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Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________ 
FORM 10-Q
_____________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
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, Georgia
 
30309
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (404) 888-8000
_____________________________________  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
x  
Smaller reporting company
¨
 
 
Emerging growth company
¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
None
N/A
N/A

The number of shares outstanding of the registrant’s Class B Stock, par value $100, as of April 30, 2019 was 49,969,584.


Table of Contents


Table of Contents
 

Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



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, 2019
 
As of December 31, 2018
Assets
 
 
 
Cash and due from banks
$
70

 
$
35

Interest-bearing deposits (including deposits with other FHLBanks of $5 and $20 as of March 31, 2019 and December 31, 2018, respectively)
3,444

 
6,782

Securities purchased under agreements to resell
4,500

 
3,750

Federal funds sold
12,775

 
8,978

Investment securities:
 
 
 
    Trading securities
1,055

 
55

    Available-for-sale securities
823

 
865

    Held-to-maturity securities (fair value of $24,149 and $23,846 as of March 31, 2019 and December 31, 2018, respectively)
24,184

 
23,879

Total investment securities
26,062

 
24,799

Advances
90,929

 
108,462

Mortgage loans held for portfolio, net:
 
 
 
Mortgage loans held for portfolio
347

 
361

Allowance for credit losses on mortgage loans
(1
)
 
(1
)
Total mortgage loans held for portfolio, net
346

 
360

Loan to another FHLBank

 
500

Accrued interest receivable
261

 
295

Derivative assets
380

 
314

Other assets
173

 
201

Total assets
$
138,940

 
$
154,476

Liabilities
 
 
 
Interest-bearing deposits
$
1,163

 
$
1,176

Consolidated obligations, net:
 
 
 
Discount notes
61,166

 
66,025

Bonds
69,186

 
79,114

Total consolidated obligations, net
130,352

 
145,139

Mandatorily redeemable capital stock
1

 
1

Accrued interest payable
217

 
204

Affordable Housing Program payable
89

 
85

Derivative liabilities
13

 
17

Other liabilities
182

 
207

Total liabilities
132,017

 
146,829

Commitments and contingencies (Note 15)

 

Capital
 
 
 
Capital stock Class B putable ($100 par value) issued and outstanding shares:
 
 
 
Subclass B1 issued and outstanding shares: 9 as of March 31, 2019 and December 31, 2018
913

 
891

Subclass B2 issued and outstanding shares: 39 and 46 as of March 31, 2019 and December 31, 2018, respectively
3,840

 
4,595

Total capital stock Class B putable
4,753

 
5,486

Retained earnings:
 
 
 
Restricted
484

 
463

Unrestricted
1,642

 
1,647

Total retained earnings
2,126

 
2,110

Accumulated other comprehensive income
44

 
51

Total capital
6,923

 
7,647

Total liabilities and capital
$
138,940

 
$
154,476


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

3

Table of Contents


FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF INCOME
(Unaudited)
(In millions)
 
 
For the Three Months Ended March 31,
 
2019
 
2018
Interest income
 
 
 
Advances
$
656

 
$
455

Interest-bearing deposits
28

 
14

Securities purchased under agreements to resell
26

 
6

Federal funds sold
78

 
49

Trading securities
1

 

Available-for-sale securities
23

 
26

Held-to-maturity securities
172

 
127

Mortgage loans
4

 
6

Total interest income
988

 
683

Interest expense
 
 
 
Consolidated obligations:
 
 
 
 Discount notes
372

 
224

 Bonds
466

 
320

Interest-bearing deposits
6

 
4

Total interest expense
844

 
548

Net interest income
144

 
135

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

 

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

Net impairment losses recognized in earnings
(1
)
 

Net gains (losses) on trading securities
1

 
(1
)
Net (losses) gains on derivatives and hedging activities
(2
)
 
22

Standby letters of credit fees
7

 
6

Other
2

 

Total noninterest income
7

 
27

Noninterest expense
 
 
 
Compensation and benefits
20

 
20

Other operating expenses
9

 
9

Finance Agency
3

 
2

Office of Finance
2

 
2

Other
5

 
2

Total noninterest expense
39


35

Income before assessment
112

 
127

Affordable Housing Program assessment
11

 
13

Net income
$
101


$
114


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

4

Table of Contents


FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In millions)
 
 
 
For the Three Months Ended March 31,
 
 
2019
 
2018
Net income
 
$
101

 
$
114

Other comprehensive loss income:
 
 
 
 
Net noncredit portion of other-than-temporary impairment losses on available-for-sale securities:
 
 
 
 
Net change in fair value on other-than-temporarily impaired available-for-sale securities
 
(9
)
 
(16
)
Reclassification of noncredit portion of impairment losses included in net income
 
1

 

Total net noncredit portion of other-than-temporary impairment losses on available-for-sale securities
 
(8
)
 
(16
)
Pension and postretirement benefit plans
 
1

 
1

Total other comprehensive loss
 
(7
)
 
(15
)
Total comprehensive income
 
$
94

 
$
99


The accompanying notes are an integral part of these financial statements


.

5

Table of Contents


FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CAPITAL
(Unaudited)
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital Stock Class B Putable
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total Capital    
 
Shares        
 
Par Value
 
Restricted    
 
Unrestricted    
 
Total        
 
Balance, December 31, 2017
52

 
$
5,154

 
$
380

 
$
1,623

 
$
2,003

 
$
110

 
$
7,267

Issuance of capital stock
35

 
3,495

 

 

 

 

 
3,495

Repurchase/redemption of capital stock
(40
)
 
(3,869
)
 

 

 

 

 
(3,869
)
Net shares reclassified to mandatorily redeemable capital stock

 
(32
)
 

 

 

 

 
(32
)
Comprehensive income (loss)

 

 
23

 
91

 
114

 
(15
)
 
99

Cash dividends on capital stock

 

 

 
(65
)
 
(65
)
 

 
(65
)
Balance, March 31, 2018
47

 
$
4,748

 
$
403

 
$
1,649

 
$
2,052

 
$
95

 
$
6,895

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
55

 
$
5,486

 
$
463

 
$
1,647

 
$
2,110

 
$
51

 
$
7,647

Issuance of capital stock
20

 
2,029

 

 

 

 

 
2,029

Repurchase/redemption of capital stock
(27
)
 
(2,762
)
 

 

 

 

 
(2,762
)
Net shares reclassified to mandatorily redeemable capital stock

 

 

 

 

 

 

Comprehensive income (loss)

 

 
21

 
80

 
101

 
(7
)
 
94

Cash dividends on capital stock

 

 

 
(85
)
 
(85
)
 

 
(85
)
Balance, March 31, 2019
48

 
$
4,753

 
$
484

 
$
1,642

 
$
2,126

 
$
44

 
$
6,923


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

6

Table of Contents


FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
 
 
For the Three Months Ended March 31,
 
2019
 
2018
Operating activities
 
 
 
Net income
$
101

 
$
114

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
(53
)
 
8

Net change in fair value adjustment on derivatives and related hedging activities
(295
)
 
179

  Net change in fair value adjustment on trading securities
(1
)
 
1

  Net impairment losses recognized in earnings
1

 

Net change in:
 
 
 
  Accrued interest receivable
34

 
(27
)
  Other assets
25

 
22

  Affordable Housing Program payable
3

 
3

  Accrued interest payable
14

 
2

  Other liabilities
(25
)
 
(33
)
  Total adjustments
(297
)
 
155

Net cash (used in) provided by operating activities
(196
)
 
269

Investing activities
 
 
 
Net change in:
 
 
 
  Interest-bearing deposits
3,369

 
(475
)
  Securities purchased under agreements to resell
(750
)
 
(3,500
)
  Federal funds sold
(3,797
)
 
