
(180
)
 
 
 
$
53

 
$
(187
)
___________
(1) 
Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing agents and/or counterparty.
The following tables present the components of net gains on derivatives and hedging activities as presented in the Statements of Income:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Derivatives and hedged items in fair value hedging relationships:
 
 
 
 
 
 
 
  Interest rate swaps
$
78

 
$
39

 
$
129

 
$
134

Total net gains related to fair value hedge ineffectiveness
78

 
39

 
129

 
134

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
  Interest rate swaps
20

 
16

 
45

 
78

  Interest rate caps or floors
(4
)
 
(1
)
 
(13
)
 
3

  Net interest settlements
(17
)
 
(20
)
 
(53
)
 
(64
)
Total net (losses) gains related to derivatives not designated as hedging instruments
(1
)
 
(5
)
 
(21
)
 
17

Net gains on derivatives and hedging activities
$
77

 
$
34

 
$
108

 
$
151



26

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


The following tables present, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Bank’s net interest income:
 
 
 
For the Three Months Ended September 30,
 
 
2014
 
2013
Hedged Item Type
 
Gains (Losses) on Derivative       
 
Gains (Losses) on Hedged Item  
 
Net Fair Value
Hedge Ineffectiveness
 
Effect of Derivatives on Net Interest Income (1)
 
Gains (Losses) on Derivative       
 
Gains (Losses) on Hedged Item  
 
Net Fair Value
Hedge Ineffectiveness
 
Effect of Derivatives on Net Interest Income (1)
Advances
 
$
319

 
$
(243
)
 
$
76

 
$
(229
)
 
$
114

 
$
(68
)
 
$
46

 
$
(259
)
Consolidated obligations bonds
 
(134
)
 
136

 
2

 
118

 
10

 
(17
)
 
(7
)
 
150

Total
 
$
185

 
$
(107
)
 
$
78

 
$
(111
)
 
$
124

 
$
(85
)
 
$
39

 
$
(109
)
____________
(1) 
The net interest on derivatives in fair value hedge relationships is presented in the interest income or expense line item of the respective hedged item.

 
 
For the Nine Months Ended September 30,
 
 
2014
 
2013
Hedged Item Type
 
Gains (Losses) on Derivative       
 
Gains (Losses) on Hedged Item  
 
Net Fair Value
Hedge Ineffectiveness
 
Effect of Derivatives on Net Interest Income (1)
 
Gains (Losses) on Derivative       
 
Gains (Losses) on Hedged Item  
 
Net Fair Value
Hedge Ineffectiveness
 
Effect of Derivatives on Net Interest Income (1)
Advances
 
$
80

 
$
47

 
$
127

 
$
(671
)
 
$
1,486

 
$
(1,333
)
 
$
153

 
$
(797
)
Consolidated obligations bonds
 
80

 
(78
)
 
2

 
383

 
(700
)
 
681

 
(19
)
 
469

Total
 
$
160

 
$
(31
)
 
$
129

 
$
(288
)
 
$
786

 
$
(652
)
 
$
134

 
$
(328
)
____________
(1) 
The net interest on derivatives in fair value hedge relationships is presented in the interest income or expense line item of the respective hedged item.

Managing Credit Risk on Derivatives

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

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

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

27

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



The following table presents the fair value of derivative instruments meeting or not meeting netting requirements, including the related collateral received from or pledged to counterparties. Non-cash collateral received from or pledged to counterparties not offset was less than $1 and $0 as of September 30, 2014 and December 31, 2013, respectively.
 
As of September 30, 2014
 
As of December 31, 2013
 
Derivative Assets
 
Derivative Liabilities
 
Derivative Assets
 
Derivative Liabilities
Gross recognized amount:
 
 
 
 
 
 
 
     Bilateral derivatives
$
532

 
$
(1,825
)
 
$
820

 
$
(2,545
)
     Cleared derivatives
54

 
(287
)
 
39

 
(129
)
Total gross recognized amount
586

 
(2,112
)
 
859

 
(2,674
)
Gross amounts of netting adjustments and cash collateral:
 
 
 
 
 
 
 
     Bilateral derivatives
(532
)
 
1,645

 
(818
)
 
2,358

     Cleared derivatives
64

 
287

 
12

 
129

Total gross amounts of netting adjustments and cash collateral
(468
)
 
1,932

 
(806
)
 
2,487

Derivative assets and derivative liabilities: (1)
 
 
 
 
 
 
 
     Bilateral derivatives

 
(180
)
 
2

 
(187
)
     Cleared derivatives
118

 

 
51

 

Total derivative assets and total derivative liabilities
$
118

 
$
(180
)
 
$
53

 
$
(187
)
____________ 
(1)
The Bank had net credit exposure of $118 and $47 as of September 30, 2014 and December 31, 2013, respectively, due to instances where the Bank’s pledged collateral to a counterparty exceeds the Bank’s net derivative liability position.
Certain of the Bank’s bilateral derivative instruments contain provisions that require the Bank to post additional collateral with its counterparties if there is deterioration in the Bank’s credit rating. If the Bank’s credit rating is lowered by a NRSRO, the Bank may be required to deliver additional collateral on bilateral derivative instruments in net liability positions. The aggregate fair value of all bilateral derivative instruments with credit-risk-related contingent features that were in a net liability position (before cash collateral and related accrued interest) as of September 30, 2014 was $1,357 for which the Bank has posted collateral with a fair value of $1,180 in the normal course of business. If the Bank’s credit ratings had been lowered from its current rating to the next lower rating that would have triggered additional collateral to be delivered, the Bank would have been required to deliver an additional $114 of collateral at fair value to its derivative counterparties as of September 30, 2014.

Note 14—Estimated Fair Values

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

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

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


28

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


Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. As of September 30, 2014 and December 31, 2013, the Bank carried grantor trust assets at fair value hierarchy Level 1.

Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. As of September 30, 2014 and December 31, 2013, the Bank carried trading securities and derivatives at fair value hierarchy Level 2.

Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are supported by little or no market activity and reflect the entity's own assumptions. As of September 30, 2014 and December 31, 2013, 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.

For financial instruments carried at fair value, the Bank reviews the fair value hierarchy classification of financial assets and liabilities on a quarterly basis. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out at fair value as of the beginning of the quarter in which the changes occur. There were no such transfers during the periods presented.
Fair Value on a Recurring Basis. The following tables present, for each fair value hierarchy level, the Bank’s financial assets and liabilities that are measured at fair value on a recurring basis on its Statements of Condition:
 
 
As of September 30, 2014
 
Fair Value Measurements Using
 
Netting Adjustment (1)
 
 
 
Level 1        
 
Level 2        
 
Level 3        
 
Total
Assets
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
  Government-sponsored enterprises debt obligations
$

 
$
1,366

 
$

 
$

 
$
1,366

  Another FHLBank’s bond

 
61

 

 

 
61

  State or local housing agency debt obligations

 
1

 

 

 
1

Total trading securities

 
1,428

 

 

 
1,428

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

 

 
2,073

 

 
2,073

Derivative assets:
 
 
 
 
 
 
 
 
 
  Interest-rate related

 
586

 

 
(468
)
 
118

Grantor trust (included in Other assets)
24

 

 

 

 
24

Total assets at fair value
$
24

 
$
2,014

 
$
2,073

 
$
(468
)
 
$
3,643

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
Interest-rate related
$

 
$
(2,112
)
 
$

 
$
1,932

 
$
(180
)
Total liabilities at fair value
$

 
$
(2,112
)
 
$

 
$
1,932

 
$
(180
)
____________ 
(1) 
Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral held or placed with the same clearing agents and/or counterparties.


29

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


 
As of December 31, 2013
 
Fair Value Measurements Using
 
Netting Adjustment (1)    
 
 
 
Level 1        
 
Level 2        
 
Level 3        
 
Total
Assets
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises debt obligations
$

 
$
1,601

 
$

 
$

 
$
1,601

  Another FHLBank’s bond

 
65

 

 

 
65

  State or local housing agency debt obligations

 
1

 

 

 
1

Total trading securities

 
1,667

 

 

 
1,667

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

 

 
2,299

 

 
2,299

Derivative assets:
 
 
 
 
 
 
 
 
 
  Interest-rate related

 
859

 

 
(806
)
 
53

Grantor trust (included in Other assets)
21

 

 

 

 
21

Total assets at fair value
$
21

 
$
2,526

 
$
2,299

 
$
(806
)
 
$
4,040

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
Interest-rate related
$

 
$
(2,674
)
 
$

 
$
2,487

 
$
(187
)
Total liabilities at fair value
$

 
$
(2,674
)
 
$

 
$
2,487

 
$
(187
)
____________ 
(1) 
Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral held or placed with the same clearing agents and/or counterparties.
The following table presents a reconciliation of available-for-sale securities that are measured at fair value using significant unobservable inputs (Level 3):
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Balance, beginning of period
$
2,155

 
$
2,536

 
$
2,299

 
$
2,676

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

 

 

 
11

Total (losses) gains realized and unrealized: (1)
 
 
 
 
 
 
 
  Included in net impairment losses recognized in earnings
(2
)
 

 
(3
)
 

     Included in other comprehensive income (2)
(3
)
 
16

 
14

 
141

     Accretion of credit losses in net interest income
8

 
4

 
24

 
5

Settlements
(85
)
 
(158
)
 
(261
)
 
(435
)
Balance, end of period
$
2,073

 
$
2,398

 
$
2,073

 
$
2,398

____________ 
(1) 
Related to available-for-sale securities held at period end.
(2) 
This amount is included in other comprehensive income within the net change in fair value on other-than-temporary impairment available-for-sale securities and reclassification of noncredit portion of impairment losses included in net income.
Fair Value on a Nonrecurring Basis. The Bank measures certain impaired mortgage loans held for portfolio and real estate owned at Level 3 fair value on a nonrecurring basis. Impaired mortgage loans are subject to being measured at fair value as a result of becoming impaired during the reported period. Real estate owned is measured at fair value when its fair value, less cost to sell, is lower than its carrying value as of the Statements of Condition date. The Bank estimates fair value based on (1) a property appraisal provided by the loan servicer; (2) a broker price opinion provided by the loan servicer; or (3) a current property value provided by a third party vendor, adjusted for estimated selling costs.

30

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


The following table presents the Bank's assets that are measured at fair value on a nonrecurring basis on its Statements of Condition only as of the dates shown:
 
As of September 30, 2014
 
As of December 31, 2013
Real estate owned
$
6

 
$
9


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

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

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

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

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

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

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

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

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

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

As of September 30, 2014 and December 31, 2013, four vendor prices were received for a majority of the Bank's investment securities holdings and the final prices for those securities were computed by averaging the prices received. Based on the Bank's review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or, in those instances in which there were outliers or significant yield variances, the Bank's additional analyses), the Bank believes its final prices are representative of the prices that would have been received if the assets had been sold at the measurement date (i.e., exit prices) and further that the fair value measurements are classified appropriately in the fair value

31

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


hierarchy. Based on the lack of significant market activity for private-label MBS, the fair value measurement for those securities were classified as Level 3 within the fair value hierarchy as of September 30, 2014 and December 31, 2013.

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. The estimated fair values of impaired mortgage loans are based on the current property value, as provided by a third party vendor, adjusted for estimated selling costs.

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 London Interbank Offered Rate (LIBOR) curve for advances with similar terms as of September 30, 2014 and December 31, 2013, respectively. In accordance with the advances regulations, advances with a maturity or repricing period greater than six months require a prepayment fee sufficient to make the Bank financially indifferent to the borrower's decision to prepay the advances, thereby removing prepayment risk from the fair value calculation. The Bank did not adjust the fair value measurement of advances for creditworthiness because advances were fully collateralized (see Note 7—Advances to the Bank’s interim financial statements for additional information).

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

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

Derivative instruments are transacted primarily in the institutional dealer market and priced with observable market assumptions at a mid-market valuation point. The Bank does not provide a credit valuation adjustment based on aggregate exposure by derivative counterparty when measuring the fair value of its derivatives. This is because the collateral provisions pertaining to the Bank's derivatives obviate the need to provide such a credit valuation adjustment. The fair values of the Bank's derivatives take into consideration the effects of legally enforceable master netting agreements, where applicable, that allow the Bank to settle positive and negative positions and offset cash collateral with the same counterparty on a net basis. The Bank and each bilateral derivative counterparty have collateral thresholds that take into account both the Bank's and the counterparty's credit ratings. As a result of these practices and agreements, the Bank has concluded that the impact of the credit differential between the Bank and its derivative counterparties was mitigated to an immaterial level and no further adjustments were deemed necessary to the recorded fair values of derivative assets and liabilities on the Statements of Condition as of September 30, 2014 and December 31, 2013.

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

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

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

Mandatorily Redeemable Capital Stock. The fair value of mandatorily redeemable capital stock is par value, including estimated dividends earned at the time of reclassification from capital to liabilities, until such amount is paid. Capital stock can be acquired by members only at par value and redeemed by the Bank at par value. Capital stock is not traded and no market mechanism exists for the exchange of capital stock outside the cooperative structure.
The following estimated fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the

32

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


Bank as of September 30, 2014 and December 31, 2013. Although the Bank uses its best judgment in estimating the fair values of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology.
For example, because an active secondary market does not exist for a portion of the Bank’s financial instruments, in certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. Therefore, these estimated fair values are not necessarily indicative of the amounts that would be realized in current market transactions, although they do reflect the Bank’s judgment of how a market participant would estimate the fair value. The fair value tables presented below do not represent an estimate of the overall fair value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.
The carrying values and estimated fair values of the Bank’s financial instruments were as follows:
 
As of September 30, 2014
 
 
 
Estimated Fair Value
 
Carrying Value
 
Total        
 
Level 1        
 
Level 2        
 
Level 3        
 
Netting Adjustment (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 Cash and due from banks
$
4,386

 
$
4,386

 
$
4,386

 
$

 
$

 
$

 Interest bearing-deposits
1,010

 
1,010

 

 
1,010

 

 

 Securities purchased under agreements to resell
455

 
455

 

 
455

 

 

 Federal funds sold
4,095

 
4,095

 

 
4,095

 

 

 Trading securities
1,428

 
1,428

 

 
1,428

 

 

 Available-for-sale securities
2,073

 
2,073

 

 

 
2,073

 

 Held-to-maturity securities
21,082

 
21,141

 

 
19,545

 
1,596

 

 Advances
88,627

 
88,699

 

 
88,699

 

 

 Mortgage loans held for portfolio, net
788

 
871

 

 
871

 

 

 Accrued interest receivable
184

 
184

 

 
184

 

 

 Derivative assets
118

 
118

 

 
586

 

 
(468
)
    Grantor trust assets (included in Other assets)
24

 
24

 
24

 

 

 

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 Interest-bearing deposits
(1,271
)
 
(1,271
)
 

 
(1,271
)
 

 

 Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
Discount notes
(26,055
)
 
(26,055
)
 

 
(26,055
)
 

 

Bonds
(89,670
)
 
(89,912
)
 

 
(89,912
)
 

 

 Mandatorily redeemable capital stock
(19
)
 
(19
)
 
(19
)
 

 

 

 Accrued interest payable
(202
)
 
(202
)
 

 
(202
)
 

 

 Derivative liabilities
(180
)
 
(180
)
 

 
(2,112
)
 

 
1,932

____________ 
(1) 
Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral held or placed with the same clearing agents and/or counterparties.

