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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2007
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 000-51845
FEDERAL HOME LOAN BANK OF ATLANTA
(Exact name of registrant as specified in its charter)
Federally chartered corporation | 56-6000442 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1475 Peachtree Street, NE, Atlanta, Ga. | 30309 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (404) 888-8000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days.
x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
¨ Large accelerated filer ¨ Accelerated filer x Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes x No
The number of shares outstanding of the registrant’s Class B Stock, par value $100, as of July 31, 2007, was 63,474,127.
Table of Contents
PART I. FINANCIAL INFORMATION | 1 | |||
Item 1. | Financial Statements | 1 | ||
Statements Of Condition | 1 | |||
Statements Of Income | 2 | |||
Statements Of Capital | 3 | |||
Statements Of Cash Flows | 4 | |||
Notes To Financial Statements | 6 | |||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 | ||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 34 | ||
Item 4. | Controls and Procedures | 37 | ||
Item 4T. | Controls and Procedures | 37 | ||
PART II. OTHER INFORMATION | 38 | |||
Item 1. | Legal Proceedings | 38 | ||
Item 1A. | Risk Factors | 38 | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 38 | ||
Item 3. | Defaults Upon Senior Securities | 38 | ||
Item 4. | Submission of Matters to a Vote of Security Holders | 38 | ||
Item 5. | Other Information | 38 | ||
Item 6. | Exhibits | 39 | ||
SIGNATURES | 39 |
Table of Contents
PART I. | FINANCIAL INFORMATION |
Item 1. | Financial Statements |
FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CONDITION
(Unaudited)
(In thousands, except par value)
As of | ||||||||
June 30, 2007 | December 31, 2006 | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 39,401 | $ | 28,671 | ||||
Interest-bearing deposits (includes deposits with other FHLBanks of $3,676 and $5,016 as of June 30, 2007 and December 31, 2006, respectively) | 867,594 | 800,982 | ||||||
Federal funds sold | 15,467,000 | 10,532,000 | ||||||
Trading securities (includes other FHLBanks’ bonds of $271,645 and $280,488 as of June 30, 2007 and December 31, 2006, respectively) | 4,445,212 | 4,515,309 | ||||||
Held-to-maturity securities, net (fair value of $18,565,744 and $18,984,477 as of June 30, 2007 and December 31, 2006, respectively) | 19,053,878 | 19,329,711 | ||||||
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans of $685 and $774 as of June 30, 2007 and December 31, 2006, respectively | 3,252,625 | 3,003,399 | ||||||
Advances, net | 104,182,061 | 101,476,335 | ||||||
Accrued interest receivable | 635,963 | 692,493 | ||||||
Premises and equipment, net | 30,240 | 30,594 | ||||||
Derivative assets | 338,767 | 259,024 | ||||||
Other assets | 85,625 | 89,913 | ||||||
TOTAL ASSETS | $ | 148,398,366 | $ | 140,758,431 | ||||
LIABILITIES AND CAPITAL | ||||||||
Deposits | ||||||||
Interest-bearing | $ | 5,747,187 | $ | 4,600,756 | ||||
Noninterest-bearing | 35,727 | 19,712 | ||||||
Total deposits | 5,782,914 | 4,620,468 | ||||||
Securities sold under agreements to repurchase | 500,000 | 500,000 | ||||||
Consolidated obligations, net: | ||||||||
Discount notes | 4,624,283 | 4,934,073 | ||||||
Bonds | 128,562,835 | 122,067,636 | ||||||
Total consolidated obligations, net | 133,187,118 | 127,001,709 | ||||||
Mandatorily redeemable capital stock | 226,511 | 215,705 | ||||||
Accrued interest payable | 1,481,850 | 1,386,989 | ||||||
Affordable Housing Program | 137,582 | 130,006 | ||||||
Payable to REFCORP | 23,311 | 23,606 | ||||||
Derivative liabilities | 349,071 | 569,983 | ||||||
Other liabilities | 445,667 | 136,328 | ||||||
Total liabilities | 142,134,024 | 134,584,794 | ||||||
Commitments and contingencies (Note 9) | ||||||||
CAPITAL | ||||||||
Capital stock Class B putable ($100 par value) issued and outstanding shares: | 5,842,839 | 5,771,798 | ||||||
Retained earnings | 425,862 | 406,376 | ||||||
Accumulated other comprehensive loss | (4,359 | ) | (4,537 | ) | ||||
Total capital | 6,264,342 | 6,173,637 | ||||||
TOTAL LIABILITIES AND CAPITAL | $148,398,366 | $140,758,431 | ||||||
The accompanying notes are an integral part of these financial statements.
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FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF INCOME
(Unaudited)
(In thousands)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
INTEREST INCOME | ||||||||||||||||
Advances | $ | 1,381,148 | $ | 1,269,274 | $ | 2,749,822 | $ | 2,402,605 | ||||||||
Prepayment fees on advances, net | 547 | 668 | 1,040 | 900 | ||||||||||||
Interest-bearing deposits | 14,991 | 9,985 | 24,409 | 15,480 | ||||||||||||
Federal funds sold | 181,943 | 123,836 | 309,772 | 224,308 | ||||||||||||
Trading securities | 66,464 | 72,289 | 132,808 | 148,383 | ||||||||||||
Held-to-maturity securities | 228,649 | 228,828 | 460,062 | 457,657 | ||||||||||||
Mortgage loans held for portfolio | 42,222 | 37,300 | 82,486 | 73,430 | ||||||||||||
Loans to other FHLBanks | — | 11 | 3 | 30 | ||||||||||||
Total interest income | 1,915,964 | 1,742,191 | 3,760,402 | 3,322,793 | ||||||||||||
INTEREST EXPENSE | ||||||||||||||||
Consolidated obligations: | ||||||||||||||||
Discount notes | 78,785 | 111,947 | 154,834 | 178,975 | ||||||||||||
Bonds | 1,597,036 | 1,400,968 | 3,138,729 | 2,696,168 | ||||||||||||
Deposits | 71,607 | 54,942 | 130,628 | 104,363 | ||||||||||||
Borrowings from other FHLBanks | 29 | 13 | 29 | 23 | ||||||||||||
Securities sold under agreements to repurchase | 6,184 | 5,793 | 12,308 | 10,885 | ||||||||||||
Mandatorily redeemable capital stock | 3,563 | 1,884 | 6,746 | 3,817 | ||||||||||||
Other borrowings | 271 | 50 | 294 | 254 | ||||||||||||
Total interest expense | 1,757,475 | 1,575,597 | 3,443,568 | 2,994,485 | ||||||||||||
NET INTEREST INCOME | 158,489 | 166,594 | 316,834 | 328,308 | ||||||||||||
Provision (reversal) for credit losses on mortgage loans held for portfolio | 39 | (60 | ) | (89 | ) | (63 | ) | |||||||||
NET INTEREST INCOME AFTER MORTGAGE LOAN LOSS PROVISION (REVERSAL) | 158,450 | 166,654 | 316,923 | 328,371 | ||||||||||||
OTHER (LOSS) INCOME | ||||||||||||||||
Service fees | 656 | 569 | 1,330 | 1,176 | ||||||||||||
Net loss on trading securities | (77,733 | ) | (74,052 | ) | (72,815 | ) | (179,912 | ) | ||||||||
Net gain on derivatives and hedging activities | 72,240 | 77,300 | 62,918 | 183,421 | ||||||||||||
Other | 478 | 307 | 579 | 442 | ||||||||||||
Total other (loss) income | (4,359 | ) | 4,124 | (7,988 | ) | 5,127 | ||||||||||
OTHER EXPENSE | ||||||||||||||||
Operating | 23,983 | 21,705 | 45,050 | 42,830 | ||||||||||||
Finance Board | 1,251 | 1,271 | 2,503 | 2,543 | ||||||||||||
Office of Finance | 774 | 609 | 1,787 | 1,364 | ||||||||||||
Other | 774 | 941 | 1,542 | 2,143 | ||||||||||||
Total other expenses | 26,782 | 24,526 | 50,882 | 48,880 | ||||||||||||
INCOME BEFORE ASSESSMENTS | 127,309 | 146,252 | 258,053 | 284,618 | ||||||||||||
Affordable Housing Program | 10,756 | 12,131 | 21,754 | 23,623 | ||||||||||||
REFCORP | 23,311 | 26,826 | 47,260 | 52,204 | ||||||||||||
Total assessments | 34,067 | 38,957 | 69,014 | 75,827 | ||||||||||||
NET INCOME | $ | 93,242 | $ | 107,295 | $ | 189,039 | $ | 208,791 | ||||||||
The accompanying notes are an integral part of these financial statements.
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FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Unaudited)
(In thousands)
Capital Stock Class B Putable | Retained | Accumulated Other Comprehensive Loss | Total Capital | ||||||||||||||||
Shares | Par Value | ||||||||||||||||||
BALANCE, December 31, 2005 | 57,532 | $ | 5,753,203 | $ | 328,369 | $ | — | $ | 6,081,572 | ||||||||||
Issuance of capital stock | 20,395 | 2,039,531 | — | — | 2,039,531 | ||||||||||||||
Repurchase/redemption of capital stock | (18,006 | ) | (1,800,563 | ) | — | — | (1,800,563 | ) | |||||||||||
Net shares reclassified to mandatorily redeemable capital stock | (15 | ) | (1,530 | ) | — | — | (1,530 | ) | |||||||||||
Net income | — | — | 208,791 | — | 208,791 | ||||||||||||||
Cash dividends on capital stock | — | — | (159,554 | ) | — | (159,554 | ) | ||||||||||||
BALANCE, June 30, 2006 | 59,906 | $ | 5,990,641 | $ | 377,606 | $ | — | $ | 6,368,247 | ||||||||||
BALANCE, December 31, 2006 | 57,718 | $ | 5,771,798 | $ | 406,376 | $ | (4,537 | ) | $ | 6,173,637 | |||||||||
Issuance of capital stock | 20,815 | 2,081,617 | — | — | 2,081,617 | ||||||||||||||
Repurchase/redemption of capital stock | (19,646 | ) | (1,964,636 | ) | — | — | (1,964,636 | ) | |||||||||||
Net shares reclassified to mandatorily redeemable capital stock | (459 | ) | (45,940 | ) | — | — | (45,940 | ) | |||||||||||
Comprehensive income: | |||||||||||||||||||
Net income | — | — | 189,039 | — | 189,039 | ||||||||||||||
Other comprehensive loss: | |||||||||||||||||||
Benefit plans: | |||||||||||||||||||
Net loss | — | — | — | 520 | 520 | ||||||||||||||
Net prior service credit | — | — | — | (362 | ) | (362 | ) | ||||||||||||
Net transition obligation | — | — | — | 20 | 20 | ||||||||||||||
Other comprehensive loss | — | — | — | 178 | 178 | ||||||||||||||
Total comprehensive income | — | — | — | — | 189,217 | ||||||||||||||
Cash dividends on capital stock | — | — | (169,553 | ) | — | (169,553 | ) | ||||||||||||
BALANCE, June 30, 2007 | 58,428 | $ | 5,842,839 | $ | 425,862 | $ | (4,359 | ) | $ | 6,264,342 | |||||||||
The accompanying notes are an integral part of these financial statements.
