UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 10-Q
_____________________________________
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2012
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 000-51845
_____________________________________
FEDERAL HOME LOAN BANK OF ATLANTA
(Exact name of registrant as specified in its charter)
_____________________________________
Federally chartered corporation | 56-6000442 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1475 Peachtree Street, NE, Atlanta, Ga. | 30309 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (404) 888-8000
_____________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days. ý Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ |
Non-accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes ý No
The number of shares outstanding of the registrant’s Class B Stock, par value $100, as of October 31, 2012, was 51,751,166.
Table of Contents
PART I. FINANCIAL INFORMATION | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II. OTHER INFORMATION | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CONDITION
(Unaudited)
(In millions, except par value)
As of | |||||||
September 30, 2012 | December 31, 2011 | ||||||
Assets | |||||||
Cash and due from banks | $ | 12 | $ | 6 | |||
Interest-bearing deposits (including deposits with other FHLBank of $2 as of September 30, 2012 and December 31, 2011) | 1,005 | 1,203 | |||||
Securities purchased under agreements to resell | 250 | — | |||||
Federal funds sold | 7,014 | 12,630 | |||||
Trading securities (includes other FHLBank’s bond of $80 and $82 as of September 30, 2012 and December 31, 2011, respectively) | 2,393 | 3,120 | |||||
Available-for-sale securities | 2,770 | 2,942 | |||||
Held-to-maturity securities (fair value of $16,475 and $16,242 as of September 30, 2012 and December 31, 2011, respectively) | 16,286 | 16,243 | |||||
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans of $10 and $6 as of September 30, 2012 and December 31, 2011, respectively | 1,335 | 1,633 | |||||
Advances | 80,543 | 86,971 | |||||
Accrued interest receivable | 264 | 314 | |||||
Premises and equipment, net | 32 | 35 | |||||
Derivative assets | 40 | 18 | |||||
Other assets | 134 | 155 | |||||
Total assets | $ | 112,078 | $ | 125,270 | |||
Liabilities | |||||||
Interest-bearing deposits | $ | 2,061 | $ | 2,655 | |||
Consolidated obligations, net: | |||||||
Discount notes | 21,767 | 24,330 | |||||
Bonds | 81,434 | 90,662 | |||||
Total consolidated obligations, net | 103,201 | 114,992 | |||||
Mandatorily redeemable capital stock | 42 | 286 | |||||
Accrued interest payable | 299 | 286 | |||||
Affordable Housing Program payable | 93 | 109 | |||||
Derivative liabilities | 160 | 241 | |||||
Other liabilities | 127 | 140 | |||||
Total liabilities | 105,983 | 118,709 | |||||
Commitments and contingencies (Note 13) | |||||||
Capital | |||||||
Capital stock Class B putable ($100 par value) issued and outstanding shares: | |||||||
Subclass B1 issued and outstanding shares: 12 as of September 30, 2012 and December 31, 2011 | 1,156 | 1,250 | |||||
Subclass B2 issued and outstanding shares: 36 and 45 as of September 30, 2012 and December 31, 2011, respectively | 3,635 | 4,468 | |||||
Total capital stock Class B putable | 4,791 | 5,718 | |||||
Retained earnings: | |||||||
Restricted | 60 | 19 | |||||
Unrestricted | 1,341 | 1,235 | |||||
Total retained earnings | 1,401 | 1,254 | |||||
Accumulated other comprehensive loss | (97 | ) | (411 | ) | |||
Total capital | 6,095 | 6,561 | |||||
Total liabilities and capital | $ | 112,078 | $ | 125,270 | |||
The accompanying notes are an integral part of these financial statements.
1
FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF INCOME
(Unaudited)
(In millions)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
Interest income | |||||||||||||||
Advances | $ | 74 | $ | 51 | $ | 216 | $ | 181 | |||||||
Prepayment fees on advances, net | 1 | 2 | 6 | 7 | |||||||||||
Interest-bearing deposits | 2 | 1 | 5 | 3 | |||||||||||
Federal funds sold | 4 | 6 | 14 | 18 | |||||||||||
Trading securities | 28 | 37 | 90 | 118 | |||||||||||
Available-for-sale securities | 40 | 42 | 125 | 131 | |||||||||||
Held-to-maturity securities | 71 | 95 | 232 | 309 | |||||||||||
Mortgage loans held for portfolio | 18 | 24 | 59 | 75 | |||||||||||
Total interest income | 238 | 258 | 747 | 842 | |||||||||||
Interest expense | |||||||||||||||
Consolidated obligations: | |||||||||||||||
Discount notes | 6 | 4 | 15 | 15 | |||||||||||
Bonds | 140 | 144 | 449 | 472 | |||||||||||
Deposits | — | — | 1 | 1 | |||||||||||
Mandatorily redeemable capital stock | 1 | 1 | 3 | 3 | |||||||||||
Total interest expense | 147 | 149 | 468 | 491 | |||||||||||
Net interest income | 91 | 109 | 279 | 351 | |||||||||||
Provision for credit losses | 1 | — | 4 | — | |||||||||||
Net interest income after provision for credit losses | 90 | 109 | 275 | 351 | |||||||||||
Noninterest income (loss) | |||||||||||||||
Total other-than-temporary impairment losses | — | (8 | ) | — | (45 | ) | |||||||||
Net amount of impairment losses reclassified from other comprehensive loss | (1 | ) | (11 | ) | (16 | ) | (63 | ) | |||||||
Net impairment losses recognized in earnings | (1 | ) | (19 | ) | (16 | ) | (108 | ) | |||||||
Net (losses) gains on trading securities | (9 | ) | 36 | (42 | ) | 22 | |||||||||
Net gains (losses) on derivatives and hedging activities | 30 | (67 | ) | 83 | (41 | ) | |||||||||
Letters of credit fees | 5 | 6 | 14 | 14 | |||||||||||
Other | (1 | ) | — | 2 | 2 | ||||||||||
Total noninterest income (loss) | 24 | (44 | ) | 41 | (111 | ) | |||||||||
Noninterest expense | |||||||||||||||
Compensation and benefits | 15 | 15 | 46 | 50 | |||||||||||
Other operating expenses | 11 | 10 | 29 | 29 | |||||||||||
Finance Agency | 2 | 2 | 8 | 8 | |||||||||||
Office of Finance | 2 | 1 | 4 | 4 | |||||||||||
Other | — | 1 | — | (8 | ) | ||||||||||
Total noninterest expense | 30 | 29 | 87 | 83 | |||||||||||
Income before assessments | 84 | 36 | 229 | 157 | |||||||||||
Assessments: | |||||||||||||||
Affordable Housing Program | 8 | 4 | 23 | 14 | |||||||||||
REFCORP | — | — | — | 22 | |||||||||||
Total assessments | 8 | 4 | 23 | 36 | |||||||||||
Net income | $ | 76 | $ | 32 | $ | 206 | $ | 121 |
The accompanying notes are an integral part of these financial statements.
2
FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In millions)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
Net income | $ | 76 | $ | 32 | $ | 206 | $ | 121 | |||||||
Other comprehensive income: | |||||||||||||||
Net noncredit portion of other-than-temporary impairment losses on available-for-sale securities: | |||||||||||||||
Noncredit losses transferred from held-to-maturity securities | — | (2 | ) | — | (28 | ) | |||||||||
Net change in fair value on other-than-temporary impairment available-for-sale securities | 188 | (32 | ) | 297 | 22 | ||||||||||
Reclassification of noncredit portion of impairment losses included in net income | 1 | 13 | 16 | 91 | |||||||||||
Net noncredit portion of other-than-temporary impairment losses on available-for-sale securities | 189 | (21 | ) | 313 | 85 | ||||||||||
Net noncredit portion of other-than-temporary impairment losses on held-to-maturity securities: | |||||||||||||||
Noncredit losses on held-to-maturity securities | — | (2 | ) | — | (28 | ) | |||||||||
Reclassification of noncredit portion from held-to-maturity securities to available-for-sale securities | — | 2 | — | 28 | |||||||||||
Net noncredit portion of other-than-temporary impairment losses on held-to-maturity securities | — | — | — | — | |||||||||||
Pension and postretirement benefits: | |||||||||||||||
Total other comprehensive income | — | — | 1 | — | |||||||||||
Total other comprehensive income (loss) | 189 | (21 | ) | 314 | 85 | ||||||||||
Total comprehensive income | $ | 265 | $ | 11 | $ | 520 | $ | 206 |
The accompanying notes are an integral part of these financial statements.
3
FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(Unaudited)
(In millions)
Capital Stock Class B Putable | Retained Earnings | Accumulated Other Comprehensive Loss | Total Capital | |||||||||||||||||||||||
Shares | Par Value | Restricted | Unrestricted | Total | ||||||||||||||||||||||
Balance, December 31, 2010 | 72 | $ | 7,224 | $ | — | $ | 1,124 | $ | 1,124 | $ | (402 | ) | $ | 7,946 | ||||||||||||
Issuance of capital stock | 2 | 173 | — | — | — | — | 173 | |||||||||||||||||||
Repurchase/redemption of capital stock | (14 | ) | (1,440 | ) | — | — | — | — | (1,440 | ) | ||||||||||||||||
Net shares reclassified to mandatorily redeemable capital stock | (1 | ) | (47 | ) | — | — | — | — | (47 | ) | ||||||||||||||||
Comprehensive income | — | — | 6 | 115 | 121 | 85 | 206 | |||||||||||||||||||
Cash dividends on capital stock | — | — | — | (42 | ) | (42 | ) | — | (42 | ) | ||||||||||||||||
Balance, September 30, 2011 | 59 | $ | 5,910 | $ | 6 | $ | 1,197 | $ | 1,203 | $ | (317 | ) | $ | 6,796 | ||||||||||||
Balance, December 31, 2011 | 57 | $ | 5,718 | $ | 19 | $ | 1,235 | $ | 1,254 | $ | (411 | ) | $ | 6,561 | ||||||||||||
Issuance of capital stock | 8 | 799 | — | — | — | — | 799 | |||||||||||||||||||
Repurchase/redemption of capital stock | (16 | ) | (1,667 | ) | — | — | — | — | (1,667 | ) | ||||||||||||||||
Net shares reclassified to mandatorily redeemable capital stock | (1 | ) | (59 | ) | — | — | — | — | (59 | ) | ||||||||||||||||
Comprehensive income | — | — | 41 | 165 | 206 | 314 | 520 | |||||||||||||||||||
Cash dividends on capital stock | — | — | — | (59 | ) | (59 | ) | — | (59 | ) | ||||||||||||||||
Balance, September 30, 2012 | 48 | $ | 4,791 | $ | 60 | $ | 1,341 | $ | 1,401 | $ | (97 | ) | $ | 6,095 |
The accompanying notes are an integral part of these financial statements.
4
FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Nine Months Ended September 30, | |||||||
2012 | 2011 | ||||||
Operating activities | |||||||
Net income | $ | 206 | $ | 121 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | (32 | ) | (24 | ) | |||
Provision for credit losses | 4 | — | |||||
Loss due to change in net fair value adjustment on derivative and hedging activities | 160 | 376 | |||||
Net change in fair value adjustment on trading securities | 42 | (22 | ) | ||||
Net impairment losses recognized in earnings | 16 | 108 | |||||
Loss on disposal of fixed assets and capital software costs | 1 | — | |||||
Net change in: | |||||||
Accrued interest receivable | 50 | 70 | |||||
Other assets | 14 | 31 | |||||
Affordable Housing Program payable | (18 | ) | (12 | ) | |||
Accrued interest payable | 13 | (17 | ) | ||||
Payable to REFCORP | — | (20 | ) | ||||
Other liabilities | (13 | ) | (30 | ) | |||
Total adjustments | 237 | 460 | |||||
Net cash provided by operating activities | 443 | 581 | |||||
Investing activities | |||||||
Net change in: | |||||||
Interest-bearing deposits | 280 | (1,910 | ) | ||||
Securities purchased under agreements to resell | (250 | ) | — | ||||
Federal funds sold | 5,616 | (739 | ) | ||||
Trading securities: | |||||||
Proceeds from maturities | 690 | 272 | |||||
Available-for-sale securities: | |||||||
Proceeds from maturities | 479 | 589 | |||||
Held-to-maturity securities: | |||||||
Net change in short-term | 75 | 90 | |||||
Proceeds from maturities of long-term | 3,259 | 3,394 | |||||
Purchases of long-term | (3,382 | ) | (3,634 | ) | |||
Advances: | |||||||
Proceeds from principal collected | 131,679 | 54,701 | |||||
Made | (125,387 | ) | (40,277 | ) | |||
Mortgage loans held for portfolio: | |||||||
Proceeds from principal collected | 283 | 284 | |||||
Proceeds from sale of foreclosed assets | 10 | 12 | |||||
Purchase of premise, equipment and software | (3 | ) | (4 | ) | |||
Net cash provided by investing activities | 13,349 | 12,778 | |||||
5
FEDERAL HOME LOAN BANK OF ATLANTA STATEMENTS OF CASH FLOWS—(Continued) (Unaudited) (In millions) | |||||||
Nine Months Ended September 30, | |||||||
2012 | 2011 | ||||||
Financing activities | |||||||
Net change in deposits | (564 | ) | 39 | ||||
Net payments on derivatives containing a financing element | (250 | ) | (379 | ) | |||
Proceeds from issuance of consolidated obligations: | |||||||
Discount notes | 240,007 | 780,788 | |||||
Bonds | 49,297 | 61,612 | |||||
Payments for debt issuance costs | (7 | ) | (12 | ) | |||
Payments for maturing and retiring consolidated obligations: | |||||||
Discount notes | (242,574 | ) | (788,638 | ) | |||
Bonds | (58,465 | ) | (65,204 | ) | |||
Proceeds from issuance of capital stock | 799 | 173 | |||||
Payments for repurchase/redemption of capital stock | (1,667 | ) | (1,440 | ) | |||
Payments for repurchase/redemption of mandatorily redeemable capital stock | (303 | ) | (257 | ) | |||
Cash dividends paid | (59 | ) | (42 | ) | |||
Net cash used in financing activities | (13,786 | ) | (13,360 | ) | |||
Net increase (decrease) in cash and due from banks | 6 | (1 | ) | ||||
Cash and due from banks at beginning of the period | 6 | 5 | |||||
Cash and due from banks at end of the period | $ | 12 | $ | 4 | |||
Supplemental disclosures of cash flow information: | |||||||
Cash paid for: | |||||||
Interest | $ | 476 | $ | 536 | |||
Affordable Housing Program assessments, net | $ | 40 | $ | 24 | |||
REFCORP assessments | $ | — | $ | 42 | |||
Noncash investing and financing activities: | |||||||
Net shares reclassified to mandatorily redeemable capital stock | $ | 59 | $ | 47 | |||
Transfer of held-to-maturity securities to available-for-sale securities | $ | 6 | $ | 369 | |||
Transfers of mortgage loans to real estate owned | $ | 11 | $ | 13 |
The accompanying notes are an integral part of these financial statements.
6
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
Note 1—Basis of Presentation
The accompanying unaudited interim financial statements of the Federal Home Loan Bank of Atlanta (Bank) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). To prepare the financial statements in conformity with GAAP, management must make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could be different from these estimates. The foregoing interim financial statements are unaudited; however, in the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the results for the interim periods, have been included. The results of operations for interim periods are not necessarily indicative of results to be expected for the year ending December 31, 2012, 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, 2011, which are contained in the Bank’s 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 23, 2012 (Form 10-K).
A description of the Bank’s significant accounting policies is included in Note 2–Summary of Significant Accounting Policies to the 2011 audited financial statements contained in the Bank’s Form 10-K. There have been no material changes to these policies as of September 30, 2012.
Note 2—Recently Issued and Adopted Accounting Guidance
Recently Issued Accounting Guidance
Disclosures about Offsetting Assets and Liabilities. In December 2011, the Financial Accounting Standards Board (FASB) issued disclosure requirements that are intended to help investors and other financial statement users to better assess the effect or potential effect of offsetting arrangements on an entity’s financial position. Entities are required to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, entities are required to disclose collateral received and posted in connection with master netting agreements or similar arrangements. This guidance is effective for interim and annual periods beginning on or after January 1, 2013 and will be applied retrospectively for all comparative periods presented. The adoption of this guidance will result in increased disclosures, but will have no effect on the Bank’s financial condition or results of operations.
Recently Adopted Accounting Guidance
Presentation of Comprehensive Income. In June 2011, the FASB issued amended guidance that eliminates the option to report other comprehensive income and its components in the statement of change in equity. The main provisions of this amended guidance provide that an entity that reports items of other comprehensive income present comprehensive income in either: (1) a single financial statement that presents the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and total comprehensive income; or (2) a two-statement approach, where the components of net income and total net income are presented in the first statement, immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and total comprehensive income. For public entities, this amended guidance is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Bank adopted this guidance effective January 1, 2012. The adoption of this guidance did not have any effect on the Bank’s financial condition or results of operations.
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. In May 2011, the FASB issued amended guidance to converge fair value measurement and disclosure guidance in GAAP with the fair value measurement guidance concurrently issued by the International Accounting Standards Board for International Financial Reporting Standards (IFRS). The amended guidance does not extend the use of fair value but, rather, provides guidance about how fair value should be applied where it already is required or permitted under GAAP. While many of the changes are clarifications of existing guidance or wording changes to align with IFRS, the amended guidance changes some fair value measurement principles and disclosure requirements. For public entities, this guidance is effective prospectively for interim and annual periods beginning on or after December 15, 2011. The Bank adopted this guidance effective January 1, 2012. The adoption of this guidance did not have any effect on the Bank’s financial condition or results of operations.
7
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
Reconsideration of Effective Control for Repurchase Agreements. In April 2011, the FASB issued guidance to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The new guidance removes certain criteria from the assessment of effective control. This guidance is effective for the first interim or annual periods beginning on or after December 15, 2011. This guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. The Bank adopted this guidance effective January 1, 2012. The adoption of this guidance did not have any effect on the Bank’s financial condition or results of operations.
Note 3—Trading Securities
Major Security Types. Trading securities were as follows:
As of September 30, 2012 | As of December 31, 2011 | ||||||
Government-sponsored enterprises debt obligations | $ | 2,312 | $ | 3,035 | |||
Other FHLBank’s bond (1) | 80 | 82 | |||||
State or local housing agency debt obligations | 1 | 3 | |||||
Total | $ | 2,393 | $ | 3,120 |
____________
(1) | The Federal Home Loan Bank of Chicago is the primary obligor of this consolidated obligation bond. |
Net unrealized and realized (losses) gains on trading securities were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
Net unrealized (losses) gains on trading securities held at period end | $ | (9 | ) | $ | 36 | $ | (35 | ) | $ | 28 | |||||
Net unrealized/realized losses on trading securities sold/matured during the period | — | — | (7 | ) | (6 | ) | |||||||||
Net (losses) gains on trading securities | $ | (9 | ) | $ | 36 | $ | (42 | ) | $ | 22 |
As of September 30, 2012 and December 31, 2011, 99.9 percent of the Bank’s fixed-rate trading securities were swapped and all of the Bank’s variable-rate trading securities were swapped.
Note 4—Available-for-sale Securities
During the nine-month periods ended September 30, 2012 and 2011, the Bank transferred certain private-label mortgage-backed securities (MBS) from its held-to-maturity portfolio to its available-for-sale portfolio. These securities represent private-label MBS in the Bank’s held-to-maturity portfolio for which the Bank has recorded an other-than-temporary impairment loss. The Bank believes the other-than-temporary impairment loss constitutes evidence of a significant deterioration in the issuer’s creditworthiness. The Bank has no current plans to sell these securities nor is the Bank under any requirement to sell these securities.
8
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
The following table presents information on private-label MBS transferred. The amounts below represent the values as of the transfer date.
2012 | 2011 | ||||||||||||||||||||||
Amortized Cost | Other-than-temporary Impairment Recognized in Accumulated Other Comprehensive Loss | Estimated Fair Value | Amortized Cost | Other-than-temporary Impairment Recognized in Accumulated Other Comprehensive Loss | Estimated Fair Value | ||||||||||||||||||
Transferred at March 31, | $ | 6 | $ | — | $ | 6 | $ | 322 | $ | 20 | $ | 302 | |||||||||||
Transferred at June 30, | — | — | — | 52 | 6 | 46 | |||||||||||||||||
Transferred at September 30, | — | — | — | 23 | 2 | 21 | |||||||||||||||||
Total | $ | 6 | $ | — | $ | 6 | $ | 397 | $ | 28 | $ | 369 |
Major Security Types. Available-for-sale securities were as follows:
As of September 30, 2012 | |||||||||||||||||||
Amortized Cost | Other-than-temporary Impairment Recognized in Accumulated Other Comprehensive Loss | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||||
Private-label MBS | $ | 2,855 | $ | 156 | $ | 71 | $ | — | $ | 2,770 |
As of December 31, 2011 | |||||||||||||||||||
Amortized Cost | Other-than-temporary Impairment Recognized in Accumulated Other Comprehensive Loss | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||||
Private-label MBS | $ | 3,340 | $ | 392 | $ | 12 | $ | 18 | $ | 2,942 |
The following tables summarize the available-for-sale securities with unrealized losses. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
As of September 30, 2012 | ||||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||
Number of Positions | Estimated Fair Value | Gross Unrealized Losses | Number of Positions | Estimated Fair Value | Gross Unrealized Losses | Number of Positions | Estimated Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||
Private-label MBS | 1 | $ | 1 | $ | — | 29 | $ | 1,479 | $ | 156 | 30 | $ | 1,480 | $ | 156 | |||||||||||||||||
As of December 31, 2011 | ||||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||
Number of Positions | Estimated Fair Value | Gross Unrealized Losses | Number of Positions | Estimated Fair Value | Gross Unrealized Losses | Number of Positions | Estimated Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||
Private-label MBS | 10 | $ | 635 | $ | 26 | 42 | $ | 2,053 | $ | 384 | 52 | $ | 2,688 | $ | 410 |
The Bank did not swap any of its available-for-sale securities as of September 30, 2012 and December 31, 2011.
9
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
A summary of available-for-sale MBS issued by members or affiliates of members follows:
�� | As of September 30, 2012 | ||||||||||||||||||
Amortized Cost | Other-than-temporary Impairment Recognized in Other Accumulated Comprehensive Loss | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||||
Bank of America Corporation, Charlotte, NC | $ | 1,794 | $ | 138 | $ | 40 | $ | — | $ | 1,696 | |||||||||
As of December 31, 2011 | |||||||||||||||||||
Amortized Cost | Other-than-temporary Impairment Recognized in Other Accumulated Comprehensive Loss | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||||
Bank of America Corporation, Charlotte, NC | $ | 2,027 | $ | 287 | $ | 1 | $ | 12 | $ | 1,729 |
Note 5—Held-to-maturity Securities
Major Security Types. Held-to-maturity securities were as follows:
As of September 30, 2012 | As of December 31, 2011 | ||||||||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||||||
Certificates of deposit | $ | 575 | $ | — | $ | — | $ | 575 | $ | 650 | $ | — | $ | — | $ | 650 | |||||||||||||||
State or local housing agency debt obligations | 110 | 2 | — | 112 | 100 | 1 | — | 101 | |||||||||||||||||||||||
Government-sponsored enterprises debt obligations | 1,358 | 1 | — | 1,359 | 1,111 | 1 | — | 1,112 | |||||||||||||||||||||||
Mortgage-backed securities: | |||||||||||||||||||||||||||||||
U.S. agency obligations-guaranteed | 673 | 8 | — | 681 | 803 | 8 | — | 811 | |||||||||||||||||||||||
Government-sponsored enterprises | 10,625 | 192 | 2 | 10,815 | 9,886 | 185 | 5 | 10,066 | |||||||||||||||||||||||
Private-label | 2,945 | 33 | 45 | 2,933 | 3,693 | 28 | 219 | 3,502 | |||||||||||||||||||||||
Total | $ | 16,286 | $ | 236 | $ | 47 | $ | 16,475 | $ | 16,243 | $ | 223 | $ | 224 | $ | 16,242 |
10
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
The following tables summarize the held-to-maturity securities with unrealized losses. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
As of September 30, 2012 | ||||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||
Number of Positions | Estimated Fair Value | Gross Unrealized Losses | Number of Positions | Estimated Fair Value | Gross Unrealized Losses | Number of Positions | Estimated Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||
Government-sponsored enterprises debt obligations | 4 | $ | 375 | $ | — | — | $ | — | $ | — | 4 | $ | 375 | $ | — | |||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||||||||||
Government-sponsored enterprises | 2 | 177 | — | 3 | 90 | 2 | 5 | 267 | 2 | |||||||||||||||||||||||
Private-label | 1 | 42 | — | 56 | 1,435 | 45 | 57 | 1,477 | 45 | |||||||||||||||||||||||
Total | 7 | $ | 594 | $ | — | 59 | $ | 1,525 | $ | 47 | 66 | $ | 2,119 | $ | 47 |
As of December 31, 2011 | ||||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||
Number of Positions | Estimated Fair Value | Gross Unrealized Losses | Number of Positions | Estimated Fair Value | Gross Unrealized Losses | Number of Positions | Estimated Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||
Certificates of deposit | 3 | $ | 350 | $ | — | — | $ | — | $ | — | 3 | $ | 350 | $ | — | |||||||||||||||||
Government-sponsored enterprises debt obligations | 3 | 194 | — | — | — | — | 3 | 194 | — | |||||||||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||||||||||
Government-sponsored enterprises | 9 | 1,104 | 3 | 10 | 804 | 2 | 19 | 1,908 | 5 | |||||||||||||||||||||||
Private-label | 23 | 437 | 8 | 59 | 1,656 | 211 | 82 | 2,093 | 219 | |||||||||||||||||||||||
Total | 38 | $ | 2,085 | $ | 11 | 69 | $ | 2,460 | $ | 213 | 107 | $ | 4,545 | $ | 224 |
Redemption Terms. The amortized cost and estimated fair value of held-to-maturity securities by contractual maturity are shown below. Expected maturities of some securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
As of September 30, 2012 | As of December 31, 2011 | ||||||||||||||
Amortized Cost | Estimated Fair Value | Amortized Cost | Estimated Fair Value | ||||||||||||
Non-mortgage-backed securities: | |||||||||||||||
Due in one year or less | $ | 619 | $ | 619 | $ | 703 | $ | 702 | |||||||
Due after one year through five years | 1,424 | 1,427 | 1,158 | 1,161 | |||||||||||
Total non-mortgage-backed securities | 2,043 | 2,046 | 1,861 | 1,863 | |||||||||||
Mortgage-backed securities | 14,243 | 14,429 | 14,382 | 14,379 | |||||||||||
Total | $ | 16,286 | $ | 16,475 | $ | 16,243 | $ | 16,242 |
The amortized cost of the Bank’s MBS classified as held-to-maturity includes net discounts of $11 and $13 as of September 30, 2012 and December 31, 2011, respectively.
