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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2011

OR

 

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

Commission File Number: 000-51845

 

 

FEDERAL HOME LOAN BANK OF ATLANTA

(Exact name of registrant as specified in its charter)

 

 

 

Federally chartered corporation   56-6000442

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1475 Peachtree Street,

NE, Atlanta, Ga.

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

Registrant’s telephone number, including area code:

(404) 888-8000

 

 

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

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

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

 

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

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

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

 

 

 


Table of Contents

Table of Contents

 

PART I.

  

FINANCIAL INFORMATION

     1   

Item 1.

  

Financial Statements (Unaudited)

     1   
  

STATEMENTS OF CONDITION (Unaudited)

     1   
  

STATEMENTS OF INCOME (Unaudited)

     2   
  

STATEMENTS OF CAPITAL (Unaudited)

     3   
  

STATEMENTS OF CASH FLOWS (Unaudited)

     4   
  

NOTES TO FINANCIAL STATEMENTS (Unaudited)

     6   

Item 2.

  

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

     33   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     64   

Item 4.

  

Controls and Procedures

     67   

PART II.

  

OTHER INFORMATION

     68   

Item 1.

  

Legal Proceedings

     68   

Item 1A.

  

Risk Factors

     68   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     68   

Item 3.

  

Defaults Upon Senior Securities

     68   

Item 4.

  

(Removed and Reserved)

     69   

Item 5.

  

Other Information

     69   

Item 6.

  

Exhibits

     69   

SIGNATURES

     70   


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

FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF CONDITION

(Unaudited)

(In millions, except par value)

 

     As of  
       March 31, 2011          December 31, 2010    

ASSETS

     

Cash and due from banks

   $ 14       $ 5   

Deposits with other FHLBank

     2         2   

Federal funds sold

     16,663         15,701   

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

     3,300         3,383   

Available-for-sale securities

     3,466         3,319   

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

     16,445         17,474   

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

     1,915         2,039   

Advances, net

     81,257         89,258   

Accrued interest receivable

     357         388   

Premises and equipment, net

     34         35   

Derivative assets

     4         5   

Other assets

     176         189   
                 

TOTAL ASSETS

   $ 123,633       $ 131,798   
                 

LIABILITIES

     

Interest-bearing deposits

   $ 2,955       $ 3,093   

Consolidated obligations, net:

     

Discount notes

     15,700         23,915   

Bonds

     94,854         95,198   
                 

Total consolidated obligations, net

     110,554         119,113   
                 

Mandatorily redeemable capital stock

     531         529   

Accrued interest payable

     394         357   

Affordable Housing Program payable

     127         126   

Payable to REFCORP

     13         20   

Derivative liabilities

     391         455   

Other liabilities

     568         159   
                 

Total liabilities

     115,533         123,852   
                 

Commitments and contingencies (Note 13)

     

CAPITAL

     

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

     

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

     1,483         1,466   

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

     5,780         5,758   
                 

Total capital stock Class B putable

     7,263         7,224   

Retained earnings

     1,160         1,124   

Accumulated other comprehensive loss

     (323)         (402)   
                 

Total capital

     8,100         7,946   
                 

TOTAL LIABILITIES AND CAPITAL

   $ 123,633       $ 131,798   
                 

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

 

1


Table of Contents

FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF INCOME

(Unaudited)

(In millions)

 

     Three Months Ended March 31,  
                 2011                               2010               

INTEREST INCOME

     

Advances

   $ 73       $ 69   

Prepayment fees on advances, net

     2         3   

Interest-bearing deposits

     1         1   

Federal funds sold

     8         5   

Trading securities

     41         42   

Available-for-sale securities

     45         39   

Held-to-maturity securities

     113         172   

Mortgage loans held for portfolio

     26         32   
                 

Total interest income

     309         363   
                 

INTEREST EXPENSE

     

Consolidated obligations:

     