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FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended June 30, | ||||||||
2007 | 2006 | |||||||
OPERATING ACTIVITIES | ||||||||
Net income | $ | 189,039 | $ | 208,791 | ||||
Adjustments to reconcile income to net cash provided by operating activities: | ||||||||
Depreciation and amortization: | ||||||||
Net premiums and discounts on consolidated obligations | 5,983 | 24,183 | ||||||
Net premiums and discounts on investments | (1,780 | ) | (2,482 | ) | ||||
Net premiums and discounts on mortgage loans | (382 | ) | (136 | ) | ||||
Concessions on consolidated obligation bonds | 15,442 | 14,885 | ||||||
Net deferred loss on interest-rate exchange agreements | 151 | 181 | ||||||
Premises and equipment | 1,220 | 1,176 | ||||||
Capitalized software | 2,235 | 1,862 | ||||||
Other | (7,696 | ) | (7,602 | ) | ||||
Reversal for credit losses on mortgage loans held for the portfolio | (89 | ) | (63 | ) | ||||
Gain due to early extinguishment of debt | (234 | ) | (259 | ) | ||||
Gain due to change in net fair value adjustment on derivative and hedging activities | (168,960 | ) | (175,868 | ) | ||||
Net change in: | ||||||||
Trading securities | 72,815 | 738,086 | ||||||
Accrued interest receivable (excluding derivative accrued interest) | 56,530 | (49,358 | ) | |||||
Other assets | 1,024 | (1,303 | ) | |||||
Affordable Housing Program (AHP) liability | 8,000 | 13,768 | ||||||
Accrued interest payable (excluding derivative accrued interest) | 94,861 | 52,113 | ||||||
Payable to REFCORP | (295 | ) | 6,058 | |||||
Other liabilities | 2,481 | 4,007 | ||||||
Total adjustments | 81,306 | 619,248 | ||||||
Net cash provided by operating activities | 270,345 | 828,039 | ||||||
INVESTING ACTIVITIES | ||||||||
Net change in: | ||||||||
Interest-bearing deposits | (67,952 | ) | (582,668 | ) | ||||
Federal funds sold | (4,935,000 | ) | (941,500 | ) | ||||
Deposits to other FHLBanks for mortgage loan programs | 1,340 | 1 | ||||||
Held-to-maturity securities: | ||||||||
Proceeds | 1,487,022 | 1,840,611 | ||||||
Purchases | (903,662 | ) | (1,767,655 | ) | ||||
Advances: | ||||||||
Proceeds from principal collected | 82,944,729 | 88,806,175 | ||||||
Made | (85,997,656 | ) | (90,940,569 | ) | ||||
Mortgage loans held for portfolio: | ||||||||
Proceeds from principal collected | 191,526 | 170,925 | ||||||
Purchases | (440,495 | ) | (310,445 | ) | ||||
Capital expenditures: | ||||||||
Purchase of premises and equipment | (884 | ) | (357 | ) | ||||
Purchase of software | (1,520 | ) | (743 | ) | ||||
Net cash used in investing activities | (7,722,552 | ) | (3,726,225 | ) | ||||
The accompanying notes are an integral part of these financial statements.
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Six Months Ended June 30, | ||||||||
2007 | 2006 | |||||||
FINANCING ACTIVITIES | ||||||||
Net change in deposits | 1,162,446 | (371,117 | ) | |||||
Proceeds from issuance of consolidated obligations: | ||||||||
Discount notes | 436,896,387 | 244,706,209 | ||||||
Bonds | 55,961,485 | 21,241,466 | ||||||
Bonds transferred from other FHLBanks | — | 67,518 | ||||||
Payments for debt issuance costs | (13,413 | ) | (12,006 | ) | ||||
Payments for maturing and retiring consolidated obligations: | ||||||||
Discount notes | (437,195,901 | ) | (241,904,707 | ) | ||||
Bonds | (49,258,776 | ) | (20,890,706 | ) | ||||
Proceeds from issuance of capital stock | 2,081,617 | 2,039,531 | ||||||
Payments for repurchase/redemption of capital stock | (1,964,636 | ) | (1,800,563 | ) | ||||
Payments for repurchase/redemption of mandatorily redeemable capital stock | (35,134 | ) | (12,402 | ) | ||||
Cash dividends paid | (171,138 | ) | (144,261 | ) | ||||
Net cash provided by financing activities | 7,462,937 | 2,918,962 | ||||||
Net increase in cash and cash equivalents | 10,730 | 20,776 | ||||||
Cash and cash equivalents at beginning of the period | 28,671 | 13,345 | ||||||
Cash and cash equivalents at end of the period | $ | 39,401 | $ | 34,121 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for: | ||||||||
Interest paid | $ | 3,165,975 | $ | 2,739,868 | ||||
AHP assessments paid, net | $ | 14,179 | $ | 12,841 | ||||
REFCORP assessments paid | $ | 47,555 | $ | 46,146 | ||||
Noncash investing and financing activities: | ||||||||
Dividends declared but not paid | $ | 85,624 | $ | 82,032 | ||||
Net shares reclassified to mandatorily redeemable capital stock | $ | 45,940 | $ | 1,530 | ||||
Held-to-maturity securities acquired with accrued liabilities | $ | 308,466 | $ | — | ||||
The accompanying notes are an integral part of these financial statements.
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FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1—Basis of Presentation
The accompanying unaudited interim financial statements of the Federal Home Loan Bank of Atlanta (the “Bank’”) have been prepared in accordance with generally accepted accounting principles 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, 2007, 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, 2006, which are contained in the Bank’s 2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 30, 2007 (“Form 10-K”).
Descriptions of the significant accounting policies of the Bank are included in Note 1 to the 2006 audited financial statements. There have been no significant changes to these policies as of June 30, 2007.
Certain reclassifications have been made in the prior-year financial statements to conform to current presentation.
Note 2—Recently Issued Accounting Standards
Statement of Financial Accounting Standards(“SFAS”) No. 157, Fair Value Measurements(“SFAS 157”) was issued in September 2006. In defining fair value, SFAS 157 retains the exchange price notion in earlier definitions of fair value. However, the definition of fair value under SFAS 157 focuses on the price that would be received to sell an asset or paid to transfer a liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). SFAS 157 applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value. Accordingly, SFAS 157 does not expand the use of fair value in any new circumstances. SFAS 157 also establishes a fair value hierarchy that prioritizes the information used to develop assumptions used to determine the exit price. Under this standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted. The Bank does not expect the adoption of SFAS 157 to have a material effect on its financial condition or results of operations.
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SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115(“SFAS 159”), issued in February 2007, creates a fair value option allowing an entity irrevocably to elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities, with changes in fair value recognized in earnings as they occur. SFAS 159 requires an entity to report those financial assets and financial liabilities measured at fair value in a manner that separates those reported fair values from the carrying amounts of assets and liabilities measured using another measurement attribute on the face of the statement of financial position. SFAS 159 also requires an entity to provide information that would allow users to understand the effect on earnings of changes in the fair value on those instruments selected for the fair value election. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. The Bank does not expect the adoption of SFAS 159 to have a material effect on its financial condition or results of operations.
FASB Staff Position No. FIN 39-1, Amendment of FASB Interpretation No. 39 (“FSP FIN 39-1”), issued in April 2007, permits an entity to offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instruments recognized at fair value executed with the same counterparty under a master netting arrangement. Under FSP FIN 39-1, the receivable or payable related to cash collateral may not be offset if the amount recognized does not represent or approximate fair value or arises from instruments in a master netting arrangement that are not eligible to be offset. The decision whether to offset such fair value amounts represents an elective accounting policy decision that, once elected, must be applied consistently. An entity should recognize the effects of applying FSP FIN 39-1 as a change in accounting principle through retrospective application for all financial statements presented unless it is impracticable to do so. Upon adoption of FSP FIN 39-1, an entity is permitted to change its accounting policy to offset or not offset fair value amounts recognized for derivative instruments under master netting arrangements. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007, with earlier application permitted. The Bank has not yet determined the effect that the adoption of FSP FIN 39-1 will have on its financial condition or results of operations.
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Note 3—Advances
Redemption Terms.The Bank had advances outstanding, as summarized below (in thousands):
As of June 30, 2007 | As of December 31, 2006 | |||||||
Year of maturity: | ||||||||
Overdrawn demand deposit accounts | $ | 6,305 | $ | 699 | ||||
Due in one year or less | 37,220,066 | 36,478,661 | ||||||
Due after one year through two years | 8,635,328 | 18,351,050 | ||||||
Due after two years through three years | 16,109,286 | 10,350,987 | ||||||
Due after three years through four years | 13,096,298 | 6,871,301 | ||||||
Due after four years through five years | 9,136,348 | 6,870,784 | ||||||
Due after five years | 20,760,627 | 22,990,520 | ||||||
Total par value | 104,964,258 | 101,914,002 | ||||||
Deferred commitment fees | (612 | ) | — | |||||
Discount on AHP advances | (13,239 | ) | (13,070 | ) | ||||
Discount on EDGE* advances | (13,016 | ) | (12,761 | ) | ||||
SFAS 133** hedging adjustments | (755,330 | ) | (411,836 | ) | ||||
Total | $ | 104,182,061 | $ | 101,476,335 | ||||
* The Economic Development and Growth Enhancement Program
** SFAS No. 133,Accounting for Derivatives Instruments and Hedging Activities
The following table summarizes advances by year of original maturity or next conversion date for convertible advances (in thousands):
As of June 30, 2007 | |||
Year of original maturity or next conversion date: | |||
Overdrawn demand deposit accounts | $ | 6,305 | |
Due in one year or less | 51,799,956 | ||
Due after one year through two years | 13,991,603 | ||
Due after two years through three years | 16,717,036 | ||
Due after three years through four years | 12,363,563 | ||
Due after four years through five years | 5,962,598 | ||
Due after five years | 4,123,197 | ||
Total par value | $ | 104,964,258 | |
The Bank has never experienced any credit losses on advances to a member. Based on the collateral pledged as security for advances, management’s credit analysis of members’ financial condition, and prior repayment history, no allowance for losses on advances is deemed necessary by management. No advance was past due as of June 30, 2007 or December 31, 2006.
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Interest-rate Payment Terms.The following table details interest-rate payment terms for advances (in thousands):
As of June 30, 2007 | As of December 31, 2006 | |||||
Par value of advances: | ||||||
Fixed-rate | $ | 46,545,877 | $ | 42,736,147 | ||
Variable-rate | 58,418,381 | 59,177,855 | ||||
Total | $ | 104,964,258 | $ | 101,914,002 | ||
Note 4—Deposits
The following table details interest-bearing deposits (in thousands):
As of June 30, 2007 | As of December 31, 2006 | |||||
Interest-bearing deposits: | ||||||
Demand and overnight | $ | 5,508,511 | $ | 4,445,172 | ||
Term deposits of $100,000 or more | 7,415 | 13,215 | ||||
Term deposits less than $100,000 | 10 | 10 | ||||
Other | 231,251 | 142,359 | ||||
Total | $ | 5,747,187 | $ | 4,600,756 | ||
The Bank acts as a pass-through correspondent for member institutions required to deposit reserves with the Federal Reserve Banks. The amount of pass-through reserves deposited with Federal Reserve Banks was approximately $35.7 million and $19.7 million as of June 30, 2007 and December 31, 2006, respectively. The Bank includes member reserve balances in “Noninterest-bearing deposits” on the Statements of Condition.
Note 5—Consolidated Obligations
Consolidated obligations, consisting of consolidated obligation bonds and discount notes, are the joint and several obligations of the 12 Federal Home loan Banks (“FHLBanks”) and are backed only by the financial resources of the FHLBanks. The FHLBanks issue consolidated obligations through the Office of Finance as their agent. In connection with each debt issuance, each FHLBank specifies the amount of debt it wants issued on its behalf. The 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. The Federal Housing Finance Board (“Finance Board”) and the U.S. Secretary of the Treasury have oversight over the issuance of FHLBank debt through the Office of Finance. Consolidated obligation bonds are issued primarily to raise intermediate and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on maturity. Consolidated obligation discount notes are issued primarily to raise short-term funds. These notes sell at less than their face amounts and are redeemed at par value when they mature.