33

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



 
 
As of December 31, 2013
 
 
 
Estimated Fair Value
 
Carrying Value
 
Total        
 
Level 1        
 
Level 2        
 
Level 3        
 
Netting Adjustment (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 Cash and due from banks
$
4,374

 
$
4,374

 
$
4,374

 
$

 
$

 
$

 Interest bearing-deposits
1,007

 
1,007

 

 
1,007

 

 

 Federal funds sold
1,795

 
1,795

 

 
1,795

 

 

 Trading securities
1,667

 
1,667

 

 
1,667

 

 

 Available-for-sale securities
2,299

 
2,299

 

 

 
2,299

 

 Held-to-maturity securities
20,176

 
20,146

 

 
18,225

 
1,921

 

 Advances
89,588

 
89,413

 

 
89,413

 

 

 Mortgage loans held for portfolio, net
918

 
1,004

 

 
1,004

 

 

 Accrued interest receivable
199

 
199

 

 
199

 

 

 Derivative assets
53

 
53

 

 
859

 

 
(806
)
    Grantor trust assets (included in Other assets)
21

 
21

 
21

 

 

 

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 Interest-bearing deposits
(1,752
)
 
(1,752
)
 

 
(1,752
)
 

 

 Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
Discount notes
(32,202
)
 
(32,203
)
 

 
(32,203
)
 

 

Bonds
(80,728
)
 
(80,733
)
 

 
(80,733
)
 

 

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

 

 

 Accrued interest payable
(183
)
 
(183
)
 

 
(183
)
 

 

 Derivative liabilities
(187
)
 
(187
)
 

 
(2,674
)
 

 
2,487

____________ 
(1) 
Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral held or placed with the same clearing agents and/or counterparties.

Note 15—Commitments and Contingencies

As described in Note 10–Consolidated Obligations, consolidated obligations are backed only by the financial resources of the 12 FHLBanks. The Finance Agency may at any time require any FHLBank to make principal or interest payments due on any consolidated obligations, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation. No FHLBank has ever had to assume or pay the consolidated obligation of another FHLBank.

The par value of the FHLBanks’ outstanding consolidated obligations for which the Bank is jointly and severally liable was $701,462 and $654,076 as of September 30, 2014 and December 31, 2013, respectively, exclusive of the Bank’s own outstanding consolidated obligations. The Bank determined that it is not necessary to recognize a liability for the fair value of the Bank’s joint and several liability for all of the consolidated obligations.  As of September 30, 2014, none of the other FHLBanks defaulted on their consolidated obligations, the Finance Agency was not required to allocate any obligation among the FHLBanks, and no amount of the joint and several obligation was fixed.  Accordingly, the Bank has not recognized a liability for its joint and several obligation related to the other FHLBanks consolidated obligations as of September 30, 2014.


34

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


 The following table shows the Bank's outstanding commitments, which represent off-balance sheet obligations:
 
 
As of September 30, 2014
 
As of December 31, 2013
 
 
Expire Within One Year
 
Expire After One Year
 
Total
 
Expire Within One Year
 
Expire After One Year
 
Total
Standby letters of credit (1)
 
$
5,437

 
$
19,172

 
$
24,609

 
$
4,785

 
$
23,004

 
$
27,789

Commitments to fund additional advances
 
124

 
170

 
294

 
110

 
34

 
144

Unsettled consolidated obligation bonds, at par (2)
 
472

 

 
472

 
171

 

 
171

Unsettled consolidated obligation discount notes, at par (2)
 
2,500

 

 
2,500

 
467

 

 
467

____________
(1) 
Expire within one year includes 17 standby letters of credit for a total of $26 and 14 standby letters of credit for a total of $20 as of September 30, 2014 and December 31, 2013, respectively, that have no stated maturity date and are subject to renewal on an annual basis.
(2) 
Expiration is based on settlement period rather than underlying contractual maturity of consolidated obligations. As of September 30, 2014 and December 31, 2013, $470 and $145 of the Bank's unsettled consolidated obligation bonds were hedged with associated interest rate swaps that had traded but not yet settled. As of September 30, 2014 and December 31, 2013, $500 and $0 of the Bank's unsettled consolidated obligation discount notes were hedged with associated interest rate swaps that had traded but not yet settled.
The carrying value of the guarantees related to standby letters of credit is recorded in other liabilities and amounted to $97 and $137 as of September 30, 2014 and December 31, 2013, respectively. Based on the Bank’s credit analyses and collateral requirements, the Bank does not deem it necessary to record any additional liability on these commitments.
The Bank monitors the creditworthiness of its standby letters of credit based on an evaluation of the member. In addition, standby letters of credit are fully collateralized from the time of issuance. The Bank has established parameters for the 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 had no commitments that unconditionally obligate the Bank to purchase closed mortgage loans as of September 30, 2014 and December 31, 2013. Such commitments would be recorded as derivatives at their fair values.
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 16—Transactions with Members and their Affiliates and with Housing Associates

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

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

The Bank defines related parties as each of the other FHLBanks and those members with regulatory capital stock outstanding in excess of 10 percent of the Bank's total regulatory capital stock. Based on this definition, one member institution, Bank of America, National Association, which held 16.0 percent of the Bank’s total regulatory capital stock as of September 30, 2014,

35

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


was considered a related party. Total advances outstanding to Bank of America, National Association were $16,262 and $17,263 as of September 30, 2014 and December 31, 2013, respectively. Total deposits held in the name of Bank of America, National Association were less than $1 as of September 30, 2014 and December 31, 2013. No mortgage loans or MBS were acquired from Bank of America, National Association during the nine months ended September 30, 2014 and 2013.

Note 17—Subsequent Events

On October 30, 2014, the Bank’s board of directors approved a cash dividend for the third quarter of 2014 in the amount of $51. The Bank paid the third quarter 2014 dividend on November 4, 2014.


36



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

Forward-Looking Information

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

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

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

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

The discussion presented below provides an analysis of the Bank’s financial condition as of September 30, 2014 and December 31, 2013, and results of operations for the third quarter and first nine months of 2014 and 2013. Management’s discussion and analysis should be read in conjunction with the financial statements and accompanying notes presented elsewhere in this report, as well as the Bank’s audited financial statements for the year ended December 31, 2013.

Executive Summary

Financial Condition

As of September 30, 2014, total assets were $124.4 billion, an increase of $2.1 billion, or 1.73 percent, from December 31, 2013. This increase was primarily due to a $3.2 billion, or 11.9 percent, increase in total investments, partially offset by a $961 million, or 1.07 percent, decrease in advances.
As of September 30, 2014, total liabilities were $117.9 billion, an increase of $2.3 billion, or 1.95 percent, from December 31, 2013. This increase was primarily due to a $2.8 billion, or 2.47 percent, increase in consolidated obligations (COs), partially offset by a $481 million, or 27.4 percent, decrease in deposits.
As of September 30, 2014, total capital was $6.5 billion, a decrease of $132 million, or 1.98 percent, from December 31, 2013. This decrease was primarily due to the repurchase/redemption of $3.6 billion in excess capital stock excluding capital stock classified as mandatorily redeemable capital stock, and the payment of $131 million in dividends, partially offset by the issuance of $3.4 billion in capital stock related to new advance activity and the recording of $213 million of net income.




37


Results of Operations

The Bank recorded net income of $74 million for the third quarter of 2014, an increase of $3 million, or 4.13 percent, from net income of $71 million for the third quarter of 2013. Interest income decreased by $62 million offset by a $22 million decrease in interest expense, which resulted in a decrease in net interest income of $40 million for the third quarter of 2014. During the third quarter of 2014, previously restructured advances were prepaid prior to their maturity which resulted in a $48 million gain recorded in net gains on derivatives and hedging activities and a $48 million decrease in net interest income due to accelerated amortization.

The Bank recorded net income of $213 million for the first nine months of 2014, a decrease of $15 million, or 6.67 percent, from net income of $228 million during the same period in 2013. Interest income decreased by $106 million offset by a $75 million decrease in interest expense, which resulted in a decrease in net interest income of $31 million for the first nine months of 2014. For the first nine months of 2014, the Bank recorded a decrease in net gains on derivatives and hedging activities, compared to the same period in 2013, this decrease was due to more stable interest rates during the first nine months of 2014, compared to the same period in 2013. This decrease was partially offset by the prepayment of previously restructured advances prior to their maturity, as previously discussed.

One way in which the Bank analyzes its performance is by comparing its annualized return on equity (ROE) to three-month average LIBOR. The Bank's ROE was 4.45 percent for the third quarter of 2014, compared to 4.50 percent for the third quarter of 2013. ROE decreased for the third quarter of 2014, compared to the third quarter of 2013, primarily as a result of an increase in average total capital during the period which had a greater impact than the increase in net income. ROE spread to three-month average LIBOR decreased to 422 basis points for the third quarter of 2014, compared to 424 basis points for the third quarter of 2013. The decrease in the ROE spread to LIBOR was primarily due to the decrease in ROE.

The Bank's annualized ROE was 4.34 percent for the first nine months of 2014, compared to 4.92 percent during the same period in 2013. ROE decreased for the first nine months of 2014, compared to the same period in 2013, primarily as a result of a decrease in net income, and an increase in average total capital during the period. ROE spread to three-month average LIBOR decreased to 411 basis points for the first nine months of 2014, compared to 464 basis points for the same period in 2013. The decrease in the ROE spread to LIBOR was primarily due to the decrease in ROE.

The Bank's interest rate spread was 13 basis points and 22 basis points for the third quarter and first nine months of 2014, respectively, compared to 26 basis points for the third quarter and the first nine months of 2013.

Business Outlook

The Bank’s business outlook remains largely unchanged from the discussion in the Bank’s Form 10-K. Overall advances remained relatively stable during the third quarter of 2014. Although the Bank continues to see some shift toward slightly longer maturities, overall advances balances are expected to continue fluctuating during 2014, given the large percentage of short-term advances, and members continue to experience high levels of liquidity and slow loan growth. The Bank expects that large member institutions subject to the liquidity coverage ratio rule recently issued by the federal banking agencies may take actions to comply with the rule that could result in changes to demand for advances and letters of credit. The prolonged low interest rate environment continues to place pressure on the Bank's investment portfolio, as higher-yielding investments mature or prepay in an environment with limited attractive reinvestment opportunities.


38


Selected Financial Data

The following table presents a summary of certain financial information for the Bank for the periods indicated (dollars in millions):
 
As of and for the Three Months Ended
 
September 30,
2014
 
June 30,
2014
 
March 31,
2014
 
December 31,
2013
 
September 30,
2013
Statements of Condition (at period end)
 
 
 
 
 
 
 
 
 
Total assets
$
124,437

 
$
128,942

 
$
119,467

 
$
122,316

 
$
112,068

Investments (1)
30,143

 
30,894

 
32,206

 
26,944

 
28,991

Mortgage loans held for portfolio
792

 
838

 
883

 
929

 
983

Allowance for credit losses on mortgage loans
(4
)
 
(6
)
 
(4
)
 
(11
)
 
(11
)
Advances
88,627

 
95,128

 
84,166

 
89,588

 
78,193

Interest-bearing deposits
1,271

 
1,432

 
1,465

 
1,752

 
1,890

Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
  Discount notes
26,055

 
30,679

 
22,801

 
32,202

 
16,282

  Bonds
89,670

 
89,438

 
88,276

 
80,728

 
87,139

Total consolidated obligations, net (2)
115,725

 
120,117

 
111,077

 
112,930

 
103,421

Mandatorily redeemable capital stock
19

 
21

 
23

 
24

 
24

Affordable Housing Program payable
69

 
71

 
76

 
74

 
72

Capital stock - putable
4,654

 
4,906

 
4,412

 
4,883

 
4,351

Retained earnings
1,739

 
1,708

 
1,690

 
1,657

 
1,579

Accumulated other comprehensive income
127

 
130

 
117

 
112

 
83

Total capital
6,520

 
6,744

 
6,219

 
6,652

 
6,013

Statements of Income (for the period ended)
 
 
 
 
 
 
 
 
 
Net interest income
46

 
92

 
90

 
82

 
86

(Reversal) provision for credit losses
(2
)
 
2

 
(4
)
 
1

 
1

Net impairment losses recognized in earnings
(2
)
 

 
(1
)
 

 

Net losses on trading securities
(19
)
 
(13
)
 
(14
)
 
(21
)
 
(15
)
Net gains on derivatives and hedging activities
77

 
16

 
15

 
53

 
34

Letters of credit fees
7

 
6

 
7

 
6

 
4

Other income (3)
4

 
1

 
16

 
38

 
2

Noninterest expense
32

 
32

 
31

 
35

 
31

Income before assessments
83

 
68

 
86

 
122

 
79

Affordable Housing Program assessments
9

 
6

 
9

 
12

 
8

Net income
74

 
62

 
77

 
110

 
71

Performance Ratios (%)
 
 
 
 
 
 
 
 
 
Return on equity (4)
4.45

 
3.81

 
4.75

 
6.86

 
4.50

Return on assets (5)
0.22

 
0.19

 
0.25

 
0.36

 
0.24

Net interest margin (6)
0.14

 
0.29

 
0.29

 
0.27

 
0.29

Regulatory capital ratio (at period end) (7)
5.15

 
5.15

 
5.13

 
5.37

 
5.31

Equity to assets ratio (8)
5.05

 
5.03

 
5.24

 
5.19

 
5.23

Dividend payout ratio (9)
58.11

 
71.35

 
56.88

 
29.59

 
40.25


39


____________
(1) 
Investments consist of interest-bearing deposits, securities purchased under agreements to resell, federal funds sold, and securities classified as trading, available-for-sale, and held-to-maturity.
(2) 
The amounts presented are the Bank’s primary obligations on consolidated obligations outstanding. The par value of the FHLBanks’ outstanding consolidated obligations for which the Bank is jointly and severally liable was as follows (in millions):
September 30, 2014
$
701,462

June 30, 2014
680,240

March 31, 2013
643,157

December 31, 2013
654,076

September 30, 2013
617,648


(3) 
Other income includes service fees and other. For the periods ended March 31, 2014, December 31, 2013, and September 30, 2013, the amount includes a $15 million, $4 million, and $2 million net gain on early extinguishment of debt, respectively. For the period ended September 30, 2014 and December 31, 2013, amount includes a $4 million and $33 million gain on litigation settlements, net, respectively.
(4) 
Calculated as net income divided by average total equity.
(5) 
Calculated as net income divided by average total assets.
(6) 
Net interest margin is net interest income as a percentage of average earning assets.
(7) 
Regulatory capital ratio is regulatory capital stock plus retained earnings as a percentage of total assets at period end.
(8) 
Calculated as average equity divided by average total assets.
(9) 
Calculated as dividends declared during the period divided by net income during the period.