(1,348
)
  Loan to another FHLBank
500

 
200

Trading securities:
 
 
 
  Purchases of long-term
(999
)
 

Available-for-sale securities:
 
 
 
  Proceeds from principal collected
48

 
51

Held-to-maturity securities:
 
 
 
  Proceeds from principal collected
891

 
1,273

  Purchases of long-term
(1,196
)
 
(2,945
)
Advances:
 
 
 
  Proceeds from principal collected
99,457

 
140,699

  Made
(81,655
)
 
(130,323
)
Mortgage loans:
 
 
 
  Proceeds from principal collected
14

 
19

Proceeds from sale of foreclosed assets

 
1

Purchases of premises, equipment, and software

 
(1
)
Net cash provided by investing activities
15,882

 
3,651

 
 
 
 
 
 
 
 
 
 
 
 

7

Table of Contents


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

 
For the Three Months Ended March 31,
 
2019
 
2018
Financing activities
 
 
 
Net change in interest-bearing deposits
3

 
3

Net payments on derivatives containing a financing element

 
(1
)
Proceeds from issuance of consolidated obligations:
 
 
 
 Discount notes
274,674

 
280,479

 Bonds
13,719

 
14,051

Payments for debt issuance costs
(4
)
 
(3
)
Payments for maturing and retiring consolidated obligations:
 
 
 
 Discount notes
(279,491
)
 
(275,982
)
 Bonds
(23,734
)
 
(24,275
)
Proceeds from issuance of capital stock
2,029

 
3,495

Payments for repurchase/redemption of capital stock
(2,762
)
 
(3,869
)
Payments for repurchase/redemption of mandatorily redeemable capital stock

 
(30
)
Cash dividends paid
(85
)
 
(65
)
Net cash used in financing activities
(15,651
)
 
(6,197
)
Net increase (decrease) in cash and due from banks
35

 
(2,277
)
Cash and due from banks at beginning of the period
35

 
2,357

Cash and due from banks at end of the period
$
70

 
$
80

Supplemental disclosures of cash flow information:
 
 
 
 Cash paid for:
 
 
 
Interest
$
871

 
$
523

Affordable Housing Program assessment, net
$
8

 
$
9

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

 
$
32

Held-to-maturity securities acquired with accrued liabilities
$

 
$
97

Transfers of mortgage loans to real estate owned
$

 
$
1


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

 


8

Table of Contents


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 as of 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, 2019, 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, 2018, which are contained in the Bank’s 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 7, 2019 (Form 10-K).

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

Refer to Note 2Summary of Significant Accounting Policies to the Bank’s 2018 audited financial statements for a description of all the Bank’s significant accounting policies. There have been no changes to these policies as of March 31, 2019, except for policy updates related to new accounting guidance for derivatives and hedging activities, which is described in Note 13Derivatives and Hedging Activities to the Bank’s interim financial statements, and leases which is described below.

Beginning on January 1, 2019, as a result of adopting new accounting guidance for leases, the Bank recognized right-of-use assets and lease liabilities on its existing leases. The adoption of this guidance did not have a material impact on the Bank’s financial condition or results of operations.


9

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


Note 2—Recently Issued and Adopted Accounting Guidance

The following tables provide a summary of accounting guidance issued by the Financial Accounting Standards Board that was adopted, and recently issued guidance not yet adopted, which may impact the Bank’s financial statements.

Recently Adopted Accounting Guidance
Accounting Standard Update (ASU)
 
Description
 
Effective Date
 
Effect on Financial Statements or Other Significant Matters
Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedging Purposes
(ASU 2018-16)
 
This guidance permits the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes.
 
January 1, 2019
 
The adoption of this guidance did not have an impact on the Bank’s financial condition or results of operations.
Targeted Improvements to Accounting for Hedging Activities
(ASU 2017-12)
 
This guidance amends the accounting for derivatives and hedging activities to better portray the economics of the transactions.
 
January 1, 2019
 
The adoption of this guidance did not have an impact on the Bank’s financial condition or results of operations.
Premium Amortization on Purchased Callable Debt Securities
(ASU 2017-08)
 
This guidance shortens the amortization period for certain callable debt securities held at a premium by requiring that the premium be amortized to the earliest call date, rather than contractual maturity.
 
January 1, 2019
 
The adoption of this guidance did not have an impact on the Bank’s financial condition or results of operations.
Leases
(ASU 2016-02)
 
The guidance amends the accounting for leases. It will require lessees to recognize a right-of-use asset and lease liability for virtually all leases.
 
January 1, 2019
 
The adoption of this guidance did not have a material impact on the Bank’s financial condition or results of operations.


10

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


Recently Issued Accounting Guidance Not Yet Adopted
Accounting Standard Update (ASU)
 
Description
 
Effective Date
 
Effect on Financial Statements or Other Significant Matters
Disclosure Framework–Changes to the Disclosure Requirements for Defined Benefit Plans
(ASU 2018-14)
 
This guidance amends the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.
 
December 31, 2020

Early adoption is permitted
 
The Bank does not intend to adopt this guidance early. This guidance is not expected to have any impact on the Bank’s financial condition or results of operations.

Disclosure Framework–Changes to the Disclosure Requirements for Fair Value Measurement
(ASU 2018-13)
 
This guidance amends the disclosure requirements on fair value measurements.
 
January 1, 2020

Early adoption is permitted
 
The Bank does not intend to adopt this guidance early. This guidance is not expected to have any impact on the Bank’s financial condition or results of operations.

Measurement of Credit Losses on Financial Instruments
(ASU 2016-13)
 
This guidance replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects lifetime expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
 
January 1, 2020

Early adoption is permitted

 
The Bank does not intend to adopt this guidance early. The Bank has completed its preliminary assessment of the impact of this guidance on all its financial assets, including advances, investments, and other financial assets, and does not expect the adoption of this guidance to have a material impact on its financial condition or results of operations. However, the Bank will continue to evaluate this guidance, as well as the economic conditions and forecasts at the time of adoption. The ultimate impact on the Bank’s financial condition and results of operations will depend upon the composition of the financial assets held by the Bank at the adoption date, as well as the economic conditions and forecasts at that time.




11

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



Note 3—Trading Securities

Major Security Types. The following table presents trading securities.
 
As of March 31, 2019
 
As of December 31, 2018
U.S. Treasury obligations
$
999

 
$

Government-sponsored enterprises debt obligations
56

 
55

Total
$
1,055

 
$
55


The following table presents net gains (losses) on trading securities.
 
 
For the Three Months Ended March 31,
 
 
2019
 
2018
Net gains (losses) on trading securities held at period end
 
$
1

 
$
(1
)


Note 4—Available-for-sale Securities

Major Security Type. The following table presents information on private-label residential mortgage-backed securities (MBS) that are classified as available-for-sale.
 
Amortized    
Cost
 
Other-than-temporary
Impairment
Recognized in
Accumulated Other
Comprehensive Income (1)
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair Value
As of March 31, 2019
$
758

 
$

 
$
65

 
$

 
$
823

As of December 31, 2018
$
793

 
$
(1
)
 
$
73

 
$

 
$
865

____________ 
(1) Amounts represent the non-credit portion of an other-than-temporary impairment during the life of the security.

The following table presents private-label residential MBS that are classified as available-for-sale with unrealized losses. The unrealized losses are aggregated by the length of time that the individual securities have been in a continuous unrealized loss position. 
 