11
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
A summary of held-to-maturity MBS issued by members or affiliates of members follows:
As of September 30, 2012 | As of December 31, 2011 | ||||||||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||||||
Bank of America Corporation, Charlotte, NC | $ | 973 | $ | 11 | $ | 15 | $ | 969 | $ | 1,226 | $ | 10 | $ | 56 | $ | 1,180 |
Note 6—Other-than-temporary Impairment
The Bank evaluates its individual available-for-sale and held-to-maturity securities holdings in an unrealized loss position for other-than-temporary impairment on a quarterly basis. As part of this process, the Bank considers its intent to sell each debt security and whether it is more likely than not the Bank will be required to sell the security before its anticipated recovery. If either of these conditions is met, the Bank recognizes the maximum impairment loss in earnings which is equal to the entire difference between the security’s amortized cost basis and its fair value as of the Statements of Condition date. For securities in an unrealized loss position that meet neither of these conditions, the Bank evaluates whether there is other-than-temporary impairment by performing an analysis to determine if any of these securities will incur a credit loss, which could be up to the difference between the security’s amortized cost basis and its fair value.
Mortgage-backed Securities. The Bank’s investments in MBS consist of U.S. agency guaranteed securities and senior tranches of private-label MBS. The Bank has increased exposure to the risk of loss on its investments in MBS when the loans backing the MBS exhibit high rates of delinquency and foreclosures, as well as losses on the sale of foreclosed properties. The Bank regularly requires high levels of credit enhancements from the structure of the collateralized mortgage obligation to reduce its risk of loss on such securities. Credit enhancements are defined as the percentage of subordinate tranches, overcollateralization, or excess spread, or the support of monoline insurance, if any, in a security structure that will absorb the losses before the security the Bank purchased will take a loss. The Bank does not purchase credit enhancements for its MBS from monoline insurance companies.
The Bank’s investments in private-label MBS were rated “AAA” (or its equivalent) by a nationally recognized statistical rating organization (NRSRO), such as Moody’s Investors Service (Moody’s) and Standard and Poor’s Ratings Services (S&P), at purchase date. The “AAA”-rated securities achieved their ratings through credit enhancement, overcollateralization and senior-subordinated shifting interest features; the latter results in subordination of payments by junior classes to ensure cash flows to the senior classes. The ratings on a significant number of the Bank’s private-label MBS have changed since their purchase date.
Non-private-label MBS. The unrealized losses related to U.S. agency MBS and government-sponsored enterprises MBS are caused by interest rate changes and not credit quality. These securities are guaranteed by government agencies or government-sponsored enterprises and the Bank does not expect these securities to be settled at a price less than the amortized cost basis. In addition, the Bank does not intend to sell these investments and it is not more likely than not that the Bank will be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. The Bank does not consider these investments to be other-than-temporarily impaired as of September 30, 2012.
Private-label MBS. To assess whether the entire amortized cost basis of its private-label MBS will be recovered, the Bank performs a cash flow analysis for each of its private-label MBS. In performing the cash flow analysis for each of these securities, the Bank uses two third-party models. The first model considers borrower characteristics and the particular attributes of the loans underlying the Bank’s securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults, and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas (CBSAs), which are based upon an assessment of the individual housing markets. The term CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the United States Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area of 10,000 or more people. The Bank’s housing price forecast as of September 30, 2012 assumed current-to-trough home price declines ranging from zero percent (for those housing markets that are believed to have reached their trough) to four percent. For those markets for which further home price declines are anticipated, such declines were projected to occur over the three- to nine-month period beginning July 1, 2012. For the vast majority of markets where further home price declines are anticipated, the declines were projected to range from one percent to two percent over the three-month period beginning July 1, 2012.
12
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
From the trough, home prices were projected to recover using one of five different recovery paths that vary by housing market. The following table presents projected home price recovery ranges by months as of September 30, 2012:
Months | Annualized Rates (%) | |
1 to 6 | 0.00 to 2.80 | |
7 to 18 | 0.00 to 3.00 | |
19 to 24 | 1.00 to 4.00 | |
25 to 30 | 2.00 to 4.00 | |
31 to 42 | 2.00 to 5.00 | |
43 to 66 | 2.00 to 6.00 | |
Thereafter | 2.30 to 5.60 |
The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults, and loss severities, were then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. The model classifies securities, as noted in the below table, based on current characteristics and performance, which may be different from the securities’ classification as determined by the originator at the time of origination.
At each quarter end, the Bank compares the present value of the cash flows (discounted at the securities effective yield) expected to be collected with respect to its private-label MBS to the amortized cost basis of the security to determine whether a credit loss exists. For the Bank’s variable rate and hybrid private-label MBS, the Bank uses a forward interest rate curve to project the future estimated cash flows. The Bank then uses the effective interest rate for the security prior to impairment for determining the present value of the future estimated cash flows. For securities previously identified as other-than-temporarily impaired, the Bank updates its estimate of future estimated cash flows on a quarterly basis.
The following table represents a summary of the significant inputs used to measure the amount of the credit loss recognized in earnings for those securities for which an other-than-temporary impairment was determined to have occurred during the three-month period ended September 30, 2012 as well as related current credit enhancement:
Significant Inputs | |||||||||||||||||
Prepayment Rate | Default Rates | Loss Severities | Current Credit Enhancement | ||||||||||||||
Year of Securitization | Weighted Average (%) | Range (%) | Weighted Average (%) | Range (%) | Weighted Average (%) | Range (%) | Weighted Average (%) | Range (%) | |||||||||
Prime: | |||||||||||||||||
2006 | 8.29 | 7.06 to 8.74 | 27.87 | 25.76 to 33.76 | 42.90 | 42.03 to 45.33 | (0.10 | ) | (0.13) to 0.00 | ||||||||
Alt-A: | |||||||||||||||||
2006 | 6.31 | 6.31 to 6.31 | 58.78 | 58.78 to 58.78 | 56.45 | 56.45 to 56.45 | 0.03 | 0.03 to 0.03 | |||||||||
2005 | 9.07 | 9.07 to 9.07 | 34.10 | 34.10 to 34.10 | 38.19 | 38.19 to 38.19 | 5.21 | 5.21 to 5.21 | |||||||||
Total Alt-A | 6.81 | 6.31 to 9.07 | 54.33 | 34.10 to 58.78 | 53.16 | 38.19 to 56.45 | 0.96 | 0.03 to 5.21 | |||||||||
Total | 7.75 | 6.31 to 9.07 | 37.59 | 25.76 to 58.78 | 46.67 | 38.19 to 56.45 | 0.29 | (0.13) to 5.21 |
13
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
The following table presents a roll-forward of the amount of credit losses on the Bank’s investment securities recognized in earnings for which a portion of the other-than-temporary loss was recognized in accumulated other comprehensive loss:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
Balance of credit losses previously recognized in earnings, beginning of period | $ | 597 | $ | 553 | $ | 582 | $ | 464 | |||||||
Amount related to credit loss for which an other-than-temporary impairment was not previously recognized | — | — | — | 10 | |||||||||||
Amount related to credit loss for which an other-than-temporary impairment was previously recognized | 1 | 19 | 16 | 98 | |||||||||||
Balance of cumulative credit losses recognized in earnings, end of period | $ | 598 | $ | 572 | $ | 598 | $ | 572 |
Certain other private-label MBS that have not been designated as other-than-temporarily impaired have experienced unrealized losses and decreases in fair value due to interest rate volatility, illiquidity in the marketplace, and general disruption in the U.S. mortgage markets. These declines in fair value are considered temporary as the Bank expects to recover the amortized cost basis of the securities, the Bank does not intend to sell these securities and it is not more likely than not that the Bank will be required to sell these securities before the anticipated recovery of the securities’ remaining amortized cost basis, which may be at maturity. This assessment is based on the fact that the Bank has sufficient capital and liquidity to operate its business and has no need to sell these securities, nor has the Bank entered into any contractual constraints that would require the Bank to sell these securities.
Note 7—Advances
Redemption Terms. The Bank had advances outstanding, as summarized below.
As of September 30, 2012 | As of December 31, 2011 | ||||||
Overdrawn demand deposit accounts | $ | — | $ | 3 | |||
Due in one year or less | 30,422 | 36,542 | |||||
Due after one year through two years | 9,992 | 11,173 | |||||
Due after two years through three years | 6,131 | 7,851 | |||||
Due after three years through four years | 4,716 | 3,881 | |||||
Due after four years through five years | 8,868 | 5,836 | |||||
Due after five years | 16,208 | 17,283 | |||||
Total par value | 76,337 | 82,569 | |||||
Discount on AHP (1) advances | (11 | ) | (12 | ) | |||
Discount on EDGE (2) advances | (9 | ) | (10 | ) | |||
Hedging adjustments | 4,232 | 4,431 | |||||
Deferred commitment fees | (6 | ) | (7 | ) | |||
Total | $ | 80,543 | $ | 86,971 |
____________
(1) | The Affordable Housing Program |
(2) | The Economic Development and Growth Enhancement program |
14
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
The following table summarizes advances by year of contractual maturity or, for convertible advances, next conversion date:
As of September 30, 2012 | As of December 31, 2011 | ||||||
Overdrawn demand deposit accounts | $ | — | $ | 3 | |||
Due or convertible in one year or less | 35,577 | 42,376 | |||||
Due or convertible after one year through two years | 9,910 | 11,946 | |||||
Due or convertible after two years through three years | 6,272 | 7,716 | |||||
Due or convertible after three years through four years | 4,302 | 3,464 | |||||
Due or convertible after four years through five years | 7,073 | 5,021 | |||||
Due or convertible after five years | 13,203 | 12,043 | |||||
Total par value | $ | 76,337 | $ | 82,569 |
Interest-rate Payment Terms. The following table details interest-rate payment terms for advances:
As of September 30, 2012 | As of December 31, 2011 | ||||||
Fixed-rate: | |||||||
Due in one year or less | $ | 27,729 | $ | 32,389 | |||
Due after one year | 37,401 | 38,811 | |||||
Total fixed-rate | 65,130 | 71,200 | |||||
Variable-rate: | |||||||
Due in one year or less | 2,693 | 4,156 | |||||
Due after one year | 8,514 | 7,213 | |||||
Total variable-rate | 11,207 | 11,369 | |||||
Total par value | $ | 76,337 | $ | 82,569 |
As of September 30, 2012 and December 31, 2011, 64.1 percent and 65.7 percent, respectively, of the Bank’s fixed-rate advances were swapped and 30.7 percent and 9.79 percent respectively, of the Bank’s variable-rate advances were swapped.
Based on the collateral pledged as security for advances, the Bank's credit analysis of members’ financial condition, and prior repayment history, no allowance for credit losses on advances was deemed necessary by the Bank as of September 30, 2012 and December 31, 2011. No advance was past due as of September 30, 2012 and December 31, 2011.
The Bank’s potential credit risk from advances is concentrated in commercial banks, savings institutions and credit unions and further is concentrated in certain larger borrowing relationships. As of September 30, 2012 and December 31, 2011, the concentration of the Bank’s advances was $56,073 and $56,991 respectively, to 10 member institutions, and representing 73.5 percent and 69.0 percent, respectively, of total advances outstanding.
Note 8—Consolidated Obligations
Consolidated obligations, consisting of consolidated obligation bonds and discount notes, are the joint and several obligations of the 12 Federal Home Loan Banks (FHLBanks) and are backed only by the financial resources of the FHLBanks. The Federal Home Loan Banks Office of Finance (Office of Finance) tracks the amount of debt issued on behalf of each FHLBank. In addition, the Bank separately tracks and records as a liability its specific portion of consolidated obligations for which it is the primary obligor.
15
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
Interest-rate Payment Terms. The following table details the Bank’s consolidated obligation bonds by interest-rate payment type:
As of September 30, 2012 | As of December 31, 2011 | ||||||
Fixed-rate | $ | 76,153 | $ | 84,571 | |||
Step up/down | 3,067 | 2,978 | |||||
Simple variable-rate | 1,000 | 1,850 | |||||
Variable-rate capped floater | 20 | 20 | |||||
Total par value | $ | 80,240 | $ | 89,419 |
As of September 30, 2012 and December 31, 2011, 81.2 percent and 81.9 percent, respectively, of the Bank’s fixed-rate consolidated obligation bonds were swapped and 1.96 percent and 6.42 percent, respectively, of the Bank’s variable-rate consolidated obligation bonds were swapped.
Redemption Terms. The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding, by year of contractual maturity:
As of September 30, 2012 | As of December 31, 2011 | ||||||||||
Amount | Weighted- average Interest Rate (%) | Amount | Weighted- average Interest Rate (%) | ||||||||
Due in one year or less | $ | 51,359 | 0.82 | $ | 48,163 | 0.57 | |||||
Due after one year through two years | 12,667 | 1.90 | 20,987 | 1.83 | |||||||
Due after two years through three years | 1,495 | 2.14 | 7,927 | 2.40 | |||||||
Due after three years through four years | 3,426 | 3.72 | 2,083 | 2.65 | |||||||
Due after four years through five years | 6,391 | 2.80 | 4,005 | 3.79 | |||||||
Due after five years | 4,902 | 2.82 | 6,254 | 3.97 | |||||||
Total par value | 80,240 | 1.41 | 89,419 | 1.46 | |||||||
Premiums | 86 | 101 | |||||||||
Discounts | (37 | ) | (38 | ) | |||||||
Hedging adjustments | 1,145 | 1,180 | |||||||||
Total | $ | 81,434 | $ | 90,662 |
The Bank’s consolidated obligation bonds outstanding by call feature:
As of September 30, 2012 | As of December 31, 2011 | ||||||
Noncallable | $ | 71,368 | $ | 60,794 | |||
Callable | 8,872 | 28,625 | |||||
Total par value | $ | 80,240 | $ | 89,419 |
16
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
The following table summarizes the Bank’s consolidated obligation bonds outstanding, by year of contractual maturity or, for callable consolidated obligation bonds, next call date:
As of September 30, 2012 | As of December 31, 2011 | ||||||
Due or callable in one year or less | $ | 55,754 | $ | 60,321 | |||
Due or callable after one year through two years | 12,007 | 17,467 | |||||
Due or callable after two years through three years | 1,035 | 3,284 | |||||
Due or callable after three years through four years | 3,088 | 1,110 | |||||
Due or callable after four years through five years | 6,061 | 2,870 | |||||
Due or callable after five years | 2,295 | 4,367 | |||||
Total par value | $ | 80,240 | $ | 89,419 |
Consolidated Obligation Discount Notes. Consolidated obligation discount notes are issued to raise short-term funds. Consolidated obligation discount notes are consolidated obligations with contractual maturities of up to one year. These consolidated obligation discount notes are issued at less than their face amounts and redeemed at par value when they mature.
The Bank’s participation in consolidated obligation discount notes was as follows:
Book Value | Par Value | Weighted- average Interest Rate (%) | |||||||
As of September 30, 2012 | $ | 21,767 | $ | 21,773 | 0.12 | ||||
As of December 31, 2011 | $ | 24,330 | $ | 24,331 | 0.03 |
As of September 30, 2012 and December 31, 2011, 0.00 percent and 4.64 percent, respectively, of the Bank’s fixed-rate consolidated obligation discount notes were swapped to a variable rate.
Note 9—Capital and Mandatorily Redeemable Capital Stock
Capital. The Bank was in compliance with the Federal Housing Finance Agency (Finance Agency) regulatory capital rules and requirements, as shown in the following table:
As of September 30, 2012 | As of December 31, 2011 | ||||||||||||||
Required | Actual | Required | Actual | ||||||||||||
Risk based capital | $ | 1,705 | $ | 6,234 | $ | 1,951 | $ | 7,258 | |||||||
Total capital-to-assets ratio | 4.00 | % | 5.56 | % | 4.00 | % | 5.79 | % | |||||||
Total regulatory capital (1) | $ | 4,483 | $ | 6,234 | $ | 5,011 | $ | 7,258 | |||||||
Leverage ratio | 5.00 | % | 8.34 | % | 5.00 | % | 8.69 | % | |||||||
Leverage capital | $ | 5,604 | $ | 9,351 | $ | 6,264 | $ | 10,887 |
___________
(1) | Mandatorily redeemable capital stock is considered capital for regulatory purposes, and “total regulatory capital” includes the Bank’s $42 and $286 in mandatorily redeemable capital stock as of September 30, 2012 and December 31, 2011, respectively. |
17
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
Mandatorily Redeemable Capital Stock. The following table provides the activity in mandatorily redeemable capital stock:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
Balance, beginning of period | $ | 115 | $ | 385 | $ | 286 | $ | 529 | |||||||
Capital stock subject to mandatory redemption reclassified from equity during the period due to: | |||||||||||||||
Attainment of nonmember status | 6 | 32 | 87 | 69 | |||||||||||
Withdrawal | — | — | 1 | 1 | |||||||||||
Repurchase/redemption of mandatorily redeemable capital stock | (79 | ) | (85 | ) | (303 | ) | (257 | ) | |||||||
Capital stock no longer subject to redemption due to the transfer of stock from a nonmember to a member | — | (13 | ) | (29 | ) | (23 | ) | ||||||||
Balance, end of period | $ | 42 | $ | 319 | $ | 42 | $ | 319 |
The following table shows the amount of mandatorily redeemable capital stock by year of redemption. The year of redemption in the table is the later of the end of the five-year redemption period, or with respect to activity-based stock, the later of the expiration of the five-year redemption period or the activity’s maturity date.
As of September 30, 2012 | As of December 31, 2011 | ||||||
Due in one year or less | $ | — | $ | 4 | |||
Due after one year through two years | 4 | 8 | |||||
Due after two years through three years | 5 | 52 | |||||
Due after three years through four years | 2 | 122 | |||||
Due after four years through five years | 31 | 99 | |||||
Due after five years | — | 1 | |||||
Total | $ | 42 | $ | 286 |
Note 10—Accumulated Other Comprehensive Loss
Components comprising accumulated other comprehensive loss were as follows:
Pension and Postretirement Benefits | Noncredit Portion of Other-than- temporary Impairment Losses on Available-for- sale Securities | Total Accumulated Other Comprehensive Loss | |||||||||
Balance, December 31, 2010 | $ | (10 | ) | $ | (392 | ) | $ | (402 | ) | ||
Current period other comprehensive income | — | 85 | 85 | ||||||||
Balance, September 30, 2011 | $ | (10 | ) | $ | (307 | ) | $ | (317 | ) | ||
Balance, December 31, 2011 | $ | (13 | ) | $ | (398 | ) | $ | (411 | ) | ||
Current period other comprehensive income | 1 | 313 | 314 | ||||||||
Balance, September 30, 2012 | $ | (12 | ) | $ | (85 | ) | $ | (97 | ) |
Note 11—Derivatives and Hedging Activities
Nature of Business Activity
The Bank is exposed to interest-rate risk primarily from the effect of interest rate changes on its interest-earning assets and its funding sources that finance these assets. The goal of the Bank’s interest-rate risk management strategies is not to eliminate interest-rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, the Bank has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes it is willing to accept. In addition, the Bank monitors the risk to its interest income, net interest margin, and average maturity of interest-earning assets and funding sources. For additional information on the Bank’s derivatives and hedging activities, see Note 18—Derivatives and Hedging Activities to the 2011 audited financial statements contained in the Bank’s Form 10-K.
18
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
The Bank transacts most of its derivatives with large banks and major broker-dealers and generally enters into bilateral collateral agreements. Some of these banks and broker-dealers or their affiliates buy, sell and distribute consolidated obligations. The Bank is not a derivatives dealer and thus does not trade derivatives for short-term profit.
Financial Statement Effect and Additional Financial Information
Derivative Notional Amounts. The notional amount of derivatives serves as a factor in determining periodic interest payments or cash flows received and paid. However, the notional amount of derivatives represents neither the actual amounts exchanged nor the overall exposure of the Bank to credit and market risk. The risks of derivatives can be measured meaningfully on a portfolio basis that takes into account the derivatives, the items being hedged and any offsets between the two.
The following table summarizes the fair value of derivative instruments. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest.