Financial Condition

The following table presents the distribution of the Bank’s total assets, liabilities, and capital by major class as of the dates indicated (dollars in millions). These items are discussed in more detail below.
 
 
As of September 30, 2014
 
As of December 31, 2013
 
Increase (Decrease)
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
Amount
 
Percent
Advances
$
88,627

 
71.22
 
$
89,588

 
73.24
 
$
(961
)
 
(1.07
)
Long-term investments
24,583

 
19.76
 
24,142

 
19.74
 
441

 
1.83

Short-term investments
5,560

 
4.47
 
2,802

 
2.29
 
2,758

 
98.40

Mortgage loans, net
788

 
0.63
 
918

 
0.75
 
(130
)
 
(14.19
)
Other assets
4,879

 
3.92
 
4,866

 
3.98
 
13

 
0.28

Total assets
$
124,437

 
100.00
 
$
122,316

 
100.00
 
$
2,121

 
1.73

Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
  Discount notes
$
26,055

 
22.10
 
$
32,202

 
27.84
 
$
(6,147
)
 
(19.09
)
  Bonds
89,670

 
76.04
 
80,728

 
69.80
 
8,942

 
11.08

Deposits
1,271

 
1.08
 
1,752

 
1.51
 
(481
)
 
(27.44
)
Other liabilities
921

 
0.78
 
982

 
0.85
 
(61
)
 
(6.33
)
Total liabilities
$
117,917

 
100.00
 
$
115,664

 
100.00
 
$
2,253

 
1.95

Capital stock
$
4,654

 
71.38
 
$
4,883

 
73.41
 
$
(229
)
 
(4.69
)
Retained earnings
1,739

 
26.67
 
1,657

 
24.90
 
82

 
4.95

Accumulated other comprehensive income
127

 
1.95
 
112

 
1.69
 
15

 
13.32

Total capital
$
6,520

 
100.00
 
$
6,652

 
100.00
 
$
(132
)
 
(1.98
)

Advances

Total advances remained relatively stable as of September 30, 2014 compared to December 31, 2013. As of September 30, 2014, 73.8 percent of the Bank’s advances were fixed-rate, compared to 85.2 percent as of December 31, 2013. However, the Bank often simultaneously enters into derivatives with the issuance of advances to convert the rates on them, in effect, into a short-term variable interest rate, usually based on LIBOR. As of September 30, 2014 and December 31, 2013, 49.1 percent and 41.7 percent, respectively, of the Bank’s fixed-rate advances were swapped and 2.91 percent and 28.2 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.


40


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

 
As of September 30, 2014
 
As of December 31, 2013
 
Amount
 
Percent of Total
 
Amount
 
Percent of Total
Fixed rate (1)
$
41,603

 
47.77
 
$
49,768

 
56.63
Adjustable or variable rate indexed
22,334

 
25.65
 
12,584

 
14.32
Hybrid
18,185

 
20.88
 
20,333

 
23.14
Convertible
3,240

 
3.72
 
3,510

 
3.99
Amortizing (2)
1,722

 
1.98
 
1,687

 
1.92
Total par value
$
87,084

 
100.00
 
$
87,882

 
100.00
____________ 
(1) 
Includes convertible advances whose conversion options have expired.
(2) 
The Bank offers a fixed-rate advance that may be structured with principal amortization in either equal increments or similar to a mortgage.

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

Investments

The following table sets forth more detailed information regarding short- and long-term investments held by the Bank (dollars in millions):
 
 
 
 
Increase (Decrease)
 
As of September 30, 2014
 
As of December 31, 2013
 
Amount    
 
Percent    
Short-term investments:
 
 
 
 
 
 
 
Interest-bearing deposits (1)
$
1,010

 
$
1,007

 
$
3

 
0.23

Securities purchased under agreements to resell
455

 

 
455

 
100.00

Federal funds sold
4,095

 
1,795

 
2,300

 
128.13

Total short-term investments
5,560

 
2,802

 
2,758

 
98.40

Long-term investments:
 
 
 
 
 
 
 
State or local housing agency debt obligations
85

 
93

 
(8
)
 
(8.42
)
U.S. government agency debt obligations
6,340

 
5,404

 
936

 
17.30

  Mortgage-backed securities:
 
 
 
 
 
 
 
U.S. government agency securities
388

 
465

 
(77
)
 
(16.58
)
       Government-sponsored
  enterprises
14,104

 
13,952

 
152

 
1.08

Private-label residential
3,666

 
4,228

 
(562
)
 
(13.27
)
Total mortgage-backed securities
18,158

 
18,645

 
(487
)
 
(2.61
)
Total long-term investments
24,583

 
24,142

 
441

 
1.83

Total investments
$
30,143

 
$
26,944

 
$
3,199

 
11.87

____________ 
(1) 
As of September 30, 2014 and December 31, 2013, interest-bearing deposits includes a $1.0 billion business money market account with Branch Banking and Trust Company, one of the Bank’s ten largest borrowers.

The increase in short-term investments from December 31, 2013 to September 30, 2014 was primarily due to an increase in federal funds sold, along with an increase in securities purchased under agreements to resell. The amount held in federal funds sold will vary each day based on the federal funds rates, the Bank’s liquidity requirements as a result of advances demand, and the availability of high quality counterparties in the federal funds market. As of September 30, 2014, the federal funds rate on federal funds sold was at or above the Bank's minimum investment target rate, as determined by the Bank's internal policy, which allowed the Bank to invest its available cash in federal funds sold. The increase in securities purchased under agreements to resell is consistent with the Bank's efforts to reduce its unsecured credit exposure.

41


The Finance Agency limits an FHLBank’s investment in MBS and asset-backed securities by requiring that the total amortized historical costs for these securities classified as held-to-maturity or available-for-sale, and fair value for MBS classified as trading owned by the FHLBank, generally may not exceed 300 percent of the FHLBank’s previous month-end total capital, as defined by regulation, plus its mandatorily redeemable capital stock on the day it purchases the securities. The Bank was in compliance with this regulatory requirement as of September 30, 2014 and December 31, 2013, as these investments amounted to 281 percent and 282 percent of total capital plus mandatorily redeemable capital stock, respectively.

Mortgage Loans Held for Portfolio

The decrease in mortgage loans held for portfolio from December 31, 2013 to September 30, 2014 was primarily due to the maturity and prepayment of these assets during the period. The Bank ceased purchasing new mortgage loans in 2008.
As of September 30, 2014 and December 31, 2013, the Bank’s conventional mortgage loan portfolio was concentrated in the southeastern United States because those members selling loans to the Bank were located primarily in that region. The following table provides the percentage of unpaid principal balance of conventional single-family residential mortgage loans held for portfolio for the five largest state concentrations.
 
 
As of September 30, 2014
 
As of December 31, 2013
 
Percent of Total
 
Percent of Total
Florida
26.79

 
27.04

South Carolina
25.16

 
24.59

Georgia
14.44

 
14.34

North Carolina
10.54

 
10.92

Virginia
8.01

 
7.95

All other
15.06

 
15.16

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. The decrease in consolidated obligation discount notes and the increase in consolidated obligation bonds from December 31, 2013 to September 30, 2014 are a result of market conditions that favored the issuance of longer term debt during the period. As of September 30, 2014, CO issuances financed 93.0 percent of the $124.4 billion in total assets, remaining relatively stable from the financing ratio of 92.3 percent as of December 31, 2013.
As of September 30, 2014 and December 31, 2013, COs outstanding were primarily fixed rate. However, the Bank often simultaneously enters into derivatives with the issuance of CO bonds to convert the interest rates, in effect, into short-term variable interest rates, usually based on LIBOR. As of September 30, 2014 and December 31, 2013, 86.6 percent and 77.5 percent, respectively, of the Bank’s fixed-rate CO bonds were swapped and 0.53 percent and 0.34 percent, respectively, of the Bank’s variable-rate CO bonds were swapped. As of September 30, 2014, 1.34 percent of the Bank's fixed-rate CO discount notes were swapped. The Bank had no fixed-rate CO discount notes that were swapped to a variable rate as of December 31, 2013.

Deposits

The Bank offers demand and overnight deposit programs to members primarily as a liquidity management service. In addition, a member that services mortgage loans may deposit in the Bank funds collected in connection with the mortgage loans, pending disbursement of those funds to the owners of the mortgage loan. For demand deposits, the Bank pays interest at the overnight rate. Most of these deposits represent member liquidity investments, which members may withdraw on demand. Therefore, the total account balance of the Bank’s deposits may be volatile. Member loan demand, deposit flows, and liquidity management strategies influence the amount and volatility of deposit balances carried with the Bank.

To support its member deposits, the FHLBank Act requires the Bank to have as a reserve an amount equal to or greater than the current deposits received from members. These reserves are required to be invested in obligations of the United States, deposits in eligible banks or trust companies or advances with maturities not exceeding five years. The Bank was in compliance with this depository liquidity requirement as of September 30, 2014.


42


Capital

The decrease in total capital from December 31, 2013 to September 30, 2014 was primarily due to the repurchase/redemption of $3.6 billion in excess capital stock excluding capital stock classified as mandatorily redeemable capital stock, and the payment of $131 million in dividends, partially offset by the issuance of $3.4 billion in capital stock related to new advance activity and $228 million in comprehensive income during the period. Comprehensive income primarily includes $213 million of net income.
The FHLBank Act and Finance Agency regulations specify that each FHLBank must meet certain minimum regulatory capital standards. The Bank was in compliance with these regulatory capital rules and requirements as shown in Note 11Capital and Mandatorily Redeemable Capital Stock to the Bank's interim financial statements.
Finance Agency regulations establish criteria based on the amount and type of capital held by an FHLBank for four capital classifications as follows:
Adequately Capitalized - FHLBank meets both risk-based and minimum capital requirements;
Undercapitalized - FHLBank does not meet one or both of its risk-based or minimum capital requirements;
Significantly Undercapitalized - FHLBank has less than 75 percent of one or both of its risk-based or minimum capital requirements; and
Critically Undercapitalized - FHLBank total capital is two percent or less of total assets.

Under the regulations, the Director of the Finance Agency (Director) will make a capital classification for each FHLBank at least quarterly and notify the FHLBank in writing of any proposed action and provide an opportunity for the FHLBank to submit information relevant to such action. The Director is permitted to make discretionary classifications. An FHLBank must provide written notice to the Finance Agency within 10 days of any event or development that has caused or is likely to cause its permanent or total capital to fall below the level required to maintain its most recent capital classification or reclassification. The regulations delineate the types of prompt corrective actions the Director may order in the event an FHLBank is not adequately capitalized, including submission of a capital restoration plan by the FHLBank and restrictions on its dividends, stock redemptions, executive compensation, new business activities, or any other actions the Director determines will ensure safe and sound operations and capital compliance by the FHLBank. On September 23, 2014, the Bank received notification from the Director that, based on June 30, 2014 data, the Bank meets the definition of “adequately capitalized.”

As of September 30, 2014 and December 31, 2013, the Bank had capital stock subject to mandatory redemption from 13 and 17 members and former members, respectively, consisting of B1 membership stock and B2 activity-based capital stock. The Bank is not required to redeem or repurchase such capital stock until the expiration of the five-year redemption period or, with respect to activity-based capital stock, until the later of the expiration of the five-year redemption period or the activity no longer remains outstanding. The Bank, in its discretion, may repurchase excess capital stock subject to certain limitations and thresholds in the Bank's capital plan.

The Bank's capital management plan is discussed in more detail in the Bank's Form 10-K, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Capital.

Results of Operations

The following is a discussion and analysis of the Bank's results of operations for the third quarter and first nine months of 2014 and 2013.


43


Net Income

The following table sets forth the Bank’s significant income items for the third quarter and first nine months of 2014 and 2013, and provides information regarding the changes during the periods (dollars in millions). These items are discussed in more detail below.
 