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Interest-rate Payment Terms.The following table details consolidated obligation bonds by interest-rate payment type (in thousands):
As of June 30, 2007 | As of December 31, 2006 | |||||
Par value of consolidated bonds: | ||||||
Fixed-rate | $ | 108,930,455 | $ | 98,016,465 | ||
Step-up | 13,571,050 | 16,337,550 | ||||
Simple variable-rate | 4,411,900 | 4,801,900 | ||||
Variable capped floater | 1,443,875 | 1,838,875 | ||||
Fixed that converts to variable | 614,950 | 1,079,450 | ||||
Zero-coupon | 709,060 | 832,760 | ||||
Variable that converts to fixed | 80,000 | 170,000 | ||||
Inverse floating-rate | 24,500 | 24,500 | ||||
Total | $ | 129,785,790 | $ | 123,101,500 | ||
Redemption Terms.The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding, by year of original maturity (dollar amounts in thousands):
As of June 30, 2007 | As of December 31, 2006 | |||||||||||||
Amount | Weighted Average Interest Rate | Amount | Weighted Average Interest Rate | |||||||||||
Year of maturity: | ||||||||||||||
Due in one year or less | $ | 36,129,005 | 4.55 | % | $ | 38,957,115 | 4.25 | % | ||||||
Due after one year through two years | 39,247,665 | 4.82 | % | 37,843,965 | 4.66 | % | ||||||||
Due after two years through three years | 19,580,075 | 5.05 | % | 13,362,175 | 4.56 | % | ||||||||
Due after three years through four years | 6,476,645 | 4.91 | % | 8,758,745 | 4.61 | % | ||||||||
Due after four years through five years | 6,783,000 | 5.21 | % | 5,359,100 | 4.82 | % | ||||||||
Due after five years | 21,569,400 | 5.01 | % | 18,820,400 | 4.88 | % | ||||||||
Total par value | 129,785,790 | 4.84 | % | 123,101,500 | 4.56 | % | ||||||||
Premiums | 20,367 | 24,997 | ||||||||||||
Discounts | (404,774 | ) | (429,583 | ) | ||||||||||
SFAS 133 hedging adjustments | (837,326 | ) | (627,904 | ) | ||||||||||
Deferred net losses on terminated interest-rate exchange agreements | (1,222 | ) | (1,374 | ) | ||||||||||
Total | $ | 128,562,835 | $ | 122,067,636 | ||||||||||
The Bank’s consolidated obligation bonds outstanding included (in thousands):
As of June 30, 2007 | As of December 31, 2006 | |||||
Par value of consolidated bonds: | ||||||
Noncallable | $ | 43,975,215 | $ | 39,511,725 | ||
Callable | 85,810,575 | 83,589,775 | ||||
Total | $ | 129,785,790 | $ | 123,101,500 | ||
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The following table summarizes consolidated obligation bonds outstanding, by year of original maturity or next call date (in thousands):
As of June 30, 2007 | |||
Year of maturity or next call date: | |||
Due in one year or less | $ | 90,390,980 | |
Due after one year through two years | 19,378,840 | ||
Due after two years through three years | 7,706,075 | ||
Due after three years through four years | 2,328,645 | ||
Due after four years through five years | 1,481,000 | ||
Due after five years | 8,500,250 | ||
Total par value | $ | 129,785,790 | |
Consolidated Obligation Discount Notes.The Bank’s participation in consolidated obligation discount notes, all of which are due within one year, was as follows (in thousands):
Book Value | Par Value | |||||
As of June 30, 2007 | $ | 4,624,283 | $ | 4,645,501 | ||
As of December 31, 2006 | $ | 4,934,073 | $ | 4,952,285 | ||
Note 6—Capital and Mandatorily Redeemable Capital Stock
Capital Requirements. The Bank was in compliance with the Finance Board’s regulatory capital rules and requirements as shown in the following table (dollar amounts in thousands):
As of June 30, 2007 | As of December 31, 2006 | |||||||||||||||
Required | Actual | Required | Actual | |||||||||||||
Regulatory capital requirements: | ||||||||||||||||
Risk based capital | $ | 924,635 | $ | 6,495,212 | $ | 830,446 | $ | 6,393,879 | ||||||||
Total capital-to-assets ratio | 4.00 | % | 4.38 | % | 4.00 | % | 4.54 | % | ||||||||
Total regulatory capital | $ | 5,935,935 | $ | 6,495,212 | $ | 5,630,337 | $ | 6,393,879 | ||||||||
Leverage ratio | 5.00 | % | 6.57 | % | 5.00 | % | 6.81 | % | ||||||||
Leverage capital | $ | 7,419,918 | $ | 9,742,818 | $ | 7,037,922 | $ | 9,590,819 |
Mandatorily Redeemable Capital Stock. The Bank’s activity for mandatorily redeemable capital stock was as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Balance, beginning of period | $ | 247,356 | $ | 138,876 | $ | 215,705 | $ | 143,096 | ||||||||
Capital stock subject to mandatory redemption reclassified from equity during the period due to attainment of nonmember status | 11,570 | — | 45,940 | 1,530 | ||||||||||||
Repurchase/redemption of mandatorily redeemable capital stock during the period | (32,415 | ) | (6,652 | ) | (35,134 | ) | (12,402 | ) | ||||||||
Balance, end of period | $ | 226,511 | $ | 132,224 | $ | 226,511 | $ | 132,224 | ||||||||
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The following table shows the amount of mandatorily redeemable capital stock by year of redemption (in thousands). The year of redemption in the table is the later of the end of the five-year redemption period, or the maturity date of the activity the stock is related to, if the capital stock represents the activity-based stock purchase requirement of a non-member.
As of June 30, 2007 | As of December 31, 2006 | |||||
Contractual year of redemption: | ||||||
Due in one year or less | $ | 195,019 | $ | 187,953 | ||
Due after one year through two years | 5,445 | 23,573 | ||||
Due after two years through three years | 405 | 360 | ||||
Due after three years through four years | 1,706 | 627 | ||||
Due after four years through five years | 2,302 | 225 | ||||
Due after five years | 21,634 | 2,967 | ||||
$ | 226,511 | $ | 215,705 | |||
Note 7—Employee Retirement Plans
Components of the net periodic benefit cost for the Bank’s supplemental defined benefit pension plan were as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Service cost | $ | 200 | $ | 129 | $ | 400 | $ | 258 | ||||||||
Interest cost | 150 | 87 | 300 | 174 | ||||||||||||
Amortization of prior service credit | (31 | ) | (31 | ) | (62 | ) | (62 | ) | ||||||||
Amortization of net loss | 150 | 72 | 300 | 144 | ||||||||||||
Net periodic cost | $ | 469 | $ | 257 | $ | 938 | $ | 514 | ||||||||
Components of the net periodic benefit cost for the Bank’s postretirement health benefit plan were as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||
Service cost | $ | 147 | $ | 185 | $ | 294 | $ | 370 | ||||||
Interest cost | 133 | 158 | 266 | 316 | ||||||||||
Net transition obligation | 10 | — | 20 | — | ||||||||||
Amortization of prior service (credit) cost | (150 | ) | 11 | (300 | ) | 22 | ||||||||
Amortization of net loss | 110 | 125 | 220 | 250 | ||||||||||
Net periodic cost | $ | 250 | $ | 479 | $ | 500 | $ | 958 | ||||||
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Note 8—Derivatives and Hedging Activities
For accounting policies and additional information concerning derivatives and hedging activities, see Note 14 to the 2006 audited financial statements included in the Bank’s Form 10-K.
Net gain on derivatives and hedging activities was as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
2007 | 2006 | 2007 | 2006 | ||||||||||
(Loss) gain related to fair-value hedge ineffectiveness | $ | (2,914 | ) | $ | 8,119 | $ | 6,348 | $ | 22,728 | ||||
Gain on SFAS 133 non-qualifying hedge and other | 75,154 | 69,181 | 56,570 | 160,693 | |||||||||
Net gain on derivatives and hedging activities | $ | 72,240 | $ | 77,300 | $ | 62,918 | $ | 183,421 | |||||
The following table represents outstanding notional balances and estimated fair values of the derivatives outstanding used for fair value and SFAS 133 non-qualifying hedging (in thousands):
As of June 30, 2007 | As of December 31, 2006 | |||||||||||||
Notional | Estimated Fair Value | Notional | Estimated Fair Value | |||||||||||
Interest-rate swaps: | ||||||||||||||
Fair value | $ | 182,809,410 | $ | (115,890 | ) | $ | 164,868,741 | $ | (245,987 | ) | ||||
SFAS 133 non-qualifying | 6,880,167 | (52,508 | ) | 7,447,836 | (130,852 | ) | ||||||||
Interest-rate swaptions: | ||||||||||||||
SFAS 133 non-qualifying | 115,000 | 3,493 | 345,000 | 7,227 | ||||||||||
Interest-rate caps/floors: | ||||||||||||||
SFAS 133 non-qualifying | 2,954,000 | 2,359 | 3,039,000 | 7,045 | ||||||||||
Interest-rate futures/forwards: | ||||||||||||||
SFAS 133 non-qualifying | 1,500 | (20 | ) | 1,500 | 51 | |||||||||
Mortgage delivery commitments: | ||||||||||||||
SFAS 133 non-qualifying | 5,236 | — | 5,312 | (15 | ) | |||||||||
Total | $ | 192,765,313 | $ | (162,566 | ) | $ | 175,707,389 | $ | (362,531 | ) | ||||
Total derivatives excluding accrued interest | $ | (162,566 | ) | $ | (362,531 | ) | ||||||||
Accrued interest | 152,262 | 51,572 | ||||||||||||
Net derivative balances | $ | (10,304 | ) | $ | (310,959 | ) | ||||||||
Net derivative asset balances | $ | 338,767 | $ | 259,024 | ||||||||||
Net derivative liability balances | (349,071 | ) | (569,983 | ) | ||||||||||
Net derivative balances | $ | (10,304 | ) | $ | (310,959 | ) | ||||||||
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The fair values of bifurcated derivatives presented on a combined basis with the host contract and not included in the above table are as follows (in thousands):
As of June 30, 2007 | As of December 31, 2006 | |||||||
Host contract: | ||||||||
Advances | $ | (2,131 | ) | $ | (2,405 | ) | ||
Callable bonds | 1,211 | 1,635 | ||||||
Total | $ | (920 | ) | $ | (770 | ) | ||
The Bank is subject to credit risk due to the risk of nonperformance by counterparties to the derivative agreements. The amount of counterparty risk on derivative agreements depends on the extent to which master netting arrangements are included in such contracts to mitigate the risk. The Bank manages counterparty credit risk through credit analysis, collateral requirements and adherence to the requirements set forth in Bank policy and Finance Board regulations. Based on credit analyses and collateral requirements, Bank management presently does not anticipate any credit losses on its derivative agreements.
The contractual or notional amount of interest-rate exchange agreements reflects the involvement of the Bank in the various classes of financial instruments. The notional amount of interest-rate exchange agreements does not measure the credit risk exposure of the Bank, and the maximum credit exposure of the Bank is substantially less than the notional amount. The Bank requires collateral agreements that establish collateral delivery thresholds for all derivatives. The maximum credit risk is the estimated cost of replacing favorable interest rate swaps, forward agreements, mandatory delivery contracts for mortgage loans, and purchased caps and floors that have a net positive market value, if the counterparty defaults and the related collateral, if any, is of no value to the Bank. This collateral has not been sold or repledged.
As of June 30, 2007 and December 31, 2006, the Bank’s maximum credit risk, as defined above, was approximately $338.8 million and $259.0 million, respectively. These totals include $126.4 million and $100.6 million, respectively, of net accrued interest receivable. In determining maximum credit risk, the Bank considers accrued interest receivables and payables, and the legal right to offset assets and liabilities by counterparty. Cash and securities held and pledged to the Bank as collateral for interest-rate exchange agreements totaled $275.1 million and $212.0 million as of June 30, 2007 and December 31, 2006, respectively. Additionally, collateral with respect to interest-rate exchange agreements 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.
Note 9—Commitments and Contingencies
As described in Note 5, consolidated obligations are backed only by the financial resources of the 12 FHLBanks. The Finance Board, under 12 CFR Section 966.9(d), may at any time require any FHLBank to make principal or interest payments due on any consolidated obligations, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation. No FHLBank has had to assume or pay the consolidated obligation of another FHLBank.
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The par value of the FHLBanks’ outstanding consolidated obligations for which the Bank is jointly and severally liable was approximately $836.5 billion and $823.9 billion at June 30, 2007 and December 31, 2006, respectively, exclusive of the Bank’s own outstanding consolidated obligations.
The Bank’s outstanding standby letters of credit were as follows:
As of June 30, 2007 | As of December 31, 2006 | |||||
Outstanding notional (in thousands) | $ | 1,798,445 | $ | 1,437,718 | ||
Original terms | 1-15 years | 1-15 years | ||||
Final expiration year | 2018 | 2017 |
Unearned fees for transactions prior to 2003 as well as the value of the guarantees related to standby letters of credit entered into after 2002 are recorded in other liabilities and amount to $5.4 million and $5.1 million as of June 30, 2007 and December 31, 2006, respectively. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to record any additional liability on these commitments.
Commitments that unconditionally obligate the Bank to purchase closed mortgage loans totaled $5.2 million and $5.3 million at June 30, 2007 and December 31, 2006, respectively, and are generally for periods not to exceed 45 days.
The Bank executes interest-rate exchange agreements with major banks and broker-dealers and generally enters into bilateral collateral agreements. As of June 30, 2007 and December 31, 2006, the Bank had pledged, as collateral to broker-dealers who have market risk exposure from the Bank related to interest-rate exchange agreements, securities with a carrying value of $130.2 million and $238.4 million, respectively, which can be sold or repledged. As of June 30, 2007 and December 31, 2006, the Bank received, as collateral from broker-dealers who have market risk exposure to the Bank related to interest-rate exchange agreements, securities with a carrying value of $24.6 million and $73.6 million, respectively, which cannot be sold or repledged.