As of September 30, 2012 | As of December 31, 2011 | ||||||||||||||||||||||
Notional Amount of Derivatives | Derivative Assets | Derivative Liabilities | Notional Amount of Derivatives | Derivative Assets | Derivative Liabilities | ||||||||||||||||||
Derivatives in hedging relationships: | |||||||||||||||||||||||
Interest rate swaps | $ | 106,005 | $ | 1,278 | $ | (4,202 | ) | $ | 120,999 | $ | 1,344 | $ | (4,467 | ) | |||||||||
Total derivatives in hedging relationships | 106,005 | 1,278 | (4,202 | ) | 120,999 | 1,344 | (4,467 | ) | |||||||||||||||
Derivatives not designated as hedging instruments: | |||||||||||||||||||||||
Interest rate swaps | 7,292 | 14 | (546 | ) | 6,221 | 14 | (567 | ) | |||||||||||||||
Interest rate caps or floors | 12,500 | 23 | (18 | ) | 12,500 | 64 | (53 | ) | |||||||||||||||
Total derivatives not designated as hedging instruments | 19,792 | 37 | (564 | ) | 18,721 | 78 | (620 | ) | |||||||||||||||
Total derivatives before netting and collateral adjustments | $ | 125,797 | 1,315 | (4,766 | ) | $ | 139,720 | 1,422 | (5,087 | ) | |||||||||||||
Netting adjustments | (1,218 | ) | 1,218 | (1,377 | ) | 1,377 | |||||||||||||||||
Cash collateral and related accrued interest | (57 | ) | 3,388 | (27 | ) | 3,469 | |||||||||||||||||
Total collateral and netting adjustments (1) | (1,275 | ) | 4,606 | (1,404 | ) | 4,846 | |||||||||||||||||
Derivative assets and derivative liabilities | $ | 40 | $ | (160 | ) | $ | 18 | $ | (241 | ) |
___________
(1) | Amounts represent the effect of legally enforceable master netting agreements that allow the Bank to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same counterparties. |
19
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
The following tables present the components of net gains (losses) on derivatives and hedging activities as presented in the Statements of Income:
Three Months Ended September 30, | |||||||
2012 | 2011 | ||||||
Derivatives and hedged items in fair value hedging relationships: | |||||||
Interest rate swaps | $ | 49 | $ | 28 | |||
Total net gains related to fair value hedge ineffectiveness | 49 | 28 | |||||
Derivatives not designated as hedging instruments: | |||||||
Interest rate swaps | 6 | (40 | ) | ||||
Interest rate caps or floors | (1 | ) | (20 | ) | |||
Net interest settlements | (24 | ) | (35 | ) | |||
Total net losses related to derivatives not designated as hedging instruments | (19 | ) | (95 | ) | |||
Net gains (losses) on derivatives and hedging activities | $ | 30 | $ | (67 | ) | ||
Nine Months Ended September 30, | |||||||
2012 | 2011 | ||||||
Derivatives and hedged items in fair value hedging relationships: | |||||||
Interest rate swaps | $ | 136 | $ | 101 | |||
Total net gains related to fair value hedge ineffectiveness | 136 | 101 | |||||
Derivatives not designated as hedging instruments: | |||||||
Interest rate swaps | 30 | (15 | ) | ||||
Interest rate caps or floors | (5 | ) | (19 | ) | |||
Net interest settlements | (78 | ) | (108 | ) | |||
Total net losses related to derivatives not designated as hedging instruments | (53 | ) | (142 | ) | |||
Net gains (losses) on derivatives and hedging activities | $ | 83 | $ | (41 | ) |
The following tables present, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Bank’s net interest income:
Three Months Ended September 30, 2012 | ||||||||||||||||
Hedged Item Type | Gains (Losses) on Derivative | Gains (Losses) on Hedged Item | Net Fair Value Hedge Ineffectiveness | Effect of Derivatives on Net Interest Income (1) | ||||||||||||
Advances | $ | 17 | $ | 45 | $ | 62 | $ | (337 | ) | |||||||
Consolidated obligation bonds | — | (13 | ) | (13 | ) | 140 | ||||||||||
Total | $ | 17 | $ | 32 | $ | 49 | $ | (197 | ) |
____________
(1) | The net interest on derivatives in fair value hedge relationships is presented in the interest income or expense line item of the respective hedged item. |
Three Months Ended September 30, 2011 | ||||||||||||||||
Hedged Item Type | Gains (Losses) on Derivative | Gains (Losses) on Hedged Item | Net Fair Value Hedge Ineffectiveness | Effect of Derivatives on Net Interest Income (1) | ||||||||||||
Advances | $ | (889 | ) | $ | 912 | $ | 23 | $ | (491 | ) | ||||||
Consolidated obligation bonds | 169 | (164 | ) | 5 | 200 | |||||||||||
Total | $ | (720 | ) | $ | 748 | $ | 28 | $ | (291 | ) |
____________
(1) | The net interest on derivatives in fair value hedge relationships is presented in the interest income or expense line item of the respective hedged item. |
20
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
Nine Months Ended September 30, 2012 | ||||||||||||||||
Hedged Item Type | Gains (Losses) on Derivative | Gains (Losses) on Hedged Item | Net Fair Value Hedge Ineffectiveness | Effect of Derivatives on Net Interest Income (1) | ||||||||||||
Advances | $ | 169 | $ | — | $ | 169 | $ | (1,085 | ) | |||||||
Consolidated obligation bonds | (45 | ) | 12 | (33 | ) | 429 | ||||||||||
Total | $ | 124 | $ | 12 | $ | 136 | $ | (656 | ) |
____________
(1) | The net interest on derivatives in fair value hedge relationships is presented in the interest income or expense line item of the respective hedged item. |
Nine Months Ended September 30, 2011 | ||||||||||||||||
Hedged Item Type | Gains (Losses) on Derivative | Gains (Losses) on Hedged Item | Net Fair Value Hedge Ineffectiveness | Effect of Derivatives on Net Interest Income (1) | ||||||||||||
Advances | $ | (508 | ) | $ | 618 | $ | 110 | $ | (1,622 | ) | ||||||
Consolidated obligations: | ||||||||||||||||
Bonds | 162 | (171 | ) | (9 | ) | 634 | ||||||||||
Discount notes | (2 | ) | 2 | — | 2 | |||||||||||
Total | $ | (348 | ) | $ | 449 | $ | 101 | $ | (986 | ) |
____________
(1) | The net interest on derivatives in fair value hedge relationships is presented in the interest income or expense line item of the respective hedged item. |
Managing Credit Risk on Derivatives
The Bank is subject to credit risk due to nonperformance by counterparties to the derivative agreements. The amount of counterparty risk depends on the extent to which master netting arrangements are included in such contracts to mitigate the risk. The Bank manages counterparty credit risk through credit analysis, collateral requirements, and adherence to the requirements set forth in Bank policies and Finance Agency regulations. Based on credit analyses and collateral requirements, the Bank presently does not anticipate any credit losses on its existing derivative agreements with counterparties as of September 30, 2012.
The following table presents credit exposure on derivative instruments, excluding circumstances where a counterparty’s pledged collateral to the Bank exceeds the Bank’s net position.
As of September 30, 2012 | As of December 31, 2011 | ||||||
Total net exposure at fair value (1) | $ | 97 | $ | 45 | |||
Cash collateral held | 57 | 27 | |||||
Net positive exposure after cash collateral | 40 | 18 | |||||
Other collateral | — | 5 | |||||
Net exposure after collateral (2) | $ | 40 | $ | 13 |
____________
(1) | Includes net accrued interest receivable of $34 and $1 as of September 30, 2012 and December 31, 2011, respectively. |
(2) | The Bank had net credit exposure of $3 and $0 at September 30, 2012 and December 31, 2011, respectively, due to instances where the Bank’s pledged collateral to a counterparty exceeds the Bank’s net position. |
21
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
Certain of the Bank’s derivative instruments contain provisions that require the Bank to post additional collateral with its counterparties if there is deterioration in the Bank’s credit rating. If the Bank’s credit rating is lowered by a major credit rating agency, the Bank would be required to deliver additional collateral on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position (before cash collateral and related accrued interest) as of September 30, 2012 was $3,545 for which the Bank has posted collateral of $3,388 in the normal course of business. If the Bank’s credit ratings had been lowered from its current rating to the next lower rating that would have triggered additional collateral to be delivered, the Bank would have been required to deliver up to an additional $132 of collateral (at fair value) to its derivative counterparties as of September 30, 2012.
Note 12—Estimated Fair Values
The Bank records trading securities, available-for-sale securities, and derivative assets and liabilities at fair value. A fair value hierarchy is used to prioritize the inputs of valuation techniques used to measure fair value. A description of the application of the fair value hierarchy, valuation techniques, and significant inputs is disclosed in Note 19–Estimated Fair Values to the 2011 audited financial statements contained in the Bank’s Form 10-K. There have been no changes in the fair value hierarchy classification of financial assets and liabilities, valuation techniques, or significant inputs during the nine-month period ended September 30, 2012.
Fair Value on a Recurring Basis. The following tables present for each fair value hierarchy level, the Bank’s financial assets and liabilities that are measured at fair value on a recurring basis on its Statements of Condition:
As of September 30, 2012 | |||||||||||||||||||
Fair Value Measurements Using | Netting Adjustment (1) | ||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Assets | |||||||||||||||||||
Trading securities: | |||||||||||||||||||
Government-sponsored enterprises debt obligations | $ | — | $ | 2,312 | $ | — | $ | — | $ | 2,312 | |||||||||
Other FHLBank’s bond | — | 80 | — | — | 80 | ||||||||||||||
State or local housing agency debt obligations | — | 1 | — | — | 1 | ||||||||||||||
Total trading securities | — | 2,393 | — | — | 2,393 | ||||||||||||||
Available-for-sale securities: | |||||||||||||||||||
Private-label MBS | — | — | 2,770 | — | 2,770 | ||||||||||||||
Derivative assets: | |||||||||||||||||||
Interest-rate related | — | 1,315 | — | (1,275 | ) | 40 | |||||||||||||
Total assets at fair value | $ | — | $ | 3,708 | $ | 2,770 | $ | (1,275 | ) | $ | 5,203 | ||||||||
Liabilities | |||||||||||||||||||
Derivative liabilities: | |||||||||||||||||||
Interest-rate related | $ | — | $ | (4,766 | ) | $ | — | $ | 4,606 | $ | (160 | ) | |||||||
Total liabilities at fair value | $ | — | $ | (4,766 | ) | $ | — | $ | 4,606 | $ | (160 | ) |
____________
(1) | Amounts represent the effect of legally enforceable master netting agreements that allow the Bank to settle positive and negative positions and also cash collateral held or placed with the same counterparties. |
22
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
As of December 31, 2011 | |||||||||||||||||||
Fair Value Measurements Using | Netting Adjustment (1) | ||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Assets | |||||||||||||||||||
Trading securities: | |||||||||||||||||||
Government-sponsored enterprises debt obligations | $ | — | $ | 3,035 | $ | — | $ | — | $ | 3,035 | |||||||||
Other FHLBank’s bond | — | 82 | — | — | 82 | ||||||||||||||
State or local housing agency debt obligations | — | 3 | — | — | 3 | ||||||||||||||
Total trading securities | — | 3,120 | — | — | 3,120 | ||||||||||||||
Available-for-sale securities: | |||||||||||||||||||
Private-label MBS | — | — | 2,942 | — | 2,942 | ||||||||||||||
Derivative assets: | |||||||||||||||||||
Interest-rate related | — | 1,422 | — | (1,404 | ) | 18 | |||||||||||||
Total assets at fair value | $ | — | $ | 4,542 | $ | 2,942 | $ | (1,404 | ) | $ | 6,080 | ||||||||
Liabilities | |||||||||||||||||||
Derivative liabilities: | |||||||||||||||||||
Interest-rate related | $ | — | $ | (5,087 | ) | $ | — | $ | 4,846 | $ | (241 | ) | |||||||
Total liabilities at fair value | $ | — | $ | (5,087 | ) | $ | — | $ | 4,846 | $ | (241 | ) |
____________
(1) | Amounts represent the effect of legally enforceable master netting agreements that allow the Bank to settle positive and negative positions and also cash collateral held or placed with the same counterparties. |
The following table presents a reconciliation of available-for-sale securities that are measured at fair value using significant unobservable inputs (Level 3):
Nine Months Ended September 30, | |||||||
2012 | 2011 | ||||||
Balance, beginning of period | $ | 2,942 | $ | 3,319 | |||
Transfer of private-label MBS from held-to-maturity to available-for-sale | 6 | 369 | |||||
Total (losses) gains realized and unrealized: (1) | |||||||
Included in net impairment losses recognized in earnings | (16 | ) | (101 | ) | |||
Included in other comprehensive loss (2) | 313 | 113 | |||||
Accretion of credit losses in net interest income | 4 | (9 | ) | ||||
Settlements | (479 | ) | (589 | ) | |||
Balance, end of period | $ | 2,770 | $ | 3,102 |
____________
(1) | Related to available-for-sale securities held at period end. |
(2) | This amount is included in other comprehensive loss within the net change in fair value on other-than-temporary impairment available-for-sale securities and reclassification of noncredit portion of impairment losses included in net income. |
The following estimated fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank as of September 30, 2012 and December 31, 2011. Although the Bank uses its best judgment in estimating the fair values of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology.
For example, because an active secondary market does not exist for a portion of the Bank’s financial instruments, in certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. Therefore, these estimated fair values are not necessarily indicative of the amounts that would be realized in current market transactions, although they do reflect the Bank’s judgment of how a market participant would estimate the fair value. The fair value tables presented below do not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.
23
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
The carrying values and estimated fair values of the Bank’s financial instruments were as follows:
As of September 30, 2012 | |||||||||||||||||||||||
Estimated Fair Value | |||||||||||||||||||||||
Carrying Value | Total | Level 1 | Level 2 | Level 3 | Netting Adjustment | ||||||||||||||||||
Assets: | |||||||||||||||||||||||
Cash and due from banks | $ | 12 | $ | 12 | $ | 12 | $ | — | $ | — | $ | — | |||||||||||
Interest bearing-deposits | 1,005 | 1,005 | — | 1,005 | — | — | |||||||||||||||||
Securities purchased under agreements to resell | 250 | 250 | — | 250 | — | — | |||||||||||||||||
Federal funds sold | 7,014 | 7,014 | — | 7,014 | — | — | |||||||||||||||||
Trading securities | 2,393 | 2,393 | — | 2,393 | — | — | |||||||||||||||||
Available-for-sale securities | 2,770 | 2,770 | — | — | 2,770 | — | |||||||||||||||||
Held-to-maturity securities | 16,286 | 16,475 | — | 13,542 | 2,933 | — | |||||||||||||||||
Mortgage loans held for portfolio, net | 1,335 | 1,483 | — | 1,483 | — | — | |||||||||||||||||
Advances | 80,543 | 81,145 | — | 81,145 | — | — | |||||||||||||||||
Accrued interest receivable | 264 | 264 | — | 264 | — | — | |||||||||||||||||
Derivative assets | 40 | 40 | — | 1,315 | — | (1,275 | ) | ||||||||||||||||
Liabilities: | |||||||||||||||||||||||
Interest-bearing deposits | (2,061 | ) | (2,061 | ) | — | (2,061 | ) | — | — | ||||||||||||||
Consolidated obligations, net: | |||||||||||||||||||||||
Discount notes | (21,767 | ) | (21,769 | ) | — | (21,769 | ) | — | — | ||||||||||||||
Bonds | (81,434 | ) | (82,321 | ) | — | (82,321 | ) | — | — | ||||||||||||||
Mandatorily redeemable capital stock | (42 | ) | (42 | ) | (42 | ) | — | — | — | ||||||||||||||
Accrued interest payable | (299 | ) | (299 | ) | — | (299 | ) | — | — | ||||||||||||||
Derivative liabilities | (160 | ) | (160 | ) | — | (4,766 | ) | — | 4,606 |
As of December 31, 2011 | |||||||
Carrying Value | Estimated Fair Value | ||||||
Assets: | |||||||
Cash and due from banks | $ | 6 | $ | 6 | |||
Interest-bearing deposits | 1,203 | 1,203 | |||||
Federal funds sold | 12,630 | 12,629 | |||||
Trading securities | 3,120 | 3,120 | |||||
Available-for-sale securities | 2,942 | 2,942 | |||||
Held-to-maturity securities | 16,243 | 16,242 | |||||
Mortgage loans held for portfolio, net | 1,633 | 1,796 | |||||
Advances | 86,971 | 87,655 | |||||
Accrued interest receivable | 314 | 314 | |||||
Derivative assets | 18 | 18 | |||||
Liabilities: | |||||||
Interest-bearing deposits | (2,655 | ) | (2,655 | ) | |||
Consolidated obligations, net: | |||||||
Discount notes | (24,330 | ) | (24,330 | ) | |||
Bonds | (90,662 | ) | (91,839 | ) | |||
Mandatorily redeemable capital stock | (286 | ) | (286 | ) | |||
Accrued interest payable | (286 | ) | (286 | ) | |||
Derivative liabilities | (241 | ) | (241 | ) |
24
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
Note 13—Commitments and Contingencies
As described in Note 8–Consolidated Obligations, consolidated obligations are backed only by the financial resources of the FHLBanks. The Finance Agency may at any time require any FHLBank to make principal or interest payments due on any consolidated obligations, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation. No FHLBank has ever had to assume or pay the consolidated obligation of another FHLBank.
The par value of the FHLBanks’ outstanding consolidated obligations for which the Bank is jointly and severally liable was $572,473 and $578,118 as of September 30, 2012 and December 31, 2011, respectively, exclusive of the Bank’s own outstanding consolidated obligations.
The Bank’s outstanding standby letters of credit were as follows:
As of September 30, 2012 | As of December 31, 2011 | ||||||
Outstanding notional | $ | 18,572 | $ | 21,510 | |||
Original terms (1) | Less than 12 months to 20 years | Less than 12 months to 20 years | |||||
Final expiration year | 2030 | 2030 |
____________
(1) | The Bank had three standby letters of credit for a total of $6 as of September 30, 2012, and no standby letters of credit as of December 31, 2011, that have no stated maturity date and are subject to renewal on an annual basis. |
The carrying value of the guarantees related to standby letters of credit is recorded in other liabilities and amounted to $63 and $80 as of September 30, 2012 and December 31, 2011, respectively. Based on the Bank's credit analyses and collateral requirements, the Bank does not deem it necessary to record any additional liability on these commitments.
The Bank monitors the creditworthiness of its standby letters of credit based on an evaluation of the member. The Bank has established parameters for the measurement, review, classification, and monitoring of credit risk related to these standby letters of credit that results in an internal credit rating, which focuses primarily on an institution’s overall financial health and takes into account quality of assets, earnings, and capital position. In general, borrowers categorized into the highest risk rating category have more restrictions on the types of collateral they may use to secure standby letters of credit, may be required to maintain higher collateral maintenance levels and deliver loan collateral, and may face more stringent collateral reporting requirements.
The Bank had no commitments that unconditionally obligate the Bank to purchase closed mortgage loans as of September 30, 2012 and December 31, 2011. Such commitments would be recorded as derivatives at their fair values.
As of September 30, 2012, the Bank had committed to the issuance of $1,653 (par value) in consolidated obligation bonds, of which $1,631 were hedged with associated interest rate swaps that had traded but not yet settled. As of December 31, 2011, the Bank had committed to the issuance of $3,492 (par value) in consolidated obligation bonds, of which $3,475 were hedged with associated interest rate swaps that had traded but not yet settled.
The Bank is subject to legal proceedings arising in the normal course of business. After consultation with legal counsel, management does not anticipate, as of the date of the financial statements, that the ultimate liability, if any, arising out of these matters will have a material effect on the Bank’s financial condition or results of operations.
Note 14—Transactions with Members and their Affiliates and with Housing Associates
The Bank is a cooperative whose member institutions own almost all of the capital stock of the Bank. Former members own the remaining capital stock to support business transactions still carried on the Bank’s Statements of Condition. All holders of the Bank’s capital stock 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, as amended (FHLBank Act), and mortgage loans held for portfolio are purchased from members. The Bank also maintains demand deposit accounts primarily to facilitate settlement activities that are related directly to advances and mortgage loan purchases. All transactions with members are entered into in the ordinary course of the Bank’s business. Transactions with any member that has an officer or director who also is a director of the Bank are subject to the same Bank policies as transactions with other members.
25
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)
The Bank defines related parties as each of the other FHLBanks and those members with regulatory capital stock outstanding in excess of 10 percent of total regulatory capital stock. Based on this definition, one member institution, Bank of America, National Association, which held 11.9 percent of the Bank’s total regulatory capital stock as of September 30, 2012, was considered a related party. Total advances outstanding to Bank of America, National Association were $9,989 and $16,039 as of September 30, 2012 and December 31, 2011, respectively. Total deposits held in the name of Bank of America, National Association were less than $1 as of September 30, 2012 and December 31, 2011. No mortgage loans or mortgage-backed securities were acquired from Bank of America, National Association during the nine-month periods ended September 30, 2012 and 2011.
Note 15—Subsequent Events
On October 25, 2012, the Bank’s board of directors approved a cash dividend for the third quarter of 2012 in the amount of $30. The Bank paid the third quarter 2012 dividend on November 6, 2012.
On October 30, 2012, the Bank sent a notice to each current shareholder of the Bank announcing that it will repurchase all membership excess capital stock and activity-based excess capital stock on November 19, 2012. Shareholders with excess capital stock on the repurchase date may not opt out of the repurchase. As of September 30, 2012, the Bank had a total of $239 in outstanding excess capital stock.
26
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Information
Some of the statements made in this quarterly report on Form 10-Q may be “forward-looking statements” which include statements with respect to the plans, objectives, expectations, estimates and future performance of the Bank and involve known and unknown risks, uncertainties, and other factors, many of which may be beyond the Bank’s control and which may cause the Bank’s actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by the forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. The reader can identify these forward-looking statements through the Bank’s use of words such as “may,” “will,” “anticipate,” “hope,” “project,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “point to,” “could,” “intend,” “seek,” “target,” and other similar words and expressions of the future. Such forward-looking statements include statements regarding any one or more of the following topics:
• | the Bank’s business strategy and changes in operations, including, without limitation, product growth and change in product mix; |
• | future performance, including profitability, developments, or market forecasts; |
• | forward-looking accounting and financial statement effects; and |
• | those other factors identified and discussed in the Bank’s public filings with the SEC. |
The forward-looking statements may not be realized due to a variety of factors, including, without limitation, those risk factors provided under Item 1A of the Bank’s Form 10-K and those risk factors presented under Item 1A in Part II of this quarterly report on Form 10-Q.
All written or oral statements that are made by or are attributable to the Bank are expressly qualified in their entirety by this cautionary notice. The reader should not place undue reliance on forward-looking statements, since the statements speak only as of the date that they are made. The Bank has no obligation and does not undertake publicly to update, revise, or correct any of the forward-looking statements after the date of this quarterly report, or after the respective dates on which these statements otherwise are made, whether as a result of new information, future events, or otherwise, except as otherwise may be required by law.
The discussion presented below provides an analysis of the Bank’s results of operations and financial condition for the third quarter and the first nine months ended September 30, 2012 and 2011. Management’s discussion and analysis should be read in conjunction with the financial statements and accompanying notes presented elsewhere in this report, as well as the Bank’s audited financial statements for the year ended December 31, 2011.
Executive Summary
General Overview
The Bank is a cooperative whose primary business activity is providing competitively-priced loans, which the Bank refers to as “advances,” to its members and eligible housing associates to help them meet the credit needs of their communities. The Bank also makes grants and subsidized advances under the Affordable Housing Program, and provides certain cash management services to members and eligible nonmembers. The consolidated obligations (COs) issued by the Office of Finance on behalf of the FHLBanks are the principal funding source for Bank assets. The Bank is primarily liable for repayment of COs issued on its behalf and is jointly and severally liable for the COs issued on behalf of the other FHLBanks. Deposits, other borrowings, and the issuance of capital stock provide additional funding to the Bank. The Bank also maintains a portfolio of investments for liquidity purposes, to provide available funds to meet member credit needs, and to provide additional earnings.
Financial Condition
As of September 30, 2012, total assets were $112.1 billion, a decrease of $13.2 billion, or 10.5 percent, from December 31, 2011. This decrease was primarily due to a $6.4 billion, or 7.39 percent, decrease in advances and a $6.4 billion, or 17.8 percent, decrease in total investments. Advances, the largest asset on the Bank’s balance sheet, decreased as a result of scheduled maturities, prepayments, and members’ significant liquidity. The decrease in total investments was primarily due to a $5.6 billion decrease in short-term investments as further discussed in Management's Discussion and Analysis—Financial Condition—Investments below.
27
As of September 30, 2012, total liabilities were $106.0 billion, a decrease of $12.7 billion, or 10.7 percent, from December 31, 2011. This decrease was primarily due to a $11.8 billion, or 10.3 percent, decrease in COs. The decrease in COs corresponds to the decrease in demand for advances by the Bank’s members during the period.
As of September 30, 2012, total capital was $6.1 billion, a decrease of $466 million, or 7.10 percent, from December 31, 2011. This decrease was primarily due to the repurchase of $1.7 billion in excess capital stock, excluding capital stock classified as mandatorily redeemable capital stock, partially offset by the issuance of $799 million of capital stock, and a $314 million decrease in accumulated other comprehensive loss during the period. The decrease in accumulated other comprehensive loss was primarily due to improvements in the fair value of the Bank’s available-for-sale securities.
Results of Operations
The Bank recorded net income of $76 million for the third quarter of 2012, an increase of $44 million, or 140 percent, from net income of $32 million for the third quarter of 2011. The increase in net income was primarily due to a $68 million increase in noninterest income, partially offset by a $18 million decrease in net interest income and a $4 million increase in total assessments. These items are discussed in more detail in Management’s Discussion and Analysis–Results of Operations below.
The Bank recorded net income of $206 million for the first nine months of 2012, an increase of $85 million, or 70.8 percent, from net income of $121 million during the same period in 2011. The increase in net income was primarily due to a $152 million increase in noninterest income, partially offset by a $72 million decrease in net interest income. These items are discussed in more detail in Management’s Discussion and Analysis–Results of Operations below.
One way in which the Bank analyzes its performance is by comparing its annualized return on equity (ROE) to three-month average London Interbank Offered Rate (LIBOR). The Bank’s annualized ROE was 5.04 percent for the third quarter of 2012, compared to 1.78 percent for the third quarter of 2011. Annualized ROE increased for the third quarter of 2012, compared to the third quarter of 2011, primarily as a result of an increase in net income, and a decrease in average total capital during the period. Annualized ROE spread to three-month average LIBOR increased to 461 basis points for the third quarter of 2012, compared to 148 basis points for the third quarter of 2011. The increase in the ROE spread to LIBOR was primarily due to the increase in ROE.