Less than 12 Months
 
12 Months or More
 
Total
 
  Number of  
Positions
 
Estimated
  Fair  Value  
 
Gross
  Unrealized  
Losses
 
  Number of  
Positions
 
Estimated
  Fair  Value  
 
Gross
  Unrealized  
Losses
 
  Number of  
Positions
 
Estimated
  Fair  Value  
 
Gross
  Unrealized  
Losses
As of March 31, 2019
1

 
$
3

 
$

 
2

 
$
4

 
$

 
3

 
$
7

 
$

As of December 31, 2018
1

 
$
3

 
$

 
2

 
$
4

 
$
(1
)
 
3

 
$
7

 
$
(1
)



12

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


The following table presents private-label residential MBS that are classified as available-for-sale and issued by members or affiliates of members, all of which have been issued by Bank of America Corporation, Charlotte, NC.
 
Amortized  
Cost
 
Other-than-temporary
Impairment
Recognized in
Accumulated Other
Comprehensive Income (1)
 
Gross
  Unrealized  
Gains
 
Gross
  Unrealized  
Losses
 
Estimated
  Fair  Value  
As of March 31, 2019
$
521

 
$

 
$
47

 
$

 
$
568

As of December 31, 2018
$
539

 
$

 
$
54

 
$

 
$
593


____________ 
(1) Amounts represent the non-credit portion of an other-than-temporary impairment during the life of the security.

Note 5—Held-to-maturity Securities

Major Security Types. The following table presents held-to-maturity securities.
 
 
As of March 31, 2019
 
As of December 31, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
State or local housing agency debt obligations
$
1

 
$

 
$

 
$
1

 
$
1

 
$

 
$

 
$
1

Government-sponsored enterprises debt obligations
3,172

 
4

 
(1
)
 
3,175

 
2,672

 
5

 
(2
)
 
2,675

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency obligations-guaranteed residential
112

 
1

 

 
113

 
118

 
2

 

 
120

Government-sponsored enterprises residential
8,991

 
31

 
(40
)
 
8,982

 
9,304

 
40

 
(43
)
 
9,301

Government-sponsored enterprises commercial
11,516

 
3

 
(36
)
 
11,483

 
11,368

 
4

 
(41
)
 
11,331

Private-label residential
392

 
4

 
(1
)
 
395

 
416

 
4

 
(2
)
 
418

Total
$
24,184

 
$
43

 
$
(78
)
 
$
24,149

 
$
23,879

 
$
55

 
$
(88
)
 
$
23,846




13

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


The following tables present held-to-maturity securities with unrealized losses. The unrealized losses are aggregated by major security type and by the length of time that the individual securities have been in a continuous unrealized loss position.
 
 
As of March 31, 2019
 
Less than 12 Months
 
12 Months or More
 
Total
 
Number of
Positions
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
State or local housing agency debt obligations

 
$

 
$

 
1

 
$
1

 
$

 
1

 
$
1

 
$

Government-sponsored enterprises debt obligations
12

 
1,204

 
(1
)
 
1

 
100

 

 
13

 
1,304

 
(1
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises residential
70

 
1,784

 
(6
)
 
22

 
2,568

 
(34
)
 
92

 
4,352

 
(40
)
Government-sponsored enterprises commercial
43

 
6,906

 
(30
)
 
34

 
1,310

 
(6
)
 
77

 
8,216

 
(36
)
Private-label residential
22

 
98

 

 
13

 
37

 
(1
)
 
35

 
135

 
(1
)
Total
147

 
$
9,992

 
$
(37
)
 
71

 
$
4,016

 
$
(41
)
 
218

 
$
14,008

 
$
(78
)
 
 
As of December 31, 2018
 
Less than 12 Months
 
12 Months or More
 
Total
 
Number of
Positions
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
State or local housing agency debt obligations

 
$

 
$

 
1

 
$
1

 
$

 
1

 
$
1

 
$

Government-sponsored enterprises debt obligations
12

 
1,235

 
(1
)
 
1

 
99

 
(1
)
 
13

 
1,334

 
(2
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises residential
54

 
2,704

 
(13
)
 
22

 
1,382

 
(30
)
 
76

 
4,086

 
(43
)
Government-sponsored enterprises commercial
58

 
7,406

 
(34
)
 
18

 
1,015

 
(7
)
 
76

 
8,421

 
(41
)
Private-label residential
26

 
139

 
(1
)
 
11

 
25

 
(1
)
 
37

 
164

 
(2
)
Total
150

 
$
11,484

 
$
(49
)
 
53

 
$
2,522

 
$
(39
)
 
203

 
$
14,006

 
$
(88
)



14

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


Redemption Terms. The following table presents the amortized cost and estimated fair value of held-to-maturity securities by contractual maturity. MBS are not presented by contractual maturity because their actual maturities 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, 2019
 
As of December 31, 2018
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Non-mortgage-backed securities:
 
 
 
 
 
 
 
Due in one year or less
$
597

 
$
597

 
$
225

 
$
225

Due after one year through five years
2,315

 
2,316

 
2,057

 
2,058

Due after five years through 10 years
201

 
203

 
331

 
333

Due after 10 years
60

 
60

 
60

 
60

Total non-mortgage-backed securities
3,173

 
3,176

 
2,673

 
2,676

Mortgage-backed securities
21,011

 
20,973

 
21,206

 
21,170

Total
$
24,184

 
$
24,149

 
$
23,879

 
$
23,846



The following table presents private-label residential MBS that are classified as held-to-maturity and issued by members or affiliates of members, all of which have been issued by Bank of America Corporation, Charlotte, NC.
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
As of March 31, 2019
 
$
87

 
$
1

 
$
(1
)
 
$
87

As of December 31, 2018
 
$
91

 
$
1

 
$
(1
)
 
$
91




Note 6—Other-than-temporary Impairment

The Bank evaluates its individual available-for-sale and held-to-maturity securities holdings in an unrealized loss position for other-than-temporary impairment on a quarterly basis. The financial amounts related to the Bank's other-than-temporary impairment are not material to the Bank's financial condition or results of operations for the periods presented.
 
 
 
 
 
 
 
 
 

The following table presents a roll-forward of the amount of credit losses on the Bank’s investment securities recognized in earnings during the life of the securities for which a portion of the other-than-temporary loss was previously recognized in accumulated other comprehensive income.
 
 
For the Three Months Ended March 31,
 
 
2019
 
2018
Balance, beginning of period
 
$
335

 
$
394

Amount related to credit loss for which an other-than-temporary impairment was previously recognized
 
1

 

Increase in cash flows expected to be collected, (accreted as interest income over the remaining lives of the applicable securities)
 
(14
)
 
(16
)
Balance, end of period
 
$
322

 
$
378




15

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


Note 7—Advances

Redemption Terms. The following table presents the Bank’s advances outstanding by year of contractual maturity.

 
As of March 31, 2019
 
As of December 31, 2018
Overdrawn demand deposit accounts
$

 
$
33

Due in one year or less
52,086

 
72,300

Due after one year through two years
15,962

 
13,298

Due after two years through three years
4,584

 
5,403

Due after three years through four years
4,722

 
4,678

Due after four years through five years
4,509

 
3,997

Due after five years
8,749

 
8,705

Total par value
90,612

 
108,414

Deferred prepayment fees
(15
)
 
(17
)
Discount on AHP (1) advances
(4
)
 
(4
)
Discount on EDGE (2) advances
(2
)
 
(2
)
Hedging adjustments
338

 
71

Total
$
90,929

 
$
108,462


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

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

 
As of March 31, 2019
 
As of December 31, 2018
Overdrawn demand deposit accounts
$

 
$
33

Due or convertible in one year or less
52,919

 
73,009

Due or convertible after one year through two years
16,049

 
13,484

Due or convertible after two years through three years
4,606

 
5,437

Due or convertible after three years through four years
4,704

 
4,642

Due or convertible after four years through five years
4,444

 
3,951

Due or convertible after five years
7,890

 
7,858

Total par value
$
90,612

 
$
108,414



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

 
As of March 31, 2019
 
As of December 31, 2018
Fixed-rate:
 
 
 
 Due in one year or less
$
28,110

 
$
40,578

 Due after one year
25,206

 
24,043

Total fixed-rate
53,316

 
64,621

Variable-rate:
 
 
 
 Due in one year or less
23,976

 
31,755

 Due after one year
13,320

 
12,038

Total variable-rate
37,296

 
43,793

Total par value
$
90,612

 
$
108,414




16

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


Credit Risk. 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. The concentration of the Bank’s advances to its 10 largest borrowers was $65,680 and $80,211 as of March 31, 2019 and December 31, 2018, respectively. This concentration represented 72.5 percent and 74.0 percent of total advances outstanding as of March 31, 2019 and December 31, 2018, respectively.
Based on the collateral pledged as security for advances, the Bank’s credit analysis of members’ financial condition, and prior repayment history, no allowance for credit losses on advances was deemed necessary by the Bank as of March 31, 2019 and December 31, 2018. No advance was past due as of March 31, 2019 and December 31, 2018.