The Bank is subject to legal proceedings arising in the normal course of business. After consultation with legal counsel, management does not, as of the date of the financial statements, anticipate 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 10—Transactions with Members and their Affiliates and with Housing Associates
The Bank is a cooperative whose member institutions own almost all of the capital stock of the Bank. Former members own the remaining capital stock to support business transactions still carried on the Bank’s Statements of Condition. All holders of the Bank’s capital stock are able to receive dividends on their investments, to the extent declared by the Bank’s board of directors. All advances are issued to members and eligible “housing associates” under the Federal Home Loan Bank Act of 1932, as amended (“FHLBank Act”), and mortgage loans held for portfolio are purchased from members. The Bank also maintains demand deposit accounts primarily to facilitate settlement activities that are related directly to advances and mortgage loan purchases. All transactions with members are entered into in the ordinary course of the Bank’s business. Transactions with any member that has an officer
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or director who also is a director of the Bank are subject to the same Bank policies as transactions with other members.
The Bank defines related parties as each of the other FHLBanks and those members with regulatory capital stock outstanding in excess of 10 percent of total regulatory capital stock. Based on this definition, one member institution, which held 21.8 percent of the Bank’s total regulatory capital stock as of June 30, 2007, was considered a related party. Total advances outstanding to this member were $28.8 billion and $28.2 billion as of June 30, 2007 and December 31, 2006, respectively. Total deposits held in the name of this member were $73.9 million and $50.8 million as of June 30, 2007 and December 31, 2006, respectively. No mortgage loans were acquired from this member during the six months ended June 30, 2007 and 2006. Total mortgage-backed securities acquired from this member were $123.3 million and $447.2 million, respectively, for the three- and six-month periods ended June 30, 2007, compared to $344.0 million and $419.6 million for the same periods ended June 30, 2006.
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. |
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.
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The discussion presented below provides an analysis of the Bank’s results of operations and financial condition for the three- and six-months ended June 30, 2007 and 2006. Management’s discussion and analysis should be read in conjunction with the financial statements and accompanying notes presented elsewhere in the report, as well as the Bank’s audited financial statements for the year ended December 31, 2006.
Executive Summary
General Overview
The Bank is a cooperative whose primary business activity is providing loans, which the Bank refers to as “advances,” to its members and eligible housing associates. The Bank also purchases single-family mortgage loans from members, makes grants and subsidized advances under its Affordable Housing Program (“AHP”), and provides correspondent banking services to members and eligible nonmembers. The consolidated obligations issued by the Office of Finance on behalf of the Federal Home Loan Bank System are the principal funding source for Bank assets. The Bank is primarily liable for repayment of consolidated obligations issued on its behalf and is jointly and severally liable for the consolidated obligations issued on behalf of the other FHLBanks. Deposits, other borrowings, and the issuance of capital stock provide additional funding to the Bank.
Financial Condition
As of June 30, 2007, total assets were $148.4 billion, an increase of $7.6 billion, or 5.43 percent, from December 31, 2006, primarily as a result of an increase in federal funds sold and advances. Advances, the largest asset on the Bank’s balance sheet, increased by $2.7 billion, or 2.67 percent, during this same period.
As of June 30, 2007, total liabilities were $142.1 billion, an increase of $7.5 billion, or 5.61 percent, from December 31, 2006, primarily as a result of an increase in consolidated obligation bonds. Consolidated obligations, the largest liability on the Bank’s balance sheet, increased by $6.2 billion, or 4.87 percent, during this same period. Consolidated obligations increased during the first six months of 2007 primarily due to the Bank’s need to increase its liquidity level to fund the increased demand for advances by the Bank’s members during the period.
As of June 30, 2007, total capital was $6.3 billion, an increase of $90.7 million, or 1.47 percent, from December 31, 2006. The Bank increased its retained earnings during the second quarter of 2007 by $7.6 million. The Bank’s retained earnings balance was $425.9 million as of June 30, 2007. The Bank continues to meet capital-to-assets regulatory ratios and liquidity requirements at levels well above regulatory minimums.
Results of Operations
The Bank views return on equity (“ROE”) as the most important measure of profitability with net income as a second priority. ROE is a measure of a shareholder’s return on its investment in the Bank. While under the Bank’s current business model, net income fluctuates with interest rates, maintaining a minimum amount of net income is important to meet higher operating costs and to ensure that volatility associated with derivative accounting under GAAP can be absorbed with current income. In addition, AHP and Resolution Funding Corporation (“REFCORP”) assessments are tied directly to
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net income. The Bank attempts to provide a return on this investment, which, when combined with providing members with access to low-cost funding, will be competitive with comparable investments.
The Bank’s net income for the three months ended June 30, 2007 totaled $93.2 million, a decrease of 13.1 percent from $107.3 million for the three months ended June 30, 2006. The second quarter 2007 performance resulted in an annualized ROE of 6.05 percent, compared to 6.85 percent for the second quarter 2006, and an annualized return on average assets of 0.26 percent for the second quarter 2007, compared to 0.31 percent for the second quarter 2006.
For the six months ended June 30, 2007, net income totaled $189.0 million, a decrease of 9.46 percent from $208.8 million for the six months ended June 30, 2006. The Bank’s annualized ROE was 6.15 percent for the six months ended June 30, 2007 as compared to 6.80 percent for the six months ended June 30, 2006, and the Bank’s annualized return on average assets was 0.27 percent for the six months ended June 30, 2007, compared to 0.30 percent for the six months ended June 30, 2006.
The decrease in ROE for the three- and six-month periods ended June 30, 2007 compared to the same periods ended June 30, 2006 was due primarily to a decrease in net income during the reported periods. Another factor that affects ROE is the Bank’s average capital, which has not changed significantly during the reported periods. For the three- and six-month periods ended June 30, 2007 the Bank’s average capital was $6.2 billion, a decrease of 1.54 percent and 0.12 percent, respectively, compared to the same periods ended June 30, 2006.
The decrease in net income for the three- and six-month periods ended June 30, 2007 compared to the same periods ended June 30, 2006 was due to a decrease in both net interest income and other income. The decrease in net interest income was due primarily to the fact that interest expense on interest-bearing liabilities increased faster than interest income on interest-earning assets. The decrease in other income was due primarily to the effect of the interaction of interest rates on the Bank’s trading securities and derivatives and hedging activities. These decreases were offset partially by a decrease in non-interest expense during the periods.
For the quarter ended June 30, 2007, the Bank distributed $85.6 million of earnings to members as a return on their capital investment in the Bank, representing an annualized dividend rate of 6.00 percent for the second quarter, as compared to the annualized dividend rate of 5.90 percent for each of the previous two quarters.
Business Outlook
Management expects that the Bank will continue to provide attractive financial products across a wide range of business, financial, and economic environments while also generating competitive returns for members. One factor, however, could affect the Bank’s ability to meet these expectations.
The Bank’s earnings performance tends to follow the direction of market interest rates. The Bank generally maintains a positive duration of equity, which means that liabilities reprice more frequently than assets. Consequently, increases in interest income lag increases in interest expense when rates rise. However, because the Bank’s duration of equity is relatively short (typically one to three years), this unfavorable factor is short-lived and soon is offset by repricing assets at higher interest rates. The opposite occurs as rates fall.
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In addition, the relationship between short- and long-term interest rates affects the Bank’s profitability. The two most unfavorable interest-rate scenarios are (1) a dramatic rise in short-term rates coupled with a modest or no increase in long-term rates and (2) a dramatic decrease in long-term rates coupled with little change in short-term rates. Under the first scenario the ability to generate additional returns by managing the interest-rate risk associated with retaining longer term assets and funding with shorter liabilities is limited. This environment, if sustained for a long period of time, could reduce the Bank’s ability to generate competitive returns. The second scenario would be expected to result in significant mortgage prepayments and a related increase in expense recognized from mortgage premium amortization along with lower investment yields.
Management does not expect any significant changes in the overall components of the balance sheet through 2007, with modest growth in the Bank’s advance and Mortgage Purchase Program (“MPP”) portfolios. These modest increases should not have a material effect on the Bank’s risk position.
Management expects to continue to use interest-rate derivatives to hedge the Bank’s mortgage-backed securities (“MBS”) and mortgage portfolios. These derivatives assist in mitigating interest-rate and prepayment risk. However, to the extent that they do not qualify for hedge accounting treatment under GAAP, their use could result in earnings volatility. Management also uses derivative instruments to hedge other macro-level risks that do not qualify for hedge accounting treatment under GAAP. However, management seeks to contain the magnitude of mark-to-market adjustments by limiting the use of derivative instruments to hedge macro-level risks. Alternatively, management uses cash market liabilities that are not subject to mark-to-market requirements.
Management strives to maintain relatively low operating expenses, consistent with a wholesale banking structure, without sacrificing adequate systems and staffing. Management expects that operating expenses as a percent of assets generally should remain stable over the next few years, and that operating expenses on an absolute basis should increase moderately due to increased staffing and system expenses. These increases should not have a material adverse effect on the Bank’s financial performance.
Financial Condition
The Bank’s principal assets consist of advances, short- and long-term investments, and mortgage loans held for portfolio. The Bank obtains funding to support its business primarily through the issuance by the Office of Finance on the Bank’s behalf of debt securities in the form of consolidated obligations.
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The following table presents the distribution of the Bank’s total assets, liabilities, and capital by major class as of the dates indicated (dollar amounts in thousands). These items are discussed in more detail below:
As of June 30, 2007 | As of December 31, 2006 | Increase/(Decrease) | |||||||||||||||
Amount | Percent of Total | Amount | Percent of Total | Amount | Percent | ||||||||||||
Advances, net | $ | 104,182,061 | 70.21 | $ | 101,476,335 | 72.10 | $ | 2,705,726 | 2.67 | ||||||||
Long-term investments | 23,499,090 | 15.84 | 23,845,020 | 16.94 | (345,930 | ) | (1.45 | ) | |||||||||
Federal funds sold | 15,467,000 | 10.42 | 10,532,000 | 7.48 | 4,935,000 | 46.86 | |||||||||||
Mortgage loans, net | 3,252,625 | 2.19 | 3,003,399 | 2.13 | 249,226 | 8.30 | |||||||||||
Interest-bearing deposits | 867,594 | 0.58 | 800,982 | 0.57 | 66,612 | 8.32 | |||||||||||
Other assets | 1,129,996 | 0.76 | 1,100,695 | 0.78 | 29,301 | 2.66 | |||||||||||
Total assets | $ | 148,398,366 | 100.00 | $ | 140,758,431 | 100.00 | $ | 7,639,935 | 5.43 | ||||||||
Consolidated obligations, net: | |||||||||||||||||
Bonds | $ | 128,562,835 | 90.45 | $ | 122,067,636 | 90.70 | $ | 6,495,199 | 5.32 | ||||||||
Discount notes | 4,624,283 | 3.25 | 4,934,073 | 3.67 | (309,790 | ) | (6.28 | ) | |||||||||
Deposits | 5,782,914 | 4.07 | 4,620,468 | 3.43 | 1,162,446 | 25.16 | |||||||||||
Other liabilities | 3,163,992 | 2.23 | 2,962,617 | 2.20 | 201,375 | 6.80 | |||||||||||
Total liabilities | $ | 142,134,024 | 100.00 | $ | 134,584,794 | 100.00 | $ | 7,549,230 | 5.61 | ||||||||
Capital stock | $ | 5,842,839 | 93.27 | $ | 5,771,798 | 93.49 | $ | 71,041 | 1.23 | ||||||||
Retained earnings | 425,862 | 6.80 | 406,376 | 6.58 | 19,486 | 4.80 | |||||||||||
Accumulated other comphrensive loss | (4,359) | (0.07) | (4,537) | (0.07) | 178 | (3.92) | |||||||||||
Total capital | $ | 6,264,342 | 100.00 | $ | 6,173,637 | 100.00 | $ | 90,705 | 1.47 | ||||||||
Advances
Advances were $104.2 billion at June 30, 2007, an increase of $2.7 billion, or 2.67 percent, from December 31, 2006. The increase in advances was due primarily to a $3.8 billion increase in fixed-rate advances that was offset partially by a $759.5 million decrease in variable-rate advances. Fixed-rate advances increased as members increased their borrowing during the second quarter of 2007 in response to their own balance sheet demands. At June 30, 2007, 55.7 percent of the Bank’s advances were variable-rate, the majority of which were indexed primarily to the London Interbank Offered Rate (“LIBOR”). The Bank also offers variable-rate advances tied to the federal funds rate; prime rate and CMS (constant maturity swap) rates.