The Bank’s annualized ROE was 4.31 percent for the first nine months of 2012, compared to 2.13 percent during the same period in 2011. Annualized ROE increased for the first nine months of 2012, compared to the same period in 2011, primarily as a result of an increase in net income, as discussed above, and a decrease in average total capital during the period. ROE spread to three-month average LIBOR increased to 384 basis points for the first nine months of 2012, compared to 184 basis points for the same period in 2011. The increase in the ROE spread to LIBOR was primarily due to the increase in ROE.
The Bank’s interest rate spread was 26 basis points and 31 basis points for the third quarter of 2012 and 2011, respectively, and 26 basis points and 33 basis points for the first nine months of 2012 and 2011, respectively. The decrease in the Bank’s interest rate spread during the third quarter and first nine months of 2012, compared to the same periods in 2011, was primarily due to a decrease in yield on the Bank’s long-term investment portfolio during the periods.
Business Outlook
The challenges facing the Bank remain largely unchanged from those identified in the outlook discussion in the Bank’s Form 10-K. Advances have fluctuated from quarter to quarter during 2012 but are beginning to reflect some stabilization as borrowers renew existing advances and show modest demand for new advances. The majority of these new advances are short-term advances subject to refinancing risk. The Bank expects advances to continue to fluctuate through the end of the year.
The Bank has seen some recovery in fair market values for some of its private-label MBS. The credit related portion of other-than-temporary impairment losses recognized in earnings was lower for the third quarter of 2012 compared to the third quarter of 2011. However, other-than-temporary impairment losses have been highly volatile and recent reports of improvements in the housing market are still tentative. If the loans underlying the Bank’s securities further deteriorate or if certain assumptions related to forecasts of home prices, prepayments, defaults, or loss severities continue to decline, the Bank could record additional other-than-temporary impairment losses.
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The Bank continues to face challenges to net income as advances and investments decline in a low interest rate environment with few attractive reinvestment opportunities.
On October 30, 2012, the Bank announced that it will repurchase all excess membership and activity-based capital stock on November 19, 2012, and will resume daily excess activity-based capital stock repurchases beginning on November 20, 2012, subject to a $100,000 threshold and other provisions of the Bank's capital plan. The return to daily excess stock repurchases may have some positive impact on members' demand for advances and the Bank's ROE.
Selected Financial Data
The following table presents a summary of certain financial information for the Bank for the periods indicated (dollars in millions):
As of and for the Three Months Ended | |||||||||||||||||||
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | September 30, 2011 | |||||||||||||||
Statements of Condition (at period end) | |||||||||||||||||||
Total assets | $ | 112,078 | $ | 119,440 | $ | 109,137 | $ | 125,270 | $ | 118,852 | |||||||||
Investments (1) | 29,718 | 35,701 | 34,536 | 36,138 | 41,204 | ||||||||||||||
Mortgage loans held for portfolio | 1,345 | 1,432 | 1,534 | 1,639 | 1,743 | ||||||||||||||
Allowance for credit losses on mortgage loans | (10 | ) | (9 | ) | (9 | ) | (6 | ) | (1 | ) | |||||||||
Advances | 80,543 | 81,842 | 72,441 | 86,971 | 75,363 | ||||||||||||||
Interest-bearing deposits | 2,061 | 2,133 | 3,078 | 2,655 | 3,170 | ||||||||||||||
Consolidated obligations, net: | |||||||||||||||||||
Discount notes | 21,767 | 21,427 | 16,178 | 24,330 | 16,057 | ||||||||||||||
Bonds | 81,434 | 89,079 | 81,719 | 90,662 | 91,720 | ||||||||||||||
Total consolidated obligations, net (2) | 103,201 | 110,506 | 97,897 | 114,992 | 107,777 | ||||||||||||||
Mandatorily redeemable capital stock | 42 | 115 | 328 | 286 | 319 | ||||||||||||||
Affordable Housing Program payable | 93 | 98 | 109 | 109 | 115 | ||||||||||||||
Capital stock - putable | 4,791 | 5,007 | 5,899 | 5,718 | 5,910 | ||||||||||||||
Retained earnings | 1,401 | 1,344 | 1,306 | 1,254 | 1,203 | ||||||||||||||
Accumulated other comprehensive loss | (97 | ) | (286 | ) | (285 | ) | (411 | ) | (317 | ) | |||||||||
Total capital | 6,095 | 6,065 | 6,920 | 6,561 | 6,796 | ||||||||||||||
Statements of Income (for the period ended) | |||||||||||||||||||
Net interest income | 91 | 103 | 85 | 108 | 109 | ||||||||||||||
Provision for credit losses | 1 | — | 3 | 5 | — | ||||||||||||||
Net impairment losses recognized in earnings | (1 | ) | (8 | ) | (7 | ) | (10 | ) | (19 | ) | |||||||||
Net (losses) gains on trading securities | (9 | ) | (4 | ) | (29 | ) | (20 | ) | 36 | ||||||||||
Net gains (losses) on derivatives and hedging activities | 30 | (1 | ) | 54 | 32 | (67 | ) | ||||||||||||
Letters of credit fees | 5 | 4 | 5 | 5 | 6 | ||||||||||||||
Other income (3) | (1 | ) | 3 | — | — | — | |||||||||||||
Noninterest expense | 30 | 30 | 27 | 40 | 29 | ||||||||||||||
Income before assessments | 84 | 67 | 78 | 70 | 36 | ||||||||||||||
Assessments (4) | 8 | 7 | 8 | 7 | 4 | ||||||||||||||
Net income | 76 | 60 | 70 | 63 | 32 | ||||||||||||||
Performance Ratios (%) | |||||||||||||||||||
Return on equity (5) | 5.04 | 3.76 | 4.18 | 3.85 | 1.78 | ||||||||||||||
Return on assets (6) | 0.26 | 0.20 | 0.23 | 0.21 | 0.10 | ||||||||||||||
Net interest margin (7) | 0.31 | 0.34 | 0.28 | 0.35 | 0.36 | ||||||||||||||
Regulatory capital ratio (at year end) (8) | 5.56 | 5.41 | 6.90 | 5.79 | 6.25 | ||||||||||||||
Equity to assets ratio (9) | 5.15 | 5.25 | 5.43 | 5.39 | 5.77 | ||||||||||||||
Dividend payout ratio (10) | 25.57 | 36.94 | 24.94 | 19.70 | 40.09 |
29
____________
(1) | Investments consist of interest-bearing deposits, securities purchased under agreements to resell, federal funds sold, and securities classified as trading, available-for-sale, and held-to-maturity. |
(2) | The amounts presented are the Bank’s primary obligations on consolidated obligations outstanding. The par value of the FHLBanks’ outstanding consolidated obligations for which the Bank is jointly and severally liable was as follows (in millions): |
September 30, 2012 | $ | 572,473 | |
June 30, 2012 | 575,874 | ||
March 31, 2012 | 561,317 | ||
December 31, 2011 | 578,118 | ||
September 30, 2011 | 590,231 |
(3) | Other income includes service fees and other. |
(4) | On August 5, 2011, the Finance Agency certified that the FHLBanks have satisfied their REFCORP obligation. |
(5) | Calculated as net income divided by average total equity. |
(6) | Calculated as net income divided by average total assets. |
(7) | Net interest margin is net interest income as a percentage of average earning assets. |
(8) | Regulatory capital ratio is regulatory capital stock plus retained earnings as a percentage of total assets at period end. |
(9) | Calculated as average equity divided by average total assets. |
(10) | Calculated as dividends declared during the period divided by net income during the period. |
Financial Condition
The Bank’s principal assets consist of advances, short- and long-term investments, and mortgage loans held for portfolio. The Bank obtains funding to support its business primarily through the issuance of debt securities in the form of COs by the Office of Finance on the Bank’s behalf.
The following table presents the distribution of the Bank’s total assets, liabilities, and capital by major class as of the dates indicated (dollars in millions). These items are discussed in more detail below.
As of September 30, 2012 | As of December 31, 2011 | Increase (Decrease) | ||||||||||||||||||
Amount | Percent of Total | Amount | Percent of Total | Amount | Percent | |||||||||||||||
Advances | $ | 80,543 | 71.87 | $ | 86,971 | 69.43 | $ | (6,428 | ) | (7.39 | ) | |||||||||
Long-term investments | 20,874 | 18.62 | 21,655 | 17.29 | (781 | ) | (3.60 | ) | ||||||||||||
Short-term investments | 8,844 | 7.89 | 14,483 | 11.56 | (5,639 | ) | (38.94 | ) | ||||||||||||
Mortgage loans, net | 1,335 | 1.19 | 1,633 | 1.30 | (298 | ) | (18.21 | ) | ||||||||||||
Other assets | 482 | 0.43 | 528 | 0.42 | (46 | ) | (8.90 | ) | ||||||||||||
Total assets | $ | 112,078 | 100.00 | $ | 125,270 | 100.00 | $ | (13,192 | ) | (10.53 | ) | |||||||||
Consolidated obligations, net: | ||||||||||||||||||||
Discount notes | $ | 21,767 | 20.54 | $ | 24,330 | 20.50 | $ | (2,563 | ) | (10.53 | ) | |||||||||
Bonds | 81,434 | 76.84 | 90,662 | 76.37 | (9,228 | ) | (10.18 | ) | ||||||||||||
Deposits | 2,061 | 1.94 | 2,655 | 2.24 | (594 | ) | (22.39 | ) | ||||||||||||
Other liabilities | 721 | 0.68 | 1,062 | 0.89 | (341 | ) | (32.09 | ) | ||||||||||||
Total liabilities | $ | 105,983 | 100.00 | $ | 118,709 | 100.00 | $ | (12,726 | ) | (10.72 | ) | |||||||||
Capital stock | $ | 4,791 | 78.61 | $ | 5,718 | 87.15 | $ | (927 | ) | (16.21 | ) | |||||||||
Retained earnings | 1,401 | 22.98 | 1,254 | 19.11 | 147 | 11.73 | ||||||||||||||
Accumulated other comprehensive loss | (97 | ) | (1.59 | ) | (411 | ) | (6.26 | ) | 314 | 76.47 | ||||||||||
Total capital | $ | 6,095 | 100.00 | $ | 6,561 | 100.00 | $ | (466 | ) | (7.10 | ) |
30
Advances
The decrease in advances from December 31, 2011, to September 30, 2012 was due to maturing advances, prepayments, and fluctuating demand for new advances. The Bank has not seen a discernible impact on either the volume of advances or the distribution of advances outstanding by year of maturity as a result of the Federal Reserve Board’s (Federal Reserve) recent announcements that it expects to maintain short-term interest rates near zero through 2015. As of September 30, 2012, 85.3 percent of the Bank’s advances were fixed-rate. However, the Bank often simultaneously enters into derivatives with the issuance of advances to convert the rates on them, in effect, into a short-term variable interest rate, usually based on LIBOR. As of September 30, 2012 and December 31, 2011, 64.1 percent and 65.7 percent, respectively, of the Bank’s fixed-rate advances were swapped and 30.7 percent and 9.79 percent, respectively, of the Bank’s variable-rate advances were swapped. The majority of the Bank’s variable-rate advances were indexed to LIBOR. The Bank also offers variable-rate advances tied to the federal funds rate, prime rate, and constant maturity swap rates.
The following table sets forth the par value of outstanding advances by product characteristics (dollars in millions):
As of September 30, 2012 | As of December 31, 2011 | ||||||||||
Amount | Percent of Total | Amount | Percent of Total | ||||||||
Adjustable or variable rate indexed | $ | 10,724 | 14.05 | $ | 10,977 | 13.29 | |||||
Fixed rate (1) | 30,402 | 39.83 | 37,038 | 44.86 | |||||||
Hybrid | 27,533 | 36.07 | 25,082 | 30.38 | |||||||
Convertible | 5,690 | 7.45 | 8,276 | 10.02 | |||||||
Amortizing (2) | 1,988 | 2.60 | 1,196 | 1.45 | |||||||
Total par value | $ | 76,337 | 100.00 | $ | 82,569 | 100.00 |
____________
(1) | Includes convertible advances whose conversion options have expired. |
(2) | The Bank offers a fixed-rate advance that may be structured with principal amortization in either equal increments or similar to a mortgage. |
Refer to Note 7–Advances to the Bank’s interim financial statements for the concentration of the Bank’s advances to its 10 largest borrowing institutions.
Investments
The 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, and to cover operating expenses.
The Bank’s short-term investments consist of interest-bearing deposits, certificates of deposit, securities purchased under agreements to resell, and overnight and term federal funds sold. The Bank’s long-term investments consist of MBS issued by government-sponsored mortgage agencies or private securities that, at purchase, carried the highest rating from Moody’s or S&P, securities issued by the U.S. government or U.S. government agencies, state and local housing agency obligations, and consolidated obligations issued by other FHLBanks. The long-term investment portfolio generally provides the Bank with higher returns than those available in the short-term money markets.
31
The following table sets forth more detailed information regarding short- and long-term investments held by the Bank (dollars in millions):
Increase (Decrease) | ||||||||||||||
As of September 30, 2012 | As of December 31, 2011 | Amount | Percent | |||||||||||
Short-term investments: | ||||||||||||||
Interest-bearing deposits (1) | $ | 1,005 | $ | 1,203 | $ | (198 | ) | (16.47 | ) | |||||
Certificates of deposit | 575 | 650 | (75 | ) | (11.54 | ) | ||||||||
Securities purchased under agreements to resell | 250 | — | 250 | * | ||||||||||
Federal funds sold | 7,014 | 12,630 | (5,616 | ) | (44.47 | ) | ||||||||
Total short-term investments | 8,844 | 14,483 | (5,639 | ) | (38.94 | ) | ||||||||
Long-term investments: | ||||||||||||||
State or local housing agency debt obligations | 111 | 103 | 8 | 7.73 | ||||||||||
U.S. government agency debt obligations | 3,750 | 4,228 | (478 | ) | (11.31 | ) | ||||||||
Mortgage-backed securities: | ||||||||||||||
U.S. government agency securities | 11,298 | 10,689 | 609 | 5.70 | ||||||||||
Private-label | 5,715 | 6,635 | (920 | ) | (13.86 | ) | ||||||||
Total mortgage-backed securities | 17,013 | 17,324 | (311 | ) | (1.79 | ) | ||||||||
Total long-term investments | 20,874 | 21,655 | (781 | ) | (3.60 | ) | ||||||||
Total investments | $ | 29,718 | $ | 36,138 | $ | (6,420 | ) | (17.76 | ) |
____________
(1) | As of September 30, 2012 and December 31, 2011, interest-bearing deposits includes a $1.0 billion and $1.2 billion, respectively, business money market account with Branch Banking and Trust Company, one of the Bank’s ten largest borrowers. One of the Bank’s member directors is a senior executive vice president of Branch Banking and Trust Company. Pursuant to Finance Agency regulation, the Bank’s member directors serve as officers or directors of a Bank member, and the Bank may enter into business transactions with such members from time to time in the ordinary course of business. |
* Not Meaningful
The decrease in short-term investments from December 31, 2011 to September 30, 2012 was primarily due to a decrease in federal funds sold. The amount held in federal funds sold will vary each day based on the federal funds rates, the Bank’s liquidity requirements, and the availability of high quality counterparties in the federal funds market. Throughout 2012, the Federal Reserve has paid interest on required and excess reserves balances held by depository institutions at a rate of 0.25 percent. An increase in bank reserves combined with the rate of interest paid on those reserves at the Federal Reserve has contributed to a decline in the volume of transactions taking place in the overnight federal funds market. Additionally, the Bank has made a decision to limit its exposure in the unsecured credit market, which has also resulted in a decrease in federal funds sold. Consistent with its decision to reduce its unsecured credit exposure, during the third quarter of 2012 the Bank purchased securities under agreements to resell (repurchase agreements). The Bank expects to increase its purchases of securities under repurchase agreements going forward.
The Finance Agency limits an FHLBank’s investment in MBS and asset-backed securities by requiring that the total amortized historical costs for securities classified as held-to-maturity or available-for-sale, and fair value for MBS securities classified as trading owned by the FHLBank generally may not exceed 300 percent of the FHLBank’s previous month-end total capital, as defined by regulation, plus its mandatorily redeemable capital stock on the day it purchases the securities. These investments amounted to 274 percent and 244 percent of total capital plus mandatorily redeemable capital stock as of September 30, 2012 and December 31, 2011, respectively. The Bank was below its target range of 250 percent to 275 percent as of December 31, 2011 due to a lack of quality MBS at attractive prices during recent market conditions and due to the Bank’s high level of excess capital stock; however, the Bank was within its target range as of September 30, 2012 due to a decrease in total capital as a result of the repurchase of $2.0 billion in excess capital stock during the first nine months of 2012. The Bank suspended new purchases of private-label MBS beginning in the first quarter of 2008, resulting in a greater percentage of U.S. government agency MBS as of September 30, 2012 compared to December 31, 2011. Refer to Note 4–Available-for-sale Securities and Note 5–Held-to-maturity Securities to the Bank’s interim financial statements for information on securities with unrealized losses as of September 30, 2012 and December 31, 2011.
The Bank evaluates its individual investment securities for other-than-temporary impairment on at least a quarterly basis, as described in Note 6–Other-than-temporary Impairment to the Bank’s interim financial statements. For a discussion regarding impairment losses recognized in earnings during the reported periods see Management’s Discussion and Analysis–Results of Operations–Noninterest Income (Loss) below.
32
Mortgage Loans Held for Portfolio
The decrease in mortgage loans held for portfolio from December 31, 2011 to September 30, 2012 was due to the Bank ceasing to purchase these assets and the maturity and prepayment of these assets during the period.
As of September 30, 2012 and December 31, 2011, the Bank’s conventional mortgage loan portfolio was concentrated in the southeastern United States because those members selling loans to the Bank were located primarily in that region. The following table provides the percentage of unpaid principal balance of conventional single-family residential mortgage loans held for portfolio for the five largest state concentrations.
As of September 30, 2012 | As of December 31, 2011 | ||||
Percent of Total | Percent of Total | ||||
Florida | 25.25 | 23.17 | |||
South Carolina | 24.29 | 24.61 | |||
Georgia | 14.50 | 14.45 | |||
North Carolina | 11.96 | 12.99 | |||
Virginia | 8.47 | 8.90 | |||
All other | 15.53 | 15.88 | |||
Total | 100.00 | 100.00 |
Consolidated Obligations
The Bank funds its assets primarily through the issuance of consolidated obligation bonds and, to a lesser extent, consolidated obligation discount notes. As of September 30, 2012, CO issuances financed 92.1 percent of the $112.1 billion in total assets, remaining relatively stable from the financing ratio of 91.8 percent as of December 31, 2011.
The decrease in COs from December 31, 2011 to September 30, 2012 corresponds to the decrease in demand for advances by the Bank’s members and the increase in liquidity from maturing and prepaid advances during the period. As of September 30, 2012 and December 31, 2011, COs outstanding were primarily fixed-rate. However, the Bank often simultaneously enters into derivatives with the issuance of CO bonds to convert the interest rates, in effect, into short-term variable interest rates, usually based on LIBOR. As of September 30, 2012 and December 31, 2011, 81.2 percent and 81.9 percent, respectively, of the Bank’s fixed-rate CO bonds were swapped and 1.96 percent and 6.42 percent, respectively, of the Bank’s variable-rate CO bonds were swapped. As of September 30, 2012 and December 31, 2011, 0.00 percent and 4.64 percent, respectively, of the Bank’s fixed-rate CO discount notes were swapped to a variable rate.
As of September 30, 2012, callable CO bonds constituted 11.1 percent of the total par value of CO bonds outstanding, compared to 32.0 percent at December 31, 2011. This decrease was due to market conditions during the first nine months of 2012 that continued to favor issuance of swapped fixed maturity debt to replace called CO bonds. The derivatives that the Bank may employ to hedge against the interest-rate risk associated with the Bank’s callable CO bonds are callable by the counterparty; if the call feature of the derivative is exercised, the Bank in turn will generally call the hedged CO bond. These call features pose risk that the Bank could be required to refinance a substantial portion of outstanding liabilities during times of decreasing interest rates. With pricing on swapped fixed maturity debt at historic lows during the first three quarters of 2012, the Bank has been replacing swapped callable debt with swapped fixed maturity debt to reduce the Bank’s level of refunding risk. The Bank does not expect to continue shifting to swapped fixed maturity debt because this is no longer cost-effective under current market conditions. Call options on unhedged callable CO bonds generally are exercised when the bond can be replaced at a lower economic cost.
33
Deposits
The Bank offers demand and overnight deposit programs to members primarily as a liquidity management service. In addition, a member that services mortgage loans may deposit in the Bank funds collected in connection with the mortgage loans, pending disbursement of those funds to the owners of the mortgage loan. For demand deposits, the Bank pays interest at the overnight rate. Most of these deposits represent member liquidity investments, which members may withdraw on demand. Therefore, the total account balance of the Bank’s deposits may be volatile. As a matter of prudence, the Bank typically invests deposit funds in liquid short-term assets. Member loan demand, deposit flows, and liquidity management strategies influence the amount and volatility of deposit balances carried with the Bank. Total deposits were relatively stable as of September 30, 2012 compared to December 31, 2011.
To support its member deposits, the FHLBank Act requires the Bank to have as a reserve an amount equal to or greater than the current deposits received from members. These reserves are required to be invested in obligations of the United States, deposits in eligible banks or trust companies or advances with maturities not exceeding five years. The Bank was in compliance with this depository liquidity requirement as of September 30, 2012.
Capital
The decrease in total capital from December 31, 2011 to September 30, 2012 was primarily due to the repurchase of $1.7 billion in excess capital stock, excluding capital stock classified as mandatorily redeemable capital stock, partially offset by the issuance of $764 million of activity-based capital stock and $35 million of membership capital stock, and a $314 million decrease in accumulated other comprehensive loss during the period. The decrease in accumulated other comprehensive loss was primarily due to improvements in the fair value of the Bank’s available-for-sale securities.
The FHLBank Act and Finance Agency regulations specify that each FHLBank must meet certain minimum regulatory capital standards. The Bank was in compliance with these regulatory capital rules and requirements as shown in Note 9–Capital and Mandatorily Redeemable Capital Stock to the Bank’s interim financial statements.
Finance Agency regulations establish criteria based on the amount and type of capital held by an FHLBank for four capital classifications as follows:
• | Adequately Capitalized - FHLBank meets both risk-based and minimum capital requirements; |
• | Undercapitalized - FHLBank does not meet one or both of its risk-based or minimum capital requirements; |
• | Significantly Undercapitalized - FHLBank has less than 75 percent of one or both of its risk-based or minimum capital requirements; and |
• | Critically Undercapitalized - FHLBank total capital is two percent or less of total assets. |
Under the regulations, the Director of the Finance Agency (Director) will make a capital classification for each FHLBank at least quarterly and notify the FHLBank in writing of any proposed action and provide an opportunity for the FHLBank to submit information relevant to such action. The Director is permitted to make discretionary classifications. An FHLBank must provide written notice to the Finance Agency within 10 days of any event or development that has caused or is likely to cause its permanent or total capital to fall below the level required to maintain its most recent capital classification or reclassification. The regulations delineate the types of prompt corrective actions the Director may order in the event an FHLBank is not adequately capitalized, including submission of a capital restoration plan by the FHLBank and restrictions on its dividends, stock redemptions, executive compensation, new business activities, or any other actions the Director determines will ensure safe and sound operations and capital compliance by the FHLBank. On September 26, 2012, the Bank received notification from the Director that, based on June 30, 2012 data, the Bank meets the definition of “adequately capitalized.”
As of September 30, 2012, the Bank had capital stock subject to mandatory redemption from 18 members and former members, consisting of B1 membership stock and B2 activity-based capital stock, compared to 68 members and former members as of December 31, 2011, consisting of B1 membership capital stock and B2 activity-based capital stock. The Bank is not required to redeem or repurchase such capital stock until the expiration of the five-year redemption period or, with respect to activity-based capital stock, until the later of the expiration of the five-year redemption period or the activity no longer remains outstanding. The Bank makes its determination regarding the repurchase of excess capital stock on a quarterly basis, after financial results are known for the preceding quarter.