 
For the Three Months Ended September 30,
 
Increase (Decrease)
 
For the Nine Months Ended September 30,
 
Increase (Decrease)    
 
 
2014
 
2013
 
Amount
 
Percent
 
2014
 
2013
 
Amount
 
Percent
Net interest income
 
$
46

 
$
86

 
$
(40
)
 
(45.53
)
 
$
228

 
$
259

 
$
(31
)
 
(11.80
)
(Reversal) provision for credit losses
 
(2
)
 
1

 
(3
)
 
(196.77
)
 
(4
)
 
4

 
(8
)
 
(184.72
)
Noninterest income
 
67

 
25

 
42

 
166.44

 
100

 
90

 
10

 
10.91

Noninterest expense
 
32

 
31

 
1

 
6.50

 
95

 
92

 
3

 
4.69

Affordable Housing Program assessments
 
9

 
8

 
1

 
4.15

 
24

 
25

 
(1
)
 
(6.59
)
Net income
 
$
74

 
$
71

 
$
3

 
4.13

 
$
213

 
$
228

 
$
(15
)
 
(6.67
)


Net Interest Income

The primary source of the Bank’s earnings is net interest income. Net interest income equals interest earned on assets (including member advances, mortgage loans, MBS held in portfolio, and other investments), less the interest expense incurred on liabilities (including COs, deposits, and other borrowings). Also included in net interest income are miscellaneous related items such as prepayment fees earned and the amortization of debt issuance discounts, concession fees, and certain derivative instruments and hedging activities related adjustments.
The decrease in net interest income during the third quarter and first nine months of 2014, compared to the same periods in 2013, is primarily due to a reduction in yield on the Bank's long-term investments and $48 million of accelerated amortization related to prepayments of previously restructured advances. The accelerated amortization was offset by net gains on derivatives and hedging activities. The decrease in net interest income was partially offset by a reduction in rates on the Bank's long-term debt during the periods.
As discussed above, net interest income includes components of hedging activity. When a hedging relationship is discontinued, the cumulative fair value adjustment on the hedged item will be amortized into interest income or expense over the remaining life of the asset or liability. Also, when hedging relationships qualify for hedge accounting, the interest components of the hedging derivatives will be reflected in interest income or expense. As shown in the table summarizing the net effect of derivatives and hedging activity on the Bank’s results of operations, the impact of hedging on net interest income was a decrease of $203 million and $162 million for the third quarters of 2014 and 2013, respectively, and a decrease of $473 million and $469 million for the first nine months of 2014 and 2013, respectively.

The following table presents spreads between the average yield on total interest-earning assets and the average cost of interest-bearing liabilities for the third quarter and first nine months of 2014 and 2013 (dollars in millions). The interest-rate spread is affected by the inclusion or exclusion of net interest income or expense associated with the Bank's derivatives. For example, as discussed above, if the derivatives qualify for fair-value hedge accounting under GAAP, the interest income or expense associated with the derivatives is included in net interest income and in the calculation of interest-rate spread. If the derivatives do not qualify for fair-value hedge accounting under GAAP, the interest income or expense associated with the derivatives is excluded from net interest income and the calculation of the interest-rate spread and recorded in noninterest income (loss) as “Net gains on derivatives and hedging activities.” Amortization associated with some hedging-related basis adjustments is also reflected in net interest income, which affects interest-rate spread.




44


 
For the Three Months Ended September 30,
 
2014
 
2013
 
Average  Balance
 
Interest
 
Yield/    
Rate
(%)
 
Average  Balance
 
Interest
 
Yield/    
Rate
(%)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (1)
$
2,693

 
$
1

 
0.16
 
$
2,904

 
$
1

 
0.14
Certificates of deposit

 

 
 
225

 

 
0.18
Securities purchased under agreements to resell
1,987

 
1

 
0.06
 
908

 
1

 
0.05
Federal funds sold
8,263

 
2

 
0.11
 
6,385

 
1

 
0.09
Long-term investments (2)
23,871

 
107

 
1.78
 
22,625

 
124

 
2.16
Advances
92,470

 
11

 
0.05
 
85,190

 
55

 
0.26
Mortgage loans (3)
815

 
12

 
6.09
 
1,032

 
14

 
5.52
Loans to other FHLBanks
3

 

 
0.03
 
2

 

 
0.70
Total interest-earning assets
130,102

 
134

 
0.41
 
119,271

 
196

 
0.65
Allowance for credit losses on mortgage loans
(5
)
 
 
 
 
 
(11
)
 
 
 
 
Other assets
1,496

 
 
 
 
 
1,087

 
 
 
 
Total assets
$
131,593

 
 
 
 
 
$
120,347

 
 
 
 
Liabilities and Capital
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (4)
$
1,502

 

 
0.01
 
$
2,588

 

 
0.01
Short-term debt
31,449

 
8

 
0.09
 
20,393

 
5

 
0.09
Long-term debt
89,554

 
80

 
0.35
 
88,231

 
104

 
0.47
Other borrowings
21

 

 
3.72
 
24

 
1

 
2.82
Total interest-bearing liabilities
122,526

 
88

 
0.28
 
111,236

 
110

 
0.39
Other liabilities
2,423

 
 
 
 
 
2,811

 
 
 
 
Total capital
6,644

 
 
 
 
 
6,300

 
 
 
 
Total liabilities and capital
$
131,593

 
 
 
 
 
$
120,347

 
 
 
 
Net interest income and net yield on interest-earning assets
 
 
$
46

 
0.14
 
 
 
$
86

 
0.29
Interest rate spread
 
 
 
 
0.13
 
 
 
 
 
0.26
Average interest-earning assets to interest-bearing liabilities
 
 
 
 
106.18
 
 
 
 
 
107.22
 
 
 
 
 
 
 
 
 
 
 
 
____________ 
(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.



45


 
For the Nine Months Ended September 30,
 
2014
 
2013
 
Average  Balance
 
Interest
 
Yield/    
Rate
(%)
 
Average  Balance
 
Interest
 
Yield/    
Rate
(%)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (1)
$
2,715

 
$
3

 
0.15
 
$
3,319

 
$
4

 
0.15
Certificates of deposit

 

 
 
293

 

 
0.20
Securities purchased under agreements to resell
1,455

 
1

 
0.06
 
914

 
1

 
0.08
Federal funds sold
8,143

 
6

 
0.10
 
7,394

 
7

 
0.14
Long-term investments (2)
24,117

 
330

 
1.83
 
21,476

 
365

 
2.27
Advances
89,900

 
120

 
0.18
 
84,332

 
180

 
0.28
Mortgage loans (3)
859

 
38

 
5.93
 
1,120

 
47

 
5.63
Loans to other FHLBanks
2

 

 
0.04
 
1

 

 
0.09
Total interest-earning assets
127,191

 
498

 
0.52
 
118,849

 
604

 
0.68
Allowance for credit losses on mortgage loans
(6
)
 
 
 
 
 
(12
)
 
 
 
 
Other assets
1,404

 
 
 
 
 
1,064

 
 
 
 
Total assets
$
128,589

 
 
 
 
 
$
119,901

 
 
 
 
Liabilities and Capital
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (4)
$
1,479

 

 
0.01
 
$
2,356

 

 
0.03
Short-term debt
29,835

 
22

 
0.10
 
22,385

 
19

 
0.11
Long-term debt
88,209

 
247

 
0.37
 
85,663

 
325

 
0.51
Other borrowings
23

 
1

 
4.09
 
31

 
1

 
2.38
Total interest-bearing liabilities
119,546

 
270

 
0.30
 
110,435

 
345

 
0.42
Other liabilities
2,479

 
 
 
 
 
3,263

 
 
 
 
Total capital
6,564

 
 
 
 
 
6,203

 
 
 
 
Total liabilities and capital
$
128,589

 
 
 
 
 
$
119,901

 
 
 
 
Net interest income and net yield on interest-earning assets
 
 
$
228

 
0.24
 
 
 
$
259

 
0.29
Interest rate spread
 
 
 
 
0.22
 
 
 
 
 
0.26
Average interest-earning assets to interest-bearing liabilities
 
 
 
 
106.39
 
 
 
 
 
107.62
____________ 
(1) 
Includes amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative counterparties.
(2) 
Includes trading securities at fair value and available-for-sale securities at amortized cost.
(3) 
Nonperforming loans are included in average balances used to determine average rate.
(4) 
Includes amounts recognized for the right to return cash collateral received under master netting agreements with derivative counterparties.

46


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 below, the overall changes in net interest income during the third quarter and first nine months of 2014, compared to the same periods in 2013, were primarily rate related.
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014 vs. 2013
 
2014 vs. 2013
 
Volume (1)
 
Rate (1)
 
Increase (Decrease)    
 
Volume (1)
 
Rate (1)
 
Increase (Decrease)    
Increase (decrease) in interest income:
 
 
 
 
 
 
 
 
 
 
 
 Interest-bearing deposits
$

 
$

 
$

 
$
(1
)
 
$

 
$
(1
)
 Federal funds sold
1

 

 
1

 
1

 
(2
)
 
(1
)
 Long-term investments
6

 
(23
)
 
(17
)
 
41

 
(76
)
 
(35
)
 Advances
4

 
(48
)
 
(44
)
 
11

 
(71
)
 
(60
)
    Mortgage loans
(3
)
 
1

 
(2
)
 
(11
)
 
2

 
(9
)
Total
8

 
(70
)
 
(62
)
 
41

 
(147
)
 
(106
)
Increase (decrease) in interest expense:
 
 
 
 
 
 
 
 
 
 
 
 Short-term debt
3

 

 
3

 
5

 
(2
)
 
3

 Long-term debt
2

 
(26
)
 
(24
)
 
9

 
(87
)
 
(78
)
 Other borrowings
(1
)
 

 
(1
)
 

 

 

Total
4

 
(26
)
 
(22
)
 
14

 
(89
)
 
(75
)
Increase (decrease) in net interest income
$
4

 
$
(44
)
 
$
(40
)
 
$
27

 
$
(58
)
 
$
(31
)
____________ 
(1) 
Volume change is calculated as the change in volume multiplied by the previous rate, while rate change is the change in rate multiplied by the previous volume. The rate/volume change, change in rate multiplied by change in volume, is allocated between volume change and rate change at the ratio each component bears to the absolute value of its total.


Noninterest Income (Loss)

The following table presents the components of noninterest income (loss) (dollars in millions):
 
 
 
For the Three Months Ended September 30,
 
Increase (Decrease)
 
For the Nine Months Ended September 30,
 
Increase (Decrease)
 
 
2014
 
2013
 
Amount
 
Percent
 
2014
 
2013
 
Amount
 
Percent
Net impairment losses recognized in earnings
 
$
(2
)
 
$

 
$
(2
)
 
(100.00
)
 
$
(3
)
 
$

 
$
(3
)
 
*

Net losses on trading securities
 
(19
)
 
(15
)
 
(4
)
 
(16.50
)
 
(46
)
 
(79
)
 
33

 
42.35

Net gains on derivatives and hedging activities
 
77

 
34

 
43

 
127.73

 
108

 
151

 
(43
)
 
(28.71
)
Gain on early extinguishment of debt
 

 
2

 
(2
)
 
(100.00
)
 
15

 
2

 
13

 
646.09

Letters of credit fees
 
7

 
4

 
3

 
37.54

 
20

 
14

 
6

 
40.22

Gain on litigation settlements, net
 
4

 

 
4

 
100.00

 
4

 

 
4

 
100.00

Other
 

 

 

 
26.13

 
2

 
2

 

 
6.78

Total noninterest income
 
$
67

 
$
25

 
$
42

 
166.44

 
$
100

 
$
90

 
$
10

 
10.91

____________ 
* Not meaningful.
 
The increase in total noninterest income during the third quarter of 2014, compared to the same period in 2013, is primarily due to an increase in net gains on derivatives and hedging activities and gain on litigation settlements on MBS. As previously discussed, previously restructured advances were prepaid prior to their maturity resulting in a decrease to interest income and an increase to net gains on derivatives and hedging activities. Net gains on derivatives and hedging activities in the above table includes derivative gains of $20 million for the third quarter of 2014 that is used to offset the fair value changes on the trading securities of $19 million for the same period.

The decrease in net gains on derivatives and hedging activities during the first nine months of 2014, compared to the same period in 2013, is due to more stable interest rates during the first nine months of 2014, compared to the same period in 2013. This decrease was partially offset by the prepayment of previously restructured advances prior to their maturity as previously

47


discussed. Net gains on derivatives and hedging activities in the above table includes derivative gains of $49 million for the first nine months of 2014 that is used to offset the fair value changes on the trading securities of $46 million for the same period. In addition, total noninterest income increased during the first nine months of 2014, compared to the same period in 2013, due to an increase in gain on litigation settlements on MBS and gain on early extinguishment of debt.

The following tables summarize the net effect of derivatives and hedging activity on the Bank’s results of operations (in millions): 
 
For the Three Months Ended September 30, 2014
 
Advances
 
Investments
 
Consolidated
Obligation
Bonds
 
Balance Sheet
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
Amortization or accretion of hedging activities in net interest income (1)
$
(94
)
 
$

 
$
2

 
$

 
$
(92
)
Net interest settlements included in net interest income (2)
(229
)
 

 
118

 

 
(111
)
Total effect on net interest (expense) income
$
(323
)
 
$

 
$
120

 
$

 
$
(203
)
Net gains on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
 Gains on fair value hedges
$
76

 
$

 
$
2

 
$

 
$
78

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

 
2

 

 
(3
)
 
(1
)
Total net gains (losses) on derivatives and hedging activities
76

 
2

 
2

 
(3
)
 
77

Net losses on trading securities (3)

 
(19
)
 

 

 
(19
)
Total effect on noninterest income (loss)
$
76

 
$
(17
)
 
$
2

 
$
(3
)
 
$
58

____________ 
(1) 
Represents the amortization or accretion of hedging fair value adjustments for both open and closed hedge positions.
(2) 
Represents interest income or expense on derivatives included in net interest income.
(3) 
Includes only those gains or losses on trading securities or financial instruments held at fair value that have an economic derivative “assigned,” therefore, this line item may not agree to the income statement.


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

 
$
5

 
$

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

 
150

 

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

 
$
155

 
$

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

 
$

 
$
(7
)
 
$

 
$
39

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

 
(6
)
 
3

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

 
(6
)
 
(4
)
 
(2
)
 
34

Net losses on trading securities (3)

 
(16
)
 

 

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

 
$
(22
)
 
$
(4
)
 
$
(2
)
 
$
18

____________ 
(1) 
Represents the amortization or accretion of hedging fair value adjustments for both open and closed hedge positions.
(2) 
Represents interest income or expense on derivatives included in net interest income.
(3) 
Includes only those gains or losses on trading securities or financial instruments held at fair value that have an economic derivative “assigned,” therefore, this line item may not agree to the income statement.

