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EX-31.1 - EXHIBIT - Federal Home Loan Bank of Atlantafhlb-atlq22015ex311.htm
EX-32.1 - EXHIBIT - Federal Home Loan Bank of Atlantafhlb-atlq22015ex321.htm
EX-31.2 - EXHIBIT - Federal Home Loan Bank of Atlantafhlb-atlq22015ex312.htm

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 June 30, 2015
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 July 31, 2015 was 48,390,294.



Table of Contents
 





PART I. FINANCIAL INFORMATION.

Item 1. Financial Statements.
FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CONDITION
(Unaudited)
(In millions, except par value)
 
As of June 30, 2015
 
As of December 31, 2014
Assets
 
 
 
Cash and due from banks
$
510

 
$
915

Interest-bearing deposits (includes deposits with another FHLBank of $2 as of June 30, 2015 and December 31, 2014)
1,136

 
1,010

Securities purchased under agreements to resell
2,140

 
1,960

Federal funds sold
6,868

 
6,385

Investment securities:
 
 
 
    Trading securities (includes another FHLBank’s bond of $56 and $60 as of June 30, 2015 and December 31, 2014, respectively)
1,242

 
1,269

    Available-for-sale securities
1,823

 
1,981

    Held-to-maturity securities (fair value of $22,681 and $23,988 as of June 30, 2015 and December 31, 2014, respectively)
22,597

 
23,897

Total investment securities
25,662

 
27,147

Advances
102,208

 
99,644

Mortgage loans held for portfolio, net:
 
 
 
Mortgage loans held for portfolio
664

 
749

Allowance for credit losses on mortgage loans
(2
)
 
(3
)
Total mortgage loans held for portfolio, net
662

 
746

Accrued interest receivable
159

 
179

Derivative assets
155

 
112

Premises and equipment, net
25

 
27

Other assets
191

 
219

Total assets
$
139,716

 
$
138,344

Liabilities
 
 
 
Interest-bearing deposits
$
1,396

 
$
1,110

Consolidated obligations, net:
 
 
 
Discount notes
49,759

 
37,162

Bonds
80,814

 
92,088

Total consolidated obligations, net
130,573

 
129,250

Mandatorily redeemable capital stock
16

 
19

Accrued interest payable
146

 
145

Affordable Housing Program payable
64

 
65

Derivative liabilities
145

 
184

Other liabilities (includes a loan from another FHLBank of $125 and $0 as of June 30, 2015 and December 31, 2014, respectively)
434

 
580

Total liabilities
132,774

 
131,353

Commitments and contingencies (Note 15)

 

Capital
 
 
 
Capital stock Class B putable ($100 par value) issued and outstanding shares:
 
 
 
Subclass B1 issued and outstanding shares: 8 and 7 as of June 30, 2015 and December 31, 2014, respectively
747

 
726

Subclass B2 issued and outstanding shares: 43 and 45 as of June 30, 2015 and December 31, 2014, respectively
4,305

 
4,424

Total capital stock Class B putable
5,052

 
5,150

Retained earnings:
 
 
 
Restricted
229

 
195

Unrestricted
1,584

 
1,551

Total retained earnings
1,813

 
1,746

Accumulated other comprehensive income
77

 
95

Total capital
6,942

 
6,991

Total liabilities and capital
$
139,716

 
$
138,344

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 June 30,
 
For the Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Interest income
 
 
 
 
 
 
 
Advances
$
(81
)
 
$
51

 
$
(19
)
 
$
108

Prepayment fees on advances, net

 
1

 
1

 
1

Interest-bearing deposits
1

 
1

 
2

 
2

Securities purchased under agreements to resell
1

 

 
2

 

Federal funds sold
2

 
2

 
5

 
4

Trading securities
17

 
19

 
34

 
38

Available-for-sale securities
28

 
31

 
56

 
63

Held-to-maturity securities
58

 
60

 
118

 
122

Mortgage loans
10

 
13

 
21

 
26

Total interest income
36

 
178

 
220

 
364

Interest expense
 
 
 
 
 
 
 
Consolidated obligations:
 
 
 
 
 
 
 
 Discount notes
9

 
6

 
18

 
14

 Bonds
75

 
79

 
146

 
167

Mandatorily redeemable capital stock

 
1

 

 
1

Total interest expense
84

 
86

 
164

 
182

Net interest (expense) income
(48
)
 
92

 
56

 
182

Provision (reversal) for credit losses

 
2

 
(1
)
 
(2
)
Net interest (expense) income after provision (reversal) for credit losses
(48
)

90


57

 
184

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

 

 

 

Net amount of impairment losses reclassified from accumulated other comprehensive income
(3
)
 

 
(4
)
 
(1
)
Net impairment losses recognized in earnings
(3
)



(4
)
 
(1
)
Net losses on trading securities
(15
)
 
(13
)
 
(27
)
 
(27
)
Net gains on derivatives and hedging activities
188

 
16

 
212

 
31

Gain on extinguishment of debt

 

 

 
15

Letters of credit fees
7

 
6

 
14

 
13

Other
(1
)
 
1

 
1

 
2

Total noninterest income
176


10


196

 
33

Noninterest expense
 
 
 
 
 
 
 
Compensation and benefits
17

 
18

 
36

 
34

Other operating expenses
9

 
9

 
18

 
19

Finance Agency
1

 
2

 
4

 
5

Office of Finance
2

 
2

 
3

 
3

Other
2

 
1

 
4

 
2

Total noninterest expense
31


32


65


63

Income before assessments
97

 
68

 
188

 
154

Affordable Housing Program assessments
10

 
6

 
19

 
15

Net income
$
87


$
62


$
169


$
139


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 June 30,
 
For the Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
87

 
$
62

 
$
169

 
$
139

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Net noncredit portion of other-than-temporary impairment losses on available-for-sale securities:
 
 
 
 
 
 
 
Net change in fair value on other-than-temporarily impaired available-for-sale securities
(6
)
 
12

 
(23
)
 
16

Reclassification of noncredit portion of impairment losses included in net income
3

 

 
4

 
1

Net noncredit portion of other-than-temporary impairment losses on available-for-sale securities
(3
)
 
12

 
(19
)
 
17

   Other comprehensive income related to pension and postretirement benefit plans
1

 
1

 
1

 
1

Total other comprehensive (loss) income
(2
)
 
13

 
(18
)
 
18

Total comprehensive income
$
85

 
$
75

 
$
151

 
$
157


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
 
Total Capital    
 
Shares        
 
Par Value
 
Restricted    
 
Unrestricted    
 
Total        
 
Balance, December 31, 2013
49

 
$
4,883

 
$
141

 
$
1,516

 
$
1,657

 
$
112

 
$
6,652

Issuance of capital stock
23

 
2,296

 

 

 

 

 
2,296

Repurchase/redemption of capital stock
(23
)
 
(2,272
)
 

 

 

 

 
(2,272
)
Net shares reclassified to mandatorily redeemable capital stock

 
(1
)
 

 

 

 

 
(1
)
Comprehensive income

 

 
28

 
111

 
139

 
18

 
157

Cash dividends on capital stock

 

 

 
(88
)
 
(88
)
 

 
(88
)
Balance, June 30, 2014
49

 
$
4,906

 
$
169

 
$
1,539

 
$
1,708

 
$
130

 
$
6,744

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2014
52

 
$
5,150

 
$
195

 
$
1,551

 
$
1,746

 
$
95

 
$
6,991

Issuance of capital stock
29

 
2,891

 

 

 

 

 
2,891

Repurchase/redemption of capital stock
(30
)
 
(2,982
)
 

 

 

 

 
(2,982
)
Net shares reclassified to mandatorily redeemable capital stock

 
(7
)
 

 

 

 

 
(7
)
Comprehensive income (loss)

 

 
34

 
135

 
169

 
(18
)
 
151

Cash dividends on capital stock

 

 

 
(102
)
 
(102
)
 

 
(102
)
Balance, June 30, 2015
51

 
$
5,052

 
$
229

 
$
1,584

 
$
1,813

 
$
77

 
$
6,942


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 Six Months Ended June 30,
 
2015
 
2014
Operating activities
 
 
 
Net income
$
169

 
$
139

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
(70
)
 
(63
)
  Reversal of provision for credit losses
(1
)
 
(2
)
  (Gain) loss due to change in net fair value adjustment on derivative and hedging activities
(3
)
 
64

  Net change in fair value adjustment on trading securities
27

 
27

  Net impairment losses recognized in earnings
4

 
1

  Gain on extinguishment of debt

 
(15
)
Net change in:
 
 
 
  Accrued interest receivable
20

 
7

  Other assets
25

 
11

  Affordable Housing Program payable
(2
)
 
(5
)
  Accrued interest payable
2

 
(7
)
  Other liabilities
(33
)
 
(13
)
  Total adjustments
(31
)
 
5

Net cash provided by operating activities
138

 
144

Investing activities
 
 
 
Net change in:
 
 
 
  Interest-bearing deposits
257

 
(51
)
  Securities purchased under agreements to resell
(180
)
 
(1,000
)
  Federal funds sold
(483
)
 
(2,865
)
Trading securities:
 
 
 
  Proceeds from principal collected

 
200

Available-for-sale securities:
 
 
 
  Proceeds from principal collected
155

 
176

Held-to-maturity securities:
 
 
 
  Proceeds from principal collected
3,318

 
1,216

  Purchases of long-term
(2,255
)
 
(1,973
)
Advances:
 
 
 
  Proceeds from principal collected
117,413

 
84,917

  Made
(120,356
)
 
(90,217
)
Mortgage loans:
 
 
 
  Proceeds from principal collected
76

 
78

Proceeds from sale of foreclosed assets
10

 
11

Purchase of premises, equipment, and software
(1
)
 
(2
)
Net cash used in investing activities
(2,046
)
 
(9,510
)
 
 
 
 
 
 
 
 
 
 
 
 

7


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

 
For the Six Months Ended June 30,
 
2015
 
2014
Financing activities
 
 
 
Net change in:
 
 
 
Interest-bearing deposits
297

 
(339
)
Loans from other FHLBanks
125

 

Net payments on derivatives containing a financing element
(49
)
 
(51
)
Proceeds from issuance of consolidated obligations:
 
 
 
 Discount notes
427,635

 
199,451

 Bonds
37,372

 
43,678

Payments for debt issuance costs
(6
)
 
(6
)
Payments for maturing and retiring consolidated obligations:
 
 
 
 Discount notes
(415,041
)
 
(200,971
)
 Bonds
(48,627
)
 
(35,139
)
Proceeds from issuance of capital stock
2,891

 
2,296

Payments for repurchase/redemption of capital stock
(2,982
)
 
(2,272
)
Payments for repurchase/redemption of mandatorily redeemable capital stock
(10
)
 
(4
)
Cash dividends paid
(102
)
 
(88
)
Net cash provided by financing activities
1,503

 
6,555

Net decrease in cash and due from banks
(405
)
 
(2,811
)
Cash and due from banks at beginning of the period
915

 
4,374

Cash and due from banks at end of the period
$
510

 
$
1,563

Supplemental disclosures of cash flow information:
 
 
 
 Cash paid for:
 
 
 
Interest
$
163

 
$
200

Affordable Housing Program assessments, net
$
20

 
$
20

 Noncash investing and financing activities:
 
 
 
Net shares reclassified to mandatorily redeemable capital stock
$
7

 
$
1

Held-to-maturity securities acquired with accrued liabilities
$
109

 
$

Transfers of mortgage loans to real estate owned
$
8

 
$
10


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, 2015, 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, 2014, which are contained in the Bank’s 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 13, 2015 (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.

A description of the Bank’s significant accounting policies is included in Note 2Summary of Significant Accounting Policies to the 2014 audited financial statements contained in the Bank’s Form 10-K.

Revision

During the third quarter of 2014, the Bank identified a classification error in its previously reported Statements of Cash Flows for the six-month period ended June 30, 2014, contained in the previously filed Quarterly Report on Form 10-Q for that period. 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 the periods presented.

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

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

Net cash (used in) provided by operating activities
(165
)
 
144

 
 
 
 
Investing activities
 
 
 
Held-to-maturity securities:
 
 
 
Purchases of long-term
(1,664
)
 
(1,973
)
Net cash used in investing activities
(9,201
)
 
(9,510
)


9

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



Note 2—Recently Issued and Adopted Accounting Guidance

Recently Issued Accounting Guidance

Simplifying the Presentation of Debt Issuance Costs. In April 2015, the Financial Accounting Standards Board (FASB) issued guidance that requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance becomes effective for the Bank for the interim and annual periods beginning after December 15, 2015, and early adoption is permitted. The amended guidance will be applied on a retrospective basis. The adoption of this guidance is not expected to have a material effect on the Bank's financial condition or results of operations.

Amendments to the Consolidation Analysis. In February 2015, the FASB issued amended guidance intended to enhance consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The new guidance places more emphasis on risk of loss when determining a controlling financial interest. The guidance also reduces the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity. This guidance becomes effective for the Bank for the interim and annual periods ending after December 15, 2015, and early adoption is permitted. The adoption of this guidance is not expected to effect the Bank's financial condition or results of operations.

Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. In January 2015, the FASB issued amended guidance which eliminates the concept of extraordinary items from GAAP. The amended guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amended guidance prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted, provided that the amended guidance is applied from the beginning of the fiscal year of adoption. The adoption of this guidance will have no effect on the Bank’s financial condition or results of operations.

Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. In August 2014, the 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 disclosure. 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.

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 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. In July 2015, the FASB deferred the effective date of the revenue recognition standard, permitting public entities to apply the new standard to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Bank is in the process of evaluating this guidance and its effects on the Bank’s financial condition and results of operations has not yet been determined.

Recently Adopted Accounting Guidance

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. The Bank adopted this guidance prospectively on January 1, 2015. The adoption of this guidance did not have a material effect on 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,

10

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


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. The Bank adopted this guidance effective January 1, 2015. The adoption of this guidance had no effect on the Bank’s financial condition or results of operations.

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. The Bank adopted this guidance prospectively on January 1, 2015. The adoption of this guidance did not have a material effect on the Bank’s financial condition or results of operations.

Note 3—Trading Securities

Major Security Types. Trading securities were as follows:
 
 
As of June 30, 2015
 
As of December 31, 2014
Government-sponsored enterprises debt obligations
$
1,185

 
$
1,208

Another FHLBank’s bond (1)
56

 
60

State or local housing agency debt obligations
1

 
1

Total
$
1,242

 
$
1,269

 ____________
(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 June 30,
 
For the Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net losses on trading securities held at period end
$
(15
)
 
$
(13
)
 
$
(27
)
 
$
(27
)


11

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


Note 4—Available-for-sale Securities

Major Security Type. Private-label residential mortgaged-backed securities (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 June 30, 2015
$
1,724

 
$
20

 
$
119

 
$

 
$
1,823

As of December 31, 2014
$
1,863

 
$
19

 
$
137

 
$

 
$
1,981


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 June 30, 2015
3

 
$
184

 
$
5

 
9

 
$
161

 
$
15

 
12

 
$
345

 
$
20

As of December 31, 2014
4

 
$
140

 
$
2

 
9

 
$
191

 
$
17

 
13

 
$
331

 
$
19


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 June 30, 2015
$
1,129

 
$
19

 
$
77

 
$

 
$
1,187

As of December 31, 2014
$
1,213

 
$
17

 
$
90

 
$

 
$
1,286



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 June 30, 2015
 
As of December 31, 2014
 
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
$
78

 
$

 
$

 
$
78

 
$
81

 
$
1

 
$

 
$
82

Government-sponsored enterprises debt obligations
5,823

 
3

 
4

 
5,822

 
6,667

 
2

 
13

 
6,656

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency obligations-guaranteed single-family residential
322

 
4

 

 
326

 
366

 
5

 

 
371

Government-sponsored enterprises single-family residential
12,553

 
112

 
24

 
12,641

 
13,665

 
125

 
24

 
13,766

Government-sponsored enterprises multi-family commercial
2,570

 
2

 
6

 
2,566

 
1,663

 
3

 
7

 
1,659

Private-label residential
1,251

 
7

 
10

 
1,248

 
1,455

 
9

 
10

 
1,454

Total
$
22,597

 
$
128

 
$
44

 
$
22,681

 
$
23,897

 
$
145

 
$
54

 
$
23,988


The following tables summarize the held-to-maturity securities with unrealized losses. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
 
 
As of June 30, 2015
 
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
2

 
$
350

 
$

 
5

 
$
1,140

 
$
4

 
7

 
$
1,490

 
$
4

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises single-family residential
31

 
1,855

 
10

 
21

 
1,028

 
14

 
52

 
2,883

 
24

Government-sponsored enterprises multi-family commercial
30

 
1,830

 
3

 
4

 
341

 
3

 
34

 
2,171

 
6

Private-label residential
21

 
287

 
2

 
35

 
367

 
8

 
56

 
654

 
10

Total
84

 
$
4,322

 
$
15

 
65

 
$
2,876

 
$
29

 
149

 
$
7,198

 
$
44

 

13

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


 
As of December 31, 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

 
$
899

 
$
1

 
6

 
$
1,233

 
$
12

 
10

 
$
2,132

 
$
13

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises single-family residential
8

 
496

 
1

 
26

 
1,828

 
23

 
34

 
2,324

 
24

Government-sponsored enterprises multi-family commercial
14

 
758

 
1

 
2

 
285

 
6

 
16

 
1,043

 
7

Private-label residential
22

 
229

 
1

 
32

 
415

 
9

 
54

 
644

 
10

Total
48

 
$
2,382

 
$
4

 
66

 
$
3,761

 
$
50

 
114

 
$
6,143

 
$
54


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

 
As of June 30, 2015
 
As of December 31, 2014
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Non-mortgage-backed securities:
 
 
 
 
 
 
 
Due in one year or less
$
853

 
$
853

 
$
1,166

 
$
1,166

Due after one year through five years
5,048

 
5,047

 
5,582

 
5,572

Total non-mortgage-backed securities
5,901

 
5,900

 
6,748

 
6,738

Mortgage-backed securities
16,696

 
16,781

 
17,149

 
17,250

Total
$
22,597

 
$
22,681

 
$
23,897

 
$
23,988


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 June 30, 2015
 
$
335

 
$
1

 
$
4

 
$
332

As of December 31, 2014
 
$
419

 
$
2

 
$
4

 
$
417


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

14

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


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 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 June 30, 2015.
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 third-party 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 with a population of 10,000 or more people. The Bank’s housing price forecast as of June 30, 2015 included a short-term housing price forecast with projected changes ranging from a decrease of two percent to an increase of eight percent over the 12 month period beginning April 1, 2015. For the vast majority of markets, the projected short-term housing price changes range from an increase of two percent to five 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.

15

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


The following table represents a summary of the significant inputs used to measure the amount of the credit loss recognized in earnings for those securities for which an other-than-temporary impairment was determined to have occurred during the three-month period ended June 30, 2015, as well as related current credit enhancement:
 
 
Significant Inputs
 
Year of
Securitization
 
Prepayment Rates (%)
 
Default Rates (%)
 
Loss Severities (%)
 
Current Credit Enhancement (%)
Prime:
 
 
 
 
 
 
 
 
   2007
 
41.56
 
5.32
 
51.82
 
0.27
Alt-A:
 
 
 
 
 
 
 
 
2007
 
12.47
 
24.70
 
35.21
 
0.15
2006
 
11.06
 
25.39
 
38.85
 
0.46
Alt-A weighted average
 
12.08
 
24.89
 
36.22
 
0.24
Total weighted average
 
12.71
 
24.47
 
36.55
 
0.24

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 June 30,
 
For the Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Balance, beginning of period
$
533

 
$
567

 
$
542

 
$
574

Amount related to credit loss for which an other-than-temporary impairment was previously recognized
3

 

 
4

 
1

Increase in cash flows expected to be collected, (accreted as interest income over the remaining lives of the applicable securities)
(10
)
 
(8
)
 
(20
)
 
(16
)
Balance, end of period
$
526

 
$
559

 
$
526

 
$
559


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 and illiquidity in the marketplace. These declines in fair value are considered temporary as the Bank expects to recover the amortized cost basis of the securities, the Bank does not intend to sell these securities, and it is not more likely than not that the Bank will be required to sell these securities before the anticipated recovery of the securities’ remaining amortized cost basis, which may be at maturity. This assessment is based on the fact that the Bank has sufficient capital and liquidity to operate its business and has no need to sell these securities, nor has the Bank entered into any contractual constraints that would require the Bank to sell these securities.


16

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


Note 7—Advances

Redemption Terms. The Bank had advances outstanding, as summarized below.  
 
As of June 30, 2015
 
As of December 31, 2014
Due in one year or less
$
56,894

 
$
57,675

Due after one year through two years
10,860

 
12,283

Due after two years through three years
7,797

 
9,435

Due after three years through four years
3,272

 
5,146

Due after four years through five years
2,698

 
2,910

Due after five years
19,325

 
10,433

Total par value
100,846

 
97,882

Discount on AHP (1) advances
(6
)
 
(7
)
Discount on EDGE (2) advances
(5
)
 
(5
)
Hedging adjustments
1,375

 
1,778

Deferred commitment fees
(2
)
 
(4
)
Total
$
102,208

 
$
99,644

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

The following table summarizes advances by year of contractual maturity or, for convertible advances, next conversion date:
 
 
As of June 30, 2015
 
As of December 31, 2014
Due or convertible in one year or less
$
59,487

 
$
60,551

Due or convertible after one year through two years
10,233

 
12,040

Due or convertible after two years through three years
6,395

 
7,866

Due or convertible after three years through four years
2,876

 
4,241

Due or convertible after four years through five years
2,691

 
2,900

Due or convertible after five years
19,164

 
10,284

Total par value
$
100,846

 
$
97,882


Interest-rate Payment Terms. The following table details interest-rate payment terms for advances:
 
 
As of June 30, 2015
 
As of December 31, 2014
Fixed-rate:
 
 
 
 Due in one year or less
$
39,601

 
$
42,839

 Due after one year
27,890

 
30,089

Total fixed-rate
67,491

 
72,928

Variable-rate:
 
 
 
 Due in one year or less
17,292

 
14,836

 Due after one year
16,063

 
10,118

Total variable-rate
33,355

 
24,954

Total par value
$
100,846

 
$
97,882


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. The concentration of the Bank’s advances to its 10 largest

17

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


borrowers was $73,123 and $72,799, as of June 30, 2015 and December 31, 2014, respectively. This concentration represented 72.5 percent and 74.4 percent, of total advances outstanding as of June 30, 2015 and December 31, 2014, respectively.
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 June 30, 2015 and December 31, 2014. No advance was past due as of June 30, 2015 and December 31, 2014.

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 June 30, 2015
 
As of December 31, 2014
Fixed-rate medium-term (1) single-family residential mortgage loans
 
$
83

 
$
103

Fixed-rate long-term single-family residential mortgage loans
 
582

 
648

Total unpaid principal balance
 
665

 
751

Premiums
 
2

 
2

Discounts
 
(3
)
 
(4
)
Total
 
$
664

 
$
749

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

The following table details the unpaid principal balance of mortgage loans held for portfolio by collateral or guarantee type:
 
 
As of June 30, 2015
 
As of December 31, 2014
Conventional loans
 
$
618

 
$
698

Government-guaranteed or insured loans
 
47

 
53

Total unpaid principal balance
 
$
665

 
$
751


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.


18

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


Note 9—Allowance for Credit Losses

The activity in the allowance for credit losses related to conventional single-family residential mortgage loans was as follows:

 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Balance, beginning of period
 
$
2

 
$
4

 
$
3

 
$
11

Provision (reversal) for credit losses
 

 
2

 
(1
)
 
(2
)
Charge-offs
 

 

 

 
(3
)
Balance, end of period
 
$
2

 
$
6

 
$
2

 
$
6


The recorded investment in conventional single-family residential mortgage loans by impairment methodology was as follows:
 
 
As of June 30, 2015
 
As of December 31, 2014
Allowance for credit losses:
 
 
 
 
   Individually evaluated for impairment
 
$

 
$
1

   Collectively evaluated for impairment
 
2

 
2

Total allowance for credit losses
 
$
2

 
$
3

Recorded investment:
 
 
 
 
   Individually evaluated for impairment
 
$
15

 
$
15

   Collectively evaluated for impairment
 
605

 
685

Total recorded investment
 
$
620

 
$
700










19

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


Key credit quality indicators for mortgage loans include the migration of past due loans, nonaccrual loans, and loans in process of foreclosure. The tables below summarize the Bank's recorded investment in mortgage loans by these key credit quality indicators:
 
As of June 30, 2015
 
Conventional Single-family Residential Mortgage Loans
 
Government-guaranteed or Insured Single-family Residential Mortgage Loans
 
Total
Past due 30-59 days
$
18

 
$
4

 
$
22

Past due 60-89 days
5

 
1

 
6

Past due 90 days or more
23

 
3

 
26

Total past due mortgage loans
46

 
8

 
54

Total current mortgage loans
574

 
39

 
613

Total mortgage loans (1)
$
620

 
$
47

 
$
667

Other delinquency statistics:
 
 
 
 
 
  In process of foreclosure (2)
$
13

 
$
1

 
$
14

  Seriously delinquent rate (3)
3.61
%
 
6.99
%
 
3.86
%
  Past due 90 days or more and still accruing interest (4)
$

 
$
3

 
$
3

  Loans on nonaccrual status (5)
$
23

 
$

 
$
23

____________
(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.


20

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


 
As of December 31, 2014
 
Conventional Single-family Residential Mortgage Loans
 
Government-guaranteed or Insured Single-family Residential Mortgage Loans
 
Total
Past due 30-59 days
$
22

 
$
6

 
$
28

Past due 60-89 days
6

 
2

 
8

Past due 90 days or more
33

 
6

 
39

Total past due mortgage loans
61

 
14

 
75

Total current mortgage loans
639

 
39

 
678

Total mortgage loans (1)
$
700

 
$
53

 
$
753

Other delinquency statistics:
 
 
 
 
 
  In process of foreclosure (2)
$
19

 
$
1

 
$
20

  Seriously delinquent rate (3)
4.73
%
 
10.33
%
 
5.13
%
Past due 90 days or more and still accruing interest (4)
$

 
$
6

 
$
6

  Loans on nonaccrual status (5)
$
33

 
$

 
$
33

____________
(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. Troubled debt restructurings are evaluated individually for impairment.