34
As of September 30, 2012 and December 31, 2011, the Bank’s outstanding stock included $239 million and $1.1 billion, respectively, of excess shares subject to repurchase by the Bank at its discretion. The decrease in excess shares was due to the repurchases of $2.0 billion in excess capital stock during the first nine months of 2012. On October 30, 2012, the Bank sent a notice to each current shareholder of the Bank announcing that it will repurchase all membership excess capital stock and activity-based excess capital stock on November 19, 2012. Shareholders with excess capital stock on the repurchase date may not opt out of the repurchase. Beginning November 20, 2012, the Bank will repurchase activity-based excess capital stock on a daily basis. The operational threshold for daily excess stock repurchases will be $100,000. The Bank paid $19 million in dividends during the third quarter of 2012.
In 2011, the FHLBanks entered into a Joint Capital Enhancement Agreement (Joint Capital Agreement) which is intended to enhance the capital position of each FHLBank and the safety and soundness of the FHLBank System. The intent of the Joint Capital Agreement is to allocate that portion of each FHLBank’s earnings historically paid to satisfy its REFCORP obligation to a restricted retained earnings account at that FHLBank. These restricted retained earnings are not available to pay dividends. Each FHLBank subsequently amended its capital plan to implement the provisions of the Joint Capital Agreement. The Finance Agency approved the capital plan amendments and certified satisfaction of the REFCORP obligation on August 5, 2011. In accordance with the Joint Capital Agreement, starting in the third quarter of 2011, each FHLBank contributes 20 percent of its net income to a restricted retained earnings account.
Results of Operations
Net Income
The following table sets forth the Bank’s significant income items for the third quarter and first nine months of 2012 and 2011, and provides information regarding the changes during the periods (dollars in millions). These items are discussed in more detail below.
Three Months Ended September 30, | Increase (Decrease) | Nine Months Ended September 30, | Increase (Decrease) | ||||||||||||||||||||||||||
2012 | 2011 | Amount | Percent | 2012 | 2011 | Amount | Percent | ||||||||||||||||||||||
Net interest income | $ | 91 | $ | 109 | $ | (18 | ) | (17.14 | ) | $ | 279 | $ | 351 | $ | (72 | ) | (20.36 | ) | |||||||||||
Provision for credit losses | 1 | — | 1 | 390.56 | 4 | — | 4 | * | |||||||||||||||||||||
Noninterest income (loss) | 24 | (44 | ) | 68 | 154.22 | 41 | (111 | ) | 152 | 136.70 | |||||||||||||||||||
Noninterest expense | 30 | 29 | 1 | 1.72 | 87 | 83 | 4 | 4.41 | |||||||||||||||||||||
Total assessments | 8 | 4 | 4 | 153.65 | 23 | 36 | (13 | ) | (35.12 | ) | |||||||||||||||||||
Net income | $ | 76 | $ | 32 | $ | 44 | 139.68 | $ | 206 | $ | 121 | $ | 85 | 70.79 |
____________
*Not meaningful
Net Interest Income
The primary source of the Bank’s earnings is net interest income. Net interest income equals interest earned on assets (including member advances, mortgage loans, MBS held in portfolio, and other investments), less the interest expense incurred on liabilities (including COs, deposits, and other borrowings). Also included in net interest income are miscellaneous related items such as prepayment fees earned and the amortization of debt issuance discounts, concession fees, and certain derivative instruments and hedging activities related adjustments.
The decrease in net interest income during the third quarter and first nine months of 2012, compared to the same periods in 2011, was primarily due to a 51 basis points and 60 basis points decrease in yield on the Bank’s long-term investments portfolio, respectively, during the periods. The yield on the Bank’s long-term investment portfolio continued to decline primarily due to the maturity or prepayment of higher yielding investments and the purchase of lower yielding instruments.
As discussed above, net interest income also includes components of hedging activity. When a hedging relationship is discontinued, the cumulative fair value adjustment on the hedged item will be amortized into interest income or expense over the remaining life of the asset or liability. Also, when hedging relationships qualify for hedge accounting, the interest components of the hedging derivatives will be reflected in interest income or expense. As shown in the table summarizing the net effect of derivatives and hedging activity on the Bank’s results of operations, the impact of hedging on interest income was a decrease of $241 million and $336 million for the third quarters of 2012 and 2011, respectively, and a decrease of $813 million and $1.1 billion for the first nine months of 2012 and 2011, respectively.
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The following tables present spreads between the average yield on total interest-earning assets and the average cost of total interest-bearing liabilities for the third quarters and first nine months of 2012 and 2011 (dollars in millions).
Three Months Ended September 30, | |||||||||||||||||||
2012 | 2011 | ||||||||||||||||||
Average Balance | Interest | Yield/ Rate (%) | Average Balance | Interest | Yield/ Rate (%) | ||||||||||||||
Assets | |||||||||||||||||||
Interest-bearing deposits (1) | $ | 4,331 | $ | 2 | 0.17 | $ | 4,190 | $ | 1 | 0.12 | |||||||||
Certificates of deposit | 600 | 1 | 0.30 | 1,075 | — | 0.19 | |||||||||||||
Securities purchased under agreements to resell | 172 | — | 0.20 | — | — | — | |||||||||||||
Federal funds sold | 8,005 | 4 | 0.18 | 17,403 | 6 | 0.14 | |||||||||||||
Long-term investments (2) | 20,774 | 138 | 2.64 | 21,800 | 174 | 3.15 | |||||||||||||
Advances | 80,775 | 75 | 0.37 | 75,849 | 53 | 0.28 | |||||||||||||
Mortgage loans held for portfolio (3) | 1,389 | 18 | 5.24 | 1,786 | 24 | 5.37 | |||||||||||||
Loans to other FHLBanks | 1 | — | 0.15 | 3 | — | 0.11 | |||||||||||||
Total interest-earning assets | 116,047 | 238 | 0.81 | 122,106 | 258 | 0.84 | |||||||||||||
Allowance for credit losses on mortgage loans | (9 | ) | (1 | ) | |||||||||||||||
Other assets | 784 | 822 | |||||||||||||||||
Total assets | $ | 116,822 | $ | 122,927 | |||||||||||||||
Liabilities and Capital | |||||||||||||||||||
Deposits (4) | $ | 2,107 | — | 0.05 | $ | 2,771 | — | 0.02 | |||||||||||
Short-term borrowings | 18,825 | 6 | 0.14 | 22,182 | 4 | 0.06 | |||||||||||||
Long-term debt | 85,501 | 140 | 0.65 | 86,275 | 144 | 0.66 | |||||||||||||
Other borrowings | 80 | 1 | 1.37 | 363 | 1 | 0.70 | |||||||||||||
Total interest-bearing liabilities | 106,513 | 147 | 0.55 | 111,591 | 149 | 0.53 | |||||||||||||
Other liabilities | 4,290 | 4,237 | |||||||||||||||||
Total capital | 6,019 | 7,099 | |||||||||||||||||
Total liabilities and capital | $ | 116,822 | $ | 122,927 | |||||||||||||||
Net interest income and net yield on interest-earning assets | $ | 91 | 0.31 | $ | 109 | 0.36 | |||||||||||||
Interest rate spread | 0.26 | 0.31 | |||||||||||||||||
Average interest-earning assets to interest-bearing liabilities | 108.95 | 109.42 |
____________
(1) | Includes amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative counterparties. |
(2) | Includes trading securities at fair value and available-for-sale securities at amortized cost. |
(3) | Nonperforming loans are included in average balances used to determine average rate. |
(4) | Includes amounts recognized for the right to return cash collateral received under master netting agreements with derivative counterparties. |
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Nine Months Ended September 30, | |||||||||||||||||||
2012 | 2011 | ||||||||||||||||||
Average Balance | Interest | Yield/ Rate (%) | Average Balance | Interest | Yield/ Rate (%) | ||||||||||||||
Assets | |||||||||||||||||||
Interest-bearing deposits (1) | $ | 4,352 | $ | 5 | 0.16 | $ | 3,235 | $ | 3 | 0.13 | |||||||||
Certificates of deposit | 814 | 2 | 0.31 | 904 | 1 | 0.22 | |||||||||||||
Securities purchased under agreements to resell | 58 | — | 0.20 | — | — | — | |||||||||||||
Federal funds sold | 11,028 | 14 | 0.17 | 15,220 | 18 | 0.16 | |||||||||||||
Long-term investments (2) | 21,532 | 445 | 2.76 | 22,175 | 557 | 3.36 | |||||||||||||
Advances | 80,898 | 222 | 0.37 | 80,135 | 188 | 0.31 | |||||||||||||
Mortgage loans held for portfolio (3) | 1,484 | 59 | 5.32 | 1,876 | 75 | 5.33 | |||||||||||||
Loans to other FHLBanks | 2 | — | 0.12 | 3 | — | 0.14 | |||||||||||||
Total interest-earning assets | 120,168 | 747 | 0.83 | 123,548 | 842 | 0.91 | |||||||||||||
Allowance for credit losses on mortgage loans | (8 | ) | (1 | ) | |||||||||||||||
Other assets | 730 | 888 | |||||||||||||||||
Total assets | $ | 120,890 | $ | 124,435 | |||||||||||||||
Liabilities and Capital | |||||||||||||||||||
Deposits (4) | $ | 2,595 | 1 | 0.04 | $ | 2,818 | 1 | 0.04 | |||||||||||
Short-term borrowings | 20,955 | 15 | 0.10 | 19,632 | 15 | 0.10 | |||||||||||||
Long-term debt | 86,511 | 449 | 0.69 | 89,804 | 472 | 0.70 | |||||||||||||
Other borrowings | 191 | 3 | 1.74 | 451 | 3 | 0.94 | |||||||||||||
Total interest-bearing liabilities | 110,252 | 468 | 0.57 | 112,705 | 491 | 0.58 | |||||||||||||
Other liabilities | 4,253 | 4,155 | |||||||||||||||||
Total capital | 6,385 | 7,575 | |||||||||||||||||
Total liabilities and capital | $ | 120,890 | $ | 124,435 | |||||||||||||||
Net interest income and net yield on interest-earning assets | $ | 279 | 0.31 | $ | 351 | 0.38 | |||||||||||||
Interest rate spread | 0.26 | 0.33 | |||||||||||||||||
Average interest-earning assets to interest-bearing liabilities | 108.99 | 109.62 |
____________
(1) | Includes amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative counterparties. |
(2) | Includes trading securities at fair value and available-for-sale securities at amortized cost. |
(3) | Nonperforming loans are included in average balances used to determine average rate. |
(4) | Includes amounts recognized for the right to return cash collateral received under master netting agreements with derivative counterparties. |
The Bank’s interest rate spread decreased by five basis points and seven basis points during the third quarter and first nine months of 2012, respectively, compared to the same periods in 2011, primarily due to a decrease in yield on the Bank’s long-term investments portfolio as previously discussed.
Net interest income for the periods presented was affected by changes in average balances (volume change) and changes in average rates (rate change) of interest-earning assets and interest-bearing liabilities. The following table presents the extent to which volume changes and rate changes affected the Bank’s interest income and interest expense (in millions). As noted in the table, the overall change in net interest income during the third quarter and first nine months of 2012, compared to the same periods in 2011, was primarily volume and rate related, respectively.
37
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2012 vs. 2011 | 2012 vs. 2011 | ||||||||||||||||||||||
Volume (1) | Rate (1) | Increase (Decrease) | Volume (1) | Rate (1) | Increase (Decrease) | ||||||||||||||||||
Increase (decrease) in interest income: | |||||||||||||||||||||||
Interest-bearing deposits | $ | — | $ | 1 | $ | 1 | $ | 1 | $ | 1 | $ | 2 | |||||||||||
Certificates of deposit | — | 1 | 1 | — | 1 | 1 | |||||||||||||||||
Securities purchased under agreements to resell | — | — | — | — | — | — | |||||||||||||||||
Federal funds sold | (3 | ) | 1 | (2 | ) | (5 | ) | 1 | (4 | ) | |||||||||||||
Long-term investments | (8 | ) | (28 | ) | (36 | ) | (16 | ) | (96 | ) | (112 | ) | |||||||||||
Advances | 3 | 19 | 22 | 1 | 33 | 34 | |||||||||||||||||
Mortgage loans held for portfolio | (5 | ) | (1 | ) | (6 | ) | (16 | ) | — | (16 | ) | ||||||||||||
Loans to other FHLBanks | — | — | — | — | — | — | |||||||||||||||||
Total | (13 | ) | (7 | ) | (20 | ) | (35 | ) | (60 | ) | (95 | ) | |||||||||||
Increase (decrease) in interest expense: | |||||||||||||||||||||||
Deposits | — | — | — | — | — | — | |||||||||||||||||
Short-term borrowings | (1 | ) | 3 | 2 | — | �� | — | ||||||||||||||||
Long-term debt | (1 | ) | (3 | ) | (4 | ) | (17 | ) | (6 | ) | (23 | ) | |||||||||||
Other borrowings | (1 | ) | 1 | — | (2 | ) | 2 | — | |||||||||||||||
Total | (3 | ) | 1 | (2 | ) | (19 | ) | (4 | ) | (23 | ) | ||||||||||||
Decrease in net interest income | $ | (10 | ) | $ | (8 | ) | $ | (18 | ) | $ | (16 | ) | $ | (56 | ) | $ | (72 | ) |
____________
(1) | Volume change is calculated as the change in volume multiplied by the previous rate, while rate change is the change in rate multiplied by the previous volume. The rate/volume change, change in rate multiplied by change in volume, is allocated between volume change and rate change at the ratio each component bears to the absolute value of its total. |
Noninterest Income (Loss)
The following table presents the components of noninterest income (loss) (dollars in millions):
Three Months Ended September 30, | Increase (Decrease) | Nine Months Ended September 30, | Increase (Decrease) | ||||||||||||||||||||||||||
2012 | 2011 | Amount | Percent | 2012 | 2011 | Amount | Percent | ||||||||||||||||||||||
Net impairment losses recognized in earnings | $ | (1 | ) | $ | (19 | ) | $ | 18 | 92.95 | $ | (16 | ) | $ | (108 | ) | $ | 92 | 84.78 | |||||||||||
Net (losses) gains on trading securities | (9 | ) | 36 | (45 | ) | (125.83 | ) | (42 | ) | 22 | (64 | ) | (294.84 | ) | |||||||||||||||
Net gains (losses) on derivatives and hedging activities | 30 | (67 | ) | 97 | 145.53 | 83 | (41 | ) | 124 | 303.38 | |||||||||||||||||||
Letters of Credit | 5 | 6 | (1 | ) | (25.59 | ) | 14 | 14 | — | (5.36 | ) | ||||||||||||||||||
Other | (1 | ) | — | (1 | ) | (281.76 | ) | 2 | 2 | — | 23.17 | ||||||||||||||||||
Total noninterest income (loss) | $ | 24 | $ | (44 | ) | $ | 68 | 154.22 | $ | 41 | $ | (111 | ) | $ | 152 | 136.70 |
The change in total noninterest income (loss) noted in the above table was primarily due to net impairment losses recognized in earnings, adjustments required to report trading securities at fair value, and derivatives and hedging activities. The Bank recognized $1 million and $16 million of credit-related other-than-temporary impairment losses during the third quarter and nine months of 2012, respectively, which reflected the impact of additional projected losses on loan collateral underlying certain private-label MBS. Each quarter, the Bank updates its other-than-temporary impairment analysis to reflect current housing market conditions, changes in anticipated housing market conditions, observed and anticipated borrower behavior, and updated information on the loans supporting the Bank’s private-label MBS. Factors that adversely affected projected borrower default rates and projected loan loss severity included the impact of large inventories of unsold homes on current and forecasted housing prices, continued weakness in the economy and in employment, and increased foreclosure costs and delays, resulting in continued credit losses.
38
Substantially all of the Bank's trading securities are fixed interest-rate securities and 99.9 percent were swapped to a variable rate. Long-term interest rates were relatively stable during the third quarter and first nine months of 2012 resulting in net losses of $9 million and $42 million, respectively, on trading securities during the periods. These losses were offset by gains of $8 million and $34 million, respectively, on non-qualifying hedges related to the Bank's trading securities which are reported as part of net gains (losses) on derivatives and hedging activities, resulting in net losses of $1 million and $8 million, respectively, on trading securities during the 2012 periods. There was a significant decrease in long-term interest rates during the third quarter and first nine months of 2011 resulting in net gains of $36 million and $22 million, respectively, on trading securities during the periods. These gains were offset by losses of $37 million and $13 million, respectively, on non-qualifying hedges related to the Bank's trading securities, resulting in net losses of $1 million and net gains of $9 million, respectively, on trading securities during the 2011 periods.
The following tables summarize the net effect of derivatives and hedging activity on the Bank’s results of operations (in millions):
Three Months Ended September 30, 2012 | |||||||||||||||||||||||
Advances | Investments | Consolidated Obligation Bonds | Consolidated Obligation Discount Notes | Balance Sheet | Total | ||||||||||||||||||
Net interest income: | |||||||||||||||||||||||
Amortization or accretion of hedging activities in net interest income (1) | $ | (53 | ) | $ | — | $ | 9 | $ | — | $ | — | $ | (44 | ) | |||||||||
Net interest settlements included in net interest income (2) | (337 | ) | — | 140 | — | — | (197 | ) | |||||||||||||||
Total effect on net interest income | $ | (390 | ) | $ | — | $ | 149 | $ | — | $ | — | $ | (241 | ) | |||||||||
Net gains (losses) on derivatives and hedging activities: | |||||||||||||||||||||||
Gains (losses) on fair value hedges | $ | 62 | $ | — | $ | (13 | ) | $ | — | $ | — | $ | 49 | ||||||||||
(Losses) gains on derivatives not receiving hedge accounting | — | (17 | ) | 1 | — | (3 | ) | (19 | ) | ||||||||||||||
Total net gains (losses) on derivatives and hedging activities | 62 | (17 | ) | (12 | ) | — | (3 | ) | 30 | ||||||||||||||
Net losses on trading securities (3) | — | (9 | ) | — | — | — | (9 | ) | |||||||||||||||
Total effect on noninterest income (loss) | $ | 62 | $ | (26 | ) | $ | (12 | ) | $ | — | $ | (3 | ) | $ | 21 |
____________
(1) | Represents the amortization or accretion of hedging fair value adjustments for both open and closed hedge positions. |
(2) | Represents interest income or expense on derivatives included in net interest income. |
(3) | Includes only those gains or losses on trading securities or financial instruments held at fair value that have an economic derivative “assigned,” therefore, this line item may not agree to the income statement. |
Three Months Ended September 30, 2011 | |||||||||||||||||||||||
Advances | Investments | Consolidated Obligation Bonds | Consolidated Obligation Discount Notes | Balance Sheet | Total | ||||||||||||||||||
Net interest income: | |||||||||||||||||||||||
Amortization or accretion of hedging activities in net interest income (1) | $ | (55 | ) | $ | — | $ | 10 | $ | — | $ | — | $ | (45 | ) | |||||||||
Net interest settlements included in net interest income (2) | (491 | ) | — | 200 | — | — | (291 | ) | |||||||||||||||
Total effect on net interest income | $ | (546 | ) | $ | — | $ | 210 | $ | — | $ | — | $ | (336 | ) | |||||||||
Net gains (losses) on derivatives and hedging activities: | |||||||||||||||||||||||
Gains on fair value hedges | $ | 23 | $ | — | $ | 5 | $ | — | $ | — | $ | 28 | |||||||||||
Gains (losses) on derivatives not receiving hedge accounting | 6 | (72 | ) | 2 | — | (31 | ) | (95 | ) | ||||||||||||||
Total net gains (losses) on derivatives and hedging activities | 29 | (72 | ) | 7 | — | (31 | ) | (67 | ) | ||||||||||||||
Net gains on trading securities (3) | — | 36 | — | — | — | 36 | |||||||||||||||||
Total effect noninterest income (loss) | $ | 29 | $ | (36 | ) | $ | 7 | $ | — | $ | (31 | ) | $ | (31 | ) |
____________
(1) | Represents the amortization or accretion of hedging fair value adjustments for both open and closed hedge positions. |
(2) | Represents interest income or expense on derivatives included in net interest income. |
(3) | Includes only those gains or losses on trading securities or financial instruments held at fair value that have an economic derivative “assigned,” therefore, this line item may not agree to the income statement. |
39
Nine Months Ended September 30, 2012 | |||||||||||||||||||||||
Advances | Investments | Consolidated Obligation Bonds | Consolidated Obligation Discount Notes | Balance Sheet | Total | ||||||||||||||||||
Net interest income: | |||||||||||||||||||||||
Amortization or accretion of hedging activities in net interest income (1) | $ | (181 | ) | $ | — | $ | 24 | $ | — | $ | — | $ | (157 | ) | |||||||||
Net interest settlements included in net interest income (2) | (1,085 | ) | — | 429 | — | — | (656 | ) | |||||||||||||||
Total effect on net interest income | $ | (1,266 | ) | $ | — | $ | 453 | $ | — | $ | — | $ | (813 | ) | |||||||||
Net gains (losses) on derivatives and hedging activities: | |||||||||||||||||||||||
Gains (losses) on fair value hedges | $ | 169 | $ | — | $ | (33 | ) | $ | — | $ | — | $ | 136 | ||||||||||
Gains (losses) on derivatives not receiving hedge accounting | 1 | (46 | ) | 3 | — | (11 | ) | (53 | ) | ||||||||||||||
Total net gains (losses) on derivatives and hedging activities | 170 | (46 | ) | (30 | ) | — | (11 | ) | 83 | ||||||||||||||
Net losses on trading securities (3) | — | (42 | ) | — | — | — | (42 | ) | |||||||||||||||
Total effect on noninterest income (loss) | $ | 170 | $ | (88 | ) | $ | (30 | ) | $ | — | $ | (11 | ) | $ | 41 |
____________
(1) | Represents the amortization or accretion of hedging fair value adjustments for both open and closed hedge positions. |
(2) | Represents interest income or expense on derivatives included in net interest income. |
(3) | Includes only those gains or losses on trading securities or financial instruments held at fair value that have an economic derivative “assigned,” therefore, this line item may not agree to the income statement. |
Nine Months Ended September 30, 2011 | |||||||||||||||||||||||
Advances | Investments | Consolidated Obligation Bonds | Consolidated Obligation Discount Notes | Balance Sheet | Total | ||||||||||||||||||
Net interest income: | |||||||||||||||||||||||
Amortization or accretion of hedging activities in net interest income (1) | $ | (150 | ) | $ | — | $ | 30 | $ | — | $ | — | $ | (120 | ) | |||||||||
Net interest settlements included in net interest income (2) | (1,622 | ) | — | 634 | 2 | — | (986 | ) | |||||||||||||||
Total effect on net interest income | $ | (1,772 | ) | $ | — | $ | 664 | $ | 2 | $ | — | $ | (1,106 | ) | |||||||||
Net gains (losses) on derivatives and hedging activities: | |||||||||||||||||||||||
Gains (losses) on fair value hedges | $ | 110 | $ | — | $ | (9 | ) | $ | — | $ | — | $ | 101 | ||||||||||
Gains (losses) on derivatives not receiving hedge accounting | 7 | (123 | ) | 7 | — | (33 | ) | (142 | ) | ||||||||||||||
Total net gains (losses) on derivatives and hedging activities | 117 | (123 | ) | (2 | ) | — | (33 | ) | (41 | ) | |||||||||||||
Net gains on trading securities (3) | — | 22 | — | — | — | 22 | |||||||||||||||||
Total effect on noninterest income (loss) | $ | 117 | $ | (101 | ) | $ | (2 | ) | $ | — | $ | (33 | ) | $ | (19 | ) |
____________
(1) | Represents the amortization or accretion of hedging fair value adjustments for both open and closed hedge positions. |
(2) | Represents interest income or expense on derivatives included in net interest income. |
(3) | Includes only those gains or losses on trading securities or financial instruments held at fair value that have an economic derivative “assigned,” therefore, this line item may not agree to the income statement. |
Noninterest Expense and Assessments
Noninterest expense was $30 million for the third quarter of 2012, remaining relatively stable from $29 million for the third quarter of 2011.
40
Noninterest expense was $87 million and $83 million for the first nine months of 2012 and 2011, respectively. The $4 million increase during the first nine months of 2012, compared to the same period in 2011, was primarily due to the discontinuation of the Bank’s Economic Development and Growth Enhancement Program (EDGE) during the first quarter of 2011. The EDGE was a selective program that provided subsidized advances to member financial institutions for specific community economic development projects; however, EDGE experienced low utilization by members. The Bank had a $9 million liability related to uncommitted funds as of the date the EDGE was discontinued, which was reduced to zero with a corresponding reduction to other expense during the period. Compensation and benefits expense decreased by $4 million during the first nine months of 2012, compared to the same period in 2011, which reflects the Bank’s efforts during the past year to control operating expenses.