48



 
For the Nine Months Ended September 30, 2014
 
Advances
 
Investments
 
Consolidated
Obligation
Bonds
 
Balance Sheet
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
Amortization or accretion of hedging activities in net interest income (1)
$
(190
)
 
$

 
$
5

 
$

 
$
(185
)
Net interest settlements included in net interest income (2)
(671
)
 

 
383

 

 
(288
)
Total effect on net interest (expense) income
$
(861
)
 
$

 
$
388

 
$

 
$
(473
)
Net gains on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
 Gains on fair value hedges
$
127

 
$

 
$
2

 
$

 
$
129

 Losses on derivatives not receiving hedge accounting including net interest settlements

 
(5
)
 

 
(16
)
 
(21
)
Total net gains (losses) on derivatives and hedging activities
127

 
(5
)
 
2

 
(16
)
 
108

Net losses on trading securities (3)

 
(46
)
 

 

 
(46
)
Total effect on noninterest income (loss)
$
127

 
$
(51
)
 
$
2

 
$
(16
)
 
$
62

____________ 
(1) 
Represents the amortization or accretion of hedging fair value adjustments for both open and closed hedge positions.
(2) 
Represents interest income or expense on derivatives included in net interest income.
(3) 
Includes only those gains or losses on trading securities or financial instruments held at fair value that have an economic derivative “assigned,” therefore, this line item may not agree to the income statement.

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

 
$
21

 
$

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

 
469

 

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

 
$
490

 
$

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

 
$

 
$
(19
)
 
$

 
$
134

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

 
5

 
1

 
7

 
17

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

 
5

 
(18
)
 
7

 
151

Net losses on trading securities (3)

 
(79
)
 

 

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

 
$
(74
)
 
$
(18
)
 
$
7

 
$
72

____________ 
(1) 
Represents the amortization or accretion of hedging fair value adjustments for both open and closed hedge positions.
(2) 
Represents interest income or expense on derivatives included in net interest income.
(3) 
Includes only those gains or losses on trading securities or financial instruments held at fair value that have an economic derivative “assigned,” therefore, this line item may not agree to the income statement.

Noninterest Expense and Assessments

Total noninterest expense and Affordable Housing Program assessments remained relatively stable for the third quarter and first nine months of 2014, compared to the same periods in 2013.

Liquidity and Capital Resources

Liquidity is necessary to satisfy members’ borrowing needs on a timely basis, repay maturing and called COs, and meet other obligations and operating requirements. Many members rely on the Bank as a source of standby liquidity, and the Bank attempts to be in a position to meet member funding needs on a timely basis. The Bank complies with operational liquidity and contingent liquidity, and other regulatory requirements. The Bank also performs a separate and independent measure of liquidity, the 45-day liquidity measurement, to validate the level of liquidity reserves.
Finance Agency regulations require the Bank to maintain operational liquidity (generally, the ready cash and borrowing capacity available to meet the Bank's intraday needs), and contingent liquidity in an amount sufficient to meet its liquidity

49


needs for five business days if it is unable to access the capital markets. The Bank met these regulatory liquidity requirements throughout the first nine months of 2014. The Finance Agency has also provided liquidity guidance to the FHLBanks generally to provide ranges of days within which each FHLBank should maintain positive cash balances based upon different assumptions and scenarios. The Bank has operated within these ranges since the Finance Agency issued this guidance.
The Bank has established an internal liquidity measurement separate from the Finance Agency requirements described above. The Bank performs a supplemental analysis to confirm that liquidity reserves are sufficient to service debt obligations for at least 45 days. This analysis assumes no access to debt market issuance and other management assumptions which are completely independent of the operational and contingent liquidity calculation measured above. The Bank met its 45 day internal liquidity goal throughout the first nine months of 2014.
The Bank’s principal source of liquidity is CO debt instruments. To provide liquidity, the Bank also may use other short-term borrowings, such as federal funds purchased, securities sold under agreements to repurchase, and loans from other FHLBanks. These funding sources depend on the Bank’s ability to access the capital markets at competitive market rates. Although the Bank may maintain secured and unsecured lines of credit with money market counterparties, the Bank’s income and liquidity would be adversely affected if it were not able to access the capital markets at competitive rates for an extended period. Historically, the FHLBanks have had excellent capital market access, although pricing and investor appetite tend to favor discount notes during times of market volatility.
Contingency plans are in place that prioritize the allocation of liquidity resources in the event of operational disruptions at the Bank or the Office of Finance, as well as systemic Federal Reserve wire transfer system disruptions. Under the FHLBank Act, the Secretary of Treasury has the authority, at his discretion, to purchase COs up to an aggregate amount of $4.0 billion. No borrowings under this authority have been outstanding since 1977.


50


Off-balance Sheet Commitments

The Bank’s primary off-balance sheet commitments are as follows:
the Bank’s joint and several liability for all FHLBank COs; and
the Bank’s outstanding commitments arising from standby letters of credit.
Should an FHLBank be unable to satisfy its payment obligation under a CO for which it is the primary obligor, any of the other FHLBanks, including the Bank, could be called upon to repay all or any part of such payment obligation, as determined or approved by the Finance Agency. As of September 30, 2014, none of the other FHLBanks defaulted on their consolidated obligations, the Finance Agency was not required to allocate any obligation among the FHLBanks, and no amount of the joint and several obligation was fixed. Accordingly, the Bank has not recognized a liability for its joint and several obligations related to other FHLBanks’ COs as of September 30, 2014 and December 31, 2013. As of September 30, 2014, the FHLBanks had $816.9 billion in aggregate par value of COs issued and outstanding, $115.5 billion of which was attributable to the Bank. No FHLBank has ever defaulted on its principal or interest payments under any CO, and the Bank has never been required to make payments under any CO as a result of the failure of another FHLBank to meet its obligations.
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 that have no stated maturity and are subject to renewal on an annual basis, based on the creditworthiness of the member applicant and appropriate additional fees. Letters of credit decreased $3.2 billion, or 11.4 percent as of September 30, 2014 from December 31, 2013, as member institutions adjusted to recent liquidity coverage ratio requirements. The Bank expects that the letters of credit balance may continue to fluctuate through the end of the year.
Commitments to extend credit, including standby letters of credit, are agreements to lend. The Bank issues a standby letter of credit for the account of a member in exchange for a fee. A member may use these standby letters of credit to facilitate a financing arrangement. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to have an allowance for credit losses for these unfunded standby letters of credit as of September 30, 2014. 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.
For more information about the Bank's outstanding standby letters of credit refer to Note 15—Commitments and Contingencies to the Bank’s interim financial statements.

Contractual Obligations

As of September 30, 2014, there has been no material change outside the ordinary course of business in the Bank’s contractual obligations as reported in the Bank’s Form 10-K.

Legislative and Regulatory Developments

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

Joint Final Rule on Credit Risk Retention for Asset-Backed Securities. On October 22, 2014, the Finance Agency and other U.S. federal regulators jointly approved a final rule requiring sponsors of asset-backed securities (ABS) to retain credit risk in those transactions. The final rule largely retains the risk retention framework contained in the proposal issued by the agencies in August 2013 and generally requires sponsors of ABS to retain a minimum 5% economic interest in a portion of the credit risk of the assets collateralizing the ABS, unless all the securitized assets satisfy specified qualifications. The final rule specifies criteria for qualified residential mortgage (QRM), commercial real estate, auto, and commercial loans that would make them exempt from the risk retention requirement. The definition of QRM is aligned with the definition of “qualified mortgage” (QM) as provided in Section 129C of the Truth in Lending Act, and its implementing regulations, as adopted by the Consumer Financial Protection Bureau. The QM definition requires, among other things, full documentation and verification of consumers’ debt and income and a debt-to-income ratio that does not exceed 43 percent; and restricts the use of certain product features, such as negative amortization and interest-only and balloon payments.

Other exemptions from the credit risk requirement include certain owner-occupied mortgage loans secured by three-to-four unit residential properties that meet the criteria for QM and certain types of community-focused residential mortgages (including extensions of credit made by community development financial institutions). The final rule also includes a provision that

51


requires the agencies to periodically review the definition of QRM, the exemption for certain community-focused residential mortgages, and the exemption for certain three-to-four unit residential mortgage loans and consider whether they should be modified.

The final rule exempts agency MBS from the risk retention requirements as long as the sponsoring agency is operating under the conservatorship or receivership of the Finance Agency and fully guarantees the timely payment of principal and interest on all assets in the issued security. Further, MBS issued by any limited-life regulated entity succeeding to either Fannie Mae or Freddie Mac oeprating with capital support from the United States would be exempt from the risk retention requirements. The Bank is currently assessing the impact of the final rule and has not yet determined the effect, if any, that this rule may have on the Bank's operations. The final rule will be effective one year after publication in the Federal Register for residential mortgage-backed securitizations and two years after publication for all other securitization types.

FHLBank Capital Stock and Capital Plans. On October 8, 2014, the Finance Agency issued a proposed rule that would transfer existing parts 931 and 933 of the Federal Housing Finance Board regulations, which address requirements for FHLBanks’ capital stock and capital plans, to new Part 1277 of the Finance Agency regulations. The proposed rule would not make any substantive changes to these requirements, but would delete certain provisions that applied only to the one-time conversion of FHLBank stock to the new capital structure required by the Gramm-Leach- Bliley Act. The proposed rule would also make certain clarifying changes so that the rules would more precisely reflect long-standing practices and requirements with regard to transactions in FHLBank stock. The proposed rule would add appropriate references to ‘‘former members’’ to clarify when former FHLBank members can be required to maintain investment in FHLBank capital stock after withdrawal from the FHLBank. The Bank is currently evaluating the proposed rule. Comments on the proposed rule are due by December 8, 2014.

FHLBank Membership. On September 12, 2014, the Finance Agency issued a proposed rule that would:

Impose a new test on all Bank members that requires them to maintain at least 1% of their assets in first-lien home mortgage loans, including MBS, on an ongoing basis, with maturities of five years or more to maintain their membership in the Bank. The proposal also suggests the possibility of a 2% or a 5% test as options.
Require all insured depository members (other than FDIC-insured depositories with less than $1.1 billion in assets) to maintain, on an ongoing basis, at least 10% of their assets in a broader range of residential mortgage loans, including those secured by junior liens and MBS, in order to maintain their membership in the Bank.
Eliminate all currently eligible captive insurance companies from Bank membership. Current captive insurance company members would have their memberships terminated five years after this rule is finalized. There would be restrictions on the level and maturity of advances that the Bank could make to these members during the sunset period. Under the proposed rule, a captive insurance company is defined as a company that is authorized under state law to conduct an insurance business but whose primary business is not the underwriting of insurance for nonaffiliated persons or entities.
Clarify how the Bank should determine the principal place of business of certain insurance companies or community development financial institutions for purposes of membership. Current rules define an institution’s principal place of business as the state in which it maintains its home office, and provides certain circumstances under which an institution's principal place of business may be designated in a state other than the state in which it maintains its home office. The proposal provides that insurance companies or community development financial institutions that cannot satisfy the requirements for designation of principal place of business, a Bank shall designate as the principal place of business the geographic location from which the institution actually conducts the predominant portion of its business operations, based on the totality of the circumstances. The changes would apply prospectively.

Comments on the proposed rule are due by January 12, 2015. Although a number of Bank members may not meet one or more of the new tests if the proposed rule is adopted as of September 30, 2014, the future impact of the proposed rule on the Bank’s membership is unknown.

Basel Committee on Bank Supervision - Liquidity Coverage Ratio. On September 3, 2014, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation finalized the liquidity coverage ratio (LCR) rule, applicable to: (i) U.S. banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in total on-balance sheet foreign exposure, and their consolidated subsidiary depository institutions with $10 billion or more in total consolidated assets; and (ii) certain other U.S. bank or savings and loan holding companies having at least $50 billion in total consolidated assets (which will be subject to less stringent requirements under the LCR rule). The LCR rule requires such covered companies to maintain an amount of high quality liquid assets (HQLA) that is no less than 100% of their total net cash outflows over a prospective 30-day stress period. Among other things, the final rule defines the various categories of HQLA, called Levels 1, 2A, or 2B. The treatment of HQLAs for the LCR is most

52


favorable under the Level 1 category, less favorable under the Level 2A category, and least favorable under the Level 2B category.

Under the final rule, collateral pledged to the Bank but not securing existing borrowings may be considered eligible HQLA to the extent the collateral itself qualifies as eligible HQLA; qualifying FHLBank System consolidated obligations are categorized as Level 2A HQLAs; and the amount of a covered company’s funding that is assumed to run off includes 25% of FHLBank advances maturing within 30 days, to the extent such advances are not secured by level 1 or level 2A HQLA, where 0% and 15% run-off assumptions apply, respectively.  At this time, the impact of the final rule is uncertain. The final rule requires that all covered companies be fully compliant by January 1, 2017.

Margin and Capital Requirements for Covered Swap Entities.  On September 3, 2014, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the Finance Agency (collectively, the Agencies) jointly proposed a rule to establish minimum margin and capital requirements for registered swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants (collectively, Swap Entities) that are subject to the jurisdiction of one of the Agencies (the Proposed Rule). In addition, the Proposed Rule affords the Agencies discretion to subject other persons to the Proposed Rule’s requirements (together with Swap Entities, the Covered Swap Entities). Comments on the Proposed Rule are due by November 24, 2014.

In addition, on September 17, 2014, the Commodity Futures Trading Commission (CFTC) adopted its version of the Proposed Rule (CFTC Proposed Rule) that generally mirrors the Proposed Rule. The CFTC Proposed Rule will only apply to a limited number of registered swap dealers and major swap participants that are not subject to the jurisdiction of one of the Agencies. Comments on the CFTC Proposed Rule are due by December 2, 2014.

The Proposed Rule would subject non-cleared swaps and non-cleared security-based swaps between Covered Swap Entities, and between Covered Swap Entities and financial end users that have material swaps exposure to a mandatory two-way initial margin requirement.  The amount of initial margin required to be posted or collected would be either the amount calculated using a standardized schedule set forth in the Proposed Rule, which provides the gross initial margin (as a percentage of total notional exposure) for certain asset classes, or an internal margin model conforming to the requirements of the Proposed Rule that is approved by the applicable Agency. The Proposed Rule specifies the types of collateral that may be posted or collected as initial margin (generally, cash, certain government securities, certain liquid debt, certain equity securities and gold); and sets forth haircuts for certain collateral asset classes. Initial margin must be segregated with an independent, third-party custodian and may not be rehypothecated.

The Proposed Rule would require variation margin to be exchanged daily for non-cleared swaps and non-cleared security-based
swaps between Covered Swap Entities and between Covered Swap Entities and all financial end users (without regard to the swaps exposure of the particular financial end-user). The variation margin amount is the daily mark-to-market change in the value of the swap to the Covered Swap Entity, taking into account variation margin previously paid or collected. Variation margin may only be paid or collected in cash, is not subject to segregation with an independent, third-party custodian, and may, if permitted by contract, be rehypothecated.