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The Bank is subject to concentration risk from advance exposure to a relatively small number of commercial banks and savings institutions. As of June 30, 2007 and December 31, 2006, the concentration of the Bank’s advances was $67.3 billion and $64.7 billion, respectively, to 10 member institutions, and this concentration represented 64.1 percent and 63.5 percent, respectively, of the Bank’s total advances outstanding. Management believes that the Bank holds sufficient collateral, on a member-specific basis, to secure the advances to these 10 institutions, and the Bank does not expect to incur any credit losses on these advances.
Investments
The Bank maintains a portfolio of investments for liquidity purposes, to provide for the availability of funds to meet member credit needs and to provide additional earnings. Investment income also enhances the Bank’s capacity to meet its commitment to affordable housing and community investment, to cover operating expenses, and to satisfy the Bank’s annual REFCORP and AHP assessments. In addition, by purchasing MBS, the Bank further supports its commitment to affordable housing.
The Bank’s short-term investments consist of overnight and term federal funds, and interest-bearing deposits. The Bank’s long-term investments consist of MBS issued by government-sponsored mortgage agencies or that carry the highest rating from Moody’s or S&P, securities issued by the U.S. government or U.S. government agencies, and consolidated obligations issued by other FHLBanks. The long-term investment portfolio generally provides the Bank with higher returns than those available in the short-term money markets. The following table sets forth more detailed information regarding short- and long-term investments held by the Bank (dollar amounts in thousands):
Increase/ (Decrease) | |||||||||||||
As of June 30, 2007 | As of December 31, 2006 | Amount | Percent | ||||||||||
Short-term investments: | |||||||||||||
Interest-bearing deposits | $ | 867,594 | $ | 800,982 | $ | 66,612 | 8.32 | ||||||
Federal funds sold | 15,467,000 | 10,532,000 | 4,935,000 | 46.86 | |||||||||
Total short-term investments | $ | 16,334,594 | $ | 11,332,982 | $ | 5,001,612 | 44.13 | ||||||
Long-term investments: | |||||||||||||
Trading securities: | |||||||||||||
Government-sponsored enterprises debt obligations | $ | 4,114,290 | $ | 4,175,011 | $ | (60,721 | ) | (1.45 | ) | ||||
Other FHLBanks’ bonds | 271,645 | 280,488 | (8,843 | ) | (3.15 | ) | |||||||
State or local housing agency obligations | 59,277 | 59,810 | (533 | ) | (0.89 | ) | |||||||
Held-to-maturity securities: | |||||||||||||
State or local housing agency obligations | 122,311 | 107,180 | 15,131 | 14.12 | |||||||||
Mortgage-backed securities: | |||||||||||||
U.S. agency obligations-guaranteed | 54,520 | 65,882 | (11,362 | ) | (17.25 | ) | |||||||
Government-sponsored enterprises | 2,003,756 | 2,160,861 | (157,105 | ) | (7.27 | ) | |||||||
Other | 16,873,291 | 16,995,788 | (122,497 | ) | (0.72 | ) | |||||||
Total long-term investments | $ | 23,499,090 | $ | 23,845,020 | $ | (345,930 | ) | (1.45 | ) | ||||
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As of June 30, 2007, total short-term investments were $16.3 billion, an increase of $5.0 billion from December 31, 2006. This increase was due primarily to an increase in member deposits with the Bank, as the Bank typically invests deposit funds in liquid short-term assets, and higher liquidity levels at quarter-end. The Bank’s interest-bearing deposits consist of Certificates of Deposits, deposits held as collateral for interest-rate exchange agreements, and deposits with other FHLBanks.
As of June 30, 2007, total long-term investments were $23.5 billion, a decrease of $345.9 million from December 31, 2006. This decrease was due primarily to paydowns on the Bank’s MBS portfolio.
The Finance Board limits an FHLBank’s investment in MBS and asset-backed securities by requiring that the total book value of MBS owned by the FHLBank may not exceed 300 percent of the FHLBank’s previous month-end regulatory capital on the day it purchases the securities. On June 30, 2007, these investments amounted to 292 percent of the Bank’s total regulatory capital.
Held-to-maturity securities are evaluated for impairment on a quarterly basis, or more frequently if events or changes in circumstances indicate that these investments are impaired. The Bank would record an impairment charge when a held-to-maturity security has experienced an other-than-temporary decline in fair value, or its cost may not be recoverable. The Bank reviewed its held-to-maturity securities as of June 30, 2007 and has determined that all unrealized losses were temporary and related to increases in interest rates. Additionally, the Bank has the ability and the intent to hold such investments to maturity, at which time the unrealized losses will be recovered.
Mortgage Loans Held for Portfolio
Mortgage loans purchased from participating financial institutions under the MPP and Mortgage Partnership Finance® Program (“MPF® Program”) and loan participations purchased under the Affordable Multifamily Participation Program (“AMPP”) comprised 2.19 percent of the Bank’s total assets as of June 30, 2007, compared to 2.13 percent as of December 31, 2006. The mortgage loan balance at June 30, 2007 was $3.3 billion, representing an increase of $249.2 million, or 8.30 percent, from the 2006 year-end balance. In 2006, the Bank ceased purchasing assets under AMPP but retains its existing portfolio, which eventually will be reduced to zero in accordance with the ordinary course of the maturities of the assets. Currently, the Bank plans for slow, modest growth in its mortgage loan portfolio with a strategic emphasis on MPP over the MPF Program. The Bank believes it will be able to fund these additional mortgage purchases through the issuance of bullet and callable consolidated obligations.
As of June 30, 2007 and December 31, 2006, the Bank’s mortgage loan portfolio was concentrated in the Southeast because those members selling loans to the Bank were located primarily in the Southeast.
Consolidated Obligations
The Bank funds its assets primarily through the issuance of consolidated obligation bonds and, to a lesser extent, consolidated obligation discount notes. Consolidated obligation issuances financed 89.7 percent of the $148.4 billion in total assets at June 30, 2007, a slight decrease from the financing ratio of 90.2 percent as of December 31, 2006.
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As of June 30, 2007, the Bank had outstanding consolidated bonds totaling $128.6 billion, compared to $122.1 billion as of December 31, 2006. Consolidated obligation bonds outstanding at June 30, 2007 and December 31, 2006 were primarily fixed-rate debt. However, the Bank often enters into interest-rate exchange agreements simultaneously with the issuance of consolidated obligation bonds to convert, in effect, the investor-defined terms of these debt instruments into terms more consistent with management’s funding strategies. Of the par value of $129.8 billion of consolidated obligation bonds outstanding as of June 30, 2007, $106.4 billion, or 82.0 percent, had their terms reconfigured through the use of interest rate exchange agreements. The comparable notional amount of such outstanding interest-rate exchange agreements at December 31, 2006 was $99.2 billion, or 80.6 percent, of the total par value of consolidated obligation bonds.
As of June 30, 2007, the Bank had outstanding consolidated discount notes totaling $4.6 billion, compared to $4.9 billion as of December 31, 2006. The increase in consolidated obligation bonds and decrease in discount notes from December 31, 2006 to June 30, 2007 were due primarily to the Bank’s increased used of bonds over discount notes due to slightly more attractive pricing and a more stable funding source.
Deposits
The Bank offers demand and overnight deposits and a short-term deposit program 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. The rate paid on term deposits is dependent upon the term of the deposit.
Most of these deposits represent member liquidity investments, which members may withdraw on demand. Therefore, the total account balance of the Bank’s deposits may be quite volatile. As a matter of prudence, the Bank typically invests deposit funds in liquid short-term assets. Member loan demand, deposit flows, and liquidity management strategies influence the amount and volatility of deposit balances carried with the Bank. Deposits totaled $5.8 billion as of June 30, 2007, compared to $4.6 billion as of December 31, 2006. Demand deposits comprised the largest percentage of deposits, representing 95.3 percent of total deposits as of June 30, 2007 compared to 96.2 percent as of December 31, 2006.
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 its 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, 2007.
Other Liabilities
The $201.4 million, or 6.80 percent, increase in other liabilities to $3.2 billion at June 30, 2007 from the 2006 year-end balance was due primarily to a $308.5 million payable related to securities purchased but not yet delivered and a $94.9 million increase in accrued interest payable due primarily to an increase in consolidated obligation bonds. These increases were offset partially by a $220.9 million
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decrease in derivative liabilities due primarily to the interaction of interest rates on the associated derivatives.
Capital
As of June 30, 2007, the Bank had total capital of $6.3 billion, an increase of $90.7 million, or 1.47 percent, from the 2006 year-end balance. Increased advance balances that resulted in increased equity balances for members were the primary factors causing the increase in the Bank’s total capital.
The FHLBank Act and Finance Board regulations specify that each FHLBank must meet certain minimum regulatory capital standards. Finance Board staff has indicated that mandatorily redeemable capital stock is considered capital for regulatory purposes, and the Bank’s $226.5 million and $215.7 million in mandatorily redeemable capital stock at June 30, 2007 and December 31, 2006, respectively, is included in the line item “total regulatory capital” in the table below.
The Bank was in compliance with the Finance Board’s regulatory capital rules and requirements as shown in the following table (dollar amounts in thousands):
As of June 30, 2007 | As of December 31, 2006 | |||||||||||||||
Required | Actual | Required | Actual | |||||||||||||
Regulatory capital requirements: | ||||||||||||||||
Risk based capital | $ | 924,635 | $ | 6,495,212 | $ | 830,446 | $ | 6,393,879 | ||||||||
Total capital-to-assets ratio | 4.00 | % | 4.38 | % | 4.00 | % | 4.54 | % | ||||||||
Total regulatory capital | $ | 5,935,935 | $ | 6,495,212 | $ | 5,630,337 | $ | 6,393,879 | ||||||||
Leverage ratio | 5.00 | % | 6.57 | % | 5.00 | % | 6.81 | % | ||||||||
Leverage capital | $ | 7,419,918 | $ | 9,742,818 | $ | 7,037,922 | $ | 9,590,819 |
As of June 30, 2007, the Bank had $226.5 million in capital stock subject to mandatory redemption from 11 members and former members, consisting of B1 membership stock and B2 activity-based stock. The Bank is not required to redeem or repurchase such stock until the expiration of the five-year redemption period or, with respect to activity-based stock, until the later of the expiration of the five-year redemption period or the activity no longer remains outstanding. In accordance with the Bank’s current practice, if activity-based stock becomes excess stock as a result of an activity no longer remaining outstanding, the Bank will repurchase the excess activity-based stock if the dollar amount of excess stock exceeds the threshold specified by the Bank, which is currently $100 thousand. As of June 30, 2007 and December 31, 2006, the Bank’s activity-based stock included $13.0 million and $52.6 million, respectively, of excess shares subject to repurchase by the Bank at its discretion. The Bank’s excess stock threshold and standard repurchase practice may be changed at the Bank’s discretion with proper notice to members.
The following table presents total capital stock by subclass (in thousands):
As of June 30, 2007 | As of December 31, 2006 | |||||
Subclass B1 capital stock – membership | $ | 1,333,763 | $ | 1,386,914 | ||
Subclass B2 capital stock – activity | 4,509,076 | 4,384,884 | ||||
Total | $ | 5,842,839 | $ | 5,771,798 | ||
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Results of Operations
Net Income
The following table sets forth the Bank’s significant income items for the three- and six-month periods ended June 30, 2007 and 2006 and provides information regarding the changes during the periods (dollar amounts in thousands):
Components of Net Income
Three Months Ended June 30, | Increase/ (Decrease) | Increase/ (Decrease) % | Six Months Ended June 30, | Increase/ (Decrease) | Increase/ (Decrease) % | ||||||||||||||||||||||
2007 | 2006 | 2007 | 2006 | ||||||||||||||||||||||||
Net interest income | $ | 158,489 | $ | 166,594 | $ | (8,105 | ) | (4.86) | $ | 316,834 | $ | 328,308 | $ | (11,474 | ) | (3.49 | ) | ||||||||||
Other (loss) income | (4,359 | ) | 4,124 | (8,483 | ) | (205.70) | (7,988 | ) | 5,127 | (13,115 | ) | (255.80 | ) | ||||||||||||||
Other expense | 26,782 | 24,526 | 2,256 | 9.20 | 50,882 | 48,880 | 2,002 | 4.10 | |||||||||||||||||||
Total assessments | 34,067 | 38,957 | (4,890 | ) | (12.55) | 69,014 | 75,827 | (6,813 | ) | (8.98 | ) | ||||||||||||||||
Net income | 93,242 | 107,295 | (14,053 | ) | (13.10) | 189,039 | 208,791 | (19,752 | ) | (9.46 | ) |
Net income decreased during the three- and six-month periods ended June 30, 2007 compared to the same periods ended June 30, 2006, primarily as a result of a decrease in other income due to the effects of SFAS 133 and SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”). The decrease in net income also was due to a decrease in net interest income, which resulted from a decrease in the Bank’s interest rate spread, which is discussed in more detail below.