Discount notes

     7         3   

Bonds

     169         207   

Deposits

     1           

Mandatorily redeemable capital stock

     1           
                 

Total interest expense

     178         210   
                 

NET INTEREST INCOME

     131         153   
                 

OTHER INCOME (LOSS)

     

Total other-than-temporary impairment losses

     (25)         (64)   

Portion of impairment losses recognized in other comprehensive loss

     (27)         18   
                 

Net impairment losses recognized in earnings

     (52)         (46)   
                 

Net (losses) gains on trading securities

     (34)         4   

Net gains (losses) on derivatives and hedging activities

     46         (17)   

Other

     1           
                 

Total other loss

     (39)         (59)   
                 

OTHER EXPENSE

     

Compensation and benefits

     17         14   

Other operating expenses

     9         11   

Finance Agency

     3         2   

Office of Finance

     2         2   

Other

     (9)           
                 

Total other expense

     22         29   
                 

INCOME BEFORE ASSESSMENTS

     70         65   
                 

Affordable Housing Program

     6         5   

REFCORP

     13         12   
                 

Total assessments

     19         17   
                 

NET INCOME

   $ 51       $ 48   
                 

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF CAPITAL

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(Unaudited)

(In millions)

 

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

BALANCE, DECEMBER 31, 2009

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

Issuance of capital stock

             25                         25   

Repurchase/redemption of capital stock

             (4)                         (4)   

Net shares reclassified to mandatorily redeemable capital stock

     (3)         (293)                         (293)   

Comprehensive income:

              

Net income

                     48                 48   

Other comprehensive income

                             75         75   
                    

Total comprehensive income

                                     123   
                    

Cash dividends on capital stock

                     (5)                 (5)   
                                            

BALANCE, MARCH 31, 2010

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

BALANCE, DECEMBER 31, 2010

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

Issuance of capital stock

     1         41                         41   

Net shares reclassified to mandatorily redeemable capital stock

             (2)                         (2)   

Comprehensive income:

              

Net income

                     51                 51   

Other comprehensive income

                             79         79   
                    

Total comprehensive income

                                     130   
                    

Cash dividends on capital stock

                     (15)                 (15)   
                                            

BALANCE, MARCH 31, 2011

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

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)

 

     Three Months Ended March 31,  
             2011                      2010          

OPERATING ACTIVITIES

     

Net income

   $ 51       $ 48   

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

     

Depreciation and amortization

     (4)         (34)   

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

     44         212   

Net change in fair value adjustment on trading securities

     34         (4)   

Net impairment losses recognized in earnings

     52         46   

Net change in:

     

Accrued interest receivable

     31         50   

Other assets

     15         (311)   

Affordable Housing Program payable

             2   

Accrued interest payable

     37         7   

Payable to REFCORP

     (7)         (7)   

Other liabilities

     (25)         5   
                 

Total adjustments

     177         (34)   
                 

Net cash provided by operating activities

     228         14   
                 

INVESTING ACTIVITIES

     

Net change in:

     

Interest-bearing deposits

     515         189   

Federal funds sold

     (962)         (5,187)   

Trading securities:

     

Proceeds from maturities

     50         200   

Available-for-sale securities:

     

Proceeds from maturities

     204         95   

Held-to-maturity securities:

     

Net change in short-term

     495         (355)   

Proceeds from maturities of long-term

     1,458         1,449   

Purchases of long-term

     (819)         (481)   

Advances:

     

Proceeds from principal collected

     19,070         19,278   

Made

     (11,733)         (10,203)   

Mortgage loans held for portfolio:

     

Proceeds from principal collected

     124         104   

Purchase of premise, equipment and software

             (3)   
                 

Net cash provided by investing activities

     8,402         5,086   
                 

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

 

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Table of Contents
     Three Months Ended March 31,  
             2011                      2010          

FINANCING ACTIVITIES

     

Net change in:

     

Deposits

     (158)         (64)   