Total assessments were $8 million and $4 million for the third quarters of 2012 and 2011, respectively, and $23 million and $36 million for the first nine months of 2012 and 2011, respectively. The increase in total assessments during the third quarter of 2012, compared to the third quarter of 2011, was due to an increase in income before assessments. The decrease during the first nine months of 2012, compared to the same period in 2011, was primarily due to the satisfaction of the Bank’s REFCORP obligation during the third quarter of 2011.
Liquidity and Capital Resources
Liquidity is necessary to satisfy members’ borrowing needs on a timely basis, repay maturing and called COs, and meet other obligations and operating requirements. Many members rely on the Bank as a source of standby liquidity, and the Bank attempts to be in a position to meet member funding needs on a timely basis. The Bank maintains contingent liquidity, 45-day liquidity, and operational liquidity.
Finance Agency regulations require the Bank to maintain contingent liquidity in an amount sufficient to meet its liquidity needs for five business days if it is unable to access the capital markets. The Bank met this regulatory liquidity requirement during the first nine months of 2012. During the recent financial crisis, the Finance Agency provided liquidity guidance to the FHLBanks generally to provide ranges of days within which each FHLBank should maintain positive cash balances based upon different assumptions and scenarios. The Bank has operated within these ranges since the Finance Agency issued this guidance.
In addition, the Bank strives to maintain sufficient liquidity to service debt obligations for at least 45 days, assuming restricted debt market access. The Bank’s 45-day debt service goal is closely aligned with those recommended by the Finance Agency. The Bank met its internal liquidity goal during the first nine months of 2012.
The Bank’s principal source of liquidity is CO debt instruments. To provide liquidity, the Bank also may use other short-term borrowings, such as federal funds purchased, securities sold under agreements to repurchase, and loans from other FHLBanks. These funding sources depend on the Bank’s ability to access the capital markets at competitive market rates. Although the Bank maintains secured and unsecured lines of credit with money market counterparties, the Bank’s income and liquidity would be adversely affected if it were not able to access the capital markets at competitive rates for an extended period. Historically, the FHLBanks have had excellent capital market access, although the FHLBanks experienced a decrease in investor demand for consolidated obligation bonds beginning in mid-July 2008 and continuing through the first half of 2009. During that time, the Bank increased its issuance of short-term discount notes as an alternative source of funding. The Bank’s funding costs and ability to issue longer-term and structured debt generally have returned to pre-2008 levels, but continue to reflect some market volatility.
The Bank plans to increase its liquidity in advance of the potential "fiscal cliff" at the beginning of 2013, when certain federal tax increases and budget cuts will automatically take effect if the U.S. Congress does not intercede. Given the wide spread anticipation of the "fiscal cliff," the Bank does not expect the "fiscal cliff" to have a material impact on the Bank's liquidity or access to capital markets.
Contingency plans are in place that prioritize the allocation of liquidity resources in the event of operational disruptions at the Bank or the Office of Finance, as well as systemic Federal Reserve wire transfer system disruptions. Under the FHLBank Act, the Secretary of Treasury has the authority, at his discretion, to purchase COs up to an aggregate amount of $4.0 billion. No borrowings under this authority have been outstanding since 1977. In September 2012, the Office of Finance revised its methodology for the allocation of the proceeds from the issuance of COs when COs cannot be issued in sufficient amounts to satisfy all FHLBank demand for funding during periods of financial distress and when its existing allocation processes are deemed insufficient. In general, this methodology provides that the proceeds in such circumstances will be allocated among the FHLBanks based on relative FHLBank total regulatory capital unless the Office of Finance determines that there is an overwhelming reason to adopt a different allocation method.
41
Off-balance Sheet Commitments
The Bank’s primary off-balance sheet commitments are as follows:
• | the Bank’s joint and several liability for all FHLBank COs; and |
• | the Bank’s outstanding commitments arising from standby letters of credit. |
Should an FHLBank be unable to satisfy its payment obligation under a CO for which it is the primary obligor, any of the other FHLBanks, including the Bank, could be called upon to repay all or any part of such payment obligation, as determined or approved by the Finance Agency. The Bank considers the joint and several liabilities to be a related-party guarantee. These related-party guarantees meet the scope exception under GAAP. Accordingly, the Bank has not recognized a liability for its joint and several obligations related to other FHLBanks’ COs as of September 30, 2012 and December 31, 2011. As of September 30, 2012, the FHLBanks had $674.5 billion in aggregate par value of COs issued and outstanding, $102.0 billion of which was attributable to the Bank. No FHLBank has ever defaulted on its principal or interest payments under any CO, and the Bank has never been required to make payments under any CO as a result of the failure of another FHLBank to meet its obligations.
Refer to Note 13 – Commitments and Contingencies in the Bank’s interim financial statements for the amount of outstanding standby letters of credit as of September 30, 2012 and December 31, 2011. The Bank expects its overall standby letter of credit activity to remain relatively stable for the near future.
The Bank generally requires standby letters of credit to contain language permitting the Bank, upon annual renewal dates and prior notice to the beneficiary, to choose not to renew the standby letter of credit, which effectively terminates the standby letter of credit prior to its scheduled final expiration date. The Bank may issue standby letters of credit for terms of longer than one year without annual renewals or for open-ended terms with annual renewals (commonly known as evergreen letters of credit) based on the creditworthiness of the member applicant and appropriate additional fees.
Commitments to extend credit, including standby letters of credit, are agreements to lend. The Bank issues a standby letter of credit for the account of a member in exchange for a fee. A member may use these standby letters of credit to facilitate a financing arrangement. The Bank requires its borrowers, upon the effective date of the letter of credit through its expiration, to collateralize fully the face amount of any letter of credit issued by the Bank, as if such face amount were an advance to the borrower. Standby letters of credit are not subject to activity-based capital stock purchase requirements. If the Bank is required to make a payment for a beneficiary’s draw, the Bank in its discretion may convert such paid amount to an advance to the member and will require a corresponding activity-based capital stock purchase. The Bank’s underwriting and collateral requirements for standby letters of credit are the same or in some instances more stringent as those requirements for advances. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to have an allowance for credit losses for these unfunded standby letters of credit as of September 30, 2012. Management regularly reviews its standby letter of credit pricing in light of several factors, including the Bank’s potential liquidity needs related to draws on its standby letters of credit.
Contractual Obligations
As of September 30, 2012 there has been no material change outside the ordinary course of business in the Bank’s contractual obligations as reported in the Bank’s Form 10-K.
Legislative and Regulatory Developments
The legislative and regulatory environment in which the Bank operates continues to undergo rapid change driven principally by regulations enacted pursuant to the Housing and Economic Reform Act of 2008, as amended (Housing Act) and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). The Bank’s business operations, funding costs, rights, obligations, and/or the environment in which the Bank carries out its housing finance mission are likely to continue to be significantly impacted by these changes. Significant regulatory actions and developments for the period covered by this report are summarized below.
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Dodd-Frank Act Developments
Definitions of Certain Terms under New Derivatives Requirements. The Dodd-Frank Act will require swap dealers and certain other large users of derivatives to register as “swap dealers” or “major swap participants,” as the case may be, with the U.S. Commodity Futures Trading Commission (the CFTC) and/or the SEC. Based on the definitions in the final rules jointly issued by the CFTC and SEC in April 2012, the Bank is not expected to be required to register as either a major swap participant or as a swap dealer because of the derivative transactions that the Bank enters into for the purposes of hedging and managing interest rate risk or the derivatives transactions that the Bank intermediates for member institutions.
Based on the final rules and accompanying interpretive guidance jointly issued by the CFTC and SEC in July 2012, call and put optionality in certain advances to member institutions will not be treated as “swaps” as long as the optionality relates solely to the interest rate on the advance and does not result in enhanced or inverse performance or other risks unrelated to the interest rate. Accordingly, the Bank’s ability to offer these advance products to its members should not be affected by the new derivatives regulations.
Mandatory Clearing of Derivatives Transactions. The Dodd-Frank Act provides for new statutory and regulatory requirements for derivative transactions, including those utilized by the Bank to hedge its interest rate and other risks. As a result of these requirements, certain derivative transactions will be required to be cleared through a third-party central clearinghouse and traded on regulated exchanges or new swap execution facilities. As further discussed in the Bank’s Form 10-K, cleared swaps will be subject to new requirements including mandatory reporting, recordkeeping and documentation requirements established by applicable regulators and initial and variation margin requirements established by the clearinghouse and its clearing members. The CFTC recently issued guidance regarding the treatment of customer collateral for cleared swaps and proposed additional protections for such collateral.
The implementation timeframe for mandatory clearing of eligible interest rate swaps is determined according to the effective date of the CFTC's mandatory clearing determinations, which were released in proposed form on July 24, 2012 for interest rate swaps. The CFTC is expected to finalize these determinations in November 2012, and the Bank will have to clear eligible interest rate swaps within 180 days after publication of the final determinations.
The CFTC has approved an end-user exception to mandatory clearing that would exempt derivatives transactions the Bank intermediates for members with $10 billion or less in assets; the exemption applies only if the member uses the swaps to hedge or mitigate its commercial risk and the reporting counterparty for such swaps complies with certain additional reporting requirements. As a result, any such intermediated swaps would not be subject to mandatory clearing, although such swaps would be subject to applicable new requirements for derivatives transactions that are not subject to mandatory clearing requirements (uncleared trades). The Bank is evaluating the feasibility of continuing to intermediate derivatives transactions as uncleared swaps.
Uncleared Derivatives Transactions. The Dodd-Frank Act will also change the regulatory landscape for derivative transactions that are not subject to mandatory clearing requirements (uncleared trades). While the Bank expects to continue to enter into uncleared trades on a bilateral basis, such trades will be subject to new requirements, including mandatory reporting, recordkeeping, documentation, and minimum margin and capital requirements established by applicable regulators. These requirements are discussed in the Bank’s Form 10-K.
The CFTC recently finalized rules regarding certain new documentation requirements for uncleared trades. These rules (and the external business conduct rules for swap dealers and major swap participants that the CFTC had previously finalized) and certain additional rules that have yet to be finalized) will require amendments to the documentation for swaps the Bank enters into with swap dealers. The Bank has adhered to an ISDA protocol to address the new documentation requirements under the external business conduct rules and the Bank will consider adhering to future ISDA protocols to address the recently finalized new documentation requirements for uncleared trades. The recently finalized rules require new dispute resolution and valuation provisions, new representations regarding applicable insolvency regimes and credit support modifications to our existing swap documentation. The Bank's swap documentation with swap dealers must comply with these requirements by April 1, 2013. The recently finalized rules also impose requirements for acknowledgments and confirmations of uncleared trades between the Bank and swap dealers. With respect to interest rate swaps that the Bank enters into with swap dealers, these requirements are scheduled to be phased in between November 13, 2012 and March 1, 2014. However, the Bank believes that this scheduled phase-in period may be delayed until December 31, 2012 due to a delay in swap dealer registration. This same delay in registration has also delayed the start of swap dealer compliance with certain of the external business conduct rules discussed above beyond their originally scheduled effective date of October 15, 2012. The compliance date for the remaining external business conduct rules is January 1, 2013.
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The Dodd-Frank Act also imposes new margin requirements for uncleared trades, which are discussed in the Bank's Form 10-K. The CFTC, the Finance Agency and other bank regulators proposed margin requirements in 2011 and the CFTC has re-opened the comment period for such requirements on two occasions. The Finance Agency and other bank regulators recently re-opened the comment period for their proposed margin requirements until November 26, 2012. As a result the Bank does not expect that such requirements will be finalized until sometime in 2013 and the Bank does not expect that they will apply to the Bank until later in 2013 at the earliest.
Recordkeeping and Reporting. Compliance dates for the new recordkeeping and reporting requirements for all of the Bank's cleared and uncleared swaps have now been established, based on the effective date for the final rule further defining the term "swap," issued jointly by the CFTC and SEC, which became effective on October 12, 2012. The Bank currently complies with recordkeeping requirements for swaps that were (or are) in effect on or after July 21, 2010 and, beginning on April 10, 2013, the Bank will have to comply with new recordkeeping requirements for swaps entered into on or after April 10, 2013. For interest rate swaps that the Bank enters into with swap dealers, the swap dealers must comply with reporting requirements applicable to such swaps, including real-time reporting requirements, as of the date these swap dealers register as such. The Bank will be required to comply with reporting requirements, including real-time reporting requirements for any swaps that the Bank intermediates for its members, beginning on April 10, 2013.
The Bank, together with the other FHLBanks, will continue to monitor these rulemakings and the overall regulatory process to implement the derivatives reform under the Dodd-Frank Act. The Bank will also continue to work with the other FHLBanks to implement the processes and documentation necessary to comply with the Dodd-Frank Act’s new requirements for derivatives.
Significant Finance Agency Developments
Advance Notice of Proposed Rulemaking on Stress-Testing Requirements. On October 5, 2012, the Finance Agency issued a notice of proposed rulemaking that would implement a provision in the Dodd-Frank Act that requires all financial companies with assets over $10 billion to conduct annual stress tests, which will be used to evaluate an institution's capital adequacy under various economic conditions and financial conditions. The Finance Agency proposes to issue annual guidance to describe the baseline, adverse, and severely adverse scenarios and methodologies that the FHLBanks must follow in conducting their stress tests, which, as required by the Dodd-Frank Act, would be generally consistent and comparable to those established by the Federal Reserve. An FHLBank would be required to provide an annual report on the results of the stress tests to the Finance Agency and the Federal Reserve and to then publicly disclose a summary of such report within 90 days. Comments are due by December 4, 2012.
Proposed Guidance on Collateralization of Advances and Other Credit Products Provided to Insurance Company Members. On October 5, 2012, the Finance Agency published a notice requesting comments on a proposed Advisory Bulletin which would set forth standards to guide the Finance Agency in its supervision of secured lending to insurance company members by the FHLBanks. The Finance Agency's notice provides that lending to insurance company members exposes FHLBanks to risks that are not associated with advances to the insured depository institution members, arising from differences in each state's statutory and regulatory regimes and the statutory accounting principles and reporting practices applicable to insurance companies. The proposed standards include consideration of, among other things:
• | the level of an FHLBank's exposure to insurance companies in relation to its capital structure and retained earnings; |
• | an FHLBank's control of pledged securities collateral and ensuring it has a first-priority perfected security interest; |
• | the use of funding agreements between an FHLBank and an insurance company member to document advances and whether the FHLBank would be recognized as a secured creditor with a first priority security interest in the collateral; and |
• | the FHLBank's documented framework, procedures, methodologies and standards to evaluate an insurance company member's creditworthiness and financial condition, and the value of the pledged collateral |
• | whether an FHLBank has a written plan for the liquidation of insurance company member collateral. |
Comments are due by December 4, 2012.
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Proposed Order on Qualified Financial Contracts (QFCs). On August 9, 2012, the Finance Agency circulated a proposed order on QFCs that would be applicable to the FHLBanks as well as Fannie Mae and Freddie Mac (collectively, the Regulated Entities). The Finance Agency has indicated that the proposed order is intended to permit the Finance Agency to comply with certain statutory requirements for the transfer of QFCs in the event of the receivership of a Regulated Entity. The proposed order sets forth certain recordkeeping and reporting requirements for a Regulated Entity's QFCs. If the order is issued as proposed, each FHLBank will have to, among other things, establish and maintain infrastructure sufficient to meet the recordkeeping and reporting requirements and engage external personnel to audit its compliance with the order on an annual basis. Comments were due by October 10, 2012.
Other Significant Developments
National Credit Union Administration Proposed Rule on Access to Emergency Liquidity. On July 30, 2012, the National Credit Union Administration (NCUA) published a proposed rule requiring, among other things, that federally-insured credit unions of $100 million or larger must maintain access to at least one federal liquidity source for use in times of financial emergency and distressed circumstances. This access must be demonstrated through direct or indirect membership in the Central Liquidity Facility (a U.S. government corporation created to improve the general financial stability of credit unions by serving as a liquidity lender to credit unions) or by establishing access to the Federal Reserve's discount window. If enacted as proposed, the proposed rule may encourage credit unions to favor these federal sources of liquidity over FHLBank membership and advances, which could have a negative impact on the Bank's results of operations. Comments were due by September 28, 2012.
Risk Management
The Bank’s lending, investment, and funding activities and the use of derivative hedge instruments expose the Bank to a number of risks. A robust risk management framework aligns risk-taking activities with the Bank’s strategies and risk appetite. A risk management framework also balances risks and rewards. The Bank’s risk management framework consists of risk governance, risk appetite, and risk management policies.
The Bank’s board of directors and management recognize that risks are inherent to the Bank’s business model and that the process of establishing a risk appetite does not imply that the Bank seeks to mitigate or eliminate all risk. By defining and managing to a specific risk appetite, the board of directors and management ensure that there is a common understanding of the Bank’s desired risk profile which enhances their ability to make improved strategic and tactical decisions. Additionally, the Bank aspires to achieve and exceed best practices in governance, ethics, and compliance, and to sustain a corporate culture that fosters transparency, integrity, and adherence to legal and ethical obligations.
The Bank’s board of directors and management have established this risk appetite statement and risk metrics for controlling and escalating actions based on the nine continuing objectives that represent the foundation of the Bank’s strategic and tactical planning, as described in the Bank’s Form 10-K.
Discussion of the Bank’s management of its credit risk and market risk is provided below. Further discussion of these risks, as well as the Bank’s management of its liquidity, operational, and business risks, is contained in the Bank’s Form 10-K.
Credit Risk
The Bank faces credit risk primarily with respect to its advances, investments, derivatives and mortgage loan assets.
Advances
Secured advances to member financial institutions account for the largest category of Bank assets; thus, advances are a major source of the Bank’s credit risk exposure. The Bank uses a risk-focused approach to credit and collateral underwriting. The Bank attempts to reduce credit risk on advances by monitoring the financial condition of borrowers and the quality and value of the assets members pledge as eligible collateral.
The Bank utilizes a credit risk rating system for its members, which focuses primarily on an institution’s overall financial health and takes into account quality of assets, earnings, and capital position. The Bank assigns each borrower that is an insured depository institution a credit risk rating from one to 10 according to the relative amount of credit risk such borrower poses to the Bank (one being the least amount of credit risk and 10 the greatest amount of credit risk). In general, borrowers in category 10 may have more restrictions on the types of collateral they may use to secure advances, may be required to maintain higher collateral maintenance levels and deliver loan collateral, may be restricted from obtaining further advances, and may face more stringent collateral reporting requirements. At times, the Bank may place more restrictive requirements on a borrower than those generally applicable to borrowers with the same rating based upon management’s assessment of the borrower and its collateral.
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The following table sets forth the number of borrowers and the par amount of advances outstanding to borrowers with the specified ratings as of the specified dates (dollars in millions).
As of September 30, 2012 | As of December 31, 2011 | |||||||||||||
Rating | Number of Borrowers | Outstanding Advances | Number of Borrowers | Outstanding Advances | ||||||||||
1-9 | 522 | $ | 74,223 | 536 | $ | 78,355 | ||||||||
10 | 84 | 1,854 | 117 | 3,033 |
The Bank establishes a credit limit for each borrower. The credit limit is not a committed line of credit, but rather an indication of the borrower’s general borrowing capacity with the Bank. The Bank determines the credit limit in its sole and absolute discretion, by evaluating a wide variety of factors indicating the borrower’s overall creditworthiness. The credit limit generally is expressed as a percentage equal to the ratio of the borrower’s total liabilities to the Bank (including the face amount of outstanding letters of credit, the principal amount of outstanding advances and the total exposure of the Bank to the borrower under any derivative contract) to the borrower’s total assets. Generally, borrowers are held to a credit limit of no more than 30 percent. However, the Bank’s board of directors, or a relevant committee thereof, may approve a higher limit at its discretion, and such borrowers may be subject to certain additional collateral reporting and maintenance requirements. As of September 30, 2012, 8 borrowers have been approved for a credit limit higher than 30 percent.
Each borrower must maintain an amount of qualifying collateral that, when discounted to the lendable collateral value (LCV), is equal to at least 100 percent of the outstanding principal amount of all advances and other liabilities of the borrower to the Bank. The LCV is the value that the Bank assigns to each type of qualifying collateral for purposes of determining the amount of credit that such qualifying collateral will support. For each type of qualifying collateral, the Bank discounts the market value of the qualifying collateral to calculate the LCV. The Bank regularly reevaluates the appropriate level of discounting. The following table provides information about the types of collateral held for the Bank’s advances (dollars in millions).
Total Par Value of Outstanding Advances | LCV of Collateral Pledged by Members | First Mortgage Collateral (%) | Securities Collateral (%) | Other Real Estate Related Collateral (%) | |||||||||
As of September 30, 2012 | $ | 76,337 | $ | 197,496 | 64.53 | 11.13 | 24.34 | ||||||
As of December 31, 2011 | 82,569 | 188,597 | 64.36 | 10.93 | 24.71 |
For purposes of determining each member’s LCV, the Bank generally estimates the current market value of all loans pledged as collateral based on information provided by the member on individual loans or its loan portfolio through the regular collateral reporting process. The estimated market value is discounted to account for the price volatility of loans as well as estimated liquidation and servicing costs in the event of the member’s default. Market values, and thus LCVs, change monthly. The Bank believes a market-based valuation methodology allows the Bank to establish its collateral discounts with greater precision and greater transparency with respect to the valuation of collateral pledged for advances and other credit products offered by the Bank.
The following table provides information on Federal Deposit Insurance Corporation (FDIC) insured institutions that were placed into receivership during the periods indicated.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||
FHLBank Atlanta members | 4 | 13 | 18 | 38 | |||||||
Non-FHLBank Atlanta members | 8 | 13 | 25 | 36 | |||||||
Total FDIC-insured | 12 | 26 | 43 | 74 |
All outstanding advances to those member institutions placed into FDIC receivership were either paid in full or assumed by another member or non-member institution under purchase and assumption agreements between the assuming institution and the FDIC. The Bank expects more member institution failures during 2012, but at a lower rate than during 2011 as capital levels, asset quality, and the overall financial condition of member institutions slowly improve.
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The FHLBank Act affords any security interest granted to the Bank by any member of the Bank, or any affiliate of any such member, priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor), other than claims and rights of a party that (1) would be entitled to priority under otherwise applicable law; and (2) is an actual bona fide purchaser for value or is an actual secured party whose security interest is perfected in accordance with applicable state law.
In its history, the Bank has never experienced a credit loss on an advance. In consideration of this, and the Bank’s policies and practices detailed above, the Bank has not established an allowance for credit losses on advances as of September 30, 2012 and December 31, 2011.
Investments
The Bank is subject to credit risk on certain unsecured investments, including interest-bearing deposits, certificates of deposit and federal funds sold.
The Bank follows guidelines approved by its board of directors regarding unsecured extensions of credit, in addition to Finance Agency regulations with respect to term limits and eligible counterparties.
Finance Agency regulations prohibit the Bank from investing in any of the following securities:
• | instruments such as common stock that represent an ownership interest in an entity, other than stock in small business investment companies or certain investments targeted to low-income people or communities; |
• | instruments issued by non-United States entities, other than those issued by United States branches and agency offices of foreign commercial banks; |
• | non-investment grade debt instruments, other than certain investments targeted to low-income people or communities and instruments that were downgraded to below an investment grade rating after purchase by the Bank; |
• | whole mortgages or other whole loans, other than (1) those acquired under the Bank’s mortgage purchase programs; (2) certain investments targeted to low-income people or communities; (3) certain marketable direct obligations of state, local, or tribal government units or agencies having at least the second highest credit rating from a NRSRO; (4) MBS or asset-backed securities backed by manufactured housing loans or home equity loans; and (5) certain foreign housing loans authorized under section 12(b) of the FHLBank Act; |
• | interest-only or principal-only stripped MBS, collateralized mortgage obligations (CMOs), collateralized debt obligations, and real estate mortgage investment conduits (REMICs); |
• | residual-interest or interest-accrual classes of CMOs and REMICs; |
• | fixed-rate or variable-rate MBS, CMOs, and REMICs that on the trade date are at rates equal to their contractual cap and that have average lives that vary by more than six years under an assumed instantaneous interest-rate change of 300 basis points; and |
• | non-U.S. dollar denominated securities. |
The Bank monitors the financial condition of investment counterparties to ensure that they are in compliance with the Bank’s Risk Management Policy (RMP) and Finance Agency regulations. Unsecured credit exposure to any counterparty is limited by the credit quality and capital of the counterparty and by the capital of the Bank. On a regular basis, management produces financial monitoring reports detailing the financial condition of the Bank’s counterparties. These reports are reviewed by the Bank’s board of directors. In light of continuing European sovereign credit concerns, the Bank has suspended overnight and term trading with certain European counterparties, and the Bank has limited term trades and capped overnight trades with certain European counterparties based on their financial condition. The Bank may further limit or suspend overnight and term trading in addition to RMP and regulatory requirements. Limiting or suspending counterparties limits the pool of available counterparties, shifts the geographical distribution of counterparty exposure, and may reduce the Bank’s overall short-term investment opportunities. As noted above, Finance Agency regulations prohibit the Bank from investing in non-U.S. sovereign debt.