Note 8—Mortgage Loans Held for Portfolio

The following table presents information on mortgage loans held for portfolio by contractual maturity at the time of purchase.
 
 
As of March 31, 2019
 
As of December 31, 2018
Medium-term (15 years or less)
 
$
7

 
$
8

Long-term (greater than 15 years)
 
340

 
353

Total unpaid principal balance
 
347

 
361

Premiums
 
1

 
1

Discounts
 
(1
)
 
(1
)
Total
 
$
347

 
$
361




The following table presents the unpaid principal balance of mortgage loans held for portfolio by collateral or guarantee type.
 
 
As of March 31, 2019
 
As of December 31, 2018
Conventional mortgage loans
 
$
324

 
$
338

Government-guaranteed or insured mortgage loans
 
23

 
23

Total unpaid principal balance
 
$
347

 
$
361



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

Note 9—Allowance for Credit Losses

The following table presents the activity in the allowance for credit losses related to conventional residential mortgage loans.
 
 
For the Three Months Ended March 31,
 
 
2019
 
2018
Balance, beginning of period
 
$
1

 
$
1

Provision for credit losses
 

 

Balance, end of period
 
$
1

 
$
1


The following table presents the recorded investment in conventional residential mortgage loans by impairment methodology.
 
 
As of March 31, 2019
 
As of December 31, 2018
Allowance for credit losses:
 
 
 
 
   Collectively evaluated for impairment
 
$
1

 
$
1

Recorded investment:
 
 
 
 
   Individually evaluated for impairment
 
$
9

 
$
9

   Collectively evaluated for impairment
 
316

 
330

Total recorded investment
 
$
325

 
$
339



17

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



Key credit quality indicators for mortgage loans include the migration of past due mortgage loans, nonaccrual mortgage loans, and mortgage loans in process of foreclosure. The following tables present the Bank’s recorded investment in mortgage loans by these key credit quality indicators.
 
As of March 31, 2019
 
Conventional Residential Mortgage Loans
 
Government-guaranteed or Insured Residential Mortgage Loans
 
Total
Past due 30-59 days
$
10

 
$
2

 
$
12

Past due 60-89 days
2

 
1

 
3

Past due 90 days or more
6

 

 
6

Total past due mortgage loans
18

 
3

 
21

Total current mortgage loans
307

 
20

 
327

Total mortgage loans (1)
$
325

 
$
23

 
$
348

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

 
$

 
$
2

  Seriously delinquent rate (3)
1.77
%
 
0.68
%
 
1.70
%
  Past due 90 days or more and still accruing interest (4)
$

 
$

 
$

  Mortgage loans on nonaccrual status (5)
$
6

 
$

 
$
6

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


18

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


 
As of December 31, 2018
 
Conventional Residential Mortgage Loans
 
Government-guaranteed or Insured Residential Mortgage Loans
 
Total
Past due 30-59 days
$
8

 
$
2

 
$
10

Past due 60-89 days
3

 

 
3

Past due 90 days or more
6

 

 
6

Total past due mortgage loans
17

 
2

 
19

Total current mortgage loans
322

 
21

 
343

Total mortgage loans (1)
$
339

 
$
23

 
$
362

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

 
$

 
$
2

  Seriously delinquent rate (3)
1.93
%
 
1.23
%
 
1.89
%
Past due 90 days or more and still accruing interest (4)
$

 
$

 
$

  Mortgage loans on nonaccrual status (5)
$
6

 
$

 
$
6

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

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

Note 10—Consolidated Obligations

Consolidated obligations, consisting of consolidated obligation bonds and discount notes, are the joint and several obligations of the 11 Federal Home Loan Banks (FHLBanks) and are backed only by the financial resources of the FHLBanks. The Federal Home Loan Banks Office of Finance (Office of Finance) tracks the amount of debt issued on behalf of each FHLBank. In addition, the Bank separately tracks its specific portion of consolidated obligations for which it is the primary obligor and records it as a liability.
Interest-rate Payment Terms. The following table presents the Bank’s consolidated obligation bonds by interest-rate payment type. 
 
As of March 31, 2019
 
As of December 31, 2018
Fixed-rate
$
23,032

 
$
21,217

Step up/down
3,370

 
4,379

Simple variable-rate
42,853

 
53,670

Total par value
$
69,255

 
$
79,266




19

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


Redemption Terms. The following table presents the Bank’s participation in consolidated obligation bonds outstanding by year of contractual maturity.
 
 
As of March 31, 2019
 
As of December 31, 2018
 
Amount
 
Weighted-
average
Interest Rate (%)    
 
Amount
 
Weighted-
average
Interest Rate (%)    
Due in one year or less
$
46,956

 
2.35
 
$
55,386

 
2.26
Due after one year through two years
10,197

 
2.27
 
13,292

 
2.30
Due after two years through three years
2,921

 
2.52
 
3,387

 
2.44
Due after three years through four years
3,910

 
2.28
 
3,884

 
2.27
Due after four years through five years
3,368

 
2.86
 
1,429

 
2.87
Due after five years
1,903

 
3.22
 
1,888

 
3.23
Total par value
69,255

 
2.39
 
79,266

 
2.31
Premiums
6

 
 
 
7

 
 
Discounts
(23
)
 
 
 
(18
)
 
 
Hedging adjustments
(52
)
 
 
 
(141
)
 
 
Total
$
69,186

 
 
 
$
79,114

 
 


The following table presents the Bank’s consolidated obligation bonds outstanding by call feature.
 
 
As of March 31, 2019
 
As of December 31, 2018
Noncallable
$
53,732

 
$
65,237

Callable
15,523

 
14,029

Total par value
$
69,255

 
$
79,266



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

 
As of March 31, 2019
 
As of December 31, 2018
Due or callable in one year or less
$
57,283

 
$
65,560

Due or callable after one year through two years
8,118

 
10,874

Due or callable after two years through three years
834

 
982

Due or callable after three years through four years
400

 
429

Due or callable after four years through five years
1,367

 
168

Due or callable after five years
1,253

 
1,253

Total par value
$
69,255

 
$
79,266



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

20

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


The following table presents the Bank’s participation in consolidated obligation discount notes.
 
 
Book Value
 
Par Value
 
Weighted-average
Interest Rate (%)
As of March 31, 2019
$
61,166

 
$
61,417

 
2.42
As of December 31, 2018
$
66,025

 
$
66,270

 
2.33


Note 11—Capital and Mandatorily Redeemable Capital Stock

Capital. The following table presents the Bank’s compliance with the Federal Housing Finance Agency’s (Finance Agency) regulatory capital rules and requirements.
 