Borrowings from other FHLBanks

             35   

Net payments from derivatives containing a financing element

     (137)         (201)   

Proceeds from issuance of consolidated obligations:

     

Discount notes

     258,901         231,354   

Bonds

     15,045         24,696   

Payments for debt issuance costs

     (4)         (6)   

Payments for maturing and retiring consolidated obligations:

     

Discount notes

     (267,115)         (230,667)   

Bonds

     (15,179)         (30,724)   

Proceeds from issuance of capital stock

     41         25   

Payments for repurchase/redemption of capital stock

             (4)   

Cash dividends paid

     (15)         (5)   
                 

Net cash used in financing activities

     (8,621)         (5,561)   
                 

Net increase (decrease) in cash and cash equivalents

     9         (461)   

Cash and cash equivalents at beginning of the period

     5         465   
                 

Cash and cash equivalents at end of the period

   $ 14       $ 4   
                 

Supplemental disclosures of cash flow information:

     

Cash paid for:

     

Interest

   $ 148       $ 209   
                 

AHP assessments, net

   $ 5       $ 3   
                 

REFCORP assessments

   $ 20       $ 19   
                 

Noncash investing and financing activities:

     

Net shares reclassified to mandatorily redeemable capital stock

   $ 2       $ 293   
                 

Held-to-maturity securities acquired with accrued liabilities

   $ 433       $ 84   
                 

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

   $ 302       $ 409   
                 

Transfers of mortgage loans to real estate owned

   $ 4       $ 10   
                 

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

Note 1—Basis of Presentation

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

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

Note 2—Recently Issued and Adopted Accounting Guidance

Recently Issued Accounting Guidance

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

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Recently Adopted Accounting Guidance

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

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

Note 3—Trading Securities

Major Security Types. Trading securities were as follows:

 

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

Government-sponsored enterprises debt obligations

                     $ 3,225       $ 3,306   

Other FHLBank’s bond*

                       72         74   

State or local housing agency debt obligations

                       3         3   
                                   

Total

                     $ 3,300       $ 3,383   
                                   

 

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

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

 

                                                      Three Months Ended March 31,  
                                                              2011                      2010          

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

                        $ (33)       $ 5   

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

                          (1)         (1)   
                                      

Net (losses) gains on trading securities

                        $ (34)       $ 4   
                                      

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

Note 4—Available-for-sale Securities

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

the Bank has recorded an other-than-temporary impairment loss. The Bank believes the other-than-temporary impairment loss constitutes evidence of a significant deterioration in the issuer’s creditworthiness. The Bank has no current plans to sell these securities nor is the Bank under any requirement to sell these securities.

The following table presents information on private-label MBS transferred. The amounts below represent the values as of the transfer dates.

 

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

Transferred at March 31,

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

Total

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

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

 

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

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

Mortgage-backed securities:

              

Private label

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

Total

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

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

Mortgage-backed securities:

              

Private label

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

Total

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

     As of March 31, 2011  
     Less than 12 Months      12 Months or More      Total  
     Number of
     Positions    
     Fair
    Value     
     Gross
Unrealized
    Losses    
     Number of
    Positions    
     Fair
    Value     
     Gross
Unrealized
    Losses    
     Number of
     Positions    
     Fair
    Value     
     Gross
Unrealized
    Losses    
 

Mortgage-backed securities:

                          

Private label

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

Total

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

Mortgage-backed securities:

                          

Private label

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

Total

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

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

 

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

Bank of America Corporation, Charlotte, NC

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

Total

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

Bank of America Corporation, Charlotte, NC

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

Total

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

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

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Note 5—Held-to-maturity Securities

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

 

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

Certificates of deposit

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

State or local housing agency debt obligations

     120         2                 122         108         3                 111   

Government-sponsored enterprises debt obligations

     776                         776         873                 3         870   

Mortgage-backed securities:

                       

U.S. agency obligations-guaranteed

     913         6                 919         960         9                 969   

Government-sponsored enterprises

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

Private label

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

Total

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

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

 