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 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 SFAS 133-related adjustments.
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-earnings assets and interest-bearing liabilities.
The following tables present spreads between the average yield on total interest-earning assets and the average cost of interest-bearing liabilities during the three- and six-month periods ended June 30, 2007, compared to the same periods ended June 30, 2006 (dollar amounts in thousands). As noted in the below tables, during the three- and six-month periods ended June 30, 2007 compared to the same periods ended June 30, 2006, interest rate spread decreased by four basis points. Two basis points of the decrease is due to the removal of less interest expense associated with derivatives in SFAS 133 non-qualifying hedging relationships on long-term securities. The remainder of the decrease is due to the fact that the Bank’s liabilities (representing interest expense) have re-priced faster than the Bank’s
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assets (representing interest income) in the rising interest rate environment, thus reducing the Bank’s interest rate spread.
Spread and Yield Analysis
Three Months Ended June 30, | ||||||||||||||||||||
2007 | 2006 | |||||||||||||||||||
Average Balance | Interest | Yield/ Rate | Average Balance | Interest | Yield/ Rate | |||||||||||||||
Assets | ||||||||||||||||||||
Federal funds sold | $ | 13,645,896 | $ | 181,943 | 5.35 | % | $ | 9,939,811 | $ | 123,836 | 5.00 | % | ||||||||
Interest-bearing deposits | 1,115,569 | 14,991 | 5.39 | % | 790,936 | 9,985 | 5.06 | % | ||||||||||||
Long-term investments (1) | 23,174,357 | 295,113 | 5.11 | % | 24,146,240 | 301,117 | 5.00 | % | ||||||||||||
Advances | 102,150,880 | 1,381,695 | 5.43 | % | 100,277,720 | 1,269,942 | 5.08 | % | ||||||||||||
Mortgage loans held for portfolio (2) | 3,202,841 | 42,222 | 5.29 | % | 2,912,609 | 37,300 | 5.14 | % | ||||||||||||
Loans to other FHLBanks | — | — | 0.00 | % | 879 | 11 | 5.02 | % | ||||||||||||
Total interest-earning assets | 143,289,543 | 1,915,964 | 5.36 | % | 138,068,195 | 1,742,191 | 5.06 | % | ||||||||||||
Allowance for credit losses on mortgage loans | (647 | ) | (525 | ) | ||||||||||||||||
Other assets | 2,672,727 | 2,323,666 | ||||||||||||||||||
Total assets | $ | 145,961,623 | $ | 140,391,336 | ||||||||||||||||
Liabilities and Capital | ||||||||||||||||||||
Demand and overnight deposits | $ | 5,283,186 | 69,041 | 5.24 | % | $ | 4,237,017 | 51,354 | 4.86 | % | ||||||||||
Term deposits | 7,881 | 103 | 5.24 | % | 31,115 | 380 | 4.91 | % | ||||||||||||
Other interest-bearing deposits | 185,459 | 2,463 | 5.33 | % | 257,969 | 3,208 | 4.99 | % | ||||||||||||
Short-term borrowings | 6,115,154 | 79,085 | 5.19 | % | 9,162,230 | 112,010 | 4.90 | % | ||||||||||||
Long-term debt | 124,009,963 | 1,597,036 | 5.17 | % | 116,571,435 | 1,400,968 | 4.82 | % | ||||||||||||
Other borrowings | 738,154 | 9,747 | 5.30 | % | 641,428 | 7,677 | 4.80 | % | ||||||||||||
Total interest-bearing liabilities | 136,339,797 | 1,757,475 | 5.17 | % | 130,901,194 | 1,575,597 | 4.83 | % | ||||||||||||
Noninterest-bearing deposits | 31,320 | 35,400 | ||||||||||||||||||
Other liabilities | 3,406,494 | 3,173,710 | ||||||||||||||||||
Total capital | 6,184,012 | 6,281,032 | ||||||||||||||||||
Total liabilities and capital | $ | 145,961,623 | $ | 140,391,336 | ||||||||||||||||
Net interest income and net yield on interest-earning assets | $ | 158,489 | 0.44 | % | $ | 166,594 | 0.48 | % | ||||||||||||
Interest rate spread | 0.19 | % | 0.23 | % | ||||||||||||||||
Average interest-earning assets to interest-bearing liabilities | 105.10 | % | 105.48 | % | ||||||||||||||||
Notes
(1) | Trading securities are included in the Long-term investments line at fair value. |
(2) | Nonperforming loans are included in average balances used to determine average rate. |
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Spread and Yield Analysis
Six Months Ended June 30, | ||||||||||||||||||||
2007 | 2006 | |||||||||||||||||||
Average Balance | Interest | Yield/ Rate | Average Balance | Interest | Yield/ Rate | |||||||||||||||
Assets | ||||||||||||||||||||
Federal funds sold | $ | 11,680,984 | $ | 309,772 | 5.35 | % | $ | 9,472,103 | $ | 224,308 | 4.78 | % | ||||||||
Interest-bearing deposits | 911,107 | 24,409 | 5.40 | % | 637,668 | 15,480 | 4.90 | % | ||||||||||||
Long-term investments (1) | 23,319,375 | 592,870 | 5.13 | % | 24,343,295 | 606,040 | 5.02 | % | ||||||||||||
Advances | 102,173,534 | 2,750,862 | 5.43 | % | 100,244,423 | 2,403,505 | 4.84 | % | ||||||||||||
Mortgage loans held for portfolio (2) | 3,134,742 | 82,486 | 5.31 | % | 2,885,559 | 73,430 | 5.13 | % | ||||||||||||
Loans to other FHLBanks | 110 | 3 | 5.50 | % | 1,271 | 30 | 4.76 | % | ||||||||||||
Total interest-earning assets | 141,219,852 | 3,760,402 | 5.37 | % | 137,584,319 | 3,322,793 | 4.87 | % | ||||||||||||
Allowance for credit losses on mortgage loans | (708 | ) | (538 | ) | ||||||||||||||||
Other assets | 2,623,068 | 2,208,044 | ||||||||||||||||||
Total assets | $ | 143,842,212 | $ | 139,791,825 | ||||||||||||||||
Liabilities and Capital | ||||||||||||||||||||
Demand and overnight deposits | $ | 4,852,164 | 126,041 | 5.24 | % | $ | 4,305,994 | 98,972 | 4.64 | % | ||||||||||
Term deposits | 9,863 | 257 | 5.25 | % | 31,065 | 716 | 4.65 | % | ||||||||||||
Other interest-bearing deposits | 163,937 | 4,330 | 5.33 | % | 194,699 | 4,675 | 4.84 | % | ||||||||||||
Short-term borrowings | 6,001,637 | 155,157 | 5.21 | % | 7,692,667 | 179,252 | 4.70 | % | ||||||||||||
Long-term debt | 122,499,251 | 3,138,729 | 5.17 | % | 117,439,895 | 2,696,168 | 4.63 | % | ||||||||||||
Other borrowings | 728,528 | 19,054 | 5.27 | % | 642,092 | 14,702 | 4.62 | % | ||||||||||||
Total interest-bearing liabilities | 134,255,380 | 3,443,568 | 5.17 | % | 130,306,412 | 2,994,485 | 4.63 | % | ||||||||||||
Noninterest-bearing deposits | 27,677 | 34,050 | ||||||||||||||||||
Other liabilities | 3,357,176 | 3,256,935 | ||||||||||||||||||
Total capital | 6,201,979 | 6,194,428 | ||||||||||||||||||
Total liabilities and capital | $ | 143,842,212 | $ | 139,791,825 | ||||||||||||||||
Net interest income and net yield on interest-earning assets | $ | 316,834 | 0.45 | % | $ | 328,308 | 0.48 | % | ||||||||||||
Interest rate spread | 0.20 | % | 0.24 | % | ||||||||||||||||
Average interest-earning assets to interest-bearing liabilities | 105.19 | % | 105.59 | % | ||||||||||||||||
Notes
(1) | Trading securities are included in the Long-term investments line at fair value. |
(2) | Nonperforming loans are included in average balances used to determine average rate. |
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The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities affected the Bank’s interest income and interest expense (in thousands). As noted in the tables, the overall change in net interest income during the three- and six-month periods ended June 30, 2007, compared to the same periods ended June 30, 2006 were due primarily to increases in interest rates.
Volume and Rate Table *
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
2007 vs. 2006 | 2007 vs. 2006 | |||||||||||||||||||||||
Volume | Rate | Increase (Decrease) | Volume | Rate | Increase (Decrease) | |||||||||||||||||||
Increase (decrease) in interest income: | ||||||||||||||||||||||||
Federal funds sold | $ | 48,900 | $ | 9,207 | $ | 58,107 | $ | 56,450 | $ | 29,014 | $ | 85,464 | ||||||||||||
Interest-bearing deposits | 4,327 | 679 | 5,006 | 7,192 | 1,737 | 8,929 | ||||||||||||||||||
Long-term investments | (12,288 | ) | 6,284 | (6,004 | ) | (25,851 | ) | 12,681 | (13,170 | ) | ||||||||||||||
Advances | 24,070 | 87,683 | 111,753 | 47,023 | 300,334 | 347,357 | ||||||||||||||||||
Mortgage loans held for portfolio | 3,801 | 1,121 | 4,922 | 6,496 | 2,560 | 9,056 | ||||||||||||||||||
Loans to other FHLBanks | (5 | ) | (6 | ) | (11 | ) | (31 | ) | 4 | (27 | ) | |||||||||||||
Total | 68,805 | 104,968 | 173,773 | 91,279 | 346,330 | 437,609 | ||||||||||||||||||
Increase (decrease) in interest expense: | ||||||||||||||||||||||||
Demand and overnight deposits | 13,433 | 4,254 | 17,687 | 13,360 | 13,709 | 27,069 | ||||||||||||||||||
Term deposits | (301 | ) | 24 | (277 | ) | (542 | ) | 83 | (459 | ) | ||||||||||||||
Other interest-bearing deposits | (951 | ) | 206 | (745 | ) | (784 | ) | 439 | (345 | ) | ||||||||||||||
Short-term borrowings | (39,087 | ) | 6,162 | (32,925 | ) | (42,283 | ) | 18,188 | (24,095 | ) | ||||||||||||||
Long-term debt | 92,413 | 103,655 | 196,068 | 119,801 | 322,760 | 442,561 | ||||||||||||||||||
Other borrowings | 1,229 | 841 | 2,070 | 2,116 | 2,236 | 4,352 | ||||||||||||||||||
Total | 66,736 | 115,142 | 181,878 | 91,668 | 357,415 | 449,083 | ||||||||||||||||||
Increase (decrease) in net interest income | $ | 2,069 | $ | (10,174 | ) | $ | (8,105 | ) | $ | (389 | ) | $ | (11,085 | ) | $ | (11,474 | ) | |||||||
* | 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 volume of its total. |
Other (Loss) Income
The following table presents the components of other (loss) income (in thousands):
Three Months Ended June 30, | Increase (Decrease) | Six Months Ended June 30, | Increase (Decrease) | |||||||||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||||||||||
Other (loss) income: | ||||||||||||||||||||||||
Service fees | $ | 656 | $ | 569 | $ | 87 | $ | 1,330 | $ | 1,176 | $ | 154 | ||||||||||||
Net loss on trading securities | (77,733 | ) | (74,052 | ) | (3,681 | ) | (72,815 | ) | (179,912 | ) | 107,097 | |||||||||||||
Net gain on derivatives and hedging activities | 72,240 | 77,300 | (5,060 | ) | 62,918 | 183,421 | (120,503 | ) | ||||||||||||||||
Other | 478 | 307 | 171 | 579 | 442 | 137 | ||||||||||||||||||
Total other (loss) income | $ | (4,359 | ) | $ | 4,124 | $ | (8,483 | ) | $ | (7,988 | ) | $ | 5,127 | $ | (13,115 | ) | ||||||||
The Bank’s net loss on trading securities and net gain on derivatives and hedging activities comprise the majority of other (loss) income. The Bank hedges trading securities with derivative transactions, and the income effect of the market-value change for these securities under SFAS 115 during the three- and six-month periods ended June 30, 2007 and 2006 was offset by market-value changes in the related derivatives. The overall changes in other (loss) income during the periods were caused primarily by the adjustments required to report trading securities at fair value, as required by GAAP,
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and hedging-related adjustments, which are reported in the overall hedging activities (including those related to trading securities). The net loss on trading securities for the three- and six-month periods ended June 30, 2007 was due to rising interest rates in the portions of the yield curve pertaining to the maturities of these securities.