 
As of March 31, 2019
 
As of December 31, 2018
 
Required    
 
Actual        
 
Required    
 
Actual        
Risk-based capital
$
1,633

 
$
6,880

 
$
1,654

 
$
7,597

Total regulatory capital ratio
4.00
%
 
4.95
%
 
4.00
%
 
4.92
%
Total regulatory capital (1)
$
5,558

 
$
6,880

 
$
6,179

 
$
7,597

Leverage capital ratio
5.00
%
 
7.43
%
 
5.00
%
 
7.38
%
Leverage capital
$
6,947

 
$
10,321

 
$
7,724

 
$
11,396

____________
(1) Total regulatory capital does not include accumulated other comprehensive income, but does include mandatorily redeemable capital stock.

The Bank declares and pays any dividends only after net income is calculated for the preceding quarter. The following table presents the Bank’s declared and paid quarterly cash dividends in 2019 and 2018.
 
 
2019
 
2018
 
 
Amount
 
Annualized Rate (%)
 
Amount
 
Annualized Rate (%)
First quarter
 
$
85

 
6.47
 
$
65

 
5.16


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

 
 
For the Three Months Ended March 31,
 
 
2019
 
2018
Balance, beginning of period
 
$
1

 
$
1

Net reclassification from capital during the period
 

 
32

Repurchase/redemption of mandatorily redeemable capital stock
 

 
(30
)
Balance, end of period
 
$
1


$
3



The following table presents the amount of mandatorily redeemable capital stock by year of redemption. The year of redemption in the table is the end of the five-year redemption period, or with respect to activity-based stock, the later of the expiration of the five-year redemption period or the activity’s maturity date.
 
 
As of March 31, 2019
 
As of December 31, 2018
Due after three years through four years
$
1

 
$

Due after four years through five years

 
1

Total
$
1

 
$
1




21

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


Note 12—Accumulated Other Comprehensive Income

The following tables present the components comprising accumulated other comprehensive income.
 
 
 
 
 
 
 
Pension and
Postretirement
Benefits
 
Noncredit Portion
of Other-than-
temporary
Impairment  Losses
on Available-for-
sale Securities
 
Total  Accumulated
Other
Comprehensive
Income
Balance, December 31, 2017
$
(24
)
 
$
134

 
$
110

Other comprehensive income before reclassifications:
 
 
 
 
 
     Net change in fair value

 
(16
)
 
(16
)
Reclassification from accumulated other comprehensive income to net income:
 
 
 
 
 
     Amortization of pension and postretirement (1)
1

 

 
1

Net current period other comprehensive income (loss)
1

 
(16
)
 
(15
)
Balance, March 31, 2018
$
(23
)
 
$
118

 
$
95

 
 
 
 
 
 
Balance, December 31, 2018
$
(21
)
 
$
72

 
$
51

Other comprehensive income before reclassifications:
 
 
 
 
 
     Net change in fair value

 
(9
)
 
(9
)
Reclassification from accumulated other comprehensive income to net income:
 
 
 
 
 
     Noncredit other-than-temporary impairment losses

 
1

 
1

     Amortization of pension and postretirement (1)
1

 

 
1

Net current period other comprehensive income (loss)
1

 
(8
)
 
(7
)
Balance, March 31, 2019
$
(20
)
 
$
64

 
$
44


____________
(1) Included in Noninterest expense - Other on the Statements of Income.


22

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


Note 13—Derivatives and Hedging Activities

Nature of Business Activity

The Bank is exposed to interest-rate risk primarily from the effect of interest-rate changes on its interest-earning assets and on its interest-bearing liabilities that finance these assets. To mitigate the risk of loss, the Bank has established policies and procedures, which include guidelines on the amount of exposure to interest-rate changes that it is willing to accept. In addition, the Bank monitors the risk to its interest income, net interest margin, and average maturity of its interest-earning assets and funding sources. The goal of the Bank’s interest-rate risk management strategies is not to eliminate interest-rate risk, but to manage it within appropriate limits.

The Bank enters into derivatives to manage the interest-rate risk exposure that is inherent in its otherwise unhedged assets and funding sources, to achieve the Bank’s risk management objectives, and to act as an intermediary between its members and counterparties. 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’s over-the-counter derivative transactions may either be (1) uncleared derivatives, which are executed bilaterally with a counterparty; or (2) cleared derivatives, which are cleared through a Futures Commission Merchant (clearing agent) with a Derivatives Clearing Organization (Clearinghouse). Once a derivatives transaction has been accepted for clearing by a Clearinghouse, the derivatives transaction is novated, and the executing counterparty is replaced with the Clearinghouse as the counterparty. The Bank is not a derivatives dealer and does not trade derivatives for short-term profit. For additional information on the Bank’s derivatives and hedging activities, see Note 17—Derivatives and Hedging Activities to the 2018 audited financial statements contained in the Bank’s Form 10-K.

Financial Statement Effect and Additional Financial Information

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

The following table presents the notional amount, fair value of derivative instruments, and total derivative assets and liabilities. Total derivative assets and liabilities include the effect of netting adjustments and cash collateral. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest.
 
 
As of March 31, 2019
 
As of December 31, 2018
 
Notional
Amount of Derivatives    
 
Derivative Assets    
 
Derivative Liabilities    
 
Notional
Amount of Derivatives    
 
Derivative Assets    
 
Derivative Liabilities    
Derivatives in hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
  Interest-rate swaps (1)
$
50,790

 
$
76

 
$
87

 
$
50,427

 
$
32

 
$
151

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
  Interest-rate swaps (1)
657

 
4

 
4

 
1,008

 
3

 
11

  Interest-rate caps or floors
8,083

 
1

 

 
8,083

 
1

 
1

Total derivatives not designated as hedging instruments
8,740

 
5

 
4

 
9,091

 
4

 
12

Total derivatives before netting and collateral adjustments
$
59,530

 
81

 
91

 
$
59,518

 
36

 
163

Netting adjustments and cash collateral (2)
 
 
299

 
(78
)
 
 
 
278

 
(146
)
Derivative assets and derivative liabilities
 
 
$
380

 
$
13

 
 
 
$
314

 
$
17

___________
(1) Includes variation margin for daily settled contracts of $322 and $21 as of March 31, 2019 and December 31, 2018, respectively.
(2) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions, and also cash collateral and related accrued interest held or placed with the same clearing agents and/or counterparty. Cash collateral posted and related accrued interest was $402 and $433 as of March 31, 2019 and December 31, 2018, respectively. Cash collateral received and related accrued interest was $25 and $9 as of March 31, 2019 and December 31, 2018, respectively.


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



Beginning on January 1, 2019, as a result of adopting new accounting guidance related to derivatives and hedging activities, changes in fair value of the derivative hedging instrument and the hedged item attributable to the hedged risk for designated fair value hedges are recorded in net interest income in the same line as the earnings effect of the hedged item. Prior to January 1, 2019, for fair value hedges, any hedge ineffectiveness (which represented the amount by which the change in the fair value of the derivative differed from the change in the fair value of the hedge item) was recorded in noninterest income as net gains (losses) on derivatives and hedging activities. The change in fair value of the derivative hedging instruments and the related hedged items increased net interest income by $1 for the three months ended March 31, 2019.

The following tables present the net gains (losses) on fair value hedging relationships.
 
 
For the Three Months Ended March 31, 2019
 
 
Interest Income/Expense
 
 
Advances
 
Consolidated Obligation Bonds
Total interest income (expense) recorded in the Statements of Income
 
$
656

 
$
(466
)
Net interest income effect from fair value hedging relationships
 
 
 
 
   Interest-rate contracts:
 
 
 
 
       Derivatives (1)
 
$
(250
)
 
$
67

       Hedged items
 
268

 
(89
)
Total net interest income effect from fair value hedging relationships
 
$
18

 
$
(22
)
____________
(1) Includes net interest settlements.