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The Bank enters into investments only with U.S. counterparties or U.S. branches and agency offices of foreign commercial banks that have been approved by the Bank through its internal approval process, but may have exposure to foreign entities if a counterparty’s parent entity is located in another country. The tables below represent the Bank’s gross exposure, by instrument type, according to the location of the parent company of the counterparty (in millions):
As of September 30, 2012 | |||||||||||||||||||
Federal Funds Sold | Interest-bearing Deposits | Certificates of Deposit | Net Derivative Exposure (1) | Total | |||||||||||||||
Australia | $ | 825 | $ | — | $ | — | $ | — | $ | 825 | |||||||||
Germany | 1,000 | — | — | 90 | 1,090 | ||||||||||||||
Japan | — | — | 575 | — | 575 | ||||||||||||||
Sweden | 1,450 | — | — | — | 1,450 | ||||||||||||||
Switzerland | 475 | — | — | — | 475 | ||||||||||||||
United Kingdom | 943 | — | — | — | 943 | ||||||||||||||
United States of America | 2,321 | 1,005 | — | 1 | 3,327 | ||||||||||||||
Total | $ | 7,014 | $ | 1,005 | $ | 575 | $ | 91 | $ | 8,685 |
____________
(1) | Amounts do not reflect collateral; see the table under Risk Management – Credit Risk – Derivatives below for a breakdown of the credit ratings of and the Bank’s credit exposure to derivative counterparties, including net exposure after collateral. |
As of December 31, 2011 | |||||||||||||||||||
Federal Funds Sold | Interest-bearing Deposits | Certificates of Deposit | Net Derivative Exposure (1) | Total | |||||||||||||||
Australia | $ | 1,335 | $ | — | $ | — | $ | — | $ | 1,335 | |||||||||
Canada | 2,050 | — | — | — | 2,050 | ||||||||||||||
France | — | — | — | 3 | 3 | ||||||||||||||
Germany | 1,225 | — | — | 37 | 1,262 | ||||||||||||||
Japan | — | — | 650 | — | 650 | ||||||||||||||
Norway | 950 | — | — | — | 950 | ||||||||||||||
Spain | 575 | — | — | 5 | 580 | ||||||||||||||
Sweden | 3,090 | — | — | — | 3,090 | ||||||||||||||
Switzerland | 400 | — | — | — | 400 | ||||||||||||||
United Kingdom | 1,700 | — | — | — | 1,700 | ||||||||||||||
United States of America | 1,305 | 1,203 | — | — | 2,508 | ||||||||||||||
Total | $ | 12,630 | $ | 1,203 | $ | 650 | $ | 45 | $ | 14,528 |
____________
(1) | Amounts do not reflect collateral; see the table under Risk Management – Credit Risk – Derivatives below for a breakdown of the credit ratings of and the Bank’s credit exposure to derivative counterparties, including net exposure after collateral. |
The Bank experienced a decrease in unsecured credit exposure in its investment portfolio related to non-U.S. government or non-U.S. government agency counterparties from $14.5 billion as of December 31, 2011 to $8.6 billion as of September 30, 2012. There were four such counterparties that represented 53.1 percent, and three such counterparties, Bank of New York Mellon, Branch Banking and Trust, and Deutsche Bank, that each represented greater than 10 percent, of the total unsecured credit exposure to non-U.S. government or non-U.S. government agencies counterparties. The Bank’s unsecured credit portfolio currently consists of securities with scheduled maturities of less than 90 days and is comprised primarily of federal funds sold.
The Bank’s RMP permits the Bank to invest in U.S. agency (Fannie Mae, Freddie Mac and Ginnie Mae) obligations, including CMOs and REMICS backed by such securities, and other MBS, CMOs and REMICS rated AAA by S&P or Aaa by Moody’s at the time of purchase. The private-label MBS purchased by the Bank attain their triple-A ratings through credit enhancements, which primarily consist of the subordination of the claims of the other tranches of these securities.
The tables below provide information on the credit ratings of the Bank’s investments held as of September 30, 2012 and December 31, 2011, based on their credit ratings as of September 30, 2012 and December 31, 2011 (in millions), respectively. The credit ratings reflect the lowest long-term credit rating as reported by an NRSRO.
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As of September 30, 2012 | |||||||||||||||||||||||||||||||||||||||
Carrying Value (1) | |||||||||||||||||||||||||||||||||||||||
Investment Grade | Below Investment Grade | ||||||||||||||||||||||||||||||||||||||
AAA | AA | A | BBB | BB | B | CCC | CC | C | D | ||||||||||||||||||||||||||||||
Short-term investments: | |||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits | $ | — | $ | 2 | $ | 1,003 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||
Certificates of deposit | — | — | 575 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Securities purchased under agreements to resell | — | — | 250 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Federal funds sold | — | 3,386 | 3,628 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Total short-term investments | — | 3,388 | 5,456 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Long-term investments: | |||||||||||||||||||||||||||||||||||||||
State or local housing agency debt obligations | — | 111 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
U.S. government agency debt obligations | — | 3,750 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Mortgage-backed securities: | |||||||||||||||||||||||||||||||||||||||
U.S. government agency securities | — | 11,298 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Private-label | 412 | 186 | 515 | 415 | 733 | 807 | 1,195 | 431 | 476 | 545 | |||||||||||||||||||||||||||||
Total mortgage-backed securities | 412 | 11,484 | 515 | 415 | 733 | 807 | 1,195 | 431 | 476 | 545 | |||||||||||||||||||||||||||||
Total long-term investments | 412 | 15,345 | 515 | 415 | 733 | 807 | 1,195 | 431 | 476 | 545 | |||||||||||||||||||||||||||||
Total investments | $ | 412 | $ | 18,733 | $ | 5,971 | $ | 415 | $ | 733 | $ | 807 | $ | 1,195 | $ | 431 | $ | 476 | $ | 545 |
____________
(1) | Investment amounts noted in the above table represent the carrying value and do not include related accrued interest receivable of $65 million as of September 30, 2012. |
As of December 31, 2011 | |||||||||||||||||||||||||||||||||||||||
Carrying Value (1) | |||||||||||||||||||||||||||||||||||||||
Investment Grade | Below Investment Grade | ||||||||||||||||||||||||||||||||||||||
AAA | AA | A | BBB | BB | B | CCC | CC | C | D | ||||||||||||||||||||||||||||||
Short-term investments: | |||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits | $ | — | $ | 2 | $ | 1,201 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||
Certificates of deposit | — | — | 650 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Federal funds sold | — | 5,825 | 6,805 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Total short-term investments | — | 5,827 | 8,656 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Long-term investments: | |||||||||||||||||||||||||||||||||||||||
State or local housing agency debt obligations | — | 103 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
U.S. government agency debt obligations | — | 4,228 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Mortgage-backed securities: | |||||||||||||||||||||||||||||||||||||||
U.S. government agency securities | — | 10,689 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Private-label | 664 | 314 | 757 | 559 | 689 | 891 | 1,394 | 663 | 689 | 15 | |||||||||||||||||||||||||||||
Total mortgage-backed securities | 664 | 11,003 | 757 | 559 | 689 | 891 | 1,394 | 663 | 689 | 15 | |||||||||||||||||||||||||||||
Total long-term investments | 664 | 15,334 | 757 | 559 | 689 | 891 | 1,394 | 663 | 689 | 15 | |||||||||||||||||||||||||||||
Total investments | $ | 664 | $ | 21,161 | $ | 9,413 | $ | 559 | $ | 689 | $ | 891 | $ | 1,394 | $ | 663 | $ | 689 | $ | 15 |
____________
(1) | Investment amounts noted in the above table represent the carrying value and do not include related accrued interest receivable of $83 million as of December 31, 2011. |
49
Subsequent to September 30, 2012, $547 million, or 1.84 percent, of the Bank’s investments has been downgraded as of October 31, 2012 as outlined in the table below (in millions):
Investment Ratings | Downgrades - Balances Based on Carrying Values as of September 30, 2012 | |||||||||
As of September 30, 2012 | As of October 31, 2012 | Private-label MBS | ||||||||
From | To | Carrying Value | Fair Value | |||||||
AAA | AA | $ | 18 | $ | 19 | |||||
A | 93 | 96 | ||||||||
BBB | 55 | 56 | ||||||||
AA | A | 3 | 4 | |||||||
BBB | 19 | 19 | ||||||||
A | BBB | 31 | 32 | |||||||
CCC | 19 | 20 | ||||||||
BBB | BB | 54 | 54 | |||||||
BB | B | 42 | 42 | |||||||
B | CCC | 51 | 51 | |||||||
CC | D | 80 | 80 | |||||||
C | D | 82 | 82 | |||||||
Total | $ | 547 | $ | 555 |
The following table presents all investments, excluding overnight investments, held on September 30, 2012 and on negative watch as of October 31, 2012 (in millions):
On Negative Watch - Balances Based on Carrying Values as of September 30, 2012 | ||||||||
Private-label MBS | ||||||||
Investment Ratings | Carrying Value | Fair Value | ||||||
AAA | $ | 246 | $ | 253 | ||||
AA | 81 | 81 | ||||||
A | 172 | 171 | ||||||
BBB | 170 | 165 | ||||||
BB | 41 | 41 | ||||||
CC | 30 | 30 | ||||||
Total | $ | 740 | $ | 741 |
Private-label MBS
As of September 30, 2012, the Bank’s long-term investment portfolio included $5.7 billion of private-label MBS, which represented 27.4 percent of the carrying value of the Bank’s long-term investment portfolio. For disclosure purposes, the Bank classifies private-label MBS as either prime or Alt-A based upon the overall credit quality of the underlying loans as determined by the originator at the time of origination. Although there is no universally accepted definition of Alt-A, generally loans with credit characteristics that range between prime and subprime are classified as Alt-A. Participants in the mortgage market have used the Alt-A classification principally to describe loans for which the underwriting process has been streamlined in order to reduce the documentation requirements of the borrower or allow alternative documentation. As of September 30, 2012, based on the classification by the originator at the time of origination, approximately 86.9 percent of the underlying mortgages collateralizing the Bank’s private-label MBS were considered prime and the remaining underlying mortgages collateralizing these securities were considered Alt-A.
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The table below provides information on the interest-rate payment terms of the Bank’s private-label MBS backed by prime and Alt-A loans (in millions).
As of September 30, 2012 | As of December 31, 2011 | ||||||||||||||||||||||
Fixed-Rate | Variable-Rate | Total | Fixed-Rate | Variable-Rate | Total | ||||||||||||||||||
Prime | $ | 560 | $ | 5,009 | $ | 5,569 | $ | 933 | $ | 5,751 | $ | 6,684 | |||||||||||
Alt-A | 363 | 479 | 842 | 451 | 529 | 980 | |||||||||||||||||
Total unpaid principal balance | $ | 923 | $ | 5,488 | $ | 6,411 | $ | 1,384 | $ | 6,280 | $ | 7,664 |
The tables below provide additional information, including changes in ratings since the original purchase date, on the Bank’s private-label MBS by year of securitization as of September 30, 2012 (dollars in millions).
Year of Securitization - Prime | |||||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 and Prior | Total | ||||||||||||||||||
Investment Ratings: | |||||||||||||||||||||||
AAA | $ | — | $ | — | $ | — | $ | 17 | $ | 398 | $ | 415 | |||||||||||
AA | — | — | — | — | 183 | 183 | |||||||||||||||||
A | — | 2 | — | 161 | 240 | 403 | |||||||||||||||||
BBB | — | — | — | 19 | 200 | 219 | |||||||||||||||||
BB | — | 50 | — | 281 | 320 | 651 | |||||||||||||||||
B | — | — | 7 | 268 | 492 | 767 | |||||||||||||||||
CCC | 44 | 517 | 85 | 556 | 63 | 1,265 | |||||||||||||||||
CC | 108 | 20 | 163 | 227 | — | 518 | |||||||||||||||||
C | — | 201 | 339 | 14 | — | 554 | |||||||||||||||||
D | — | 347 | 184 | 63 | — | 594 | |||||||||||||||||
Total unpaid principal balance | $ | 152 | $ | 1,137 | $ | 778 | $ | 1,606 | $ | 1,896 | $ | 5,569 | |||||||||||
Amortized cost | $ | 134 | $ | 902 | $ | 632 | $ | 1,488 | $ | 1,878 | $ | 5,034 | |||||||||||
Gross unrealized losses | $ | — | $ | (18 | ) | $ | (18 | ) | $ | (54 | ) | $ | (46 | ) | $ | (136 | ) | ||||||
Fair value | $ | 136 | $ | 923 | $ | 638 | $ | 1,444 | $ | 1,854 | $ | 4,995 | |||||||||||
Other-than-temporary impairment (Year-to-date): | |||||||||||||||||||||||
Credit-related losses | $ | — | $ | (5 | ) | $ | (10 | ) | $ | (1 | ) | $ | — | $ | (16 | ) | |||||||
Non-credit-related losses | — | (5 | ) | (10 | ) | (1 | ) | — | (16 | ) | |||||||||||||
Total other-than-temporary impairment losses | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
Weighted average percentage of fair value to unpaid principal balance | 89.59 | % | 81.12 | % | 82.01 | % | 89.91 | % | 97.78 | % | 89.68 | % | |||||||||||
Original weighted average credit support | 15.72 | % | 13.85 | % | 10.31 | % | 6.74 | % | 3.39 | % | 7.80 | % | |||||||||||
Weighted average credit support | 8.86 | % | 3.08 | % | 1.38 | % | 5.77 | % | 8.47 | % | 5.61 | % | |||||||||||
Weighted average collateral delinquency | 16.04 | % | 23.63 | % | 21.33 | % | 12.64 | % | 8.32 | % | 14.72 | % |
51
Year of Securitization – Alt-A | |||||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 and Prior | Total | ||||||||||||||||||
Investment Ratings: | |||||||||||||||||||||||
AAA | $ | — | $ | — | $ | — | $ | — | $ | 1 | $ | 1 | |||||||||||
AA | — | — | — | — | 5 | 5 | |||||||||||||||||
A | — | — | — | — | 113 | 113 | |||||||||||||||||
BBB | — | — | — | — | 197 | 197 | |||||||||||||||||
BB | — | — | — | — | 82 | 82 | |||||||||||||||||
B | — | — | — | — | 61 | 61 | |||||||||||||||||
CCC | — | — | — | 171 | — | 171 | |||||||||||||||||
D | — | 53 | — | 159 | — | 212 | |||||||||||||||||
Total unpaid principal balance | $ | — | $ | 53 | $ | — | $ | 330 | $ | 459 | $ | 842 | |||||||||||
Amortized cost | $ | — | $ | 39 | $ | — | $ | 267 | $ | 460 | $ | 766 | |||||||||||
Gross unrealized losses | $ | — | $ | — | $ | — | $ | (62 | ) | $ | (3 | ) | $ | (65 | ) | ||||||||
Fair value | $ | — | $ | 39 | $ | — | $ | 205 | $ | 464 | $ | 708 | |||||||||||
Other-than-temporary impairment (Year-to-date): | |||||||||||||||||||||||
Credit-related losses | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
Non-credit-related losses | — | — | — | — | — | — | |||||||||||||||||
Total other-than-temporary impairment losses | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
Weighted average percentage of fair value to unpaid principal balance | 0.00 | % | 73.25 | % | 0.00 | % | 62.36 | % | 101.16 | % | 84.20 | % | |||||||||||
Original weighted average credit support | 0.00 | % | 12.29 | % | 0.00 | % | 26.28 | % | 7.33 | % | 15.06 | % | |||||||||||
Weighted average credit support | 0.00 | % | (0.90 | )% | 0.00 | % | 17.01 | % | 11.71 | % | 12.98 | % | |||||||||||
Weighted average collateral delinquency | 0.00 | % | 34.03 | % | 0.00 | % | 37.84 | % | 7.58 | % | 21.11 | % |
The following table represents a summary of the significant inputs used to evaluate each of the Bank’s private-label MBS for other-than-temporary impairment:
Significant Inputs | ||||||||||||||||
Prepayment Rate | Default Rates | Loss Severities | Current Credit Enhancement | |||||||||||||
Year of Securitization | Weighted Average (%) | Range (%) | Weighted Average (%) | Range (%) | Weighted Average (%) | Range (%) | Weighted Average (%) | Range (%) | ||||||||
Prime: | ||||||||||||||||
2008 | 9.25 | 9.25 to 9.25 | 27.88 | 27.88 to 27.88 | 43.09 | 43.09 to 43.09 | 8.86 | 7.89 to 11.24 | ||||||||
2007 | 14.06 | 9.62 to 39.69 | 18.03 | 1.76 to 22.67 | 38.30 | 21.00 to 41.35 | 4.10 | 1.27 to 8.32 | ||||||||
2006 | 9.02 | 7.06 to 37.69 | 31.05 | 7.48 to 39.56 | 42.38 | 29.95 to 47.15 | 2.12 | (0.13) to 7.22 | ||||||||
2005 | 12.39 | 7.79 to 17.03 | 12.08 | 1.83 to 23.80 | 31.46 | 20.21 to 43.69 | 6.66 | 3.27 to 13.61 | ||||||||
2004 and prior | 19.15 | 9.07 to 49.89 | 8.06 | 0.00 to 23.20 | 28.55 | 0.00 to 48.95 | 8.13 | 2.61 to 43.99 | ||||||||
Total Prime | 15.19 | 7.06 to 49.89 | 13.28 | 0.00 to 39.56 | 32.28 | 0.00 to 48.95 | 6.74 | (0.13) to 43.99 | ||||||||
Alt-A: | ||||||||||||||||
2007 | 7.15 | 5.62 to 8.89 | 52.43 | 41.60 to 61.95 | 47.44 | 44.63 to 50.94 | 2.43 | (0.09) to 5.91 | ||||||||
2006 | 7.22 | 6.31 to 8.37 | 52.08 | 44.92 to 58.78 | 51.31 | 45.71 to 56.45 | 0.64 | 0.00 to 2.83 | ||||||||
2005 | 6.99 | 2.75 to 9.44 | 47.64 | 28.09 to 75.88 | 49.32 | 38.19 to 54.32 | 9.33 | (0.08) to 32.98 | ||||||||
2004 and prior | 13.51 | 9.51 to 17.28 | 13.22 | 1.61 to 42.56 | 28.36 | 19.63 to 59.33 | 12.08 | 3.30 to 37.64 | ||||||||
Total Alt-A | 8.56 | 2.75 to 17.28 | 42.10 | 1.61 to 75.88 | 44.24 | 19.63 to 59.33 | 6.34 | (0.90) to 37.64 | ||||||||
Total | 12.53 | 2.75 to 49.89 | 24.86 | 0.00 to 75.88 | 37.08 | 0.00 to 59.33 | 6.58 | (0.09) to 43.99 |
For those securities for which an other-than-temporary impairment was determined to have occurred during the third quarter of 2012, a summary of the significant inputs used to measure the amount of the credit loss recognized in earnings is contained in Note 6–Other-than-temporary Impairment to the Bank’s interim financial statements.
52
The tables below summarize the total other-than-temporary impairment losses by newly impaired and previously impaired securities (in millions):
Three Months Ended September 30, | |||||||||||||||||||||||
2012 | 2011 | ||||||||||||||||||||||
Credit Losses | Net Noncredit Losses | Total Losses | Credit Losses | Net Noncredit Losses | Total Losses | ||||||||||||||||||
Securities newly impaired during the period | $ | — | $ | — | $ | — | $ | — | $ | 2 | $ | (2 | ) | ||||||||||
Securities previously impaired prior to current period (1) | (1 | ) | (1 | ) | — | (19 | ) | (13 | ) | (6 | ) | ||||||||||||
Total | $ | (1 | ) | $ | (1 | ) | $ | — | $ | (19 | ) | $ | (11 | ) | $ | (8 | ) |
____________
(1) | For the three months ended September 30, 2012 and 2011, “Securities previously impaired prior to current period” represents all securities that were also previously impaired prior to July 1, 2012 and 2011, respectively. |
Nine Months Ended September 30, | |||||||||||||||||||||||
2012 | 2011 | ||||||||||||||||||||||
Credit Losses | Net Noncredit Losses | Total Losses | Credit Losses | Net Noncredit Losses | Total Losses | ||||||||||||||||||
Securities newly impaired during the period | $ | — | $ | — | $ | — | $ | (10 | ) | $ | 27 | $ | (37 | ) | |||||||||
Securities previously impaired prior to current period (1) | (16 | ) | (16 | ) | — | (98 | ) | (90 | ) | (8 | ) | ||||||||||||
Total | $ | (16 | ) | $ | (16 | ) | $ | — | $ | (108 | ) | $ | (63 | ) | $ | (45 | ) |
____________
(1) | For the nine months ended September 30, 2012 and 2011, “Securities previously impaired prior to current period” represents all securities that were also previously impaired prior to January 1, 2012 and 2011, respectively. |
In addition to the cash flow analysis of the Bank’s private-label MBS under a base case (best estimate) housing price scenario as described in Note 6–Other-than-temporary Impairment to the Bank’s interim financial statements, a cash flow analysis was also performed based on a housing price scenario that is more adverse than the base case (adverse case housing price scenario). The adverse case housing price scenario was based on a housing price forecast that was five percentage points lower at the trough than the base case scenario, followed by a flatter recovery path. Under this scenario, current-to-trough home price declines were projected to range from five percent to nine percent over the three- to nine-month period beginning July 1, 2012. For most of the housing markets, the declines were projected to occur over the three-month period beginning July 1, 2012.
From the trough, home prices were projected to recover using one of five different recovery paths that vary by housing market. The following table presents projected home price recovery ranges by months under the adverse case scenario:
Months | Annualized Rates (%) | |
1 to 6 | 0.00 to 1.90 | |
7 to 18 | 0.00 to 2.00 | |
19 to 24 | 0.70 to 2.70 | |
25 to 30 | 1.30 to 2.70 | |
31 to 42 | 1.30 to 3.40 | |
43 to 66 | 1.30 to 4.00 | |
Thereafter | 1.50 to 3.80 |
The adverse case housing price scenario and associated results do not represent the Bank’s current expectations, and therefore should not be construed as a prediction of the Bank’s future results, market conditions, or the actual performance of these securities. Rather, the results from this hypothetical adverse case housing price scenario provide a measure of the credit losses the Bank might incur if home price declines (and subsequent recoveries) are more adverse than those projected in the Bank’s base case assessment.
53
The following table shows the base case scenario and what the impact on other-than-temporary impairment would have been under the more stressful adverse case housing price scenario (dollars in millions). Under the adverse case housing price scenario, the Bank may recognize a credit loss in excess of the maximum credit loss, the difference between the security’s amortized cost basis and fair value, because the Bank believes fair value would decrease in the adverse case housing price scenario.
Three Months Ended September 30, 2012 | |||||||||||||||||||||
Housing Price Scenario | |||||||||||||||||||||
Base Case (2) | Adverse Case | ||||||||||||||||||||
Number of Securities | Unpaid Principal balance | Other-than- temporary Impairment Related to Credit Loss | Number of Securities | Unpaid Principal balance | Other-than- temporary Impairment Related to Credit Loss | ||||||||||||||||
Prime loans (1) | 4 | $ | 213 | $ | (1 | ) | 35 | $ | 1,631 | $ | (29 | ) | |||||||||
Alt-A (1) | — | — | — | 4 | 213 | (5 | ) | ||||||||||||||
Total | 4 | $ | 213 | $ | (1 | ) | 39 | $ | 1,844 | $ | (34 | ) |
____________
(1) | Based on the originator’s classification of collateral at the time of origination or based on classification of collateral by an NRSRO upon issuance of the MBS. |
(2) | Represents securities and related other-than-temporary-impairment credit losses for the three months ended September 30, 2012. |
The Bank continues to actively monitor the credit quality of its private-label MBS investments. It is not possible to predict the magnitude of additional other-than temporary impairment losses in future periods because that prediction depends on the actual performance of the underlying loan collateral as well as the Bank’s future modeling assumptions. Many factors could influence the Bank’s future modeling assumptions, including economic, financial market, and housing market conditions. If performance of the underlying loan collateral deteriorates and/or the Bank’s modeling assumptions become more pessimistic, the Bank could experience further losses on its investment portfolio.