     As of March 31, 2011  
     Less than 12 Months      12 Months or More      Total  
     Number of
   Positions  
     Fair
  Value  
     Gross
Unrealized
  Losses  
     Number of
   Positions  
     Fair
  Value  
     Gross
Unrealized
  Losses  
     Number of
   Positions  
     Fair
  Value  
     Gross
Unrealized
  Losses  
 

Certificates of deposit

     1       $ 200       $               $       $         1       $ 200       $   

State or local housing agency debt obligations

     2         25                                         2         25           

Government-sponsored enterprises debt obligations

     3         376                                         3         376           

Mortgage-backed securities:

                          

U.S. agency obligations-guaranteed

     1         1                                         1         1           

Government-sponsored enterprises

     25         2,741         20                                 25         2,741         20   

Private label

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

Total

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

Certificates of deposit

     1       $ 125       $               $       $         1       $ 125       $   

State or local housing agency debt obligations

     1         7                                         1         7           

Government-sponsored enterprises debt obligations

     6         870         3                                 6         870         3   

Mortgage-backed securities:

                          

U.S. agency obligations-guaranteed

     1         173                                         1         173           

Government-sponsored enterprises

     25         2,833         14                                 25         2,833         14   

Private label

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

Total

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

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

Bank of America Corporation, Charlotte, NC

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

Total

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

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

 

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

Year of maturity:

           

Due in one year or less

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

Due after one year through five years

     889         890         978         978   

Due after 10 years

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

Mortgage-backed securities

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

Total

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

The amortized cost of the Bank’s mortgage-backed securities classified as held-to-maturity includes net discounts of $19 and $24 as of March 31, 2011 and December 31, 2010, respectively.

Note 6—Other-than-temporary Impairment

Mortgage-backed Securities. The Bank’s investments in MBS consist of U.S. agency guaranteed securities and senior tranches of private-label MBS. The Bank has increased exposure to the risk of loss on its investments in MBS when the loans backing the MBS exhibit high rates of delinquency and foreclosures, as well as losses on the sale of foreclosed properties. The Bank regularly requires high levels of credit enhancements from the structure of the collateralized mortgage obligation to reduce its risk of loss on such securities. Credit enhancements are defined as the percentage of subordinate tranches, overcollateralization, or excess spread, or the support of monoline insurance, if any, in a security structure that will absorb the losses before the security the Bank purchased will take a loss. The Bank does not purchase credit enhancements for its MBS from monoline insurance companies.

The Bank’s investments in private-label MBS were rated “AAA” (or its equivalent) by a nationally recognized statistical rating organization (NRSRO), such as Moody’s Investors Service (Moody’s) and Standard and Poor’s Ratings Services (S&P), at purchase date. The “AAA”-rated securities achieved their ratings through credit enhancement, over-collateralization and senior-subordinated shifting interest features; the latter results in subordination of payments by junior classes to ensure cash flows to the senior classes. The ratings on a significant number of the Bank’s private-label MBS have changed since their purchase date.

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

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

The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults and loss severities, were then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. The model classifies securities, as noted in the below table, based on current characteristics and performance, which may be different from the securities’ classification as determined by the originator at the time of origination.

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

     Significant Inputs  
     Prepayment Rate      Default Rates      Loss Severities      Current Credit Enhancement  
     Weighted
Average
(%)
     Range (%)      Weighted
Average
(%)
     Range (%)      Weighted
Average
(%)
     Range (%)      Weighted
Average
(%)
     Range (%)  

Year of Securitization

                       

Prime:

                       

2006

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

2005

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

2004

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

Total Prime

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

Alt-A:

                       

2007

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

2006

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

2005

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

Total Alt-A

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

Total

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

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

 

     Three Months Ended
March 31,
 
         2011              2010      

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

   $ 464       $ 321   

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

     6         3   

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

     46         43   
                 

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

   $ 516       $ 367   
                 

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Note 7—Advances

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

 