 
 
For the Three Months Ended March 31, 2018 (2)
 
 
Interest Income/Expense
 
Noninterest Income
 
 
Advances
 
Consolidated Obligation Bonds
 
Consolidated Obligation Discount Notes
 
Net gains (losses) on derivatives and hedging activities
Interest-rate contracts:
 
 
 
 
 
 
 
 
    Derivatives (1)
 
$
(33
)
 
$
4

 
$
(1
)
 
$
206

    Hedged items
 

 

 

 
(187
)
Net (losses) gains on fair value hedging relationships
 
$
(33
)
 
$
4

 
$
(1
)
 
$
19

___________
(1) Includes net interest settlements.
(2) Prior period amounts were not conformed to new hedge accounting guidance adopted January 1, 2019.

The following table presents the cumulative basis adjustments on hedged items designated as fair value hedges and the related
amortized cost of the hedged items.

 
 
As of March 31, 2019
Line Item in Statement of Conditions of Hedged Item
 
Amortized Cost of Hedged Asset or Liability (1)
 
Basis Adjustments for Active Hedging Relationships Included in Amortized Cost
 
Basis Adjustments for Discontinued Hedging Relationships included in Amortized Cost
 
Cumulative Amount of Fair Value Hedging Basis Adjustments
Advances
 
$
29,780

 
$
324

 
$
14

 
$
338

Consolidated obligations:
 
 
 
 
 
 
 
 
Bonds
 
20,758

 
(52
)
 

 
(52
)
___________
(1) Includes only the portion of amortized cost representing the hedged items in fair value hedging relationships.

24

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


The following table presents net gains (losses) related to derivatives and hedging activities recorded in noninterest income (loss) on the Statements of Income. For fair value hedging relationships, the portion of net gains (losses) representing hedge ineffectiveness are recorded in noninterest income (loss) for periods prior to January 1, 2019.
 
 
For the Three Months Ended March 31,
 
 
2019
 
2018
Derivatives and hedged items in fair value hedging relationships:
 
 
 
 
  Interest-rate swaps
 
N/A (1)
 
$
19

Derivatives not designated as hedging instruments:
 
 
 
 
  Interest-rate swaps
 
$
(1
)
 
3

  Interest-rate caps or floors
 
(1
)
 
1

  Net interest settlements
 

 
(1
)
Total net gains (losses) related to derivatives not designated as hedging instruments
 
(2
)
 
3

Net (losses) gains on derivatives and hedging activities
 
$
(2
)
 
$
22


__________
(1) Not applicable due to new hedge accounting guidance adopted January 1, 2019.

Managing Credit Risk on Derivatives

The Bank is subject to credit risk to its derivative transactions due to the risk of nonperformance by counterparties and manages this risk through credit analysis, collateral requirements, and adherence to the requirements set forth in its policies, U.S. Commodity Futures Trading Commission regulations, and Finance Agency regulations.

For uncleared derivatives, the degree of credit risk depends on the extent to which master netting arrangements are included in such contracts to mitigate the risk. The Bank requires collateral agreements with collateral delivery thresholds on all uncleared derivatives. Additionally, collateral related to derivatives with member institutions includes collateral assigned to the Bank, as evidenced by a written security agreement, and held by the member institution for the benefit of the Bank.

Certain of the Bank’s uncleared 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 nationally recognized statistical rating organization (NRSRO), the Bank may be required to deliver additional collateral on uncleared derivative instruments in net liability positions. The aggregate fair value of all uncleared derivative instruments with credit-risk-related contingent features that were in a net liability position (before cash collateral and related accrued interest) as of March 31, 2019 was $6, for which the Bank was not required to post collateral as of March 31, 2019. If the Bank’s credit ratings had been lowered from its current rating to the next lower rating, the Bank would have been required to deliver $1 of collateral at fair value to its uncleared derivative counterparties as of March 31, 2019.

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

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


25

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


The following table presents the fair value of derivative instruments meeting or not meeting netting requirements, including the related collateral received from or pledged to counterparties.

 
As of March 31, 2019
 
As of December 31, 2018
 
Derivative Assets
 
Derivative Liabilities
 
Derivative Assets
 
Derivative Liabilities
Gross recognized amount:
 
 
 
 
 
 
 
     Uncleared derivatives
$
45

 
$
88

 
$
35

 
$
128

     Cleared derivatives
36

 
3

 
1

 
35

Total gross recognized amount
81

 
91

 
36

 
163

Gross amounts of netting adjustments and cash collateral:
 
 
 
 
 
 
 
     Uncleared derivatives
(43
)
 
(75
)
 
(33
)
 
(111
)
     Cleared derivatives
342

 
(3
)
 
311

 
(35
)
Total gross amounts of netting adjustments and cash collateral
299

 
(78
)
 
278

 
(146
)
Net amounts after netting adjustments and cash collateral:
 
 
 
 
 
 
 
     Uncleared derivatives
2

 
13

 
2

 
17

     Cleared derivatives
378

 

 
312

 

Total net amounts after netting adjustments and cash collateral
380

 
13

 
314

 
17

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

 

 

 

     Cleared derivatives

 

 

 

Total cannot be sold or repledged (1)
1

 

 

 

Net unsecured amounts: (1)
 
 
 
 
 
 
 
    Uncleared derivatives
1

 
13

 
2

 
17

    Cleared derivatives
378

 

 
312

 

Total net unsecured amount (1)
$
379

 
$
13

 
$
314

 
$
17

____________ 
(1) The Bank had net credit exposure of $1 and $2 as of March 31, 2019 and December 31, 2018, respectively, due to instances where the Bank’s pledged collateral to a counterparty exceeded the Bank’s net derivative liability position.


Note 14—Estimated Fair Values

The Bank records trading securities, available-for-sale securities, derivative assets and liabilities, and grantor trust assets (publicly-traded mutual funds) at estimated fair value on a recurring basis. Fair value is defined under GAAP 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 asset or owes the liability. In general, the transaction price will equal the exit price and therefore, represents 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, 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. 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 or disclosed in the notes to the financial statements.


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


Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. The Bank carried grantor trust assets at fair value hierarchy Level 1 as of March 31, 2019 and December 31, 2018.

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. The Bank carried trading securities and derivatives at fair value hierarchy Level 2 as of March 31, 2019 and December 31, 2018.

Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are supported by limited market activity and reflect the entity’s own assumptions. The Bank carried available-for-sale securities at fair value hierarchy Level 3 as of March 31, 2019 and December 31, 2018.

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

For financial instruments carried at fair value, the Bank reviews the fair value hierarchy classification of financial assets and liabilities on a quarterly basis. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities within the fair value hierarchy. Such reclassifications are reported as transfers in/out at fair value as of the beginning of the quarter in which the changes occur. There were no such transfers during the periods presented.
Estimated Fair Value Measurements on a Recurring Basis. The following tables present, for each fair value hierarchy level, the Bank’s financial assets and liabilities that are measured at fair value on a recurring basis on its Statements of Condition.
 