Non-Private-label MBS. The unrealized losses related to U.S. agency MBS are caused by interest rate changes. Because these securities are guaranteed by government agencies or government-sponsored enterprises, it is expected that these securities would not be settled at a price less than the amortized cost basis. The Bank does not consider these investments to be other-than-temporarily impaired as of September 30, 2012 because the decline in fair value is attributable to changes in interest rates and not credit quality, the Bank does not intend to sell the investments, and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity.
Derivatives
Derivatives transactions may subject the Bank to credit risk due to potential nonperformance by counterparties to the agreements. The Bank seeks to limit counterparty risk by collateral requirements and netting procedures that establish collateral requirement thresholds. The Bank also manages counterparty credit risk through credit analysis, collateral management, and other credit enhancements. Additionally, the Bank follows applicable regulatory requirements, which set forth the eligibility criteria for counterparties (i.e., minimum capital requirements, NRSRO ratings, dollar and term limits, etc.). The Bank requires collateral agreements with counterparties that establish maximum allowable net unsecured credit exposure before collateral requirements are triggered. Limits are based on the credit rating of the counterparty. Uncollateralized exposures result when credit exposures to specific counterparties fall below collateralization trigger levels. The Bank may limit or suspend derivative transactions in addition to RMP and regulatory requirements.
As of September 30, 2012, the Bank had $125.8 billion in total notional amount of derivatives outstanding compared to $139.7 billion at December 31, 2011. The notional amount serves as a factor in determining periodic interest payments or cash flows received and paid. It does not represent actual amounts exchanged or the Bank’s exposure to credit and market risk. The amount potentially subject to credit loss is based upon the counterparty’s net payment obligations. The credit risk of derivatives is measured on a portfolio basis by netting the market values of all outstanding transactions for each counterparty.
54
As of September 30, 2012, 89.7 percent of the total notional amount of outstanding derivatives was represented by 19 counterparties with a credit rating of A or better. Of these counterparties, there were two, Deutsche Bank AG, and Goldman Sachs Group, Inc., that each represented more than 10 percent of the Bank’s total notional amount, and there was one counterparty, Deutsche Bank AG, that represented more than 10 percent of the Bank’s net exposure. As of December 31, 2011, 95.6 percent of the total notional amount of outstanding derivatives was represented by 18 counterparties with a credit rating of A or better. Of these counterparties, there were three, BNP Paribas, Deutsche Bank AG, and Goldman Sachs Group, Inc., that each represented more than 10 percent of the Bank’s total notional amount, and there were two counterparties, Deutsche Bank AG and Natixis Financial Products, that represented more than 10 percent of the Bank’s net exposure. None of the foregoing named counterparties is a member, or advances borrower, of the Bank.
The tables below provide information on the credit ratings of, and the Bank’s credit exposure to its derivative counterparties (in millions). The credit ratings reflect the lowest long-term credit rating by an NRSRO.
As of September 30, 2012 | ||||||||||||||||||||
Notional Amount | Derivatives Fair Value Before Collateral | Cash Collateral Pledged To (From) Counterparty | Other Collateral Pledged To (From) Counterparty | Net Credit Exposure to Counterparties | ||||||||||||||||
Non-member counterparties: | ||||||||||||||||||||
Asset positions with credit exposure: | ||||||||||||||||||||
Double-A | $ | 390 | $ | 1 | $ | — | $ | — | $ | 1 | ||||||||||
Single-A | 17,924 | 90 | (54 | ) | — | 36 | ||||||||||||||
Liability positions with credit exposure: | ||||||||||||||||||||
Single-A | 14,878 | (572 | ) | 575 | — | 3 | ||||||||||||||
Total derivative positions with non-member counterparties to which the Bank had credit exposure | 33,192 | (481 | ) | 521 | — | 40 | ||||||||||||||
Member institutions (1) | 4 | — | — | — | — | |||||||||||||||
Total | $ | 33,196 | $ | (481 | ) | $ | 521 | $ | — | $ | 40 |
____________
(1) Collateral held with respect to derivatives with member institutions where the Bank is acting as an intermediary represents the amount of eligible collateral physically held by or on behalf of the Bank or collateral assigned to the Bank, as evidenced by a written security agreement, and held by the member institution for the benefit of the Bank.
As of December 31, 2011 | ||||||||||||||||||||
Notional Amount | Derivatives Fair Value Before Collateral | Cash Collateral Pledged To (From) Counterparty | Other Collateral Pledged To (From) Counterparty | Net Credit Exposure to Counterparties | ||||||||||||||||
Non-member counterparties: | ||||||||||||||||||||
Asset positions with credit exposure: | ||||||||||||||||||||
Double-A | $ | 197 | $ | — | $ | — | $ | — | $ | — | ||||||||||
Single-A | 19,505 | 40 | (27 | ) | — | 13 | ||||||||||||||
Liability positions with credit exposure | — | — | — | — | — | |||||||||||||||
Total derivative positions with non-member counterparties to which the Bank had credit exposure | 19,702 | 40 | (27 | ) | — | 13 | ||||||||||||||
Member institutions (1) | 39 | 5 | — | (5 | ) | — | ||||||||||||||
Total | $ | 19,741 | $ | 45 | $ | (27 | ) | $ | (5 | ) | $ | 13 |
____________
(1) Collateral held with respect to derivatives with member institutions where the Bank is acting as an intermediary represents the amount of eligible collateral physically held by or on behalf of the Bank or collateral assigned to the Bank, as evidenced by a written security agreement, and held by the member institution for the benefit of the Bank.
The maximum credit risk is the estimated cost of replacing interest-rate swaps, forward agreements, mandatory delivery contracts for mortgage loans, and purchased caps and floors that have a net positive market value, if the counterparty defaults and any related collateral pledged to the Bank is of no value to the Bank.
55
If the Bank’s credit ratings had been lowered from its current rating to the next lower rating that would have triggered additional collateral to be delivered, the Bank would have been required to deliver up to an additional $132 million of collateral (at fair value) to its derivative counterparties as of September 30, 2012.
Mortgage Loan Programs
The Bank seeks to manage the credit risk associated with the Mortgage Purchase Program (MPP) and the Mortgage Partnership Finance® Program* (MPF® Program or MPF) by maintaining underwriting and eligibility standards and structuring possible losses into several layers to be shared with the participating financial institution (PFI). In some cases, a portion of the credit support for MPP and MPF loans is provided under a primary and/or supplemental mortgage insurance policy. Currently, eight mortgage insurance companies provide primary and/or supplemental mortgage insurance for loans in which the Bank has a retained interest. As of September 30, 2012, all of the Bank’s mortgage insurance providers have been rated below "A" by one or more NRSROs for their claims paying ability or insurer financial strength. Ratings downgrades imply an increased risk that these mortgage insurers may be unable to fulfill their obligations to pay claims that may be made under the insurance policies. The Bank holds additional risk-based capital to mitigate the incremental risk, if any, that results from the supplemental mortgage insurance providers.
As of September 30, 2012 and December 31, 2011, the allowance for credit losses on MPF loans was $9 million and $5 million, respectively. The primary driver for the increased loan loss reserve was the increase in the Bank’s loss severity estimates. The loss severity rate used in the loan loss reserve methodology for MPF loans increased to 41.0 percent at September 30, 2012 from 37.6 percent at December 31, 2011. The increase was based on weakening performance of the Bank’s portfolio of MPF loans. The Bank uses actual loss claim data from its MPF loans to estimate incurred losses. The loss severity rate does not reflect the application of any credit enhancement that may be available on a given pool. Another factor contributing to the increased loan loss reserve was an increased percentage of seriously delinquent loans. The Bank’s seriously delinquent rate for conventional single-family residential mortgages increased to 6.66 percent as of September 30, 2012 from 5.87 percent as of December 31, 2011.
____________
* Mortgage Partnership Finance” and “MPF” are registered trademarks of FHLBank Chicago.
Critical Accounting Policies and Estimates
A description of the Bank’s critical accounting policies and estimates is contained in detail in the Bank’s Form 10-K. There have been no material changes to these policies and estimates during the period reported.
Recently Issued and Adopted Accounting Guidance
See Note 2–Recently Issued and Adopted Accounting Guidance to the Bank’s interim financial statements for a discussion of recently issued and adopted accounting guidance.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
The following quantitative and qualitative disclosures about market risk should be read in conjunction with the quantitative and qualitative disclosures about market risk that are included in the Bank’s Form 10-K. The information provided herein is intended to update the disclosures made in the Bank’s Form 10-K.
Changes in interest rates and spreads can have a direct effect on the value of the Bank’s assets and liabilities. As a result of the volume of the Bank’s interest-earning assets and interest-bearing liabilities, the component of market risk having the greatest effect on the Bank’s financial condition and results of operations is interest-rate risk. A description of the Bank’s management of interest-rate risk is contained in the Bank’s Form 10-K.
The Bank uses derivative financial instruments to reduce the interest-rate risk exposure inherent in otherwise unhedged assets and funding positions. These derivatives are used to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve risk management objectives.
The following table summarizes the notional amounts of derivative financial instruments (in millions). The category “Fair value hedges” represents hedge strategies for which hedge accounting is achieved. The category “non-qualifying hedges” represents hedge strategies for which the derivatives are not in designated hedge relationships that formally meet the hedge accounting requirements under GAAP.
56
As of September 30, 2012 | As of December 31, 2011 | |||||||||||
Hedged Item / Hedging Instrument | Hedging Objective | Hedge Accounting Designation | Notional Amount | Notional Amount | ||||||||
Advances | ||||||||||||
Pay fixed, receive variable interest rate swap (without options) | Converts the advance’s fixed rate to a variable rate index. | Fair value hedges | $ | 7,658 | $ | 13,160 | ||||||
Non-qualifying hedges | 100 | 100 | ||||||||||
Pay fixed, receive variable interest rate swap (with options) | Converts the advance’s fixed rate to a variable rate index and offsets option risk in the advance. | Fair value hedges | 33,225 | 32,749 | ||||||||
Non-qualifying hedges | 741 | 741 | ||||||||||
Pay variable with embedded features, receive variable interest rate swap (non-callable) | Reduces interest rate sensitivity and repricing gaps by converting the advance’s variable rate to a different variable rate index and/or offsets embedded option risk in the advance. | Fair value hedges | 3,215 | 864 | ||||||||
Pay variable, receive variable basis swap | Reduces interest rate sensitivity and repricing gaps by converting the advance’s variable rate to a different variable rate index. | Non-qualifying hedges | 228 | 248 | ||||||||
Total | 45,167 | 47,862 | ||||||||||
Investments | ||||||||||||
Pay fixed, receive variable interest rate swap | Converts the investment’s fixed rate to a variable rate index. | Non-qualifying hedges | 1,990 | 2,678 | ||||||||
Pay variable, receive variable interest rate swap | Converts the investment’s variable rate to a different variable rate index. | Non-qualifying hedges | 50 | 50 | ||||||||
Total | 2,040 | 2,728 | ||||||||||
Consolidated Obligation Bonds | ||||||||||||
Receive fixed, pay variable interest rate swap (without options) | Converts the bond’s fixed rate to a variable rate index. | Fair value hedges | 53,156 | 46,674 | ||||||||
Non-qualifying hedges | 4,050 | 1,100 | ||||||||||
Receive fixed, pay variable interest rate swap (with options) | Converts the bond’s fixed rate to a variable rate index and offsets option risk in the bond. | Fair value hedges | 8,731 | 26,403 | ||||||||
Non-qualifying hedges | — | 1,000 | ||||||||||
Receive variable with embedded features, pay variable interest rate swap (callable) | Reduces interest rate sensitivity and repricing gaps by converting the bond’s variable rate to a different variable rate index and/or offsets embedded option risk in the bond. | Fair value hedges | 20 | 20 | ||||||||
Receive variable, pay variable basis swap | Reduces interest rate sensitivity and repricing gaps by converting the bond’s variable rate to a different variable rate index. | Non-qualifying hedges | — | 100 | ||||||||
Total | 65,957 | 75,297 | ||||||||||
Consolidated Obligation Discount Notes | ||||||||||||
Receive fixed, pay variable interest rate swap | Converts the discount note’s fixed rate to a variable rate index. | Fair value hedges | — | 1,129 | ||||||||
Total | — | 1,129 |
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As of September 30, 2012 | As of December 31, 2011 | |||||||||||
Hedged Item / Hedging Instrument | Hedging Objective | Hedge Accounting Designation | Notional Amount | Notional Amount | ||||||||
Balance Sheet | ||||||||||||
Pay fixed, receive variable interest rate swap | Converts the asset or liability fixed rate to a variable rate index. | Non-qualifying hedges | 125 | 125 | ||||||||
Interest rate cap or floor | Protects against changes in income of certain assets due to changes in interest rates. | Non-qualifying hedges | 12,500 | 12,500 | ||||||||
Total | 12,625 | 12,625 | ||||||||||
Intermediary Positions and Other | ||||||||||||
Pay fixed, receive variable interest rate swap, and receive-fixed, pay variable interest rate swap | To offset interest rate swaps executed with members by executing interest rate swaps with derivatives counterparties. | Non-qualifying hedges | 8 | 79 | ||||||||
Total | 8 | 79 | ||||||||||
Total notional amount | $ | 125,797 | $ | 139,720 |
The Bank measures interest-rate risk exposure by various methods, including calculating the effective duration and convexity of assets, liabilities, and equity under various scenarios, and calculating the theoretical market value of equity. Effective duration, normally expressed in years or months, measures the price sensitivity of the Bank’s interest-bearing assets and liabilities to changes in interest rates. As effective duration lengthens, market-value changes become more sensitive to interest-rate changes. The Bank employs sophisticated modeling systems to measure effective duration.
Bank policy requires the Bank to maintain its effective duration of equity within a range of +5 years to –5 years, assuming current interest rates, and within a range of +7 years to –7 years, assuming an instantaneous parallel increase or decrease in market interest rates of 200 basis points.
Under normal circumstances, effective duration is computed by calculating an option adjusted spread based on market price. This method works well if the market price is dependent on interest rates instead of credit or liquidity. In light of the ongoing credit concerns and lack of liquidity in the private-label MBS market, however, market prices are influenced more by credit and liquidity than interest rates, resulting in very low prices and very high option adjusted spreads which distort the effective duration impact. Thus, in the third quarter of 2009, management changed its method of calculating effective duration to use the option adjusted spread at a date prior to the recent market disruptions. To capture interest-rate changes, management further adjusted its option adjusted spread by adding a spread to reflect option adjusted spread changes in callable debt instruments with like effective duration characteristics. This approach provides effective duration values that more accurately reflect the Bank’s interest-rate risk but may still result in modest differences due to volatility and uncertainty in the capital markets (such as changing credit standards, variable mortgage refinancing capacity, the spread between MBS rates and Treasury rates, and uncertainty regarding future MBS actions by the Federal Reserve; factors such as these are difficult to reduce to quantitative model inputs). Given this limitation, management views its current effective duration gap exposure calculations as approximate, rather than absolute, values.
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The table below reflects the Bank’s effective duration exposure measurements as calculated in accordance with Bank policy (in years).
As of September 30, 2012 | As of December 31, 2011 | ||||||||||||||||
Up 200 Basis Points | Current | Down 200 Basis Points (1) | Up 200 Basis Points | Current | Down 200 Basis Points (1) | ||||||||||||
Assets | 0.51 | 0.35 | — | 0.56 | 0.37 | (0.03 | ) | ||||||||||
Liabilities | 0.42 | 0.48 | 0.07 | 0.45 | 0.43 | 0.06 | |||||||||||
Equity | 1.80 | (1.62 | ) | (1.04 | ) | 2.27 | (0.53 | ) | (1.33 | ) | |||||||
Effective duration gap | 0.09 | (0.13 | ) | (0.07 | ) | 0.11 | (0.06 | ) | (0.09 | ) | |||||||
____________
(1) | The “down 200 basis points” scenarios shown above are considered to be “constrained shocks,” intended to prevent the possibility of negative interest rates when a designated low rate environment exists. |
The Bank also analyzes its interest-rate risk and market exposure by evaluating the theoretical market value of equity. The market value of equity represents the net result of the present value of future cash flows discounted to arrive at the theoretical market value of each balance sheet item. By using the discounted present value of future cash flows, the Bank is able to factor in the various maturities of assets and liabilities, similar to the effective duration analysis discussed above. The Bank determines the theoretical market value of assets and liabilities utilizing a Level 3 pricing approach as more fully described in Note 12–Estimated Fair Values to the Bank’s interim financial statements. The difference between the market value of total assets and the market value of total liabilities is the market value of equity. A more volatile market value of equity under different shock scenarios tends to result in a higher effective duration of equity, indicating increased sensitivity to interest rate changes. From December 31, 2011 to September 30, 2012, the Bank’s total capital decreased by $466 million and the market value of equity decreased by $355 million.
The table below reflects the Bank’s market value of equity measurements as calculated in accordance with Bank policy (in millions).
As of September 30, 2012 | As of December 31, 2011 | ||||||||||||||||||||||
Up 200 Basis Points | Current | Down 200 Basis Points (1) | Up 200 Basis Points | Current | Down 200 Basis Points (1) | ||||||||||||||||||
Assets | $ | 107,398 | $ | 108,431 | $ | 108,761 | $ | 120,027 | $ | 121,356 | $ | 121,878 | |||||||||||
Liabilities | 101,186 | 102,106 | 102,375 | 113,610 | 114,676 | 114,904 | |||||||||||||||||
Equity | 6,212 | 6,325 | 6,386 | 6,417 | 6,680 | 6,974 | |||||||||||||||||
____________
(1) | The “down 200 basis points” scenarios shown above are considered to be “constrained shocks,” intended to prevent the possibility of negative interest rates when a designated low rate environment exists. |
Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
The Bank’s President and Chief Executive Officer and the Bank’s Executive Vice President and Chief Financial Officer (Certifying Officers) are responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.
As of September 30, 2012, the Bank’s Certifying Officers have evaluated the effectiveness of the design and operation of its disclosure controls and procedures. Based on that evaluation, they have concluded that the Bank’s disclosure controls and procedures (as defined in Rules 13a-15(a) and 15d-15(e) under the Exchange Act) were effective to provide reasonable assurance that information required to be disclosed by the Bank in the reports that it files or submits under the Exchange Act (1) is accumulated and communicated to the Certifying Officers, as appropriate, to allow timely decisions regarding required disclosure; and (2) is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.
In designing and evaluating the Bank’s disclosure controls and procedures, the Bank’s Certifying Officers recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
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Changes in Internal Control Over Financial Reporting
During the third quarter of 2012, there were no changes in the Bank’s internal control over financial reporting that have affected materially, or are reasonably likely to affect materially, the Bank’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
MBS Litigation
On January 18, 2011, the Bank filed a complaint in the State Court of Fulton County, Georgia against Countrywide Financial Corporation (n/k/a/ Bank of America Home Loans), Countywide Securities Corporation, Countrywide Home Loans, Inc., Bank of America Corporation (as successor to the Countrywide defendants), J.P. Morgan Securities, LLC (f/k/a J.P. Morgan Securities, Inc. and Bear Stearns & Co., Inc.) and UBS Securities, LLC, et al. The Bank’s claims arise from material misrepresentations in the offering documents of thirty private-label MBS sold to the Bank. The Bank’s complaint alleges that the Countrywide Defendants (Countrywide Financial Corporation, Countrywide Securities Corporation, and Countrywide Home Loans, Inc.) and J.P. Morgan Securities, LLC violated the Georgia RICO (Racketeer Influenced and Corrupt Organizations) Act. The complaint further alleges that those defendants, as well as UBS Securities, LLC committed fraud and negligent misrepresentation in violation of Georgia law, and that Bank of America Corporation is liable to the Bank as a successor to the Countrywide Defendants. The Bank is seeking monetary damages and other relief as compensation for losses it has incurred in connection with the purchase of these private-label MBS.
On January 5, 2012, the State Court of Fulton County, Georgia entered into a scheduling order that requires the parties to complete fact discovery by December 15, 2012 and expert discovery by March 1, 2013, requires the parties to file pretrial dispositive motions by May 1, 2013 and responses by June 1, 2013, establishes September 15, 2013 as the date for the consolidated pretrial order, and sets trial for October 2013. On March 1, 2012, the court granted a motion to sever the Bank’s claims against the J.P. Morgan entities so that these claims will proceed in a separate action. For further discussion of this litigation, see the Bank’s Form 10-K.
MBS Proposed Settlement
In a separate matter, on January 21, 2011, the Bank (together with certain other private-label MBS holders collectively comprising greater than 25 percent of the voting rights with respect to certain private-label MBS) instructed The Bank of New York Mellon, in its capacity as indenture trustee, to pursue enforcement of seller representations and warranties concerning the eligibility of mortgages for securitization in certain Countrywide-issued private-label MBS. On June 29, 2011, a proposed settlement was announced between the trustee and certain Countrywide affiliates with respect to nearly all trust-related claims arising out of these private-label MBS, and the Bank and other investors (Institutional Investors) filed a Notice of Petition to intervene with the Supreme Court of the State of New York, County of New York in support of final court approval of this settlement. On July 23, 2012, Walnut Place LLC and certain of its affiliates who previously objected to the settlement formally withdrew from the proceeding. On July 31, 2012, The Western and Southern Life Insurance Company and other affiliated objectors also formally withdrew from the proceeding. On August 10, 2012, the Supreme Court of the State of New York, County of New York entered into a scheduling order that requires the parties to complete fact discovery by December 14, 2012 and expert discovery by February 15, 2013, requires briefs, responses, and replies in support or opposition to the proposed settlement by March 15, 2013, March 29, 2013, and April 12, 2013, respectively, and establishes May 2, 2013 as the date for a final hearing on the proposed settlement to begin. It is not certain at this time whether the settlement will ultimately be approved, the timing of any final settlement or the amount of any distribution the Bank may receive as part of a final settlement. For further discussion of this proposed settlement and previous material developments, see the Bank’s Form 10-K.
Other
The Bank is subject to other various legal proceedings and actions from time to time in the ordinary course of its business. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of those matters presently known to the Bank will have a material adverse effect on the Bank’s financial condition or results of operations.
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Item 1A. | Risk Factors |
In addition to the other information set forth in this report, the factors discussed in Part I, “Item 1A. Risk Factors” in the Bank’s Form 10-K, should be carefully considered as they could materially affect the Bank’s business, financial condition or future results. The risks described in the Bank’s Form 10-K are not the only risks facing the Bank. Additional risks and uncertainties not currently known to the Bank or that the Bank currently deems to be immaterial also may materially adversely affect the Bank’s business, financial condition and/or operating results.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Not applicable.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Mine Safety Disclosure |
Not applicable.
Item 5. | Other Information |
None.
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Item 6. | Exhibits |
3.1 | Amended and Restated Organization Certificate of the Federal Home Loan Bank of Atlanta (1) | |
3.2 | Bylaws of the Federal Home Loan Bank of Atlanta (Revised and Restated) (1) | |
4.1 | Capital Plan of the Federal Home Loan Bank of Atlanta (2) | |
31.1 | Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. + | |
31.2 | Certification of the Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. + | |
32.1 | Certification of the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. + | |
101 | Unaudited financial statements from the Quarterly Report on Form 10-Q of Federal Home Loan Bank of Atlanta for the quarter ended September 30, 2012, filed on November 8, 2012, formatted in XBRL: (i) Statements of Condition, (ii) Statements of Income, (iii) Statements of Comprehensive Income, (iv) Statements of Capital, (v) Statements of Cash Flows, and (vi) Notes to Financial Statements.+ | |
(1) | Filed on October 26, 2012 with the Securities and Exchange Commission in the Bank’s Form 8-K and incorporated herein by reference. |
(2) | Filed on August 5, 2011 with the Securities and Exchange Commission in the Bank’s Form 8-K and incorporated herein by reference. |
+ | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Federal Home Loan Bank of Atlanta | |||
Date: | November 8, 2012 | By: | /s/ W. Wesley McMullan |
Name: | W. Wesley McMullan | ||
Title: | President and Chief Executive Officer | ||
By: | /s/ Kirk R. Malmberg | ||
Name: | Kirk R. Malmberg | ||
Title: | Executive Vice President and Chief Financial Officer |
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