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

Year of contractual maturity:

     

Overdrawn demand deposit accounts

   $       $ 1   

Due in one year or less

     23,157         26,628   

Due after one year through two years

     15,162         16,186   

Due after two years through three years

     9,435         10,938   

Due after three years through four years

     6,000         6,369   

Due after four years through five years

     3,256         3,678   

Due after five years

     20,705         21,251   
                 

Total par value

     77,715         85,051   

Discount on AHP* advances

     (13)         (13)   

Discount on EDGE** advances

     (11)         (11)   

Hedging adjustments

     3,572         4,238   

Deferred commitment fees

     (6)         (7)   
                 

Total

   $ 81,257       $ 89,258   
                 

 

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

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

 

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

Year of contractual maturity or next conversion date:

     

Overdrawn demand deposit accounts

   $       $ 1   

Due or convertible in one year or less

     30,903         36,487   

Due or convertible after one year through two years

     14,858         14,302   

Due or convertible after two years through three years

     9,849         11,374   

Due or convertible after three years through four years

     5,473         6,065   

Due or convertible after four years through five years

     2,721         3,023   

Due or convertible after five years

     13,911         13,799   
                 

Total par value

   $ 77,715       $ 85,051   
                 

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

Interest-rate Payment Terms. The following table details interest-rate payment terms for advances:

 

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

Fixed-rate:

           

Due in one year or less

          $ 20,174      $ 24,033   

Due after one year

            47,871        50,907   
                       

Total fixed-rate

            68,045        74,940   
                       

Variable-rate:

           

Due in one year or less

            2,983        2,596   

Due after one year

            6,687        7,515   
                       

Total variable-rate

            9,670        10,111   
                       

Total par value

          $ 77,715      $ 85,051   
                       

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

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

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

Note 8—Consolidated Obligations

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

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

 

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

Fixed-rate

                        $ 72,675       $ 73,779   

Simple variable-rate

                          12,532         12,432   

Step up/down

                          8,551         7,686   

Variable-rate capped floater

                          30         30   
                                      

Total par value

                        $ 93,788       $ 93,927   
                                      

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

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

 

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

Year of contractual maturity:

     

Due in one year or less

   $ 44,883         0.70       $ 46,987         0.76   

Due after one year through two years

     15,904         1.82         13,751         1.50   

Due after two years through three years

     11,482         2.62         14,097         2.63   

Due after three years through four years

     5,308         3.45         4,378         3.70   

Due after four years through five years

     5,776         1.84         4,660         1.89   

Due after five years

     10,435         4.09         10,054         4.19   
                       

Total par value

     93,788         1.73         93,927         1.70   

Premiums

     121            127      

Discounts

     (45)            (48)      

Hedging adjustments

     990            1,192      
                       

Total

   $ 94,854          $ 95,198      
                       

The Bank’s consolidated obligation bonds outstanding by type:

 

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

Noncallable

   $ 70,334       $ 69,248   

Callable

     23,454         24,679   
                 

Total par value

   $ 93,788       $ 93,927   
                 

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

 

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

Year of contractual maturity or next call date:

     

Due or callable in one year or less

   $ 64,716       $ 61,505   

Due or callable after one year through two years

     11,532         11,329   

Due or callable after two years through three years

     7,077         10,477   

Due or callable after three years through four years

     2,825         2,685   

Due or callable after four years through five years

     908         1,062   

Due or callable after five years

     6,730         6,869   
                 

Total par value

   $ 93,788       $ 93,927   
                 

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

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

 

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

As of March 31, 2011

   $ 15,700       $ 15,702         0.13   
                          

As of December 31, 2010

   $ 23,915       $ 23,919         0.14   
                          

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

Note 9—Capital and Mandatorily Redeemable Capital Stock

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

 

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

Regulatory capital requirements:

           