The table below presents the Bank's recorded investment balance in mortgage loans classified as troubled debt restructurings:
 
 
As of June 30, 2015
 
As of December 31, 2014
 
 
Performing
 
Non-performing
 
Total
 
Performing
 
Non-performing
 
Total
Conventional single-family residential loans
 
$
12

 
$
3

 
$
15

 
$
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 restructurings during the three and six months ended June 30, 2015 and 2014.

The financial amounts related to the Bank's troubled debt restructurings are not material to the Bank's financial condition or results of operations for the periods presented.



21

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


Note 10—Consolidated Obligations

Consolidated obligations, consisting of consolidated obligation bonds and discount notes, are the joint and several obligations of the 11 Federal Home Loan Banks (FHLBanks) and are backed only by the financial resources of the FHLBanks. The Federal Home Loan Banks Office of Finance (Office of Finance) tracks the amount of debt issued on behalf of each FHLBank. In addition, the Bank separately tracks and records as a liability its specific portion of consolidated obligations for which it is the primary obligor.
Interest-rate Payment Terms. The following table details the Bank’s consolidated obligation bonds by interest-rate payment type: 
 
As of June 30, 2015
 
As of December 31, 2014
Fixed-rate
$
66,860

 
$
77,912

Step up/down
5,712

 
6,301

Simple variable-rate
7,950

 
7,550

Variable-rate capped floater

 
25

Total par value
$
80,522

 
$
91,788


Redemption Terms. The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding, by year of contractual maturity:
 
 
As of June 30, 2015
 
As of December 31, 2014
 
Amount
 
Weighted-
average
Interest Rate (%)    
 
Amount
 
Weighted-
average
Interest Rate (%)    
Due in one year or less
$
45,693

 
0.48
 
$
52,081

 
0.24
Due after one year through two years
14,624

 
1.64
 
16,116

 
1.27
Due after two years through three years
8,575

 
1.80
 
9,683

 
2.22
Due after three years through four years
2,876

 
1.58
 
4,971

 
1.67
Due after four years through five years
3,678

 
1.85
 
3,094

 
1.56
Due after five years
5,076

 
2.11
 
5,843

 
2.12
Total par value
80,522

 
1.03
 
91,788

 
0.86
Premiums
57

 
 
 
73

 
 
Discounts
(17
)
 
 
 
(21
)
 
 
Hedging adjustments
252

 
 
 
248

 
 
Total
$
80,814

 
 
 
$
92,088

 
 

The following presents the Bank’s consolidated obligation bonds outstanding by call feature:
 
 
As of June 30, 2015
 
As of December 31, 2014
Noncallable
$
59,134

 
$
69,164

Callable
21,388

 
22,624

Total par value
$
80,522

 
$
91,788



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 June 30, 2015
 
As of December 31, 2014
Due or callable in one year or less
$
60,752

 
$
67,980

Due or callable after one year through two years
12,834

 
12,220

Due or callable after two years through three years
4,474

 
7,796

Due or callable after three years through four years
1,376

 
2,177

Due or callable after four years through five years
545

 
875

Due or callable after five years
541

 
740

Total par value
$
80,522

 
$
91,788


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 June 30, 2015
$
49,759

 
$
49,776

 
0.11
As of December 31, 2014
$
37,162

 
$
37,169

 
0.10

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 June 30, 2015
 
As of December 31, 2014
 
Required    
 
Actual        
 
Required    
 
Actual        
Risk based capital
$
1,817

 
$
6,881

 
$
2,113

 
$
6,914

Total capital-to-assets ratio
4.00
%
 
4.93
%
 
4.00
%
 
5.00
%
Total regulatory capital (1)
$
5,589

 
$
6,881

 
$
5,534

 
$
6,914

Leverage ratio
5.00
%
 
7.39
%
 
5.00
%
 
7.50
%
Leverage capital
$
6,986

 
$
10,322

 
$
6,917

 
$
10,371

____________
(1) Total regulatory capital does not include accumulated other comprehensive income, but does include mandatorily redeemable capital stock.
Mandatorily Redeemable Capital Stock. The following table provides the activity in mandatorily redeemable capital stock:

 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Balance, beginning of period
$
17

 
$
23

 
$
19

 
$
24

Reclassification from (to) capital during the period
3

 
(1
)
 
7

 
1

Repurchase/redemption of mandatorily redeemable capital stock
(4
)
 
(1
)
 
(10
)
 
(4
)
Balance, end of period
$
16

 
$
21

 
$
16


$
21



23

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


The following table shows the amount of mandatorily redeemable capital stock by year of redemption. 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 June 30, 2015
 
As of December 31, 2014
Due in one year or less
$
9

 
$
9

Due after one year through two years
6

 
8

Due after two years through three years

 
1

Due after four years through five years
1

 
1

Total
$
16

 
$
19


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
 
Total  Accumulated
Other
Comprehensive
Income
Balance, March 31, 2014
$
(13
)
 
$
130

 
$
117

Other comprehensive income before reclassifications:
 
 
 
 
 
     Net change in fair value

 
12

 
12

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

 

 
1

Net current period other comprehensive income
1

 
12

 
13

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

 
$
130

 
 
 
 
 
 
Balance, March 31, 2015
$
(23
)
 
$
102

 
$
79

Other comprehensive income before reclassifications:
 
 
 
 
 
     Net change in fair value

 
(6
)
 
(6
)
Reclassification from accumulated other comprehensive income 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 (loss)
1

 
(3
)
 
(2
)
Balance, June 30, 2015
$
(22
)
 
$
99

 
$
77

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



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
 
Total  Accumulated
Other
Comprehensive
Income
Balance, December 31, 2013
$
(13
)
 
$
125

 
$
112

Other comprehensive income before reclassifications:
 
 
 
 
 
     Net change in fair value

 
16

 
16

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

 
1

 
1

     Amortization of pension and postretirement (1)
1

 

 
1

Net current period other comprehensive income
1

 
17

 
18

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

 
$
130

 
 
 
 
 
 
Balance, December 31, 2014
$
(23
)
 
$
118

 
$
95

Other comprehensive income before reclassifications:
 
 
 
 
 
     Net change in fair value

 
(23
)
 
(23
)
Reclassification from accumulated other comprehensive income to net income:
 
 
 
 
 
     Noncredit other-than-temporary impairment losses

 
4

 
4

     Amortization of pension and postretirement (1)
1

 

 
1

Net current period other comprehensive income (loss)
1

 
(19
)
 
(18
)
Balance, June 30, 2015
$
(22
)
 
$
99

 
$
77

____________
(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 2014 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 Bank is not a derivative dealer and does not trade derivatives for short-term profit.
Financial Statement Effect and Additional Financial Information
Derivative Notional Amounts. The notional amount of derivatives serves as a factor in determining periodic interest payments or cash flows received and paid. However, the notional amount of derivatives represents neither the actual amounts exchanged nor the overall exposure of the Bank to credit and market risk; the 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.

25

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


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 June 30, 2015
 
As of December 31, 2014
 
Notional
Amount of Derivatives    
 
Derivative Assets    
 
Derivative Liabilities    
 
Notional
Amount of Derivatives    
 
Derivative Assets    
 
Derivative Liabilities    
Derivatives in hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
  Interest rate swaps
$
111,924

 
$
451

 
$
(1,540
)
 
$
103,004

 
$
454

 
$
(1,995
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
  Interest rate swaps
2,210

 
11

 
(104
)
 
6,348

 
12

 
(131
)
  Interest rate caps or floors
16,500

 
12

 
(5
)
 
16,500

 
20

 
(13
)
Total derivatives not designated as hedging instruments
18,710

 
23

 
(109
)
 
22,848

 
32

 
(144
)
Total derivatives before netting and collateral adjustments
$
130,634

 
474

 
(1,649
)
 
$
125,852

 
486

 
(2,139
)
Netting adjustments and cash collateral (1)
 
 
(319
)
 
1,504

 
 
 
(374
)
 
1,955

Derivative assets and derivative liabilities
 
 
$
155

 
$
(145
)
 
 
 
$
112

 
$
(184
)
___________
(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. Cash collateral posted and related accrued interest was $1,229 and $1,613 as of June 30, 2015 and December 31, 2014, respectively. Cash collateral received and related accrued interest was $44 and $32 as of June 30, 2015 and December 31, 2014, respectively.
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 June 30,
 
For the Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Derivatives and hedged items in fair value hedging relationships:
 
 
 
 
 
 
 
  Interest rate swaps
$
188

 
$
26

 
$
217

 
$
51

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
  Interest rate swaps
15

 
12

 
25

 
25

  Interest rate caps or floors

 
(4
)
 

 
(9
)
  Net interest settlements
(15
)
 
(18
)
 
(30
)
 
(36
)
Total net losses related to derivatives not designated as hedging instruments

 
(10
)
 
(5
)
 
(20
)
Net gains on derivatives and hedging activities
$
188

 
$
16

 
$
212

 
$
31



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 June 30,
 
 
2015
 
2014
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
 
$
582

 
$
(389
)
 
$
193

 
$
(182
)
 
$
(148
)
 
$
176

 
$
28

 
$
(224
)
Consolidated obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bonds
 
(82
)
 
77

 
(5
)
 
125

 
104

 
(106
)
 
(2
)
 
135

Discount notes
 
1

 
(1
)
 

 
2

 

 

 

 

Total
 
$
501

 
$
(313
)
 
$
188

 
$
(55
)
 
$
(44
)
 
$
70

 
$
26

 
$
(89
)
____________
(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 Six Months Ended June 30,
 
 
2015
 
2014
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
 
$
398

 
$
(170
)
 
$
228

 
$
(374
)
 
$
(239
)
 
$
290

 
$
51

 
$
(442
)
Consolidated obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bonds
 
(3
)
 
(8
)
 
(11
)
 
242

 
214

 
(214
)
 

 
265

Discount notes
 
2

 
(2
)
 

 
3

 

 

 

 

Total
 
$
397

 
$
(180
)
 
$
217

 
$
(129
)
 
$
(25
)
 
$
76

 
$
51

 
$
(177
)
____________
(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 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 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.


27

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


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.

The following table presents the fair value of derivative instruments meeting or not meeting netting requirements, including the related collateral received from or pledged to counterparties.
 
As of June 30, 2015
 
As of December 31, 2014
 
Derivative Assets
 
Derivative Liabilities
 
Derivative Assets
 
Derivative Liabilities
Gross recognized amount:
 
 
 
 
 
 
 
     Bilateral derivatives
$
386

 
$
(1,315
)
 
$
439

 
$
(1,757
)
     Cleared derivatives
88

 
(334
)
 
47

 
(382
)
Total gross recognized amount
474

 
(1,649
)
 
486

 
(2,139
)
Gross amounts of netting adjustments and cash collateral:
 
 
 
 
 
 
 
     Bilateral derivatives
(383
)
 
1,170

 
(438
)
 
1,573

     Cleared derivatives
64

 
334

 
64

 
382

Total gross amounts of netting adjustments and cash collateral
(319
)
 
1,504

 
(374
)
 
1,955

Derivative assets and derivative liabilities:
 
 
 
 
 
 
 
     Bilateral derivatives
3

 
(145
)
 
1

 
(184
)
     Cleared derivatives
152

 

 
111

 

Total derivative assets and total derivative liabilities
155

 
(145
)
 
112

 
(184
)
Non-cash collateral received or pledged not offset-cannot be sold or repledged: (1)
 
 
 
 
 
 
 
     Bilateral derivatives
1

 

 
1

 

Net unsecured amounts: (2)
 
 
 
 
 
 
 
    Bilateral derivatives
2

 
(145
)
 

 
(184
)
    Cleared derivatives
152

 

 
111

 

Total net unsecured amount
$
154

 
$
(145
)
 
$
111

 
$
(184
)
____________ 
(1)
Collateral held with respect to derivatives with member institutions where the Bank is acting as an intermediary represents the amount of eligible collateral physically held by or on behalf of the Bank or collateral assigned to the Bank, as evidenced by a written security agreement, and held by the member institution for the benefit of the Bank.
(2) The Bank had net credit exposure of $145 and $110 as of June 30, 2015 and December 31, 2014, 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 June 30, 2015 was $968 for which the Bank has posted collateral with a fair value of $825 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 $86 of collateral at fair value to its bilateral derivative counterparties as of June 30, 2015.

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.


28

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


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

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

Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. As of June 30, 2015 and December 31, 2014, 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 June 30, 2015 and December 31, 2014, 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 June 30, 2015 and December 31, 2014, 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.

29

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


Estimated Fair Value Measurements on a Recurring Basis. The following tables present, for each fair value hierarchy level, the Bank’s financial assets and liabilities that are measured at fair value on a recurring basis on its Statements of Condition.
 