Under the Proposed Rule, the variation margin requirement would become effective on December 1, 2015 and the initial margin requirement would be phased in over a four-year period commencing on that date. For entities that have less than a $1 trillion notional amount of non-cleared derivatives, the Proposed Rule’s initial margin requirement would not come into effect until December 1, 2019.

The Bank would not be a Covered Swap Entity under the Proposed Rule, although the Finance Agency has discretion to designate the Bank as a Covered Swap Entity. Rather, the Bank would be a financial end-user under the Proposed Rule, and it would likely have material swaps exposure upon the effective date of the Proposed Rule’s initial margin requirement.

Since the Bank is currently posting and collecting variation margin in cash, daily, on its non-cleared swaps, it is not anticipated that the Proposed Rule’s variation margin requirement, if adopted, would have a material impact on the Bank’s costs. However, if the Proposed Rule’s initial margin requirement is adopted, the Bank’s cost of engaging in non-cleared swaps may increase.

Money Market Mutual Fund Reform. On July 23, 2014, the SEC approved final regulations governing money market mutual funds under the Investment Company Act of 1940. The final regulations, among other things, will:


53


Require institutional prime money market funds (including institutional municipal money market funds), to sell and redeem shares based on their floating net asset value, which would result in the daily share prices of these money market funds fluctuating along with changes in the market-based value of the funds’ investments.
Allow money market fund boards of directors to directly address a run on a fund by imposing liquidity fees or suspending redemptions temporarily if the money market fund's level of weekly liquid assets falls below 30 percent of its total assets.
Include enhanced diversification, disclosure and stress testing requirements, as well as provide updated reporting by money market funds and private funds that operate like money market funds.

The final regulations do not change the existing regulatory treatment of government agency debt (including FHLBank COs) as liquid assets. FHLBank consolidated obligation discount notes continue to be included in the definition of “daily liquid assets,” and the definition of “weekly liquid assets” continues to include FHLBank consolidated obligation discount notes with a remaining maturity up to 60 days. At this time, the future impact of these regulations on demand for FHLBank consolidated obligations is unknown.

Risk Management

The Bank’s lending, investment, and funding activities and the use of derivative hedge instruments expose the Bank to a number of risks. A robust risk management framework aligns risk-taking activities with the Bank’s strategies and risk appetite. A risk management framework also balances risks and rewards. The Bank’s risk management framework consists of risk governance, risk appetite, and risk management policies.
The Bank’s board of directors and management recognize that risks are inherent to the Bank’s business model and that the process of establishing a risk appetite does not imply that the Bank seeks to mitigate or eliminate all risk. By defining and managing to a specific risk appetite, the board of directors and management ensure that there is a common understanding of the Bank’s desired risk profile which enhances their ability to make improved strategic and tactical decisions. Additionally, the Bank aspires to achieve and exceed best practices in governance, ethics, and compliance, and to sustain a corporate culture that fosters transparency, integrity, and adherence to legal and ethical obligations.
The Bank's board of directors and management have established this risk appetite statement and risk metrics for controlling and escalating actions based on the nine continuing objectives that represent the foundation of the Bank's strategic and tactical planning, as described in the Bank's Form 10-K.

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

Credit Risk

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

Advances

Secured advances to member financial institutions account for the largest category of Bank assets; thus, advances are a major source of the Bank’s credit risk exposure. The Bank uses a risk-focused approach to credit and collateral underwriting. The Bank attempts to reduce credit risk on advances by monitoring the financial condition of borrowers and the quality and value of the assets borrowers pledge as eligible collateral.
The Bank utilizes a credit risk rating system for its members, which focuses primarily on an institution’s overall financial health and takes into account quality of assets, earnings, and capital position. The Bank assigns each borrower that is an insured depository institution or an insurance company a credit risk rating from one to 10 according to the relative amount of credit risk such borrower poses to the Bank (one being the least amount of credit risk and 10 the greatest amount of credit risk). In general, borrowers in category 10 may have more restrictions on the types of collateral they may use to secure advances, may be required to maintain higher collateral maintenance levels and deliver loan collateral, may be restricted from obtaining further advances, and may face more stringent collateral reporting requirements. At times, the Bank may place more restrictive requirements on a borrower than those generally applicable to borrowers with the same rating based upon the Bank's assessment of the borrower and its collateral. Beginning March 31, 2014, the Bank assigns each borrower that is not an insured depository institution or insurance company, such as housing associates, certified community development financial institutions, and corporate credit unions, a risk level rating based on a risk matrix developed for each entity type. Each matrix has risk levels that generally correspond to the 1-10 credit risk rating for insured depository institutions and insurance

54


companies. Development of these risk matrices for borrowers that are not insured depository institutions or insurance companies enables the Bank to monitor and analyze the financial condition of these borrowers in a more consistent and complete manner.
The following table sets forth the number of borrowers and the par amount of advances outstanding to borrowers with the specified ratings as of the specified dates (dollars in millions).
 
 
 
As of September 30, 2014
 
As of December 31, 2013
Rating                 
 
Number of        
Borrowers
 
Outstanding        
Advances
 
Number of        
Borrowers
 
Outstanding        
Advances
1
 
10

 
$
2,874

 
7

 
$
63

2
 
18

 
2,198

 
32

 
4,742

3
 
67

 
25,684

 
48

 
9,919

4
 
91

 
19,478

 
50

 
14,433

5
 
128

 
30,462

 
114

 
13,792

6
 
111

 
3,027

 
101

 
21,296

7
 
49

 
1,114

 
92

 
20,333

8
 
25

 
664

 
56

 
1,063

9
 
19

 
542

 
27

 
883

10
 
39

 
642

 
52

 
898


The Bank establishes a credit limit for each borrower. The credit limit is not a committed line of credit, but rather an indication of the borrower’s general borrowing capacity with the Bank. The Bank determines the credit limit in its sole and absolute discretion, by evaluating a wide variety of factors indicating the borrower’s overall creditworthiness. The credit limit generally is expressed as a percentage equal to the ratio of the borrower’s total liabilities to the Bank (including the face amount of outstanding letters of credit, the principal amount of outstanding advances and the total exposure of the Bank to the borrower under any derivative contract) to the borrower’s total assets. Generally, borrowers are held to a credit limit of no more than 30 percent. However, the Bank’s board of directors, or a relevant committee thereof, may approve a higher limit at its discretion, and such borrowers may be subject to certain additional collateral reporting and maintenance requirements. As of September 30, 2014, seven borrowers have been approved for a credit limit higher than 30 percent.
Each borrower must maintain an amount of qualifying collateral that, when discounted to the lendable collateral value (LCV), is equal to at least 100 percent of the outstanding principal amount of all advances and other liabilities of the borrower to the Bank. The LCV is the value that the Bank assigns to each type of qualifying collateral for purposes of determining the amount of credit that such qualifying collateral will support. For each type of qualifying collateral, the Bank discounts the market value of the qualifying collateral to calculate the LCV. The Bank regularly reevaluates the appropriate level of discounting. The following table provides information about the types of collateral held for the Bank’s advances (dollars in millions).

 
Total Par 
Value of
Outstanding Advances
 
LCV of 
Collateral 
Pledged by Members
 
First Mortgage 
Collateral (%)
 
Securities 
Collateral (%)
 
Other Real Estate Related Collateral (%)
As of September 30, 2014
$
87,084

 
$
270,111

 
71.31
 
6.20
 
22.49
As of December 31, 2013
87,882

 
231,342

 
67.20
 
8.18
 
24.62
For purposes of determining each member's LCV, the Bank estimates the current market value of all residential first mortgage loans, multifamily and commercial real estate loans, and home equity loans and lines of credit pledged as collateral based on information provided by the member on individual loans or its loan portfolio through the regular collateral reporting process. The estimated market value is discounted to account for the price volatility of loans as well as estimated liquidation and servicing costs in the event of the member's default. Market values, and thus LCVs, change monthly. The use of this market-based valuation methodology allows the Bank to establish its collateral discounts with greater precision and provides greater transparency with respect to the valuation of collateral pledged for advances and other credit products offered by the Bank.
The FHLBank Act affords any security interest granted to the Bank by any member of the Bank, or any affiliate of any such member, priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor), other than claims and rights of a party that (1) would be entitled to priority under otherwise applicable law; and (2) is an actual bona fide purchaser for value or is an actual secured party whose security interest is perfected in accordance with applicable state law.

55


In its history, the Bank has never experienced a credit loss on an advance. In consideration of this, and the Bank’s policies and practices detailed above, the Bank has not established an allowance for credit losses on advances as of September 30, 2014 and December 31, 2013.

Investments

The Bank is subject to credit risk on unsecured investments, such as interest-bearing deposits and federal funds sold. These investments are generally transacted with government agencies and large financial institutions that are considered to be of investment quality. The Finance Agency defines investment quality as a security with adequate financial backing so that full and timely payment of principal and interest on such security is expected and there is minimal risk that the timely payment of principal and interest would not occur because of adverse changes in economic and financial conditions during the projected life of the security.
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. On November 8, 2013, the Finance Agency issued a final rule implementing Section 939A of the Dodd-Frank Act, which requires Federal agencies to remove provisions from their regulations that require the use of ratings issued by a NRSRO. The final rule requires the Bank to make its own determination of credit quality with respect to its investments, but does not prevent the Bank from using NRSRO ratings or other third party analysis in its credit determinations. The final rule became effective on May 7, 2014.
To minimize credit risk on investments, 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;
debt instruments that are not investment quality, other than certain investments targeted to low-income people or communities and instruments that the Bank determined became less than investment quality because of developments or events that occurred 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 that are investment quality; (4) MBS or asset-backed securities backed by manufactured housing loans or home equity loans; and (5) certain foreign housing loans authorized under section 12(b) of the FHLBank Act;
interest-only or principal-only stripped MBS, collateralized mortgage obligations (CMOs), collateralized debt obligations, and real estate mortgage investment conduits (REMICs);
residual-interest or interest-accrual classes of CMOs and REMICs;
fixed-rate or variable-rate MBS, CMOs, and REMICs that on the trade date are at rates equal to their contractual cap and that have average lives that vary by more than six years under an assumed instantaneous interest-rate change of 300 basis points; and
non-U.S. dollar denominated securities.

56


The Bank enters into investments only with U.S. counterparties or U.S. branch offices of foreign banks that have been approved by the Bank through its internal approval process, but may have exposure to foreign entities if a counterparty’s parent entity is located in another country. The tables below represent the Bank’s gross exposure, by instrument type, according to the location of the parent company of the counterparty (in millions):
 
As of September 30, 2014
 
Federal Funds Sold         
 
Interest-bearing  
Deposits
 
Net Derivative Exposure (1)    
 
Total 
Australia
$
395

 
$

 
$

 
$
395

Canada
1,405

 

 

 
1,405

Germany
1,160

 

 
65

 
1,225

United States of America
1,135

 
1,010

 

 
2,145

Total
$
4,095

 
$
1,010

 
$
65

 
$
5,170

____________ 
(1) 
Amounts do not reflect collateral; see the table under Risk Management–Credit Risk–Derivatives below for a breakdown of the credit ratings of and the Bank’s credit exposure to derivative counterparties, including net exposure after collateral.
 
As of December 31, 2013
 
Federal Funds Sold         
 
Interest-bearing  
Deposits
 
Net Derivative Exposure (1)     
 
Total 
Canada
$
250

 
$

 
$

 
$
250

Germany

 

 
67

 
67

United Kingdom
510

 

 

 
510

United States of America
1,035

 
1,007

 
4

 
2,046

Total
$
1,795

 
$
1,007

 
$
71

 
$
2,873


____________ 
(1) 
Amounts do not reflect collateral; see the table under Risk Management–Credit Risk–Derivatives below for a breakdown of the credit ratings of and the Bank’s credit exposure to derivative counterparties, including net exposure after collateral.
The Bank experienced an increase in unsecured credit exposure in its investment portfolio related to non-U.S. government and non-U.S. government agency counterparties from $2.8 billion as of December 31, 2013 to $5.1 billion as of September 30, 2014. There were three such counterparties, Landesbank Baden-Wuerttemberg, Branch Banking and Trust Company, and Bank of Nova Scotia, that each represented greater than 10 percent, and collectively represented 68.1 percent of the total unsecured credit exposure to non-U.S. government or non-U.S. government agencies counterparties. As reported in the Bank's Form 10-K, Branch Banking and Trust was one of the Bank's top 10 advances borrowers as of December 31, 2013. One of the Bank's member directors is a senior executive vice president of Branch Banking and Trust Company and was elected chairman of the Bank's board of directors effective January 1, 2013. Pursuant to Finance Agency regulation, the Bank's member directors serve as officers or directors of a Bank member, and the Bank may enter into business transactions with such members from time to time in the ordinary course of business. As of September 30, 2014, the Bank’s unsecured credit portfolio consisted primarily of federal funds sold with overnight maturities.
The Bank’s Risk Management Policy (RMP) permits the Bank to invest in U.S. agency (Fannie Mae, Freddie Mac and Ginnie Mae) obligations, including CMOs and REMICS backed by such securities, and other MBS, CMOs, and REMICS rated AAA by S&P or Aaa by Moody’s at the time of purchase. The private-label MBS purchased by the Bank originally attained their triple-A ratings through credit enhancements, which primarily consisted of the subordination of the claims of the other tranches of these securities. In addition to NRSRO ratings, the Bank considers a variety of credit quality factors when analyzing potential investments, such as collateral performance, marketability, asset class considerations, local and regional economic conditions, and the financial health of the underlying issuer.
The tables below provide information on the credit ratings of the Bank’s investments held as of September 30, 2014 and December 31, 2013, based on the lowest long-term credit rating as reported by an NRSRO as of September 30, 2014 and December 31, 2013 (in millions), respectively.