Risk based capital

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

Total capital-to-assets ratio

     4.00%         7.24%         4.00%         6.74%   

Total regulatory capital*

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

Leverage ratio

     5.00%         10.86%         5.00%         10.10%   

Leverage capital

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

 

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

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

 

     Three Months Ended March 31,  
             2011                      2010          

Balance, beginning of period

   $ 529       $ 188   

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

     

Attainment of nonmember status

     4         293   

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

     (2)           
                 

Balance, end of period

   $ 531       $ 481   
                 

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

 

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

Contractual year of redemption:

                       

Due in one year or less

                     $ 8       $   

Due after one year through two years

                       3         8   

Due after two years through three years

                       15         12   

Due after three years through four years

                       375         137   

Due after four years through five years

                       126         366   

Due after five years

                       4         6   
                                   

Total

                     $ 531       $ 529   
                                   

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

Note 10—Accumulated Other Comprehensive Loss

Components comprising other comprehensive income were as follows:

 

                                 Three Months Ended March 31,  
                                 2011      2010  

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

                 

Change in unrealized losses on available-for-sale securities

               $ 49       $ 93   

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

                 47         40   
                             

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

                 96         133   
                             

Change in unrealized gains on available-for-sale securities

                 2           

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

                 (19)         (58)   
                             

Other comprehensive income

               $ 79       $ 75   
                             

Components comprising accumulated other comprehensive loss were as follows:

 

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

Balance, December 31, 2010

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

Net change during the period

                      2         96         (19)         79   

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

                              (19)         19           
                                                     

Balance, March 31, 2011

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

The amount shown in the above table as the noncredit portion of other-than-temporary impairment losses does not correspond directly to the amount reported on the Statements of Income as “Portion of impairment losses recognized in other comprehensive loss.” The balance shown in the above table reflects all fair value changes related to available-for-sale securities for which an other-than-temporary impairment

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

loss has been recorded, including fair value changes for available-for-sale securities impaired in previous reporting periods. The above noncredit portion of other-than-temporary impairment losses includes subsequent increases in fair value in previously impaired available-for-sale securities, which are not reflected in the amounts reported on the Statements of Income.

Note 11—Derivatives and Hedging Activities

Nature of Business Activity

The Bank is exposed to interest-rate risk primarily from the effect of interest rate changes on its interest-earning assets and funding sources which finance these assets.

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

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

protect the value of existing asset or liability positions;

 

   

manage embedded options in assets and liabilities; and

 

   

achieve overall asset/liability management objectives.

Application of Derivatives

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

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

Types of Derivatives

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

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

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

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

Types of Hedged Items

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

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

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

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

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

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

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

Managing Credit Risk on Derivatives

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

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

 

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

Total net exposure at fair value *

   $ 50       $ 71   

Cash collateral held

     46         66   
                 

Net positive exposure after cash collateral

     4         5   

Other collateral

     4         5   
                 

Net exposure after collateral

   $       $   
                 

 

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

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

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

Financial Statement Effect and Additional Financial Information

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

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

 

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

Derivatives in hedging relationships:

                           

Interest rate swaps

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

Total derivatives in hedging relationships

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

Derivatives not designated as hedging instruments:

                           

Interest rate swaps

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

Interest rate caps or floors

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

Total derivatives not designated as hedging instruments

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

Total derivatives before netting and collateral adjustments

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

Netting adjustments

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

Cash collateral and related accrued interest

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

Total collateral and netting adjustments *

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

Derivative assets and derivative liabilities

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

 

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

The following tables present the components of net gains (losses) on derivatives and hedging activities as presented in the Statements of Income:

 

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

Derivatives and hedged items in
fair value hedging
relationships:

              

Interest rate swaps

            $                     38       $                     46   
                          

Total net gain related to fair
value hedge ineffectiveness

              38         46   
                          

Derivatives not designated as
hedging instruments:

              

Non-qualifying hedges:

              

Interest rate swaps

              42         (21)   