The following table details each of the components of net gain on derivatives and hedging activities, for the three- and six-month periods ended June 30, 2007 and 2006 (in thousands). When hedging, both the derivative instrument and the related asset or liability are marked to market and net gain on derivatives and hedging activities reflects the degree of ineffectiveness in the hedging activity, which can be favorable or unfavorable to net income at any particular point. Net gain on derivatives and hedging activities also includes the interest component for hedging activity not qualifying for hedge accounting treatment under GAAP.
Net Gain on Derivatives and Hedging Activities
Advances | Purchased Options, Macro Hedging and Synthetic Macro Funding | Trading Securities | MPF/MPP Loans | Consolidated Obligations | Intermediary Positions | Total | |||||||||||||||||||||
Three Months Ended June 30, 2007 | |||||||||||||||||||||||||||
Interest-related | $ | — | $ | (1,877 | ) | $ | (4,246 | ) | $ | — | $ | — | $ | 26 | $ | (6,097 | ) | ||||||||||
SFAS 133 qualifying fair-value hedges | 3,859 | — | — | — | (6,773 | ) | — | (2,914 | ) | ||||||||||||||||||
SFAS 133 non-qualifying hedges and other | — | 2,291 | 79,295 | (298 | ) | — | (37 | ) | 81,251 | ||||||||||||||||||
Total gain (loss) | $ | 3,859 | $ | 414 | $ | 75,049 | $ | (298 | ) | $ | (6,773 | ) | $ | (11 | ) | $ | 72,240 | ||||||||||
Advances | Purchased Options, Macro Hedging and Synthetic Macro Funding | Trading Securities | MPF/MPP Loans | Consolidated Obligations | Intermediary Positions | Total | |||||||||||||||||||||
Three Months Ended June 30, 2006 | |||||||||||||||||||||||||||
Interest-related | $ | — | $ | (782 | ) | $ | (9,372 | ) | $ | — | $ | — | $ | 27 | $ | (10,127 | ) | ||||||||||
SFAS 133 qualifying fair-value hedges | 5,565 | — | — | — | 2,554 | — | 8,119 | ||||||||||||||||||||
SFAS 133 non-qualifying hedges and other | — | 5,408 | 74,197 | (178 | ) | — | (119 | ) | 79,308 | ||||||||||||||||||
Total gain (loss) | $ | 5,565 | $ | 4,626 | $ | 64,825 | $ | (178 | ) | $ | 2,554 | $ | (92 | ) | $ | 77,300 | |||||||||||
Advances | Purchased Options, Macro Hedging and Synthetic Macro Funding | Trading Securities | MPF/MPP Loans | Consolidated Obligations | Intermediary Positions | Total | |||||||||||||||||||||
Six Months Ended June 30, 2007 | |||||||||||||||||||||||||||
Interest-related | $ | — | $ | (3,912 | ) | $ | (9,035 | ) | $ | — | $ | — | $ | 52 | $ | (12,895 | ) | ||||||||||
SFAS 133 qualifying fair-value hedges | 9,924 | — | — | — | (3,576 | ) | — | 6,348 | |||||||||||||||||||
SFAS 133 non-qualifying hedges and other | — | 996 | 68,824 | (293 | ) | — | (62 | ) | 69,465 | ||||||||||||||||||
Total gain (loss) | $ | 9,924 | $ | (2,916 | ) | $ | 59,789 | $ | (293 | ) | $ | (3,576 | ) | $ | (10 | ) | $ | 62,918 | |||||||||
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Advances | Purchased Options, Macro Hedging and Synthetic Macro Funding | Trading Securities | MPF/MPP Loans | Consolidated Obligations | Intermediary Positions | Total | ||||||||||||||||||||
Six Months Ended June 30, 2006 | ||||||||||||||||||||||||||
Interest-related | $ | — | $ | (1,978 | ) | $ | (25,308 | ) | $ | — | $ | — | $ | 54 | $ | (27,232 | ) | |||||||||
SFAS 133 qualifying fair-value hedges | 15,626 | — | — | — | 7,102 | — | 22,728 | |||||||||||||||||||
SFAS 133 non-qualifying hedges and other | — | 6,695 | 181,660 | (295 | ) | — | (135 | ) | 187,925 | |||||||||||||||||
Total gain (loss) | $ | 15,626 | $ | 4,717 | $ | 156,352 | $ | (295 | ) | $ | 7,102 | $ | (81 | ) | $ | 183,421 | ||||||||||
Management generally uses derivative instruments to hedge net interest income, with a primary goal of stabilizing the interest-rate spread over time and mitigating interest-rate risk and cash-flow variability.
The table below outlines the overall effect of hedging activities on net interest income and other (loss) income related results (in thousands). For a description regarding the individual interest components discussed below, see the Bank’s Form 10-K.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Net interest income | $ | 158,489 | $ | 166,594 | $ | 316,834 | $ | 328,308 | ||||||||
Interest components of hedging activities included in net interest income: | ||||||||||||||||
Hedging advances | $ | 155,486 | $ | 130,295 | $ | 314,717 | $ | 216,342 | ||||||||
Hedging consolidated obligations | (98,558 | ) | (203,967 | ) | (218,325 | ) | (345,082 | ) | ||||||||
Hedging related amortization | (8,258 | ) | (13,289 | ) | (14,773 | ) | (29,366 | ) | ||||||||
Net increase (decrease) in net interest income | $ | 48,670 | $ | (86,961 | ) | $ | 81,619 | $ | (158,106 | ) | ||||||
Interest components of derivative activity included in other (loss) income: | ||||||||||||||||
Purchased options | $ | 325 | $ | 1,924 | $ | 654 | $ | 3,375 | ||||||||
Synthetic macro funding | (2,202 | ) | (2,706 | ) | (4,566 | ) | (5,353 | ) | ||||||||
Trading securities | (4,246 | ) | (9,372 | ) | (9,035 | ) | (25,308 | ) | ||||||||
Other | 26 | 27 | 52 | 54 | ||||||||||||
Net decrease in other (loss) income | $ | (6,097 | ) | $ | (10,127 | ) | $ | (12,895 | ) | $ | (27,232 | ) | ||||
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Non-interest Expense
The following table presents non-interest expense (in thousands).
Three Months Ended June 30, | Increase (Decrease) | Six Months Ended June 30, | Increase (Decrease) | |||||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||||||
Other expense: | ||||||||||||||||||||
Salaries and employee benefits | $ | 15,784 | $ | 13,537 | $ | 2,247 | $ | 29,994 | $ | 27,394 | $ | 2,600 | ||||||||
Occupancy cost | 847 | 922 | (75 | ) | 1,654 | 1,760 | (106 | ) | ||||||||||||
Other operating expenses | 7,352 | 7,246 | 106 | 13,402 | 13,676 | (274 | ) | |||||||||||||
Total operating expenses | 23,983 | 21,705 | 2,278 | 45,050 | 42,830 | 2,220 | ||||||||||||||
Finance Board and Office of Finance | 2,025 | 1,880 | 145 | 4,290 | 3,907 | 383 | ||||||||||||||
Other | 774 | 941 | (167 | ) | 1,542 | 2,143 | (601 | ) | ||||||||||||
Total other expense | 26,782 | 24,526 | 2,256 | 50,882 | 48,880 | 2,002 | ||||||||||||||
Assessments: | ||||||||||||||||||||
Affordable Housing Program | 10,756 | 12,131 | (1,375 | ) | 21,754 | 23,623 | (1,869 | ) | ||||||||||||
REFCORP | 23,311 | 26,826 | (3,515 | ) | 47,260 | 52,204 | (4,944 | ) | ||||||||||||
Total assessments | 34,067 | 38,957 | (4,890 | ) | 69,014 | 75,827 | (6,813 | ) | ||||||||||||
Total non-interest expense | $ | 60,849 | $ | 63,483 | $ | (2,634 | ) | $ | 119,896 | $ | 124,707 | $ | (4,811 | ) | ||||||
Non-interest expense during the three- and six-month periods ended June 30, 2007 decreased 4.15 percent and 3.86 percent, respectively, compared to the same periods ended June 30, 2006. These decreases were due primarily to decreased AHP and REFCORP assessments. The REFCORP assessment is established as a fixed percent of net income, and the AHP assessment is established as a fixed percent of regulatory net income (which is the Bank’s net income before interest expense related to mandatorily redeemable capital stock under SFAS 150).
Liquidity and Capital Resources
Liquidity is necessary to satisfy members’ borrowing needs on a timely basis, repay maturing and called consolidated obligations (“COs”), and meet other obligations and operating requirements. Many members rely on the Bank as a source of standby liquidity, and the Bank attempts to be in a position to meet member funding needs on a timely basis.
The Bank attempts to maintain sufficient liquidity to service debt obligations for at least 90 days, assuming restricted debt market access. In addition, Finance Board regulations and Bank policy require the Bank to maintain contingent liquidity in an amount sufficient to meet its liquidity needs for five business days if it is unable to access the capital markets. The Bank was in compliance with these requirements at June 30, 2007.
The Bank’s principal source of liquidity is CO debt instruments. COs enjoy government-sponsored enterprise status and are rated Aaa/P-1 by Moody’s and AAA/A-1+ by S&P. To provide liquidity, the Bank also may use other short-term borrowings, such as federal funds purchased, securities sold under agreements to repurchase, and loans from other FHLBanks. These funding sources depend on the Bank’s ability to access the capital markets at competitive market rates. Although the Bank maintains secured and unsecured lines of credit with money market counterparties, the Bank’s income and
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liquidity would be affected adversely if it were not able to access the capital markets at competitive rates for a long period. Historically, the FHLBanks have had excellent capital market access.
Contingency plans are in place that prioritize the allocation of liquidity resources in the event of operational disruptions at the Bank or the Office of Finance, as well as systemic Federal Reserve wire transfer system disruptions. Additionally, the FHLBank Act authorizes the Secretary of Treasury, at his or her discretion, to purchase COs up to an aggregate principal amount of $4 billion. No borrowings under this authority have been outstanding since 1977.
Off-balance Sheet Commitments
The Bank’s primary off-balance sheet commitments are as follows:
• | The Bank has joint and several liability for all of the COs issued by the Office of Finance on behalf of the FHLBanks |
• | The Bank has outstanding commitments arising from standby letters of credit. |
Should an FHLBank be unable to satisfy its payment obligation under a CO for which it is the primary obligor, any of the other FHLBanks, including the Bank, could be called upon to repay all or any part of such payment obligation, as determined or approved by the Finance Board. The Bank considers the joint and several liability as a related party guarantee. These related party guarantees meet the scope exceptions in Financial Interpretation Number 45,Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. Accordingly, the Bank has not recognized a liability for its joint and several obligations related to other FHLBanks’ consolidated obligations at June 30, 2007 or December 31, 2006. As of June 30, 2007, the FHLBanks had $970.9 billion in aggregate par value of consolidated obligations issued and outstanding, $134.4 billion of which was attributable to the Bank.
As of June 30, 2007, the Bank had outstanding standby letters of credit of approximately $1.8 billion with original terms of one to 15 years, with the longest final expiration in 2018. Commitments to extend credit, including standby letters of credit, are agreements to lend. The Bank issues a standby letter of credit on behalf of a member in exchange for a fee. A member may use these standby letters of credit to facilitate a financing arrangement. If the Bank is required to make payment for a beneficiary’s draw, the Bank converts such paid amount to a collateralized advance to the member. The Bank requires its borrowers to collateralize fully the face amount of any letter of credit issued by the Bank, as if such face amount were an advance to the borrower. Based on management’s credit analyses and collateral requirements, the Bank presently does not deem it necessary to have an allowance for these unfunded letters of credit.
Contractual Obligations
There has not been a material change in the Bank’s contractual obligations reported in the Bank’s Form 10-K.
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Risk Management
A discussion of the Bank’s risk management is described in detail in the Bank’s Form 10-K. Management does not expect that the problems in the residential loan market involving subprime loans will affect the Bank’s financial condition or results of operation. The Bank believes that it has minimal exposure to subprime loans due to its business model and its credit risk policies pertaining to advances, investments, and mortgage loan programs.