 
As of June 30, 2015
 
Fair Value Measurements Using
 
Netting Adjustment (1)
 
 
 
Level 1        
 
Level 2        
 
Level 3        
 
Total
Assets
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
  Government-sponsored enterprises debt obligations
$

 
$
1,185

 
$

 
$

 
$
1,185

  Another FHLBank’s bond

 
56

 

 

 
56

  State or local housing agency debt obligations

 
1

 

 

 
1

Total trading securities

 
1,242

 

 

 
1,242

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

 

 
1,823

 

 
1,823

Derivative assets:
 
 
 
 
 
 
 
 
 
  Interest-rate related

 
474

 

 
(319
)
 
155

Grantor trust (included in Other assets)
31

 

 

 

 
31

Total assets at fair value
$
31

 
$
1,716

 
$
1,823

 
$
(319
)
 
$
3,251

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
Interest-rate related
$

 
$
(1,649
)
 
$

 
$
1,504

 
$
(145
)
Total liabilities at fair value
$

 
$
(1,649
)
 
$

 
$
1,504

 
$
(145
)
____________ 
(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.

 
As of December 31, 2014
 
Fair Value Measurements Using
 
Netting Adjustment (1)    
 
 
 
Level 1        
 
Level 2        
 
Level 3        
 
Total
Assets
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
  Government-sponsored enterprises debt obligations
$

 
$
1,208

 
$

 
$

 
$
1,208

  Another FHLBank’s bond

 
60

 

 

 
60

  State or local housing agency debt obligations

 
1

 

 

 
1

Total trading securities

 
1,269

 

 

 
1,269

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

 

 
1,981

 

 
1,981

Derivative assets:
 
 
 
 
 
 
 
 
 
  Interest-rate related

 
486

 

 
(374
)
 
112

Grantor trust (included in Other assets)
25

 

 

 

 
25

Total assets at fair value
$
25

 
$
1,755

 
$
1,981

 
$
(374
)
 
$
3,387

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
Interest-rate related
$

 
$
(2,139
)
 
$

 
$
1,955

 
$
(184
)
Total liabilities at fair value
$

 
$
(2,139
)
 
$

 
$
1,955

 
$
(184
)
____________ 
(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.



30

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


The following table presents a reconciliation of available-for-sale securities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Balance, beginning of period
$
1,905

 
$
2,223

 
$
1,981

 
$
2,299

Total (losses) gains realized and unrealized: (1)
 
 
 
 
 
 
 
  Included in net impairment losses recognized in earnings
(3
)
 

 
(4
)
 
(1
)
     Included in other comprehensive income (2)
(3
)
 
12

 
(19
)
 
17

     Accretion of credit losses in net interest income
10

 
9

 
20

 
16

Settlements
(86
)
 
(89
)
 
(155
)
 
(176
)
Balance, end of period
$
1,823

 
$
2,155

 
$
1,823

 
$
2,155

____________ 
(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.

Estimated Fair Value Measurements on a Nonrecurring Basis. The Bank periodically measures and recognizes certain assets at fair value on a nonrecurring basis. These assets are not measured at fair value on a recurring basis but are subject to fair value adjustments in certain circumstances. These adjustments to fair value usually result from the application of lower of amortized cost or fair value accounting or write-downs of individual assets due to impairment. The following tables present the fair value hierarchy and carrying value of all assets as of the last impairment date that were still held as of June 30, 2015 and December 31, 2014, for which a nonrecurring fair value adjustment was recorded during the periods presented.
 
As of June 30, 2015
 
Fair Value Measurements Using
 
 
 
Level 1        
 
Level 2        
 
Level 3        
Total
Real estate owned

 

 
2

 
2


 
As of December 31, 2014
 
Fair Value Measurements Using
 
 
 
Level 1        
 
Level 2        
 
Level 3        
Total
Real estate owned

 

 
7

 
7


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 due to the short-term nature and negligible credit risk.

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 values of overnight federal funds sold approximate the carrying values. The estimated fair values of term federal funds sold are 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,

31

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


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 June 30, 2015 and December 31, 2014, four vendor prices were received for a majority of the Bank's investment securities holdings and the final prices for those securities were computed by averaging the prices received. Based on the Bank's review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or, in those instances in which there were outliers or significant yield variances, the Bank's additional analyses), the Bank believes its final prices are representative of the prices that would have been received if the assets had been sold at the measurement date (i.e., exit prices) and further that the fair value measurements are classified appropriately in the fair value hierarchy. Based on the lack of significant market activity for private-label MBS, the fair value measurement for those securities were classified as Level 3 within the fair value hierarchy as of June 30, 2015 and December 31, 2014.

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 equivalent to the replacement advance rates for advances with similar terms as of June 30, 2015 and December 31, 2014, respectively. The Bank calculates its replacement advance rates at a spread to its cost of funds. The Bank's cost of funds approximates the consolidated obligation curve (See "Consolidated Obligations" paragraph within this note for a discussion of the consolidated obligation curve). To estimate the fair values of advances with optionality, market-based expectations of future interest rate volatility implied from current market prices for similar options are also used. 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 due to the short-term nature and negligible credit risk.

Derivative Assets and Liabilities. The Bank calculates the fair value of derivatives using a present value of future cash flows

32

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


discounted by a market observable rate. The Bank used Overnight Index Swap curve 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 June 30, 2015 and December 31, 2014.

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 London Interbank Offered Rate (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 Office of Finance constructs an internal curve, referred to as the consolidated obligation curve, using the U.S. Treasury curve as a base curve that is then adjusted by adding indicative spreads obtained from market observable sources. These market indications are generally derived from pricing indications from dealers, historical pricing relationships, recent government-sponsored enterprise trades, and secondary market activity. To estimate the fair values of consolidated obligations with optionality, the Bank uses market based expectations of future interest rate volatility implied from current market prices for similar options.

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.

Loan from another FHLBank. The estimated fair value approximates the recorded carrying value due to the short-term nature and negligible credit risk.
The following estimated fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank as of June 30, 2015 and December 31, 2014. 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.

33

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


The carrying values and estimated fair values of the Bank’s financial instruments were as follows:
 
As of June 30, 2015
 
 
 
Estimated Fair Value
 
Carrying Value
 
Total        
 
Level 1        
 
Level 2        
 
Level 3        
 
Netting Adjustment (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 Cash and due from banks
$
510

 
$
510

 
$
510

 
$

 
$

 
$

 Interest bearing-deposits
1,136

 
1,136

 

 
1,136

 

 

 Securities purchased under agreements to resell
2,140

 
2,140

 

 
2,140

 

 

 Federal funds sold
6,868

 
6,868

 

 
6,868

 

 

 Trading securities
1,242

 
1,242

 

 
1,242

 

 

 Available-for-sale securities
1,823

 
1,823

 

 

 
1,823

 

 Held-to-maturity securities
22,597

 
22,681

 

 
21,433

 
1,248

 

 Advances
102,208

 
102,174

 

 
102,174

 

 

 Mortgage loans held for portfolio, net
662

 
737

 

 
737

 

 

 Accrued interest receivable
159

 
159

 

 
159

 

 

 Derivative assets
155

 
155

 

 
474

 

 
(319
)
    Grantor trust assets (included in Other assets)
31

 
31

 
31

 

 

 

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 Interest-bearing deposits
(1,396
)
 
(1,396
)
 

 
(1,396
)
 

 

 Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
Discount notes
(49,759
)
 
(49,756
)
 

 
(49,756
)
 

 

Bonds
(80,814
)
 
(80,891
)
 

 
(80,891
)
 

 

 Mandatorily redeemable capital stock
(16
)
 
(16
)
 
(16
)
 

 

 

 Accrued interest payable
(146
)
 
(146
)
 

 
(146
)
 

 

 Derivative liabilities
(145
)
 
(145
)
 

 
(1,649
)
 

 
1,504

 Loan from another FHLBank (included in Other liabilities)
(125
)
 
(125
)
 

 
(125
)
 

 

____________ 
(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.

34

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



 
 
As of December 31, 2014
 
 
 
Estimated Fair Value
 
Carrying Value
 
Total        
 
Level 1        
 
Level 2        
 
Level 3        
 
Netting Adjustment (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 Cash and due from banks
$
915

 
$
915

 
$
915

 
$

 
$

 
$

 Interest bearing-deposits
1,010

 
1,010

 

 
1,010

 

 

 Securities purchased under agreements to resell
1,960

 
1,960

 

 
1,960

 

 

 Federal funds sold
6,385

 
6,385

 

 
6,385

 

 

 Trading securities
1,269

 
1,269

 

 
1,269

 

 

 Available-for-sale securities
1,981

 
1,981

 

 

 
1,981

 

 Held-to-maturity securities
23,897

 
23,988

 

 
22,534

 
1,454

 

 Advances
99,644

 
99,579

 

 
99,579

 

 

 Mortgage loans held for portfolio, net
746

 
828

 

 
828

 

 

 Accrued interest receivable
179

 
179

 

 
179

 

 

 Derivative assets
112

 
112

 

 
486

 

 
(374
)
    Grantor trust assets (included in Other assets)
25

 
25

 
25

 

 

 

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 Interest-bearing deposits
(1,110
)
 
(1,110
)
 

 
(1,110
)
 

 

 Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
Discount notes
(37,162
)
 
(37,162
)
 

 
(37,162
)
 

 

Bonds
(92,088
)
 
(92,211
)
 

 
(92,211
)
 

 

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

 

 

 Accrued interest payable
(145
)
 
(145
)
 

 
(145
)
 

 

 Derivative liabilities
(184
)
 
(184
)
 

 
(2,139
)
 

 
1,955

____________ 
(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 11 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 other FHLBanks’ outstanding consolidated obligations for which the Bank is jointly and severally liable was $722,485 and $718,218 as of June 30, 2015 and December 31, 2014, respectively, exclusive of the Bank’s own outstanding consolidated obligations. As of June 30, 2015, 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 June 30, 2015.


35

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 June 30, 2015
 
As of December 31, 2014
 
 
Expire Within One Year
 
Expire After One Year
 
Total
 
Expire Within One Year
 
Expire After One Year
 
Total
Standby letters of credit (1)
 
$
7,189

 
$
21,591

 
$
28,780

 
$
7,409

 
$
23,519

 
$
30,928

Commitments to fund additional advances
 
302

 
105

 
407

 
189

 
20

 
209

Unsettled consolidated obligation bonds, at par (2)
 
851

 

 
851

 
100

 

 
100

Unsettled consolidated obligation discount notes, at par (2)
 
1,490

 

 
1,490

 
50

 

 
50

____________
(1) 
Expire within one year includes 16 standby letters of credit for a total of $28 and 17 standby letters of credit for a total of $25 as of June 30, 2015 and December 31, 2014, 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 June 30, 2015 and December 31, 2014, $848 and $100 of the Bank's unsettled consolidated obligation bonds were hedged with associated interest rate swaps that had traded but not yet settled, respectively. As of June 30, 2015 and December 31, 2014, $0 and $50 of the Bank's unsettled consolidated obligation discount notes were hedged with associated interest rate swaps that had traded but not yet settled, respectively.
The carrying value of the guarantees related to standby letters of credit is recorded in other liabilities and amounted to $120 and $152 as of June 30, 2015 and December 31, 2014, 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 June 30, 2015 and December 31, 2014. 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 Shareholders

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.

Related Parties. In accordance with GAAP, financial statements are required to disclose material related-party transactions other than compensation arrangements, expense allowances, or other similar items that occur in the ordinary course of business. Under GAAP, related parties include owners of more than 10 percent of the voting interests of the Bank. Due to limits on member voting rights under the FHLBank Act and Finance Agency regulations, no member owned more than 10 percent of the total voting interests, and the Bank had no related party transactions required to be disclosed for the periods presented.


36

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


Shareholder Concentrations. The Bank considers shareholder concentration as members or non-members with regulatory capital stock outstanding in excess of 10 percent of the Bank's total regulatory capital stock. The following tables present transactions with shareholders whose holdings of regulatory capital stock exceed 10 percent or more of total regulatory capital stock outstanding.
 
As of June 30, 2015
 
Regulatory Capital Stock Outstanding
 
Percent of Total Regulatory Capital Stock Outstanding
 
Par Value of Advances
 
Percent of Total Par Value Advances
 
Interest-bearing Deposits
 
Percent of Total Interest-bearing Deposits
Bank of America, National Association
$
972

 
19.2
%
 
$
22,512

 
22.3
%
 
$

 
0.01
%
Navy Federal Credit Union
550

 
10.9
%
 
12,591

 
12.5
%
 

 
%

 
As of December 31, 2014
 
Regulatory Capital Stock Outstanding
 
Percent of Total Regulatory Capital Stock Outstanding
 
Par Value of Advances
 
Percent of Total Par Value Advances
 
Interest-bearing Deposits
 
Percent of Total Interest-bearing Deposits
Bank of America, National Association
$
803

 
15.5
%
 
$
17,512

 
17.9
%
 
$

 
0.01
%
Capital One, National Association
792

 
15.3
%
 
17,265

 
17.6
%
 
2

 
0.20
%

Note 17— Subsequent Events

On July 30, 2015, the Bank’s board of directors approved a cash dividend for the second quarter of 2015. The Bank paid the second quarter 2015 dividend on August 4, 2015, in the amount of $50.



37


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 June 30, 2015 and December 31, 2014, and results of operations for the second quarter and first six months of 2015 and 2014. 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, 2014.