Interest rate caps or floors

              3         (2)   

Net interest settlements

              (37)         (40)   
                          

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

              8         (63)   
                          

Net gains (losses) on derivatives
and hedging activities

            $ 46       $ (17)   
                          

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

 

     Three Months Ended March 31, 2011  
     Gain (Loss) on
Derivative
     Gain (Loss) on
Hedged Item
     Net Fair Value
Hedge
Ineffectiveness
     Effect of
Derivatives on Net
Interest Income *
 

Hedged item type:

           

Advances

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

Consolidated obligations:

           

Bonds

     (200)         191         (9)         216   

Discount notes

     (1)         1                 1   
                                   

Total

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

 

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

Hedged item type:

           

Advances

   $                     40       $                     23       $                     63       $                     (891)   

Consolidated obligations:

           

Bonds

     82         (96)         (14)         376   

Discount notes

     (7)         4         (3)         7   
                                   

Total

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

 

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

Note 12—Estimated Fair Values

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

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

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

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

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

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

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

 

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

Assets

              

Trading securities:

              

Government-sponsored enterprises debt obligations

   $       $ 3,225       $       $       $ 3,225   

Other FHLBank’s bond

             72                         72   

State or local housing agency debt obligations

             3                         3   
                                            

Total trading securities

             3,300                         3,300   
                                            

Available-for-sale securities:

              

Private-label MBS

                     3,466                 3,466   

Derivative assets:

              

Interest-rate related

             1,405                 (1,401)         4   
                                            

Total assets at fair value

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

Liabilities

              

Derivative liabilities:

              

Interest-rate related

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

Total liabilities at fair value

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

 

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

Assets

             

Trading securities:

             

Government-sponsored enterprises debt obligations

   $       $ 3,306       $       $      $ 3,306   

Other FHLBank’s bond

             74                        74   

State or local housing agency debt obligations

             3                        3   
                                           

Total trading securities

             3,383                        3,383   
                                           

Available-for-sale securities:

             

Private-label MBS

                     3,319                3,319   

Derivative assets:

             

Interest-rate related

             1,545                 (1,540     5   
                                           

Total assets at fair value

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

Liabilities

             

Derivative liabilities:

             

Interest-rate related

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

Total liabilities at fair value

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

 

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

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

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

 

     Three Months Ended March 31,  
             2011                      2010          

Balance, beginning of period

   $ 3,319       $ 2,256   

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

     302         409   

Total (losses) gains realized and unrealized:*

     

Included in net impairment losses recognized in earnings

     (47)         (43)   

Included in other comprehensive loss

     96         133   

Settlements

     (204)         (95)   
                 

Balance, end of period

   $ 3,466       $ 2,660   
                 

 

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

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

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

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

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

As of March 31, 2011, four third-party vendor prices were received for substantially all of the Bank’s investment securities and substantially all of those prices fell within the specified thresholds. The relative proximity of the prices received supports the Bank’s conclusion that the final estimated fair values are reasonable. Based on the current lack of significant market activity for private-label MBS, the fair value measurements for such securities as of March 31, 2011 and December 31, 2010 fell within Level 3 of the fair value hierarchy. The inputs to all other investment securities are classified as Level 2 in the fair value hierarchy.

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

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

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

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

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

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

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

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

For example, because an active secondary market does not exist for a portion of the Bank’s financial instruments, in certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. Therefore, these estimated fair values are not necessarily indicative of the amounts that would be realized in current market transactions, although they do reflect the Bank’s judgment of how a market participant would estimate the fair value. The fair value table presented below does not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

The carrying values and estimated fair values of the Bank’s financial instruments were as follows:

 

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

Financial Instruments

           

Assets:

           

Cash and due from banks

   $ 14       $ 14       $ 5       $ 5   

Deposits with other FHLBank

     2         2         2         2   

Federal funds sold

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

Trading securities

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

Available-for-sale securities

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

Held-to-maturity securities

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

Mortgage loans held for portfolio, net

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

Advances, net

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

Accrued interest receivable

     357         357         388         388   

Derivative assets

     4         4         5         5   

Liabilities:

           

Interest-bearing deposits

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

Consolidated obligations, net:

           

Discount notes

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

Bonds

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

Mandatorily redeemable capital stock

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

Accrued interest payable

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

Derivative liabilities

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

Note 13—Commitments and Contingencies

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

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

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

 

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

Outstanding notional

   $ 20,509      $ 22,333   

Original terms

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

Final expiration year

     2030        2030   

 

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

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

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

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

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

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

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

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

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions)

 

course of the Bank’s business. Transactions with any member that has an officer or director who also is a director of the Bank are subject to the same Bank policies as transactions with other members.

The Bank defines related parties as each of the other FHLBanks and those members with regulatory capital stock outstanding in excess of 10 percent of total regulatory capital stock. Based on this definition, one member institution, Bank of America, N.A., which held 22.0 percent of the Bank’s total regulatory capital stock as of March 31, 2011, was considered a related party. Total advances outstanding to Bank of America, N.A. were $21,740 and $25,040 as of March 31, 2011 and December 31, 2010, respectively. Total deposits held in the name of Bank of America, N.A. were less than $1 at March 31, 2011 and December 31, 2010. No mortgage loans or mortgage-backed securities were acquired from Bank of America, N.A. during the three-month period ended March 31, 2011.

Note 15—Subsequent Events

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

 

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

Forward-Looking Information

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

 

   

the Bank’s business strategy and changes in operations, including, without limitation, product growth and change in product mix;

 

   

future performance, including profitability, developments, or market forecasts;

 

   

forward-looking accounting and financial statement effects; and

 

   

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

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

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

The discussion presented below provides an analysis of the Bank’s results of operations and financial condition for the quarters ended March 31, 2011 and 2010. Management’s discussion and analysis should be read in conjunction with the financial statements and accompanying notes presented elsewhere in the report, as well as the Bank’s audited financial statements for the year ended December 31, 2010.

 

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Executive Summary

General Overview

The Bank is a cooperative whose primary business activity is providing competitively-priced loans, which the Bank refers to as “advances,” to its members and eligible housing associates to help them meet the credit needs of their communities. The Bank also makes grants and subsidized advances under the Affordable Housing Program, and provides certain cash management services to members and eligible nonmembers. The consolidated obligations (COs) issued by the Office of Finance on behalf of the FHLBanks are the principal funding source for Bank assets. The Bank is primarily liable for repayment of COs issued on its behalf and is jointly and severally liable for the COs issued on behalf of the other FHLBanks. Deposits, other borrowings, and the issuance of capital stock provide additional funding to the Bank. The Bank also maintains a portfolio of investments for liquidity purposes, to provide available funds to meet member credit needs and to provide additional earnings.

Financial Condition

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

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

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

Results of Operations

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

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

 

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

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

Business Outlook

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

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

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

Selected Financial Data

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

 

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

Statements of Condition (at period end)

          

Total assets

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

Investments (1)

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

Mortgage loans held for portfolio

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

Allowance for credit losses on mortgage loans

     (1     (1     (1     (1     (1

Advances, net

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

Interest-bearing deposits

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

Consolidated obligations, net:

          

Discount notes

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

Bonds

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

Total consolidated obligations, net (2)

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

Mandatorily redeemable capital stock

     531        529        492        508        481   

Affordable Housing Program payable

     127        126        127        127        128   

Payable to REFCORP

     13        20        19        19        14   

Capital stock - putable

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

Retained earnings

     1,160        1,124        1,051        985        916   

Accumulated other comprehensive loss

     (323     (402     (451     (612     (669

Total capital

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

 

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

Statements of Income (for the period ended)

                   

Net interest income

              131        131        138        136        153   

Net impairment losses recognized in earnings