 
As of March 31, 2019
 
Fair Value Measurements Using
 
Netting Adjustments and Cash Collateral (1)
 
 
 
Level 1        
 
Level 2        
 
Level 3        
 
Total
Assets
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
  U.S. Treasury obligations
$

 
$
999

 
$

 
$

 
$
999

  Government-sponsored enterprises debt obligations

 
56

 

 

 
56

Total trading securities
$

 
$
1,055

 
$

 
$

 
$
1,055

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

 
$

 
$
823

 
$

 
$
823

Derivative assets:
 
 
 
 
 
 
 
 
 
  Interest-rate related

 
81

 

 
299

 
380

Grantor trust (included in Other assets)
45

 

 

 

 
45

Total assets at fair value
$
45

 
$
1,136

 
$
823

 
$
299

 
$
2,303

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
Interest-rate related
$

 
$
91

 
$

 
$
(78
)
 
$
13

Total liabilities at fair value
$

 
$
91

 
$

 
$
(78
)
 
$
13

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

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


 
As of December 31, 2018
 
Fair Value Measurements Using
 
Netting Adjustments and Cash Collateral (1)
 
 
 
Level 1        
 
Level 2        
 
Level 3        
 
Total
Assets
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
  Government-sponsored enterprises debt obligations
$

 
$
55

 
$

 
$

 
$
55

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

 

 
865

 

 
865

Derivative assets:
 
 
 
 
 
 
 
 
 
  Interest-rate related

 
36

 

 
278

 
314

Grantor trust (included in Other assets)
52

 

 

 

 
52

Total assets at fair value
$
52

 
$
91

 
$
865

 
$
278

 
$
1,286

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
Interest-rate related
$

 
$
163

 
$

 
$
(146
)
 
$
17

Total liabilities at fair value
$

 
$
163

 
$

 
$
(146
)
 
$
17

____________ 
(1)Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions, and also cash collateral and related accrued interest held or placed with the same clearing agents and/or counterparty.
The following table presents a reconciliation of available-for-sale securities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
 
 
For the Three Months Ended March 31,
 
 
2019
 
2018
Balance, beginning of period
 
$
865

 
$
1,104

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

     Included in other comprehensive income
 
(8
)
 
(16
)
     Accretion of credit losses in net interest income
 
15

 
16

Settlements
 
(48
)
 
(51
)
Balance, end of period
 
$
823

 
$
1,053

____________ 
(1) 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 that are measured at fair value on a recurring or nonrecurring basis on the Statements of Condition and categorized within Level 2 and Level 3 of the fair value hierarchy.

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

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

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


28

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


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

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

Multiple third-party vendor prices were received for a majority of the Bank’s investment securities holdings, and the final prices for those securities were computed by averaging the prices received as of March 31, 2019 and December 31, 2018. Based on the Bank’s review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or the Bank’s additional analysis in those instances in which there were outliers or significant yield variances), the Bank believes that its final prices are representative of the prices that would have been received if the assets had been sold at the measurement date (i.e., exit prices) and further, that the fair value measurements are classified appropriately in the fair value hierarchy. Based on the lack of significant market activity for private-label MBS, the fair value measurement for those securities were classified as Level 3 within the fair value hierarchy as of March 31, 2019 and December 31, 2018.

Derivative assets and liabilities. The Bank calculates the fair values of interest-rate related derivatives using a discounted cash flow analysis which utilizes market-observable inputs. The inputs for interest-rate related derivatives uses the Overnight Index Swap curve for collateralized derivatives.

Derivative instruments are transacted primarily in the institutional dealer market and priced with observable market assumptions at a mid-market valuation point. The Bank does not provide a credit valuation adjustment based on aggregate exposure by derivative counterparty when measuring the fair value of its derivatives. This is because the collateral provisions pertaining to the Bank’s derivatives obviate the need to provide such a credit valuation adjustment. The fair values of the Bank’s derivatives take into consideration the effects of legally enforceable master netting agreements, where applicable, that allow the Bank to settle positive and negative positions and offset cash collateral with the same counterparty on a net basis. The Bank and each uncleared derivative counterparty have collateral thresholds that take into account both the Bank’s and the counterparty’s credit ratings. As a result of these practices and agreements, the Bank has concluded that the impact of the credit differential between the Bank and its derivative counterparties was mitigated to an immaterial level, and no further adjustments were deemed necessary to the recorded fair values of derivative assets and liabilities on the Statements of Condition as of March 31, 2019 and December 31, 2018.

The following estimated fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank as of March 31, 2019 and December 31, 2018. Although the Bank uses its best judgment in estimating the fair values of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for a portion of the Bank’s financial instruments, in certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. Therefore, these estimated fair values are not necessarily indicative of the amounts that would be realized in current market transactions although they do reflect the Bank’s judgment of how a market participant would estimate the fair value. The fair value tables presented below do not represent an estimate of the overall fair value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.

29

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


The following tables present the carrying values and estimated fair values of the Bank’s financial instruments.
 
As of March 31, 2019
 
 
 
Estimated Fair Value
 
Carrying Value
 
Total        
 
Level 1        
 
Level 2        
 
Level 3        
 
Netting Adjustments and Cash Collateral (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 Cash and due from banks
$
70

 
$
70

 
$
70

 
$

 
$

 
$

 Interest-bearing deposits
3,444

 
3,444

 

 
3,444

 

 

 Securities purchased under agreements to resell
4,500

 
4,500

 

 
4,500

 

 

 Federal funds sold
12,775

 
12,775

 

 
12,775

 

 

 Trading securities
1,055

 
1,055

 

 
1,055

 

 

 Available-for-sale securities
823

 
823

 

 

 
823

 

 Held-to-maturity securities
24,184

 
24,149

 

 
23,754

 
395

 

 Advances
90,929

 
91,017

 

 
91,017

 

 

 Mortgage loans held for portfolio, net
346

 
363

 

 
363

 

 

 Accrued interest receivable
261

 
261

 

 
261

 

 

 Derivative assets
380

 
380

 

 
81

 

 
299

    Grantor trust assets (included in Other assets)
45

 
45

 
45

 

 

 

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 Interest-bearing deposits
1,163

 
1,163

 

 
1,163

 

 

 Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
Discount notes
61,166

 
61,164

 

 
61,164

 

 

Bonds
69,186

 
69,262

 

 
69,262

 

 

 Mandatorily redeemable capital stock
1

 
1

 
1

 

 

 

 Accrued interest payable
217

 
217

 

 
217

 

 

 Derivative liabilities
13

 
13

 

 
91

 

 
(78
)
____________ 
(1) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions, and also cash collateral and related accrued interest held or placed with the same clearing agents and/or counterparty.

30

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


 
As of December 31, 2018
 
 
 
Estimated Fair Value
 
Carrying Value
 
Total        
 
Level 1        
 
Level 2        
 
Level 3        
 
Netting Adjustments and Cash Collateral (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 Cash and due from banks
$
35

 
$
35

 
$
35

 
$

 
$

 
$

 Interest-bearing deposits
6,782

 
6,782

 

 
6,782

 

 

 Securities purchased under agreements to resell
3,750

 
3,750

 

 
3,750

 

 

 Federal funds sold
8,978

 
8,978

 

 
8,978

 

 

 Trading securities
55

 
55

 

 
55

 

 

 Available-for-sale securities
865

 
865

 

 

 
865

 

 Held-to-maturity securities
23,879

 
23,846

 

 
23,428

 
418

 

 Advances
108,462

 
108,448

 

 
108,448

 

 

 Mortgage loans held for portfolio, net
360

 
374

 

 
374

 

 

 Loan to another FHLBank
500

 
500

 

 
500

 

 

 Accrued interest receivable
295

 
295

 

 
295

 

 

 Derivative assets
314

 
314

 

 
36

 

 
278

    Grantor trust assets (included in Other assets)
52

 
52

 
52

 

 

 

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 Interest-bearing deposits
1,176

 
1,176

 

 
1,176

 

 

 Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
Discount notes
66,025

 
66,014

 

 
66,014

 

 

Bonds
79,114

 
79,086

 

 
79,086

 

 

 Mandatorily redeemable capital stock
1

 
1

 
1

 

 

 

 Accrued interest payable
204

 
204

 

 
204

 

 

 Derivative liabilities
17

 
17

 

 
163

 

 
(146
)
____________ 
(1)Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions, and also cash collateral and related accrued interest held or placed with the same clearing agents and/or counterparty.