Executive Summary

Financial Condition

As of June 30, 2015, total assets were $139.7 billion, an increase of $1.4 billion, or 0.99 percent, from December 31, 2014. This increase was primarily due to a $2.6 billion, or 2.57 percent, increase in advances partially offset by a decrease of $1.5 billion, or 5.47 percent decrease in investment securities.
As of June 30, 2015, total liabilities were $132.8 billion, an increase of $1.4 billion, or 1.08 percent, from December 31, 2014. This increase was primarily due to a $1.3 billion, or 1.02 percent, increase in total consolidated obligations to fund the increase in advances.
As of June 30, 2015, total capital was $6.9 billion, a decrease of $49 million, or 0.69 percent, from December 31, 2014. This decrease was primarily due to a decrease in the Bank's subclass B2 activity-based capital stock. The decrease in the Bank's subclass B2 activity-based capital stock was primarily due to the decrease in the factor used to calculate members' activity-based stock requirement from 4.50 percent to 4.25 percent of the members' outstanding par value of advances, which became effective on March 20, 2015.




38


Results of Operations

The Bank recorded net income of $87 million for the second quarter of 2015, an increase of $25 million, or 41.6 percent, from net income of $62 million for the second quarter of 2014. The increase in net income during the second quarter of 2015, compared to the same period in 2014, is primarily due to increases in net gains on derivatives and hedging activities due to a modest increase in interest rates. Net interest income decreased by $140 million during the second quarter of 2015, compared to the same period in 2014. During the second quarter of 2015, previously restructured advances were prepaid prior to their maturity, which resulted in a $152 million gain recorded in net gains on derivatives and hedging activities and a $149 million decrease in net interest income due to accelerated amortization of the cumulative fair value adjustment on the related advances.

The Bank recorded net income of $169 million for the first six months of 2015, an increase of $30 million, or 22.2 percent, from net income of $139 million for the same period in 2014. Net interest income decreased by $126 million during the first six months of 2015, compared to the same period in 2014. The change in net interest income and net income during the first six months of 2015, compared to the same period in 2014, is primarily due to the factors discussed above.

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 5.54 percent for the second quarter of 2015, compared to 3.81 percent for the second quarter of 2014. ROE increased for the second quarter of 2015, compared to the second quarter of 2014, primarily as a result of an increase in net income during the period. ROE spread to three-month average LIBOR increased to 526 basis points for the second quarter of 2015, compared to 358 basis points for the second quarter of 2014. The increase in the ROE spread to LIBOR was primarily due to the increase in ROE.

The Bank's annualized ROE was 5.26 percent for the first six months of 2015, compared to 4.28 percent during the same period in 2014. ROE increased for the first six months of 2015, compared to the same period in 2014, primarily as a result of an increase in net income during the period. ROE spread to three-month average LIBOR increased to 499 basis points for the first six months of 2015, compared to 405 basis points for the same period in 2014. The increase in the ROE spread to LIBOR was primarily due to the increase in ROE, as previously discussed.

The Bank's interest rate spread was negative 16 basis points and seven basis points for the second quarter and first six months of 2015, respectively, compared to 27 basis points for the second quarter and the first six months of 2014.

Business Outlook

The Bank’s business outlook remains largely unchanged from the discussion in the Bank’s Form 10-K. Given the large proportion of short-term advances outstanding, the Bank expects advances balances will continue fluctuating during 2015 as a result of scheduled repayments and prepayments. The Bank anticipates that earnings on its investment portfolio will remain limited as higher-yielding investments that prepay or mature are replaced with lower-yielding instruments available in the current market.


39


Selected Financial Data

The following table presents a summary of certain financial information for the Bank for the periods presented (dollars in millions):
 
As of and for the Three Months Ended
 
June 30,
2015
 
March 31,
2015
 
December 31,
2014
 
September 30,
2014
 
June 30,
2014
Statements of Condition (at period end)
 
 
 
 
 
 
 
 
 
Total assets
$
139,716

 
$
121,277

 
$
138,344

 
$
124,437

 
$
128,942

Investments (1)
35,806

 
34,084

 
36,502

 
30,143

 
30,894

Mortgage loans held for portfolio
664

 
709

 
749

 
792

 
838

Allowance for credit losses on mortgage loans
(2
)
 
(2
)
 
(3
)
 
(4
)
 
(6
)
Advances
102,208

 
85,416

 
99,644

 
88,627

 
95,128

Interest-bearing deposits
1,396

 
1,482

 
1,110

 
1,271

 
1,432

Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
  Discount notes
49,759

 
26,902

 
37,162

 
26,055

 
30,679

  Bonds
80,814

 
86,072

 
92,088

 
89,670

 
89,438

Total consolidated obligations, net (2)
130,573

 
112,974

 
129,250

 
115,725

 
120,117

Mandatorily redeemable capital stock
16

 
17

 
19

 
19

 
21

Affordable Housing Program payable
64

 
65

 
65

 
69

 
71

Capital stock - putable
5,052

 
4,319

 
5,150

 
4,654

 
4,906

Retained earnings
1,813

 
1,777

 
1,746

 
1,739

 
1,708

Accumulated other comprehensive income
77

 
79

 
95

 
127

 
130

Total capital
6,942

 
6,175

 
6,991

 
6,520

 
6,744

Statements of Income (for the period ended)
 
 
 
 
 
 
 
 
 
Net interest (expense) income
(48
)
 
104

 
95

 
46

 
92

(Reversal) provision for credit losses

 
(1
)
 
(1
)
 
(2
)
 
2

Net impairment losses recognized in earnings
(3
)
 
(1
)
 

 
(2
)
 

Net losses on trading securities
(15
)
 
(12
)
 
(14
)
 
(19
)
 
(13
)
Net gains on derivatives and hedging activities
188

 
24

 
12

 
77

 
16

Letters of credit fees
7

 
7

 
6

 
7

 
6

Other (loss) income (3)
(1
)
 
2

 
1

 
4

 
1

Noninterest expense
31

 
34

 
37

 
32

 
32

Income before assessments
97

 
91

 
64

 
83

 
68

Affordable Housing Program assessments
10

 
9

 
6

 
9

 
6

Net income
87

 
82

 
58

 
74

 
62

Performance Ratios (%)
 
 
 
 
 
 
 
 
 
Return on equity (4)
5.54

 
5.00

 
3.45

 
4.45

 
3.81

Return on assets (5)
0.27

 
0.25

 
0.17

 
0.22

 
0.19

Net interest margin (6)
(0.15
)
 
0.31

 
0.29

 
0.14

 
0.29

Regulatory capital ratio (at period end) (7)
4.93

 
5.04

 
5.00

 
5.15

 
5.15

Equity to assets ratio (8)
4.91

 
4.94

 
5.03

 
5.05

 
5.03

Dividend payout ratio (9)
57.93

 
62.06

 
67.30

 
58.11

 
71.35


40


____________
(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):
June 30, 2015
$
722,485

March 31, 2015
699,589

December 31, 2014
718,218

September 30, 2014
701,462

June 30, 2014
680,240


(3) 
Other (loss) income includes service fees and other. For the period September 30, 2014, the amount includes $4 million gain on litigation settlements, net.
(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, which does not include accumulated other comprehensive income, but does include mandatorily redeemable capital stock, as a percentage of total assets as of 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 June 30, 2015
 
As of December 31, 2014
 
Increase (Decrease)
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
Amount
 
Percent
Advances
$
102,208

 
73.16
 
$
99,644

 
72.03
 
$
2,564

 
2.57

Investment securities
25,662

 
18.37
 
27,147

 
19.62
 
(1,485
)
 
(5.47
)
Other investments
10,144

 
7.26
 
9,355

 
6.76
 
789

 
8.44

Mortgage loans, net
662

 
0.47
 
746

 
0.54
 
(84
)
 
(11.26
)
Other assets
1,040

 
0.74
 
1,452

 
1.05
 
(412
)
 
(28.40
)
Total assets
$
139,716

 
100.00
 
$
138,344

 
100.00
 
$
1,372

 
0.99

Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
  Discount notes
$
49,759

 
37.48
 
$
37,162

 
28.29
 
$
12,597

 
33.90

  Bonds
80,814

 
60.86
 
92,088

 
70.11
 
(11,274
)
 
(12.24
)
Deposits
1,396

 
1.05
 
1,110

 
0.84
 
286

 
25.70

Other liabilities
805

 
0.61
 
993

 
0.76
 
(188
)
 
(18.95
)
Total liabilities
$
132,774

 
100.00
 
$
131,353

 
100.00
 
$
1,421

 
1.08

Capital stock
$
5,052

 
72.78
 
$
5,150

 
73.67
 
$
(98
)
 
(1.89
)
Retained earnings
1,813

 
26.11
 
1,746

 
24.96
 
67

 
3.89

Accumulated other comprehensive income
77

 
1.11
 
95

 
1.37
 
(18
)
 
(19.86
)
Total capital
$
6,942

 
100.00
 
$
6,991

 
100.00
 
$
(49
)
 
(0.69
)

Advances

Total advances remained relatively stable as of June 30, 2015 compared to December 31, 2014. As of June 30, 2015, 66.9 percent of the Bank’s advances were fixed-rate, compared to 74.5 percent as of December 31, 2014. 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, the majority of which are based on LIBOR. As of June 30, 2015 and December 31, 2014, 41.0 percent and 41.9 percent, respectively, of the Bank’s fixed-rate advances were swapped and 1.26 percent and 2.56 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 that may be tied to indices such as the federal funds rate, prime rate, or constant maturity swap rates.


41


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

 
As of June 30, 2015
 
As of December 31, 2014
 
Amount
 
Percent of Total
 
Amount
 
Percent of Total
Fixed rate (1)
$
46,192

 
45.81
 
$
50,975

 
52.08
Adjustable or variable rate indexed
32,957

 
32.68
 
24,501

 
25.03
Hybrid
17,211

 
17.07
 
17,679

 
18.06
Convertible
2,837

 
2.81
 
3,040

 
3.11
Amortizing (2)
1,649

 
1.63
 
1,687

 
1.72
Total par value
$
100,846

 
100.00
 
$
97,882

 
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 investments held by the Bank (dollars in millions):
 
 
 
 
Increase (Decrease)
 
As of June 30, 2015
 
As of December 31, 2014
 
Amount    
 
Percent    
Investment securities:
 
 
 
 
 
 
 
State or local housing agency debt obligations
$
79

 
$
82

 
$
(3
)
 
(4.23
)
Government-sponsored enterprises debt obligations
7,064

 
7,935

 
(871
)
 
(10.97
)
  Mortgage-backed securities:
 
 
 
 
 
 
 
U.S. agency obligations-guaranteed single-family residential
322

 
366

 
(44
)
 
(12.00
)
Government-sponsored enterprises single-family residential
12,553

 
13,665

 
(1,112
)
 
(8.13
)
Government-sponsored enterprises multi-family commercial
2,570

 
1,663

 
907

 
54.52

Private-label residential
3,074

 
3,436

 
(362
)
 
(10.56
)
Total mortgage-backed securities
18,519

 
19,130

 
(611
)
 
(3.20
)
Total investment securities
25,662

 
27,147

 
(1,485
)
 
(5.47
)
Other investments:
 
 
 
 
 
 
 
Interest-bearing deposits (1)
1,136

 
1,010

 
126

 
12.50

Securities purchased under agreements to resell
2,140

 
1,960

 
180

 
9.18

Federal funds sold
6,868

 
6,385

 
483

 
7.56

Total other investments
10,144

 
9,355

 
789

 
8.44

Total investments
$
35,806

 
$
36,502

 
$
(696
)
 
(1.91
)
____________ 
(1) 
As of June 30, 2015 and December 31, 2014, interest-bearing deposits includes a $1.1 billion and $1.0 billion, respectively, business money market account with Branch Banking and Trust Company, one of the Bank’s ten largest borrowers, and as of June 30, 2015, $35 million, business money market account with United Bank.

Total investments remained relatively stable from December 31, 2014 to June 30, 2015. The amount held in other investments will vary each day based on the Bank’s liquidity requirements as a result of advances demand, the earnings rates, and the availability of high quality counterparties in the federal funds market.

42


Finance Agency regulations prohibit an FHLBank from purchasing MBS and asset-backed securities if its investment in such securities exceeds 300 percent of the FHLBank’s previous month-end regulatory capital on the day it purchases the securities. The Bank was in compliance with this regulatory requirement as of June 30, 2015 and December 31, 2014, as these investments amounted to 268 percent and 275 percent, respectively, of the Bank's regulatory capital.

Mortgage Loans Held for Portfolio

The decrease in mortgage loans held for portfolio from December 31, 2014 to June 30, 2015 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 June 30, 2015 and December 31, 2014, 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 June 30, 2015
 
As of December 31, 2014
 
Percent of Total
 
Percent of Total
Florida
27.59

 
26.98

South Carolina
25.54

 
25.26

Georgia
13.81

 
14.14

North Carolina
10.36

 
10.57

Virginia
7.90

 
8.04

All other
14.80

 
15.01

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 increase in consolidated obligation discount notes and the decrease in consolidated obligation bonds from December 31, 2014 to June 30, 2015 are a result of market conditions and short-term advance demand that favored the issuance of shorter term debt during the period. As of June 30, 2015, consolidated obligation issuances financed 93.5 percent of the $139.7 billion in total assets, remaining relatively stable compared to the financing ratio of 93.4 percent as of December 31, 2014.
As of June 30, 2015 and December 31, 2014, consolidated obligations outstanding were primarily fixed rate. However, the Bank often simultaneously enters into derivatives with the issuance of consolidated obligation bonds to convert the interest rates, in effect, into short-term variable interest rates, usually based on LIBOR. As of June 30, 2015 and December 31, 2014, 87.7 percent and 88.6 percent, respectively, of the Bank’s fixed-rate consolidated obligation bonds were swapped. As of June 30, 2015, none of the Bank's variable-rate consolidated obligation bonds were swapped and 0.33 percent of the Bank’s variable-rate consolidated obligation bonds were swapped as of December 31, 2014. As of June 30, 2015, and December 31, 2014, 39.4 percent and 4.65 percent, respectively, of the Bank's fixed-rate consolidated obligation discount notes were swapped.