57


 
 
 
As of September 30, 2014
 
 
 
 
 
Carrying Value (1)
 
 
 
 
 
Investment Grade
 
Below Investment Grade
 
 
 
AAA
 
AA
 
A
 
BBB
 
BB
 
B
 
CCC
 
CC
 
C
 
D
 
Unrated
 
Total
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
$

 
$
2

 
$
1,008

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
1,010

Securities purchased under agreements to resell

 

 

 

 
455

 

 

 

 

 

 

 
455

Federal funds sold

 
395

 
2,820

 
880

 

 

 

 

 

 

 

 
4,095

Total short-term investments

 
397

 
3,828

 
880

 
455

 

 

 

 

 

 

 
5,560

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

 
85

 

 

 

 

 

 

 

 

 

 
85

U.S. government agency debt obligations

 
6,340

 

 

 

 

 

 

 

 

 

 
6,340

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

 
388

 

 

 

 

 

 

 

 

 

 
388

Government-sponsored enterprises
466

 
13,638

 

 

 

 

 

 

 

 

 

 
14,104

Private-label

 
33

 
99

 
429

 
518

 
601

 
807

 
231

 
186

 
757

 
5

 
3,666

Total mortgage-backed securities
466

 
14,059

 
99

 
429

 
518

 
601

 
807

 
231

 
186

 
757

 
5

 
18,158

Total long-term investments
466

 
20,484

 
99

 
429

 
518

 
601

 
807

 
231

 
186

 
757

 
5

 
24,583

Total investments
$
466

 
$
20,881

 
$
3,927

 
$
1,309

 
$
973

 
$
601

 
$
807

 
$
231

 
$
186

 
$
757

 
$
5

 
$
30,143

____________
(1) 
Investment amounts noted in the above table represent the carrying value and do not include related accrued interest receivable of $45 million as of September 30, 2014.
 
As of December 31, 2013
 
 
 
 
 
Carrying Value (1)
 
 
 
 
 
Investment Grade
 
Below Investment Grade
 
 
 
 
 
AAA
 
AA
 
A
 
BBB
 
BB
 
B
 
CCC
 
CC
 
C
 
D
 
unrated
 
Total
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Interest-bearing deposits
$

 
$
1

 
$
1,006

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
1,007

  Federal funds sold

 

 
1,395

 
400

 

 

 

 

 

 

 

 
1,795

Total short-term investments

 
1

 
2,401

 
400

 

 

 

 

 

 

 

 
2,802

Long-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

State or local housing agency debt obligations

 
93

 

 

 

 

 

 

 

 

 

 
93

U.S. government agency debt obligations

 
5,404

 

 

 

 

 

 

 

 

 

 
5,404

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

U.S. agency obligations-guaranteed residential

 
465

 

 

 

 

 

 

 

 

 

 
465

Government-sponsored enterprises residential
466

 
13,486

 

 

 

 

 

 

 

 

 

 
13,952

Private-label residential

 
62

 
123

 
511

 
523

 
809

 
534

 
323

 
161

 
1,176

 
6

 
4,228

Total mortgage-backed securities
466

 
14,013

 
123

 
511

 
523

 
809

 
534

 
323

 
161

 
1,176

 
6

 
18,645

Total long-term investments
466

 
19,510

 
123

 
511

 
523

 
809

 
534

 
323

 
161

 
1,176

 
6

 
24,142

Total investments
$
466

 
$
19,511

 
$
2,524

 
$
911

 
$
523

 
$
809

 
$
534

 
$
323

 
$
161

 
$
1,176

 
$
6

 
$
26,944

____________
(1) 
Investment amounts noted in the above table represent the carrying value and do not include related accrued interest receivable of $49 million as of December 31, 2013.


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The Bank monitors the financial condition of investment counterparties to ensure that they are in compliance with the Bank's RMP and Finance Agency regulations. Unsecured credit exposure to any counterparty is limited by the credit quality and capital of the counterparty and by the capital of the Bank. On a regular basis, management produces financial monitoring reports detailing the financial condition of the Bank’s counterparties. These reports are reviewed by the Bank’s board of directors. The Bank may further limit or suspend overnight and term trading in addition to RMP and regulatory requirements. Limiting or suspending counterparties limits the pool of available counterparties, shifts the geographical distribution of counterparty exposure, and may reduce the Bank’s overall short-term investment opportunities.

Securities Purchased Under Agreements to Resell

Securities purchased under agreements to resell are considered collateralized financing arrangements and effectively represent short-term secured loans with investment-grade counterparties. The Bank is inherently exposed to credit risk associated with the risk of default by, or insolvency of, any counterparty with whom it conducts business; however, based upon the collateral held as security and the investment-grade of the related counterparties, the Bank considers its credit exposure related to these investments to be minimal.
Non-Private-label MBS
Unrealized losses related to U.S. agency MBS and GSE MBS are caused by interest rate changes. Because these securities are guaranteed by government agencies or GSEs, it is expected that these securities would not be settled at a price less than the amortized cost basis. The Bank does not consider these investments to be other-than-temporarily impaired as of September 30, 2014 because the decline in fair value is attributable to changes in interest rates and not credit quality, the Bank does not intend to sell the investments, and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity.

Private-label MBS
For disclosure purposes, the Bank classifies private-label MBS as either prime or Alt-A based upon the overall credit quality of the underlying loans as determined by the originator at the time of origination, unless otherwise noted. Although there is no universally accepted definition of Alt-A, generally loans with credit characteristics that range between prime and subprime are classified as Alt-A. Participants in the mortgage market have used the Alt-A classification principally to describe loans for which the underwriting process has been streamlined in order to reduce the documentation requirements of the borrower or allow alternative documentation. As of September 30, 2014, based on the classification by the originator at the time of origination, approximately 86.4 percent of the underlying mortgages collateralizing the Bank’s private-label MBS were considered prime, of which 95.1 percent were variable-rate, and the remaining underlying mortgages collateralizing these securities were considered Alt-A, of which 66.4 percent were variable-rate.
The table below provides information on the interest-rate payment terms of the Bank’s private-label MBS backed by prime and Alt-A loans (in millions).
 
As of September 30, 2014
 
As of December 31, 2013
 
Fixed-Rate      
 
Variable-Rate    
 
Total        
 
Fixed-Rate      
 
Variable-Rate    
 
Total        
Prime
$
169

 
$
3,264

 
$
3,433

 
$
246

 
$
3,736

 
$
3,982

Alt-A
181

 
358

 
539

 
233

 
391

 
624

Total unpaid principal balance
$
350

 
$
3,622

 
$
3,972

 
$
479

 
$
4,127

 
$
4,606


59


The tables below provide additional information, including changes in ratings since the original purchase date, on the Bank’s private-label MBS by year of securitization as of September 30, 2014 (dollars in millions).
 
Year of Securitization - Prime
 
2008
 
2007
 
2006
 
2005
 
2004 and  
Prior
 
Total      
Investment Ratings:
 
 
 
 
 
 
 
 
 
 
 
AA
$

 
$

 
$

 
$

 
$
33

 
$
33

A

 

 

 
10

 
88

 
98

BBB

 

 

 
98

 
281

 
379

BB

 
8

 

 
167

 
270

 
445

B

 
14

 

 
233

 
245

 
492

CCC

 
273

 
25

 
374

 
101

 
773

CC
31

 
139

 
41

 
45

 

 
256

C
77

 
12

 
52

 
65

 

 
206

D

 
293

 
394

 
58

 

 
745

Unrated

 

 

 

 
6

 
6

Total unpaid principal balance
$
108

 
$
739

 
$
512

 
$
1,050

 
$
1,024

 
$
3,433

Amortized cost
$
91

 
$
573

 
$
415

 
$
959

 
$
1,011

 
$
3,049

Gross unrealized losses
$

 
$
(1
)
 
$

 
$
(4
)
 
$
(9
)
 
$
(14
)
Fair value
$
96

 
$
634

 
$
454

 
$
993

 
$
1,014

 
$
3,191

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

 
$
(2
)
 
$

 
$
(1
)
 
$

 
$
(3
)
 Non-credit-related losses

 
(2
)
 

 
(1
)
 

 
(3
)
Total other-than-temporary impairment losses
$

 
$

 
$

 
$

 
$

 
$

Weighted average percentage of fair value to unpaid principal balance
88.35
%
 
85.76
%
 
88.71
%
 
94.69
%
 
99.04
%
 
92.97
%
Original weighted average credit support
15.72
%
 
14.37
%
 
10.47
%
 
7.02
%
 
3.73
%
 
8.41
%
Weighted average credit support
2.44
%
 
0.79
%
 
0.64
%
 
5.41
%
 
10.40
%
 
5.10
%
Weighted average collateral delinquency
12.35
%
 
18.49
%
 
16.34
%
 
9.80
%
 
8.38
%
 
12.30
%
 
Year of Securitization – Alt-A
 
2008
 
2007
 
2006
 
2005
 
2004 and  
Prior
 
Total      
Investment Ratings:
 
 
 
 
 
 
 
 
 
 
 
A
$

 
$

 
$

 
$

 
$
2

 
$
2

BBB

 

 

 

 
51

 
51

BB

 

 

 

 
73

 
73

B

 

 

 

 
113

 
113

CCC

 

 

 
144

 
3

 
147

   D

 
37

 

 
116

 

 
153

Total unpaid principal balance
$

 
$
37

 
$

 
$
260

 
$
242

 
$
539

Amortized cost
$

 
$
27

 
$

 
$
209

 
$
242

 
$
478

Gross unrealized losses
$

 
$

 
$

 
$
(12
)
 
$
(1
)
 
$
(13
)
Fair value
$

 
$
30

 
$

 
$
205

 
$
243

 
$
478

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

 
$

 
$

 
$

 
$

 
$

 Non-credit-related losses

 

 

 

 

 

Total other-than-temporary impairment losses
$

 
$

 
$

 
$

 
$

 
$

Weighted average percentage of fair value to unpaid principal balance
0.00
%
 
79.97
%
 
0.00
%
 
78.98
%
 
100.67
%
 
88.77
%
Original weighted average credit support
0.00
%
 
12.29
%
 
0.00
%
 
27.92
%
 
8.43
%
 
18.10
%
Weighted average credit support
0.00
%
 
0.00
%
 
0.00
%
 
8.93
%
 
12.72
%
 
10.01
%
Weighted average collateral delinquency
0.00
%
 
28.96
%
 
0.00
%
 
26.77
%
 
8.70
%
 
18.82
%


60


The following table represents a summary of the significant inputs used to evaluate each of the Bank’s private-label MBS for other-than-temporary impairment as of September 30, 2014:
 
 
 
Significant Inputs(1)
 
 
 
Prepayment Rate
 
Default Rates
 
Loss Severities
 
Current Credit Enhancement
Classification
 
Weighted    
Average
(%)
 
Weighted    
Average
(%)
 
Weighted    
Average
(%)
 
Weighted    
Average
(%)
Prime
 
16.38
 
6.43
 
32.79
 
7.26
Alt-A
 
13.83
 
22.59
 
37.94
 
3.81
Total of all private-label residential MBS
 
15.26
 
13.49
 
35.04
 
5.75
____________
(1) 
The classification (prime and Alt-A) is based on the model used to run the estimated cash flows for the individual securities, which may not necessarily be the same as the classification at the time of origination.

For the securities for which an other-than-temporary impairment was determined to have occurred during the third quarter of 2014, a summary of the significant inputs used to measure the amount of the credit loss recognized in earnings is contained in Note 6 Other-than-temporary Impairment to the Bank’s interim financial statements.

The tables below summarize the total other-than-temporary impairment losses by newly impaired and previously impaired securities (in millions):
 
For the Three Months Ended September 30,
 
2014
 
2013
 
Credit
Losses
 
Net
Noncredit
Losses
 
Total
Losses
 
Credit
Losses
 
Net
Noncredit
Losses
 
Total
Losses
Securities newly impaired during the period
$

 
$

 
$

 
$

 
$

 
$

Securities previously impaired prior to current period (1)
(2
)
 
(2
)
 

 

 

 

Total
$
(2
)
 
$
(2
)
 
$

 
$

 
$

 
$

____________ 
(1) 
For the three months ended September 30, 2014 and 2013, “Securities previously impaired prior to current period” represents all securities that were previously impaired prior to July 1, 2014 and 2013, respectively.
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
Credit
Losses
 
Net
Noncredit
Losses
 
Total
Losses
 
Credit
Losses
 
Net
Noncredit
Losses
 
Total
Losses
Securities newly impaired during the period
$

 
$

 
$

 
$

 
$
1

 
$
(1
)
Securities previously impaired prior to current period (1)
(3
)
 
(3
)
 

 

 

 

Total
$
(3
)
 
$
(3
)
 
$

 
$

 
$
1

 
$
(1
)
____________ 
(1)
For the nine months ended September 30, 2014 and 2013, “Securities previously impaired prior to current period” represents all securities that were previously impaired prior to January 1, 2014 and 2013, respectively.
In addition to the cash flow analysis of the Bank’s private-label MBS under a base case (best estimate) housing price scenario as described in Note 6—Other-than-temporary Impairment to the Bank’s interim financial statements, a cash flow analysis was also performed based on a housing price scenario that is more adverse than the base case (adverse case housing price scenario). This more stressful scenario was based on a short-term housing price forecast that was decreased five percentage points relative to the base case, followed by a recovery path that is 33.0 percent lower than the base case.

The adverse case housing price scenario and associated results should not be construed as a prediction of the Bank’s future results, market conditions, or the actual performance of these securities. Rather, the results from this hypothetical adverse case housing price scenario provide a measure of the credit losses the Bank might incur if home price declines (and subsequent recoveries) are more adverse than those projected in the Bank’s base case assessment.


61


The following table shows the base case scenario and what the impact on other-than-temporary impairment would have been under the more stressful adverse case housing price scenario (dollars in millions). Under the adverse case housing price scenario, the Bank may recognize a credit loss in excess of the maximum credit loss, the difference between the security’s amortized cost basis and fair value, because the Bank believes fair value would decrease in the adverse case housing price scenario.

 
For the Three Months Ended September 30, 2014
 
Housing Price Scenario
 
Base Case (1)
 
Adverse Case
 
Number of    
Securities
 
Unpaid Principal
balance
 
Other-Than-Temporary Impairment Related 
to Credit Loss
 
Number of    
Securities
 
Unpaid Principal balance
 
Other-Than-Temporary Impairment Related to Credit Loss
Prime loan (2)
2

 
$
54

 
$
(2
)
 
2

 
$
54

 
$
(3
)
____________
(1) Represents the security and related other-than-temporary-impairment credit loss for the three months ended September 30, 2014.
(2) 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.