Critical Accounting Policies and Estimates
The Bank’s critical accounting policies and estimates are described in detail in the Bank’s Form 10-K. There have been no material changes to these policies and estimates during the period reported.
Recent Accounting Guidance
SFAS No. 157, Fair Value Measurements(“SFAS 157”), was issued in September 2006. In defining fair value, SFAS 157 retains the exchange price notion in earlier definitions of fair value. However, the definition of fair value under SFAS 157 focuses on the price that would be received to sell an asset or paid to transfer a liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). SFAS 157 applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value. Accordingly, SFAS 157 does not expand the use of fair value in any new circumstances. SFAS 157 also establishes a fair value hierarchy that prioritizes the information used to develop assumptions used to determine the exit price. Under this standard, fair value measurements would be disclosed separately by level within the fair value hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted. The Bank does not expect the adoption of SFAS 157 to have a material effect on its financial condition or results of operations.
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115(“SFAS 159”), issued in February 2007, creates a fair value option allowing an entity irrevocably to elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities, with changes in fair value recognized in earnings as they occur. SFAS 159 requires an entity to report those financial assets and financial liabilities measured at fair value in a manner that separates those reported fair values from the carrying amounts of assets and liabilities measured using another measurement attribute on the face of the statement of financial position. SFAS 159 also requires an entity to provide information that would allow users to understand the effect on earnings of changes in the fair value on those instruments selected for the fair value election. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. The Bank does not expect the adoption of SFAS 159 to have a material effect on its financial condition or results of operations.
FASB Staff Position No. FIN 39-1, Amendment of FASB Interpretation No. 39 (“FSP FIN 39-1”), issued in April 2007, permits an entity to offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instruments recognized at fair value executed with the same counterparty under a master netting arrangement. Under FSP FIN 39-1, the receivable
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or payable related to cash collateral may not be offset if the amount recognized does not represent or approximate fair value or arises from instruments in a master netting arrangement that are not eligible to be offset. The decision whether to offset such fair value amounts represents an elective accounting policy decision that, once elected, must be applied consistently. An entity should recognize the effects of applying FSP FIN 39-1 as a change in accounting principle through retrospective application for all financial statements presented unless it is impracticable to do so. Upon adoption of FSP FIN 39-1, an entity is permitted to change its accounting policy to offset or not offset fair value amounts recognized for derivative instruments under master netting arrangements. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007, with earlier application permitted. The Bank has not yet determined the effect that the adoption of FSP FIN 39-1 will have on its financial condition or results of operations.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
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 interest-earning assets and interest-bearing liabilities held by the Bank, the most significant component of market risk to the Bank 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, such as interest-rate swaps, swaptions, interest-rate cap and floor agreements, call, puts and forward contracts to mange its exposure to changes in interest rates. This enables the Bank to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve, in effect, risk management objectives.
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The following table summarizes the fair-value amounts of derivative financial instruments, excluding accrued interest, by product type (in thousands). The categories “Fair value” represent hedge strategies for which hedge accounting is achieved. The category “SFAS 133 non-qualifying” represents hedge strategies for which the derivatives are not in designated hedge relationships that formally meet the hedge accounting requirements under GAAP. The table also includes mandatory delivery commitments for purchased loans under both the MPF Program and MPP, which are accounted for as derivatives in accordance with GAAP.
As of June 30, 2007 | As of December 31, 2006 | |||||||||||||
Total Notional | Estimated Fair Value Gain /(Loss) (excludes accrued interest) | Total Notional | Estimated Fair Value Gain /(Loss) (excludes accrued interest) | |||||||||||
Advances: | ||||||||||||||
Fair value | $ | 76,578,797 | $ | 724,962 | $ | 66,304,379 | $ | 384,970 | ||||||
Fair value-firm commitments | 450,000 | 3,220 | — | — | ||||||||||
SFAS 133 non-qualifying | 931,150 | 2,089 | 1,236,900 | 2,366 | ||||||||||
Total | 77,959,947 | 730,271 | 67,541,279 | 387,336 | ||||||||||
Investments: | ||||||||||||||
SFAS 133 non-qualifying | 7,975,413 | (46,149 | ) | 8,461,216 | (115,875 | ) | ||||||||
Total | 7,975,413 | (46,149 | ) | 8,461,216 | (115,875 | ) | ||||||||
MPF/MPP loans: | ||||||||||||||
Stand alone delivery commitments | 5,236 | — | 5,312 | (15 | ) | |||||||||
Total | 5,236 | — | 5,312 | (15 | ) | |||||||||
Consolidated obligations bonds: | ||||||||||||||
Fair value | 105,780,613 | (844,072 | ) | 98,564,362 | (630,957 | ) | ||||||||
SFAS 133 non-qualifying | 589,500 | (2,709 | ) | 629,500 | (3,230 | ) | ||||||||
Total | 106,370,113 | (846,781 | ) | 99,193,862 | (634,187 | ) | ||||||||
Intermediary positions: | ||||||||||||||
Intermediaries | 454,604 | 93 | 505,720 | 210 | ||||||||||
Total | 454,604 | 93 | 505,720 | 210 | ||||||||||
Total notional and fair value | $ | 192,765,313 | $ | (162,566 | ) | $ | 175,707,389 | $ | (362,531 | ) | ||||
Total derivatives excluding accrued interest | $ | (162,566 | ) | $ | (362,531 | ) | ||||||||
Accrued interest | 152,262 | 51,572 | ||||||||||||
Net derivative balance | $ | (10,304 | ) | $ | (310,959 | ) | ||||||||
Net derivative assets balance | $ | 338,767 | $ | 259,024 | ||||||||||
Net derivative liabilities balance | (349,071 | ) | (569,983 | ) | ||||||||||
Net derivative balance | $ | (10,304 | ) | $ | (310,959 | ) | ||||||||
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Bank policy requires the Bank to maintain its duration of equity within a range of +60 months to – 60 months, assuming current interest rates, and within a range of +84 months to – 84 months, assuming an instantaneous parallel increase or decrease in market interest rates of 200 basis points. The table below reflects the Bank’s duration exposure measurements as calculated in accordance with Bank policy.
Duration Exposure
(In months)
As of June 30, 2007 | As of December 31, 2006 | ||||||||||||
Up 200 Basis Points | Current | Down 200 Basis Points | Up 200 Basis Points | Current | Down 200 Basis Points | ||||||||
Assets | 6.3 | 6.5 | 4.8 | 6.7 | 6.8 | 5.0 | |||||||
Liabilities | 5.3 | 5.6 | 4.7 | 5.9 | 6.0 | 5.2 | |||||||
Equity | 30.0 | 28.7 | 7.2 | 26.6 | 24.1 | (0.5 | ) | ||||||
Duration gap | 1.0 | 0.9 | 0.1 | 0.8 | 0.8 | (0.2 | ) |
As shown in the table above, as of June 30, 2007 and December 31, 2006, the Bank’s base case duration gap was 0.9 months and 0.8 months, with a duration of equity of 28.7 months and 24.1 months, respectively. These measures were higher at June 30, 2007 due to slightly higher medium- and long-term interest rates.
Management has determined that it would be prudent to consider interest-rate movements of a lesser magnitude than +/-200 basis point shifts. The table below shows duration exposure to increases and decreases in interest rates in 50 basis-point increments as of June 30, 2007.
Additional Duration Exposure Scenarios
(In months)
As of June 30, 2007 | ||||||||||||||
Up 150 Basis Points | Up 100 Basis Points | Up 50 Basis Points | Current | Down 50 Basis Points | Down 100 Basis Points | Down 150 Basis Points | ||||||||
Assets | 6.4 | 6.5 | 6.5 | 6.5 | 6.4 | 5.9 | 5.4 | |||||||
Liabilities | 5.4 | 5.5 | 5.4 | 5.6 | 5.6 | 5.2 | 4.9 | |||||||
Equity | 29.7 | 30.3 | 32.1 | 28.7 | 24.2 | 23.4 | 16.4 | |||||||
Duration gap | 1.0 | 1.0 | 1.1 | 0.9 | 0.8 | 0.7 | 0.5 |
Another way the Bank analyzes its interest-rate risk and market exposure is 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 duration analysis discussed above. The difference between the market value of total assets and the market value of total liabilities is the market value of equity. A more volatile market value of equity under different shock scenarios tends to result in a higher duration of equity, indicating increased sensitivity to interest rate changes. As shown in the table below, the Bank’s base case market value of equity was approximately $6.1 billion as of June 30, 2007 and December 31, 2006.
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Market Value of Equity
(In millions)
As of June 30, 2007 | As of December 31, 2006 | |||||||||||||||||
Up 200 Basis Points | Current | Down 200 Basis Points | Up 200 Basis Points | Current | Down 200 Basis Points | |||||||||||||
Assets | $ | 148,270 | $ | 149,868 | $ | 151,336 | $ | 140,380 | $ | 141,989 | $ | 143,389 | ||||||
Liabilities | 142,457 | 143,751 | 145,007 | 134,496 | 135,848 | 137,126 | ||||||||||||
Equity | 5,813 | 6,117 | 6,329 | 5,884 | 6,141 | 6,263 |
Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
The Bank’s President and Chief Executive Officer and the Bank’s Chief Financial Officer (the “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 Securities Exchange Act of 1934 (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. The Bank’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Bank’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. 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.
As of June 30, 2007, the Bank’s Certifying Officers have evaluated the effectiveness of the design and operation of the Bank’s disclosure controls and procedures. Based on that evaluation, they have concluded that the Bank’s disclosure controls and procedures are 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.
Internal Control Over Financial Reporting
During the second quarter of 2007, there were no changes in the Bank’s internal control over financial reporting that have affected materially, or are reasonably likely to affect materially, the Bank’s internal control over financial reporting.
Item 4T. | Controls and Procedures |
Not applicable.
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Item 1. | Legal Proceedings |
The Bank may be subject to various legal proceedings arising in the normal course of business. After consultation with legal counsel, management is not aware of any such proceedings that might result in the Bank’s ultimate liability in an amount that will have a material effect on the Bank’s financial condition or results of operations.
Item 1A. | Risk Factors |
For discussion of the Bank’s risk factors, see “Item 1A. Risk Factors” in the Bank’s Form 10-K. There have been no material changes from those risk factors previously disclosed in the Bank’s Form 10-K.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Not applicable.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Submission of Matters to a Vote of Security Holders |
None.
Item 5. | Other Information |
On August 9, 2007, the Bank appointed Steven J. Goldstein, 56, as Executive Vice President and Chief Financial Officer. Mr. Goldstein had served as the Bank’s Interim Chief Financial Officer since April 23, 2007.
The Bank will pay an annual fee of $380,000 for Mr. Goldstein’s services. In addition, the Bank, in its discretion, also may pay an annual incentive fee in an amount up to the maximum annual incentive compensation award opportunity available to an executive vice president of the Bank under the Bank’s Executive Incentive Compensation Plan in connection with the provision of Mr. Goldstein’s services to the Bank.
A description of Mr. Goldstein’s business experience is contained in the Current Report on Form 8-K that the Bank filed on April 23, 2007 in connection with his appointment as Interim Chief Financial Officer.
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Item 6. | Exhibits |
3.1 | Restated Organization Certificate of the Federal Home Loan Bank of Atlanta, incorporated by reference to Exhibit 3.1 to the Bank’s Registration Statement on Form 10 filed with the Securities and Exchange Commission on March 17, 2006. | |
3.2 | Revised and Restated Bylaws of the Federal Home Loan Bank of Atlanta, incorporated by reference to Exhibit 3.2 to the Bank’s Form 8-K filed with the Securities and Exchange Commission on September 27, 2006. | |
10.1 | Federal Home Loan Bank of Atlanta Credit and Collateral Policy, as amended. | |
10.2 | Employment Agreement, dated June 13, 2007, between the Bank and Richard A. Dorfman. | |
10.3 | Amended and Restated Services Agreement, dated August 9, 2007, between the Bank, SJG Financial Consultants, LLC, and Steven J. Goldstein. | |
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 Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of the President and Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.
Federal Home Loan Bank of Atlanta | ||||||||
Date: August 13, 2007 | By | /s/ Richard A. Dorfman | ||||||
Name: | Richard A. Dorfman | |||||||
Title: | President and Chief Executive Officer | |||||||
By | /s/ Steven J. Goldstein | |||||||
Name: | Steven J. Goldstein | |||||||
Title: | Executive Vice President and Chief Financial Officer |
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