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 fluctuate significantly. As a matter of prudence, the Bank typically invests deposit funds in liquid short-term assets. Member loan demand, deposit flows, and liquidity management strategies influence the amount and volatility of deposit balances carried with the Bank.

To support its member deposits, the FHLBank Act requires the Bank to have as a reserve an amount equal to or greater than the current deposits received from members. These reserves are required to be invested in obligations of the United States, deposits in eligible banks or trust companies or advances with maturities not exceeding five years. The Bank was in compliance with this depository liquidity requirement as of June 30, 2015.


43


Capital

The decrease in total capital from December 31, 2014 to June 30, 2015 was primarily due to a decrease in the Bank's subclass B2 activity-based capital stock. The decrease in the Bank's subclass B2 activity-based capital stock was primarily due to the decrease in the factor used to calculate members' activity-based stock requirement from 4.50 percent to 4.25 percent of the members' outstanding par value of advances, which became effective on March 20, 2015.
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 June 24, 2015, the Bank received notification from the Director that, based on March 31, 2015 data, the Bank meets the definition of “adequately capitalized.”

As of June 30, 2015 and December 31, 2014, the Bank had capital stock subject to mandatory redemption from 12 members and former members, 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.



44


Results of Operations

The following is a discussion and analysis of the Bank's results of operations for the second quarter and first six months of 2015 and 2014.

Net Income

The following table sets forth the Bank’s significant income items for the second quarter and first six months of 2015 and 2014, 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 June 30,
 
Increase (Decrease)
 
For the Six Months Ended June 30,
 
Increase (Decrease)    
 
 
2015
 
2014
 
Amount
 
Percent
 
2015
 
2014
 
Amount
 
Percent
Net interest (expense) income
 
$
(48
)
 
$
92

 
$
(140
)
 
(151.54
)
 
$
56

 
$
182

 
$
(126
)
 
(69.05
)
Provision (reversal) for credit losses
 

 
2

 
(2
)
 
(74.11
)
 
(1
)
 
(2
)
 
1

 
74.32

Noninterest income
 
176

 
10

 
166

 
*

 
196

 
33

 
163

 
*

Noninterest expense
 
31

 
32

 
(1
)
 
(0.05
)
 
65

 
63

 
2

 
4.50

Affordable Housing Program assessments
 
10

 
6

 
4

 
41.39

 
19

 
15

 
4

 
22.07

Net income
 
$
87

 
$
62

 
$
25

 
41.58

 
$
169

 
$
139

 
$
30

 
22.23

____________ 
* Not meaningful.

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 consolidated obligations, deposits, and other borrowings). Also included in net interest income are miscellaneous related items such as prepayment fees earned and the amortization of debt issuance discounts, concession fees, and certain derivative instruments and hedging activities related adjustments. The Bank also recognizes significant improvements in expected cash flows related to other-than-temporary impairment securities through net interest income.
The decrease in net interest income during the second quarter and first six months of 2015, compared to the same period in 2014, is primarily due to $149 million of accelerated amortization related to previously restructured advances that were prepaid prior to their maturity. This accelerated amortization was offset by net gains on derivatives and hedging activities.
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 $242 million and $140 million for the second quarter of 2015 and 2014, respectively, and a decrease of $373 and $270 million for the first six months of 2015 and 2014, 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 second quarter and first six months of 2015 and 2014 (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.


45


 
For the Three Months Ended June 30,
 
2015
 
2014
 
Average  Balance
 
Interest
 
Yield/    
Rate
(%)
 
Average  Balance
 
Interest
 
Yield/    
Rate
(%)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (1)
$
2,226

 
$
1

 
0.19

 
$
2,718

 
$
1

 
0.16
Securities purchased under agreements to resell
2,236

 
1

 
0.14

 
1,481

 

 
0.06
Federal funds sold
8,036

 
2

 
0.13

 
8,433

 
2

 
0.10
Investment securities (2)
26,190

 
103

 
1.58

 
24,253

 
110

 
1.83
Advances
87,727

 
(81
)
 
(0.37
)
 
89,552

 
52

 
0.23
Mortgage loans (3)
685

 
10

 
5.97

 
860

 
13

 
5.82
Loans to other FHLBanks
18

 

 
0.11

 

 

 
0.09
Total interest-earning assets
127,118

 
36

 
0.12

 
127,297

 
178

 
0.56
Allowance for credit losses on mortgage loans
(2
)
 
 
 
 
 
(4
)
 
 
 
 
Other assets
1,382

 
 
 
 
 
1,492

 
 
 
 
Total assets
$
128,498

 
 
 
 
 
$
128,785

 
 
 
 
Liabilities and Capital
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (4)
$
1,289

 

 
0.02

 
$
1,477

 

 
0.01
Short-term debt
36,286

 
9

 
0.10

 
27,460

 
6

 
0.09
Long-term debt
82,440

 
75

 
0.36

 
90,861

 
79

 
0.35
Other borrowings
17

 

 
4.28

 
23

 
1

 
3.74
Total interest-bearing liabilities
120,032

 
84

 
0.28

 
119,821

 
86

 
0.29
Other liabilities
2,162

 
 
 
 
 
2,487

 
 
 
 
Total capital
6,304

 
 
 
 
 
6,477

 
 
 
 
Total liabilities and capital
$
128,498

 
 
 
 
 
$
128,785

 
 
 
 
Net interest (expense) income and net yield on interest-earning assets
 
 
$
(48
)
 
(0.15
)
 
 
 
$
92

 
0.29
Interest rate spread
 
 
 
 
(0.16
)
 
 
 
 
 
0.27
Average interest-earning assets to interest-bearing liabilities
 
 
 
 
105.90

 
 
 
 
 
106.24
____________ 
(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


 
For the Six Months Ended June 30,
 
2015
 
2014
 
Average  Balance
 
Interest
 
Yield/    
Rate
(%)
 
Average  Balance
 
Interest
 
Yield/    
Rate
(%)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (1)
$
2,413

 
$
2

 
0.18

 
$
2,726

 
$
2

 
0.14
Securities purchased under agreements to resell
2,464

 
2

 
0.13

 
1,185

 

 
0.06
Federal funds sold
8,277

 
5

 
0.13

 
8,081

 
4

 
0.09
Investment securities (2)
26,345

 
208

 
1.59

 
24,242

 
223

 
1.86
Advances
90,169

 
(18
)
 
(0.04
)
 
88,594

 
109

 
0.25
Mortgage loans (3)
707

 
21

 
6.08

 
882

 
26

 
5.86
Loans to other FHLBanks
10

 

 
0.11

 

 

 
0.06
Total interest-earning assets
130,385

 
220

 
0.34

 
125,710

 
364

 
0.58
Allowance for credit losses on mortgage loans
(2
)
 
 
 
 
 
(6
)
 
 
 
 
Other assets
1,397

 
 
 
 
 
1,357

 
 
 
 
Total assets
$
131,780

 
 
 
 
 
$
127,061

 
 
 
 
Liabilities and Capital
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (4)
$
1,259

 

 
0.02

 
$
1,467

 

 
0.01
Short-term debt
36,867

 
18

 
0.10

 
29,015

 
14

 
0.10
Long-term debt
84,898

 
146

 
0.35

 
87,525

 
167

 
0.39
Other borrowings
18

 

 
4.26

 
24

 
1

 
4.25
Total interest-bearing liabilities
123,042

 
164

 
0.27

 
118,031

 
182

 
0.31
Other liabilities
2,249

 
 
 
 
 
2,507

 
 
 
 
Total capital
6,489

 
 
 
 
 
6,523

 
 
 
 
Total liabilities and capital
$
131,780

 
 
 
 
 
$
127,061

 
 
 
 
Net interest income and net yield on interest-earning assets
 
 
$
56

 
0.09

 
 
 
$
182

 
0.29
Interest rate spread
 
 
 
 
0.07

 
 
 
 
 
0.27
Average interest-earning assets to interest-bearing liabilities
 
 
 
 
105.97

 
 
 
 
 
106.51
____________ 
(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.

47


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 second quarter and first six months of 2015, compared to the same periods in 2014, were primarily rate related.
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2015 vs. 2014
 
2015 vs. 2014
 
Volume (1)
 
Rate (1)
 
Increase (Decrease)    
 
Volume (1)
 
Rate (1)
 
Increase (Decrease)    
Increase (decrease) in interest income:
 
 
 
 
 
 
 
 
 
 
 
 Securities purchased under agreements to resell
$

 
$
1

 
$
1

 
$
1

 
$
1

 
$
2

 Federal funds sold

 

 

 

 
1

 
1

 Investment securities
8

 
(15
)
 
(7
)
 
19

 
(34
)
 
(15
)
 Advances
(1
)
 
(132
)
 
(133
)
 
1

 
(128
)
 
(127
)
    Mortgage loans
(3
)
 

 
(3
)
 
(6
)
 
1

 
(5
)
Total
4

 
(146
)
 
(142
)
 
15

 
(159
)
 
(144
)
Increase (decrease) in interest expense:
 
 
 
 
 
 
 
 
 
 
 
 Short-term debt
2

 
1

 
3

 
4

 

 
4

 Long-term debt
(7
)
 
3

 
(4
)
 
(4
)
 
(17
)
 
(21
)
 Other borrowings
(1
)
 

 
(1
)
 
(1
)
 

 
(1
)
Total
(6
)
 
4

 
(2
)
 
(1
)
 
(17
)
 
(18
)
Increase (decrease) in net interest income
$
10

 
$
(150
)
 
$
(140
)
 
$
16

 
$
(142
)
 
$
(126
)
____________ 
(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 June 30,
 
Increase (Decrease)
 
For the Six Months Ended June 30,
 
Increase (Decrease)
 
 
2015
 
2014
 
Amount
 
Percent
 
2015
 
2014
 
Amount
 
Percent
Net impairment losses recognized in earnings
 
$
(3
)
 
$

 
$
(3
)
 
*

 
$
(4
)
 
$
(1
)
 
$
(3
)
 
(378.42
)
Net losses on trading securities
 
(15
)
 
(13
)
 
(2
)
 
(17.34
)
 
(27
)
 
(27
)
 

 
1.52

Net gains on derivatives and hedging activities
 
188

 
16

 
172

 
*

 
212

 
31

 
181

 
*

Gain on extinguishment of debt
 

 

 

 

 

 
15

 
(15
)
 
(100.00
)
Letters of credit fees
 
7

 
6

 
1

 
3.45

 
14

 
13

 
1

 
5.49

Other
 
(1
)
 
1

 
(2
)
 
(116.00
)
 
1

 
2

 
(1
)
 
(19.59
)
Total noninterest income
 
$
176

 
$
10

 
$
166

 
*

 
$
196

 
$
33

 
$
163

 
*

____________ 
* Not meaningful.

The increase in total noninterest income during the second quarter of 2015, compared to the same period in 2014, is primarily due to an increase in net gains on derivatives and hedging activities. As previously discussed, previously restructured advances were prepaid prior to their maturity resulting in a decrease to interest income and a $152 million increase to net gains on derivatives and hedging activities. The remaining increase in net gains on derivatives and hedging activities primarily relates to gains due to a modest increase in interest rates. The change in total noninterest income during the first six months of 2015, compared to the same period in 2014, primarily resulted from the changes discussed above.