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

Derivatives

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

For bilateral derivative transactions, the Bank is subject to nonperformance by counterparties to its bilateral derivative transactions. The Bank generally requires collateral on bilateral derivative transactions. The amount of net unsecured credit exposure that is permissible with respect to each counterparty depends on the credit rating of that counterparty. A counterparty must deliver collateral to the Bank if the total market value of the Bank's exposure to that counterparty rises above a specific trigger point. As a result of these risk mitigation initiatives, the Bank does not anticipate any credit losses on its bilateral derivative transactions as of September 30, 2014.

For cleared derivatives, the Bank is subject to credit risk due to nonperformance by the Clearinghouse and clearing agent. The requirement that the Bank post initial and variation margin through the clearing agent, to the Clearinghouse, exposes the Bank to institutional credit risk in the event that the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives mitigates credit risk exposure because a central counterparty is substituted for individual counterparties and collateral is posted daily for changes in the value of cleared derivatives through a clearing agent. The Bank does not anticipate any credit losses on its cleared derivatives as of September 30, 2014.

The contractual or notional amount of derivatives transactions reflects the involvement of the Bank in the various classes of financial instruments; however, the maximum credit risk of the Bank with respect to derivative transactions is the estimated cost of replacing the derivative transactions if there is default, minus the value of any related collateral, including initial and variation margin. In determining maximum credit risk, the Bank considers, accrued interest receivables and payables as well as the netting requirements to net assets and liabilities.
The tables below provide information on the credit ratings of, and the Bank’s credit exposure to, its derivative counterparties (in millions). The credit ratings reflect the lowest long-term credit rating by an NRSRO.

62


 
 
As of September 30, 2014
 
 
Notional Amount
 
Derivatives Fair Value Before Collateral
 
Cash Collateral Pledged To (From) Counterparty
 
Net Credit Exposure to Counterparties
Non-member counterparties:
 
 
 
 
 
 
 
 
  Asset positions with credit exposure:
 
 
 
 
 
 
 
 
     Single-A
 
$
11,608

 
$
65

 
$
(65
)
 
$

  Cleared derivatives
 
6,623

 

 
4

 
4

  Liability positions with credit exposure:
 
 
 
 
 
 
 
 
    Cleared derivatives
 
43,503

 
(234
)
 
348

 
114

Total derivative positions with non-member counterparties to which the Bank had credit exposure
 
61,734

 
(169
)
 
287

 
118

Member institutions (1)
 
59

 

 

 

Total
 
$
61,793

 
$
(169
)
 
$
287

 
$
118

____________ 
(1) Collateral held with respect to derivatives with member institutions where the Bank is acting as an intermediary represents the amount of eligible collateral physically held by or on behalf of the Bank or collateral assigned to the Bank, as evidenced by a written security agreement, and held by the member institution for the benefit of the Bank.
 
 
As of December 31, 2013
 
 
Notional Amount
 
Derivatives Fair Value Before Collateral
 
Cash Collateral Pledged To (From) Counterparty
 
Net Credit Exposure to Counterparties
Non-member counterparties:
 
 
 
 
 
 
 
 
Asset positions with credit exposure:
 
 
 
 
 
 
 
 
     Single-A
 
$
11,026

 
$
67

 
$
(65
)
 
$
2

     Cleared derivatives
 
1,965

 
4

 
1

 
5

  Liability positions with credit exposure:
 
 
 
 
 
 
 
 
     Cleared derivatives
 
11,030

 
(94
)
 
140

 
46

Total derivative positions with non-member counterparties to which the Bank had credit exposure
 
24,021

 
(23
)
 
76

 
53

Member institutions (1)
 
44

 

 

 

Total
 
$
24,065

 
$
(23
)
 
$
76

 
$
53

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

Certain of the Bank's bilateral derivative instruments contain provisions that require the Bank to post additional collateral with its counterparties if there is a deterioration in the Bank's credit rating. 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 $114 million of collateral at fair value to its derivative counterparties as of September 30, 2014.
The net exposure after collateral is treated as unsecured credit consistent with the Bank's RMP and Finance Agency regulations if the counterparty has an NRSRO rating. If the counterparty does not have an NRSRO rating, the Bank requires collateral for the full amount of the exposure.

Mortgage Loan Programs

The Bank seeks to manage the credit risk associated with the Mortgage Purchase Program (MPP) and the Mortgage Partnership Finance® Program (MPF® Program or MPF) by maintaining underwriting and eligibility standards and structuring possible losses into several layers to be shared with the participating financial institutions. In some cases, a portion of the credit support for MPP and MPF loans is provided under a primary and/or supplemental mortgage insurance policy. Currently, eight mortgage insurance companies provide primary and/or supplemental mortgage insurance for loans in which the Bank has a retained interest. As of September 30, 2014, all of the Bank’s mortgage insurance providers have been rated below "A" by one or more

63


NRSROs for their claims paying ability or insurer financial strength. Ratings downgrades imply an increased risk that these mortgage insurers may be unable to fulfill their obligations to pay claims that may be made under the insurance policies. The Bank holds additional risk-based capital to mitigate the incremental risk, if any, that results from the supplemental mortgage insurance providers.
As of September 30, 2014 and December 31, 2013, the allowance for credit losses on MPF loans was $4 million and $11 million, respectively. The decrease in the allowance for credit losses was related to certain enhancements to the Bank's allowance for credit loss calculation. For additional information related to the Bank's allowance for credit losses policy, see Note 1Basis of Presentation to the Bank’s interim financial statements.

Critical Accounting Policies and Estimates

During the three-month period ended March 31, 2014, the Bank made certain enhancements to its allowance for credit loss calculation related to the Bank’s conventional single-family residential mortgage loan portfolio.  The allowance for conventional single-family residential mortgage loans is determined by an analysis (performed at least quarterly) that includes segregating the portfolio into various aging groups.  For loans that are 60 days or less past due, the Bank calculates a loss severity, default rate, and the expected loss based on individual loan characteristics.  For loans that are more than 60 days past due, the allowance is determined using an automated valuation model.  Inherent in the Bank’s evaluation of loan performance is an analysis of various credit enhancements at the individual master commitment level to determine the credit enhancement available to recover losses on conventional single-family residential mortgage loans under each individual master commitment. 

Additionally, during the three-month period ended March 31, 2014, the Bank began to classify as a loss and charge-off the portion of outstanding conventional single-family residential mortgage loan balances in excess of the fair value of the underlying property, less costs to sell and adjusted for any available credit enhancements, once the loans are 180 days delinquent. These changes did not have a material effect on the Bank's financial condition or results of operations.

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

Recently Issued and Adopted Accounting Guidance

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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

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




64


The following table summarizes the notional amounts of derivative financial instruments (in millions). The category “Fair value hedges” represents hedge strategies for which hedge accounting is achieved. The category “non-qualifying hedges” represents hedge strategies for which the derivatives are not in designated hedge relationships that formally meet the hedge accounting requirements under GAAP.
 
 
 
 
 
 
As of September 30, 2014
 
As of December 31, 2013
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
 
$
9,761

 
$
6,919

Non-qualifying
hedges
 
5

 

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
 
22,056

 
23,715

Non-qualifying
hedges
 
40

 
740

Pay variable with embedded features, receive variable interest rate swap (non-callable)
 
Reduces interest rate sensitivity and repricing gaps by converting the advance’s variable rate to a different variable rate index and/or offsets embedded option risk in the advance.
 
Fair value
hedges
 
527

 
3,522

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
 
135

 
145

 
 
 
 
Total
 
32,524

 
35,041

Investments
 
 
 
 
 
 
 
 
Pay fixed, receive variable interest rate swap
 
Converts the investment’s fixed rate to a variable rate index.
 
Non-qualifying
hedges
 
1,180

 
1,380

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

 
50

 
 
 
 
Total
 
1,230

 
1,430

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
 
41,801

 
26,581

Non-qualifying
hedges
 
8,270

 
1,900

Receive fixed, pay variable interest rate swap (with options)
 
Converts the bond’s fixed rate to a variable rate index and offsets option risk in the bond.
 
Fair value
hedges
 
22,049

 
23,983

Non-qualifying
hedges
 
33

 

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
 
10

 
20

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

 
25

 
 
 
 
Total
 
72,188

 
52,509


65


 
 
 
 
 
 
As of September 30, 2014
 
As of December 31, 2013
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
 
849

 

 
 
 
 
Total
 
849

 

Balance Sheet
 
 
 
 
 
 
 
 
Pay fixed, receive variable interest rate swap
 
Converts the asset or liability fixed rate to a variable rate index.
 
Non-qualifying
hedges
 
105

 
125

Interest rate cap or floor
 
Protects against changes in income of certain assets due to changes in interest rates.
 
Non-qualifying hedges
 
16,500

 
12,500

 
 
 
 
Total
 
16,605

 
12,625

Intermediary Positions and Other
 
 
 
 
 
 
Pay fixed, receive variable interest rate swap, and receive-fixed, pay variable interest rate swap
 
To offset interest rate swaps executed with members by executing interest rate swaps with derivatives counterparties.
 
Non-qualifying
hedges
 
118

 
49

Interest rate swaption
 
To offset swaptions executed with members by executing swaptions with derivatives counterparties.
 
Non-qualifying
hedges
 
40

 
40

 
 
 
 
Total
 
158

 
89

Total notional amount
 
 
 
 
 
$
123,554

 
$
101,694



66


Interest-rate Risk Exposure Measurement

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

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

The table below reflects the Bank’s effective duration exposure measurements as calculated in accordance with Bank policy (in years). 
 
As of September 30, 2014
 
As of December 31, 2013
 
Up 200 Basis Points    
 
Current    
 
Down 200 Basis
 Points (1)    
 
Up 200 Basis Points    
 
Current
 
Down 200 Basis 
Points (1)    
Assets
0.52

 
0.38

 
0.25

 
0.62

 
0.47

 
0.26

Liabilities
0.34

 
0.44

 
0.29

 
0.37

 
0.48

 
0.36

Equity
3.76

 
(0.71
)
 
(0.43
)
 
5.21

 
0.28

 
(1.44
)
Effective duration gap
0.18

 
(0.06
)
 
(0.04
)
 
0.25

 
(0.01
)
 
(0.10
)
____________ 
(1) 
The “down 200 basis points” scenarios shown above are considered to be “constrained shocks,” intended to prevent the possibility of negative interest rates when a designated low rate environment exists.

The Bank also analyzes its interest-rate risk and market exposure by evaluating the theoretical market value of equity. The market value of equity represents the net result of the present value of future cash flows discounted to arrive at the theoretical market value of each balance sheet item. By using the discounted present value of future cash flows, the Bank is able to factor in the various maturities of assets and liabilities, similar to the effective duration analysis discussed above. The Bank determines the theoretical market value of assets and liabilities utilizing a Level 3 pricing approach as more fully described in Note 14—Estimated Fair Values to the Bank's interim financial statements. The difference between the market value of total assets and the market value of total liabilities is the market value of equity. A more volatile market value of equity under different shock scenarios tends to result in a higher effective duration of equity, indicating increased sensitivity to interest rate changes.

The table below reflects the Bank’s market value of equity measurements as calculated in accordance with Bank policy (in millions). 
 
As of September 30, 2014
 
As of December 31, 2013
 
Up 200 Basis Points    
 
Current
 
Down 200 Basis Points (1)    
 
Up 200 Basis Points    
 
Current
 
Down 200 Basis Points (1)  
Assets
$
121,709

 
$
122,808

 
$
123,279

 
$
118,940

 
$
120,261

 
$
120,863

Liabilities
115,310

 
116,202

 
116,558

 
112,686

 
113,632

 
114,242

Equity
6,399

 
6,606

 
6,721

 
6,254

 
6,629

 
6,621

____________ 
(1) 
The “down 200 basis points” scenarios shown above are considered to be “constrained shocks,” intended to prevent the possibility of negative interest rates when a designated low rate environment exists.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

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


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As of September 30, 2014, the Bank's management, with the participation of the Certifying Officers has evaluated the effectiveness of the design and operation of its disclosure controls and procedures. Based on that evaluation, the Certifying Officers have concluded that the Bank's disclosure controls and procedures (as defined in Rules 13a-15(a) and 15d-15(e) under the Exchange Act) were effective to provide reasonable assurance that information required to be disclosed by the Bank in the reports that it files or submits under the Exchange Act (1) is accumulated and communicated to the Certifying Officers, as appropriate, to allow timely decisions regarding required disclosure; and (2) is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.

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

Changes in Internal Control Over Financial Reporting

During the third quarter of 2014, there were no changes in the Bank's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Bank's internal control over financial reporting.


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PART II. OTHER INFORMATION.

Item 1.
Legal Proceedings.

The Bank is subject to various legal proceedings and actions from time to time in the ordinary course of its business. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of those matters presently known to the Bank will have a material adverse effect on the Bank’s financial condition or results of operations.
 
Item 1A. Risk Factors.

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


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

Not applicable.


Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosure.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit No.
Description
 
 
3.1
Amended and Restated Organization Certificate of the Federal Home Loan Bank of Atlanta1
 
 
3.2
Bylaws of the Federal Home Loan Bank of Atlanta (Revised and Restated through October 25, 2012)1
 
 
4.1
Capital Plan of the Federal Home Loan Bank of Atlanta2
 
 
31.1
Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
31.2
Certification of the Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
32.1
Certification of the President and Chief Executive Officer and Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
101
Unaudited financial statements from the Quarterly Report on Form 10-Q of Federal Home Loan Bank of Atlanta for the quarter ended September 30, 2014, filed on November 7, 2014, formatted in XBRL: (i) the Statements of Condition, (ii) Statements of Income, (iii) the Statements of Capital, (iv) the Statements of Cash Flows and (v) the Notes to Financial Statements.
 
 
 
 
1
Filed on October 26, 2012 with the SEC in the Bank's Form 8-K and incorporated herein by reference.
2
Filed on August 5, 2011 with the SEC in the Bank's Form 8-K and incorporated herein by reference.
 

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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:
November 7, 2014
By/s/ W. Wesley McMullan
 
 
    Name: W. Wesley McMullan
    Title: President and Chief Executive Officer
Date:
November 7, 2014
By/s/Kirk R. Malmberg
 
 
    Name: Kirk R. Malmberg
    Title: Executive Vice President and Chief Financial Officer



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