48


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 June 30, 2015
 
Advances
 
Investments
 
Consolidated
Obligation
Bonds
 
Consolidated Obligation Discount Notes
 
Balance Sheet
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
 
 
Amortization or accretion of hedging activities in net interest income (1)
$
(188
)
 
$

 
$
1

 
$

 
$

 
$
(187
)
Net interest settlements included in net interest income (2)
(182
)
 

 
125

 
2

 

 
(55
)
Total effect on net interest (expense) income
$
(370
)
 
$

 
$
126

 
$
2

 
$

 
$
(242
)
Net gains on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
 
 
 Gains (losses) on fair value hedges
$
193

 
$

 
$
(5
)
 
$

 
$

 
$
188

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

 
(2
)
 
1

 

 
1

 

Total net gains (losses) on derivatives and hedging activities
193

 
(2
)
 
(4
)
 

 
1

 
188

Net losses on trading securities (3)

 
(15
)
 

 

 

 
(15
)
Total effect on noninterest income (loss)
$
193

 
$
(17
)
 
$
(4
)
 
$

 
$
1

 
$
173

____________ 
(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 June 30, 2014
 
Advances
 
Investments
 
Consolidated
Obligation
Bonds
 
Balance Sheet
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
Amortization or accretion of hedging activities in net interest income (1)
$
(51
)
 
$

 
$

 
$

 
$
(51
)
Net interest settlements included in net interest income (2)
(224
)
 

 
135

 

 
(89
)
Total effect on net interest (expense) income
$
(275
)
 
$

 
$
135

 
$

 
$
(140
)
Net gains on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
Gains (losses) on fair value hedges
$
28

 
$

 
$
(2
)
 
$

 
$
26

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

 
(5
)
 
1

 
(6
)
 
(10
)
Total net gains (losses) on derivatives and hedging activities
28

 
(5
)
 
(1
)
 
(6
)
 
16

Net losses on trading securities (3)

 
(13
)
 

 

 
(13
)
Total effect on noninterest income (loss)
$
28

 
$
(18
)
 
$
(1
)
 
$
(6
)
 
$
3

____________ 
(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.

49


 
For the Six Months Ended June 30, 2015
 
Advances
 
Investments
 
Consolidated
Obligation
Bonds
 
Consolidated Obligation Discount Notes
 
Balance Sheet
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
 
 
Amortization or accretion of hedging activities in net interest income (1)
$
(247
)
 
$

 
$
3

 
$

 
$

 
$
(244
)
Net interest settlements included in net interest income (2)
(374
)
 

 
242

 
3

 

 
(129
)
Total effect on net interest (expense) income
$
(621
)
 
$

 
$
245

 
$
3

 
$

 
$
(373
)
Net gains on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
 
 
 Gains (losses) on fair value hedges
$
228

 
$

 
$
(11
)
 
$

 
$

 
$
217

 (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
228

 
(6
)
 
(8
)
 

 
(2
)
 
212

Net losses on trading securities (3)

 
(27
)
 

 

 

 
(27
)
Total effect on noninterest income (loss)
$
228

 
$
(33
)
 
$
(8
)
 
$

 
$
(2
)
 
$
185

____________ 
(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 Six Months Ended June 30, 2014
 
Advances
 
Investments
 
Consolidated
Obligation
Bonds
 
Balance Sheet
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
Amortization or accretion of hedging activities in net interest income (1)
$
(96
)
 
$

 
$
3

 
$

 
$
(93
)
Net interest settlements included in net interest income (2)
(442
)
 

 
265

 

 
(177
)
Total effect on net interest (expense) income
$
(538
)
 
$

 
$
268

 
$

 
$
(270
)
Net gains on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
Gains on fair value hedges
$
51

 
$

 
$

 
$

 
$
51

Losses on derivatives not receiving hedge accounting including net interest settlements

 
(7
)
 

 
(13
)
 
(20
)
Total net gains (losses) on derivatives and hedging activities
51

 
(7
)
 

 
(13
)
 
31

Net losses on trading securities (3)

 
(27
)
 

 

 
(27
)
Total effect on noninterest income (loss)
$
51

 
$
(34
)
 
$

 
$
(13
)
 
$
4

____________ 
(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 remained relatively stable for the second quarter and first six months of 2015, compared to the same periods in 2014. The increase in Affordable Housing Program assessments during the second quarter and first six months of 2015, compared to the same periods in 2014, is due to an increase in income before assessments during the periods.


50


Liquidity and Capital Resources

Liquidity is necessary to satisfy members’ borrowing needs on a timely basis, repay maturing and called consolidated obligations, and meet other obligations and operating requirements. Many members rely on the Bank as a source of standby liquidity, and the Bank attempts to be in a position to meet member funding needs on a timely basis. The Bank complies with operational liquidity and contingent liquidity, and other regulatory requirements. The Bank also performs a separate and independent measure of liquidity, a 45-day liquidity measurement, to validate the level of liquidity reserves.
Finance Agency regulations require the Bank to maintain operational liquidity (generally, the ready cash and borrowing capacity available to meet the Bank's intraday needs), and contingent liquidity in an amount sufficient to meet its liquidity needs for five business days if it is unable to access the capital markets. The Bank met these regulatory liquidity requirements throughout the first six months of 2015. 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 six months of 2015.
The Bank’s principal source of liquidity is consolidated obligation debt instruments. To provide liquidity, the Bank also may use other short-term borrowings, such as federal funds purchased, securities sold under agreements to repurchase, and loans from other FHLBanks. These funding sources depend on the Bank’s ability to access the capital markets at competitive market rates. Although the Bank 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 short-term discount notes during times of market volatility.
Contingency plans are in place that prioritize the allocation of liquidity resources in the event of operational disruptions at the Bank or the Office of Finance, as well as systemic Federal Reserve wire transfer system disruptions. Under the FHLBank Act, the Secretary of Treasury has the authority, at his discretion, to purchase consolidated obligations up to an aggregate amount of $4.0 billion. No borrowings under this authority have been outstanding since 1977.


51


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 consolidated obligations; and
the Bank’s outstanding commitments arising from standby letters of credit.
Should an FHLBank be unable to satisfy its payment obligation under a consolidated obligation for which it is the primary obligor, any of the other FHLBanks, including the Bank, could be called upon to repay all or any part of such payment obligation, as determined or approved by the Finance Agency. As of June 30, 2015, 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’ consolidated obligations as of June 30, 2015 and December 31, 2014. As of June 30, 2015, the FHLBanks had $852.8 billion in aggregate par value of consolidated obligations issued and outstanding, $130.3 billion of which was attributable to the Bank. No FHLBank has ever defaulted on its principal or interest payments under any consolidated obligation, and the Bank has never been required to make payments under any consolidated obligation 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.
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 June 30, 2015. 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 June 30, 2015, 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.

FHFA Core Mission Achievement Advisory Bulletin 2015-05

On July 14, 2015, the FHFA issued an advisory bulletin establishing a framework by which the FHFA will assess each FHLBank’s core mission achievement. Core mission achievement is determined primarily using a ratio of primary mission assets, which includes advances and mortgage loans acquired from members (also referred to as acquired member assets), to consolidated obligations. In certain cases, the FHFA also will consider supplemental mission assets and activities such as letters of credit, investments in housing finance agency debt instruments, and off-balance sheet mortgage programs. The primary mission asset ratio will be determined at year-end beginning in 2015 and calculated using annual average par values.

The advisory bulletin provides the FHFA’s expectations for each FHLBank’s strategic plan based on its ratio, which are:

when the ratio is 70% or higher, the FHFA will not undertake a further evaluation of mission achievement by the FHLBank, but the FHLBank’s strategic plan should include an assessment of the FHLBank’s prospects for maintaining its ratio at least at this level;
when the ratio is between 55% and 70%, the strategic plan should explain the FHLBank’s plan to increase its mission focus, but a high level of supplemental mission assets and activities may be factored into mission achievement; and

52


when the ratio is below 55%, the strategic plan should include an explanation of the circumstances that caused the ratio to be at that level and detailed plans to increase the ratio. The advisory bulletin provides that if an FHLBank maintains a ratio below 55% over the course of several consecutive reviews, then the FHLBank’s board of directors should consider possible strategic alternatives in addition to balance sheet adjustments.

The Bank expects its primary mission asset ratio at year-end will be 70% or higher and will seek to maintain this ratio at this level in the future, based primarily on the Bank's advance-focused business strategy. The Bank will consider the core mission achievement guidelines when developing its strategic plan and does not expect this Advisory Bulletin to have a material impact on the Bank’s operations or financial condition.

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 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. The Bank assigns each borrower that is not an insured depository institution or insurance company, such as housing associates, 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 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.

53


The following table sets forth the number of borrowers and the par amount of advances outstanding to borrowers with the specified ratings as of the specified dates (dollars in millions).
 
 
 
As of June 30, 2015
 
As of December 31, 2014
Rating                 
 
Number of        
Borrowers
 
Outstanding        
Advances
 
Number of        
Borrowers
 
Outstanding        
Advances
1
 
13

 
$
1,219

 
10

 
$
3,717

2
 
19

 
4,111

 
21

 
1,473

3
 
66

 
25,431

 
63

 
26,500

4
 
112

 
22,477

 
101

 
27,290

5
 
122

 
39,856

 
127

 
32,825

6
 
105

 
4,295

 
106

 
2,944

7
 
41

 
1,715

 
52

 
1,281

8
 
20

 
301

 
22

 
501

9
 
14

 
276

 
17

 
381

10
 
32

 
534

 
37

 
596


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 standby 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 June 30, 2015, six borrowers have been approved for a credit limit higher than 30 percent, and their outstanding advance balance was $20.5 billion.
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 June 30, 2015
$
100,846

 
$
274,820

 
72.39
 
3.51
 
24.10
As of December 31, 2014
97,882

 
265,103

 
72.29
 
3.68
 
24.03
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 a model risk component that takes into account model data uncertainty and 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.

54


In its history, the Bank has never experienced a credit loss on an advance. In consideration of this, and the Bank’s policies and practices detailed above, the Bank has not established an allowance for credit losses on advances as of June 30, 2015 and December 31, 2014.

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.
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.

Finance Agency regulations do not permit the Bank to rely exclusively on NRSRO ratings with respect to its investments. The Bank is required to make a determination of whether a security is investment quality based on its own documented analysis, which includes the NRSRO rating as one of the factors that is assessed to determine investment quality. The Bank monitors the financial condition of investment counterparties to ensure that they are in compliance with the Bank's Risk Management Policy (RMP) and Finance Agency regulations. Unsecured credit exposure to any counterparty is limited by the credit quality and capital of the counterparty and by the capital of the Bank. On a regular basis, management produces financial monitoring reports detailing the financial condition of the Bank’s counterparties. These reports are reviewed by the Bank’s board of directors. The Bank may further limit or suspend overnight and term trading in addition to RMP and regulatory requirements. Limiting or suspending counterparties limits the pool of available counterparties, shifts the geographical distribution of counterparty exposure, and may reduce the Bank’s overall investment opportunities.


55


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 June 30, 2015
 
Federal Funds Sold         
 
Interest-bearing  
Deposits
 
Net Derivative Exposure (1)    
 
Total 
Australia
$
1,000

 
$

 
$

 
$
1,000

Canada
1,230

 

 

 
1,230

France
888

 

 

 
888

Germany
1,130

 

 
41

 
1,171

Netherlands
1,125

 

 

 
1,125

Sweden
550

 

 

 
550

Switzerland

 

 
3

 
3

United Kingdom

 

 
1

 
1

United States of America
945

 
1,136

 
1

 
2,082

Total
$
6,868

 
$
1,136

 
$
46

 
$
8,050

____________ 
(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, 2014
 
Federal Funds Sold         
 
Interest-bearing  
Deposits
 
Net Derivative Exposure (1)     
 
Total 
Australia
$
845

 
$

 
$

 
$
845

Canada
1,650

 

 

 
1,650

Germany
1,150

 

 
29

 
1,179

Netherlands
1,140

 

 

 
1,140

Sweden
600

 

 

 
600

United States of America
1,000

 
1,010

 

 
2,010

Total
$
6,385

 
$
1,010

 
$
29

 
$
7,424

____________ 
(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 $7.4 billion as of December 31, 2014 to $8.0 billion as of June 30, 2015. There were six counterparties, Australia & New Zealand Banking Group, BNP Paribas, Branch Banking and Trust Company, Landesbank Baden-Wuerttemberg, Rabobank Nederland, and Royal Bank of Canada, that each represented greater than 10 percent and collectively represented 80.9 percent of the total unsecured credit exposure to non-U.S. government or non-U.S. government agencies counterparties. As of June 30, 2015, the Bank’s unsecured credit portfolio consisted primarily of federal funds sold with overnight maturities.
The Bank’s RMP permits the Bank to invest in U.S. agency (Fannie Mae, Freddie Mac and Ginnie Mae) obligations, including CMOs and REMICS backed by such securities, and other MBS, CMOs, and REMICS rated AAA by S&P or Aaa by Moody’s at the time of purchase. The private-label MBS purchased by the Bank originally attained their triple-A ratings through credit enhancements, which primarily consisted of the subordination of the claims of the other tranches of these securities. 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.


56


The tables below provide information on the credit ratings of the Bank’s investments held as of June 30, 2015 and December 31, 2014 (in millions), based on their credit rating as of June 30, 2015 and December 31, 2014, respectively. The credit ratings reflect the lowest long-term credit ratings as reported by an NRSRO.
 
 
 
As of June 30, 2015
 
 
 
 
 
Carrying Value (1)
 
 
 
 
 
Investment Grade
 
Below Investment Grade
 
 
 
AAA
 
AA
 
A
 
BBB
 
BB
 
B
 
CCC
 
CC
 
C
 
D
 
Unrated
 
Total
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State or local housing agency debt obligations
$

 
$
79

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
79

Government-sponsored enterprises debt obligations

 
7,064

 

 

 

 

 

 

 

 

 

 
7,064

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

 
322

 

 

 

 

 

 

 

 

 

 
322

Government-sponsored enterprises single family residential

 
12,553

 

 

 

 

 

 

 

 

 

 
12,553

Government-sponsored enterprises multi-family commercial
465

 
2,105

 

 

 

 

 

 

 

 

 

 
2,570

Private-label

 
9

 
29

 
330

 
516

 
383

 
784

 
182

 
85

 
751

 
5

 
3,074

Total mortgage-backed securities
465

 
14,989

 
29

 
330

 
516

 
383

 
784

 
182

 
85

 
751

 
5

 
18,519

Total investment securities
465

 
22,132

 
29

 
330

 
516

 
383

 
784

 
182

 
85

 
751

 
5

 
25,662

Other investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits

 
2

 
1,099

 
35

 

 

 

 

 

 

 

 
1,136

Securities purchased under agreements to resell

 
25

 
300

 
1,000

 
815

 

 

 

 

 

 

 
2,140

Federal funds sold

 
2,780

 
3,253

 
835

 

 

 

 

 

 

 

 
6,868

Total other investments


2,807


4,652


1,870


815














10,144

Total investments
$
465


$
24,939


$
4,681


$
2,200


$
1,331


$
383


$
784


$
182


$
85


$
751


$
5


$
35,806

____________
(1) Investment amounts noted in the above table represent the carrying value and do not include related accrued interest receivable of $40 million as of June 30, 2015.

57


 
As of December 31, 2014
 
 
 
 
 
Carrying Value (1)
 
 
 
 
 
Investment Grade
 
Below Investment Grade
 
 
 
 
 
AAA
 
AA
 
A
 
BBB
 
BB
 
B
 
CCC
 
CC
 
C
 
D
 
Unrated
 
Total
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

State or local housing agency debt obligations
$

 
$
82

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
82

Government-sponsored enterprises debt obligations

 
7,935

 

 

 

 

 

 

 

 

 

 
7,935

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

U.S. agency obligations-guaranteed single family residential

 
366

 

 

 

 

 

 

 

 

 

 
366

Government-sponsored enterprises single family residential

 
13,665

 

 

 

 

 

 

 

 

 

 
13,665

Government-sponsored enterprises multi-family commercial
465

 
1,198

 

 

 

 

 

 

 

 

 

 
1,663

Private-label residential

 
14

 
56

 
388

 
591

 
424

 
844

 
219

 
129

 
765

 
6

 
3,436

Total mortgage-backed securities
465

 
15,243

 
56

 
388

 
591

 
424

 
844

 
219

 
129

 
765

 
6

 
19,130

Total investment securities
465

 
23,260

 
56

 
388

 
591

 
424

 
844

 
219

 
129

 
765

 
6

 
27,147

Other investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits

 
2

 
1,008

 

 

 

 

 

 

 

 

 
1,010

Securities purchased under agreements to resell

 

 
250

 
1,000

 
710

 

 

 

 

 

 

 
1,960

Federal funds sold

 
1,945

 
3,815

 
625

 

 

 

 

 

 

 

 
6,385

Total other investments


1,947


5,073


1,625


710














9,355

Total investments
$
465

 
$
25,207

 
$
5,129

 
$
2,013

 
$
1,301

 
$
424

 
$
844

 
$
219

 
$
129

 
$
765

 
$
6

 
$
36,502

____________
(1) Investment amounts noted in the above table represent the carrying value and do not include related accrued interest receivable of $42 million as of December 31, 2014.

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.

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 also from time to time enters into these transactions with members on the same terms as advances. Since transactions with members are secured on the same terms as advances, members are not required to have an investment grade rating. 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 rating of the related non-member counterparties, the Bank considers its credit exposure related to these investments to be minimal.
Non-Private-label MBS
The unrealized losses related to U.S. agency MBS 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 June 30, 2015 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.


58


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.
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 June 30, 2015 (dollars in millions).
 
Year of Securitization - Prime
 
2008
 
2007
 
2006
 
2005
 
2004 and  
Prior
 
Total      
Investment Ratings:
 
 
 
 
 
 
 
 
 
 
 
AA
$

 
$

 
$

 
$

 
$
10

 
$
10

A

 

 

 
7

 
22

 
29

BBB

 

 

 
82

 
224

 
306

BB

 

 

 
235

 
221

 
456

B

 
13

 
2

 
104

 
176

 
295

CCC

 
247

 
20

 
337

 
145

 
749

CC
27

 
127

 
35

 
16

 

 
205

C
71

 

 
25

 

 

 
96

D

 
265

 
358

 
128

 

 
751

Unrated

 

 

 

 
5

 
5

Total unpaid principal balance
$
98

 
$
652

 
$
440

 
$
909

 
$
803

 
$
2,902

Amortized cost
$
83

 
$
513

 
$
360

 
$
829

 
$
791

 
$
2,576

Gross unrealized losses
$

 
$
(7
)
 
$

 
$
(2
)
 
$
(9
)
 
$
(18
)
Fair value
$
87

 
$
553

 
$
387

 
$
858

 
$
791

 
$
2,676

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

 
$
(3
)
 
$
(1
)
 
$

 
$

 
$
(4
)
 Non-credit-related losses

 
(3
)
 
(1
)
 

 

 
(4
)
Total other-than-temporary impairment losses
$

 
$

 
$

 
$

 
$

 
$

Weighted average percentage of fair value to unpaid principal balance
87.97
%
 
84.83
%
 
87.96
%
 
94.39
%
 
98.55
%
 
92.20
%
Original weighted average credit support
5.91
%
 
8.08
%
 
10.52
%
 
6.25
%
 
4.37
%
 
6.77
%
Weighted average credit support
2.21
%
 
0.28
%
 
0.58
%
 
5.58
%
 
11.25
%
 
5.08
%
Weighted average collateral delinquency
15.12
%
 
15.15
%
 
16.14
%
 
9.71
%
 
7.95
%
 
11.60
%

59


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

 
$

 
$

 
$

 
$
25

 
$
25

BB

 

 

 

 
60

 
60

B

 

 

 

 
89

 
89

CCC

 

 

 
138

 
7

 
145

   D

 
35

 

 
102

 

 
137

Total unpaid principal balance
$

 
$
35

 
$

 
$
240

 
$
181

 
$
456

Amortized cost
$

 
$
25

 
$

 
$
194

 
$
180

 
$
399

Gross unrealized losses
$

 
$

 
$

 
$
(11
)
 
$
(1
)
 
$
(12
)
Fair value
$

 
$
28

 
$

 
$
186

 
$
181

 
$
395

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
%
 
80.07
%
 
0.00
%
 
77.78
%
 
100.63
%
 
87.02
%
Original weighted average credit support
0.00
%
 
12.29
%
 
0.00
%
 
4.36
%
 
9.91
%
 
7.17
%
Weighted average credit support
0.00
%
 
0.00
%
 
0.00
%
 
7.36
%
 
13.47
%
 
9.22
%
Weighted average collateral delinquency
0.00
%
 
28.72
%
 
0.00
%
 
22.95
%
 
9.42
%
 
18.03
%

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 June 30, 2015:
 
 
 
Significant Inputs(1)
 
 
 
Prepayment Rate
 
Default Rates
 
Loss Severities
 
Current Credit Enhancement
Classification
 
Weighted    
Average
(%)
 
Weighted    
Average
(%)
 
Weighted    
Average
(%)
 
Weighted    
Average
(%)
Total Prime
 
15.33
 
7.32
 
24.18
 
7.51
Total Alt-A
 
11.72
 
21.77
 
36.28
 
3.72
Total
 
13.70
 
13.84
 
29.64
 
5.80
____________
(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 those securities for which an other-than-temporary impairment was determined to have occurred during the second quarter of 2015, 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.
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 primarily based on a short-term housing price forecast, which was five percentage points lower than the base case, followed by a recovery path with annual rates of housing price growth that were 33.0 percent lower than the base case. For the three months ended June 30, 2015 base case and adverse scenarios for credit losses on all other-than temporary impaired private-label MBS were $3 million and $6 million, respectively.

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



60



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 June 30, 2015.

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 June 30, 2015.

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.

61


The tables below provide information on the credit ratings of, and the Bank’s credit exposure to, its derivative counterparties (in millions). The credit ratings reflect the lowest long-term credit rating by an NRSRO.
 
 
As of June 30, 2015
 
 
Notional Amount
 
Derivatives Fair Value Before Collateral
 
Cash Collateral Pledged To (From) Counterparty
 
Other Collateral Pledged To (From) Counterparty
 
Net Credit Exposure to Counterparties
Non-member counterparties:
 
 
 
 
 
 
 
 
 
 
  Asset positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
    Double-A
 
$
635

 
$
1

 
$

 
$

 
$
1

    Single-A
 
464

 
1

 

 

 
1

    Triple-B
 
12,262

 
37

 
(37
)
 

 

 Cleared derivatives
 
3,734

 
7

 
33

 

 
40

  Liability positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
    Cleared derivatives
 
61,942

 
(253
)
 
365

 

 
112

Total derivative positions with non-member counterparties to which the Bank had credit exposure
 
79,037

 
(207
)
 
361

 

 
154

Member institutions (1)
 
74

 
1

 

 
(1
)
 

Total
 
$
79,111

 
$
(206
)
 
$
361

 
$
(1
)
 
$
154

____________ 
(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, 2014
 
 
Notional Amount
 
Derivatives Fair Value Before Collateral
 
Cash Collateral Pledged To (From) Counterparty
 
Other Collateral Pledged To (From) Counterparty
 
Net Credit Exposure to Counterparties
Non-member counterparties:
 
 
 
 
 
 
 
 
 
 
Asset positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
    Single-A
 
$
11,781

 
$
29

 
$
(29
)
 
$

 
$

    Cleared derivatives
 
6,708

 

 
3

 

 
3

  Liability positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
     Cleared derivatives
 
48,187

 
(335
)
 
443

 

 
108

Total derivative positions with non-member counterparties to which the Bank had credit exposure
 
66,676

 
(306
)
 
417

 

 
111

Member institutions (1)
 
74

 
1

 

 
(1
)
 

Total
 
$
66,750

 
$
(305
)
 
$
417

 
$
(1
)
 
$
111

____________ 
(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 $86 million of collateral at fair value to its bilateral derivative counterparties as of June 30, 2015.
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

62


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 June 30, 2015, five of the Bank’s eight mortgage insurance providers have been rated below "A" by one or more NRSROs for their claims paying ability or insurer financial strength, and three are no longer rated. 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 June 30, 2015 and December 31, 2014, the allowance for credit losses on MPF loans was $2 million and $3 million, respectively. The decrease in the allowance for credit losses was related to the improvement of the credit quality of the portfolio.

Critical Accounting Policies and Estimates

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

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.




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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 June 30, 2015
 
As of December 31, 2014
Hedged Item / Hedging Instrument
 
Hedging Objective
 
Hedge
Accounting
Designation
 
Notional Amount
 
Notional Amount
Advances
 
 
 
 
 
 
 
 
Pay fixed, receive variable interest rate swap (without options)
 
Converts the advance’s fixed rate to a variable rate index.
 
Fair value
hedges
 
$
7,365

 
$
9,488

Non-qualifying
hedges
 
1

 
2

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
 
20,656

 
21,223

Non-qualifying
hedges
 
40

 
60

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
 
385

 
505

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
 
35

 
135

 
 
 
 
Total
 
28,482

 
31,413

Investments
 
 
 
 
 
 
 
 
Pay fixed, receive variable interest rate swap
 
Converts the investment’s fixed rate to a variable rate index.
 
Non-qualifying
hedges
 
1,123

 
1,123

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
 
1,173

 
1,173

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
 
42,480

 
48,314

Non-qualifying
hedges
 
565

 
3,700

Receive fixed, pay variable interest rate swap (with options)
 
Converts the bond’s fixed rate to a variable rate index and offsets option risk in the bond.
 
Fair value
hedges
 
21,448

 
21,699

Non-qualifying
hedges
 

 
1,000

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

 
25

 
 
 
 
Total
 
64,493

 
74,738


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As of June 30, 2015
 
As of December 31, 2014
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
 
19,590

 
1,775

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

 
105

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

 
16,500

 
 
 
 
Total
 
16,605

 
16,605

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
 
291

 
148

Total notional amount
 
 
 
 
 
$
130,634

 
$
125,852


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 June 30, 2015
 
As of December 31, 2014
 
Up 200 Basis Points    
 
Current    
 
Down 200 Basis
 Points (1)    
 
Up 200 Basis Points    
 
Current
 
Down 200 Basis 
Points (1)    
Assets
0.42

 
0.33

 
0.23

 
0.48

 
0.36

 
0.23

Liabilities
0.26

 
0.34

 
0.24

 
0.29

 
0.39

 
0.27

Equity
3.60

 
0.08

 
0.13

 
4.00

 
(0.27
)
 
(0.39
)
Effective duration gap
0.16

 
(0.01
)
 
(0.01
)
 
0.19

 
(0.03
)
 
(0.04
)
____________ 
(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

65


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 June 30, 2015
 
As of December 31, 2014
 
Up 200 Basis Points    
 
Current
 
Down 200 Basis Points (1)    
 
Up 200 Basis Points    
 
Current
 
Down 200 Basis Points (1)  
Assets
$
137,206

 
$
138,243

 
$
138,689

 
$
135,393

 
$
136,525

 
$
137,087

Liabilities
130,474

 
131,242

 
131,585

 
128,589

 
129,432

 
129,827

Equity
6,732

 
7,001

 
7,104

 
6,804

 
7,093

 
7,260

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

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

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

As of June 30, 2015, 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 second quarter of 2015, 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 June 30, 2015, filed on August 7, 2015, 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 the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
Federal Home Loan Bank of Atlanta
 
 
 
Date:
August 7, 2015
By /s/ W. Wesley McMullan                   
 
 
    Name: W. Wesley McMullan
    Title: President and Chief Executive Officer
Date:
August 7, 2015
By /s/ Kirk R. Malmberg                        
 
 
    Name: Kirk R. Malmberg
    Title: Executive Vice President and Chief Financial Officer



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