Note 15—Commitments and Contingencies

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

The par value of the other FHLBanks’ outstanding consolidated obligations for which the Bank is jointly and severally liable was $880,223 and $886,081 as of March 31, 2019 and December 31, 2018, respectively, exclusive of the Bank’s own outstanding consolidated obligations. None of the other FHLBanks defaulted on their consolidated obligations, the Finance Agency was not required to allocate any obligation among the FHLBanks, and no amount of the joint and several obligation was fixed as of March 31, 2019 and December 31, 2018. Accordingly, the Bank has not recognized a liability for its joint and several obligation related to the other FHLBanks’ consolidated obligations as of March 31, 2019 and December 31, 2018.

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


The following table presents the Bank’s outstanding commitments, which represent off-balance sheet obligations.
 
 
As of March 31, 2019
 
As of December 31, 2018
 
 
Expire Within One Year
 
Expire After One Year
 
Total
 
Expire Within One Year
 
Expire After One Year
 
Total
Standby letters of credit (1)
 
$
11,615

 
$
15,894

 
$
27,509

 
$
12,334

 
$
17,974

 
$
30,308

Commitments to fund additional advances
 
30

 

 
30

 
48

 

 
48

Unsettled consolidated obligation bonds, at par (2)
 
1,015

 

 
1,015

 
640

 

 
640

Unsettled consolidated obligation discount notes, at par (2)
 

 

 

 
750

 

 
750

____________
(1) 
“Expire Within One Year” includes 14 standby letters of credit for a total of $37 as of March 31, 2019 and December 31, 2018, which have no stated maturity date and are subject to renewal on an annual basis.
(2) 
Expiration is based on settlement period rather than underlying contractual maturity of consolidated obligations.
The Bank monitors the creditworthiness of its standby letters of credit based on an evaluation of the member. In addition, standby letters of credit are fully collateralized from the time of issuance. The Bank has established parameters for the measurement, review, classification, and monitoring of credit risk related to these standby letters of credit that result in an internal credit rating, which focuses primarily on an institution’s overall financial health and takes into account the 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 that 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 carrying value of the guarantees related to standby letters of credit is recorded in “Other liabilities” on the Statements of Condition and amounted to $88 and $102 as of March 31, 2019 and December 31, 2018, respectively. Based on the Bank’s credit analyses and collateral requirements, the Bank does not deem it necessary to record any additional liability on the Statements of Condition for these commitments.
The Bank is subject to legal proceedings arising in the normal course of business. After consultation with legal counsel, management does not anticipate, as of the date of the financial statements, that the ultimate liability, if any, arising out of these matters will have a material effect on the Bank’s financial condition or results of operations.

Note 16—Transactions with Shareholders

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

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


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


Shareholder Concentrations. The Bank considers shareholder concentration as members or non-members with regulatory capital stock outstanding in excess of 10 percent of the Bank’s total regulatory capital stock. The following tables present transactions with shareholders whose holdings of regulatory capital stock exceed 10 percent of total regulatory capital stock outstanding.
 
As of March 31, 2019
 
Regulatory Capital Stock Outstanding
 
Percent of Total Regulatory Capital Stock Outstanding
 
Par Value of Advances
 
Percent of Total Par Value of Advances
 
Interest-bearing Deposits
 
Percent of Total Interest-bearing Deposits
Navy Federal Credit Union
$
527

 
11.08
 
$
12,040

 
13.29
 
$
99

 
8.47
Bank of America, National Association
515

 
10.83
 
11,759

 
12.98
 

 
0.01

 
As of December 31, 2018
 
Regulatory Capital Stock Outstanding
 
Percent of Total Regulatory Capital Stock Outstanding
 
Par Value of Advances
 
Percent of Total Par Value of Advances
 
Interest-bearing Deposits
 
Percent of Total Interest-bearing Deposits
Bank of America, National Association
$
855

 
15.58
 
$
19,759

 
18.23
 
$

 
0.01
Navy Federal Credit Union
570

 
10.39
 
13,058

 
12.04
 

 
0.04


Note 17—Subsequent Events

On April 25, 2019, the Bank's board of directors approved a cash dividend for the first quarter of 2019. The Bank paid the first quarter 2019 dividend on April 29, 2019 in the amount of $81.


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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 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.

Forward-looking statements may include statements related to, among others, the interest-rate environment, demand for Bank advances and FHLBank consolidated obligations, gains and losses on derivatives, plans to pay dividends and repurchase excess capital stock, future other-than-temporary impairment charges, future classification of securities, the impact of changes in product offerings, the impact of housing reform and other regulatory changes. These statements may involve matters pertaining to, but not limited to: projections regarding revenue, income, earnings, capital expenditures, dividends, the capital structure and other financial items; statements of plans or objectives for future operations; expectations for future economic performance; and statements of assumptions underlying certain of the foregoing types of statements.

The forward-looking statements may not be realized due to a variety of factors, including, but not limited to risks and uncertainties relating to economic, competitive, governmental, technological and marketing factors, as well as those risk factors provided under Item 1A of the Bank’s Form 10-K and Item 1A in Part II of this quarterly report on Form 10-Q.

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

The discussion presented below provides an analysis of the Bank’s financial condition as of March 31, 2019 and December 31, 2018, and results of operations for the first quarter of 2019 and 2018. Management’s discussion and analysis should be read in conjunction with the financial statements and accompanying notes presented elsewhere in this report, as well as the Bank’s audited financial statements for the year ended December 31, 2018.

Executive Summary

Financial Condition

As of March 31, 2019, total assets were $138.9 billion, a decrease of $15.5 billion, or 10.1 percent, from December 31, 2018. This decrease was primarily due to a $17.5 billion, or 16.2 percent, decrease in advances, partially offset by a $2.5 billion, or 5.58 percent, increase in total investments.

As of March 31, 2019, total liabilities were $132.0 billion, a decrease of $14.8 billion, or 10.1 percent, from December 31, 2018. This decrease was primarily due to a $14.8 billion, or 10.2 percent, decrease in consolidated obligations as a result of lower advances balances as of March 31, 2019.

As of March 31, 2019, total capital was $6.9 billion, a decrease of $724 million, or 9.47 percent, from December 31, 2018. This decrease was primarily due to a decrease in the Bank’s subclass B2 activity-based capital stock resulting from a decrease in the total outstanding advances during this period.

Results of Operations

The Bank recorded net interest income of $144 million for the first quarter of 2019, an increase of $9 million, or 6.23 percent, from net interest income of $135 million for the same period in 2018. This increase in net interest income during the first

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quarter of 2019, compared to the same period in 2018, was primarily due to changes in interest rates which impacted interest-earning assets more than the corresponding impact to interest-bearing liabilities. 

The Bank recorded net income of $101 million for the first quarter of 2019, a decrease of $13 million, or 11.6 percent, from net income of $114 million for the same period in 2018. This decrease primarily related to the Bank recording $22 million of net gains on derivatives and hedging activities during the first quarter of 2018, compared to recording a $2 million net loss on derivatives and hedging activities during the first quarter of 2019. The net gains on derivatives and hedging activities were primarily the result of changes in interest rates during the period. 

One way in which the Bank analyzes its performance is by comparing its annualized return on average equity (ROE) to three-month average London Interbank Offered Rate (LIBOR). The Bank has chosen to measure ROE as a spread to average three-month LIBOR because the Bank has significant assets and liabilities priced to average three-month LIBOR. The Bank’s ROE was 5.72 percent for the first quarter of 2019, compared to 6.01 percent for the same period in 2018. The decrease in ROE was primarily due to the decrease in net income during the period. ROE spread to three-month average LIBOR was 303 basis points for the first quarter of 2019, compared to 408 basis points for the same period in 2018. The decrease in the ROE spread to three-month average LIBOR was primarily due to the increase in three-month average LIBOR during the first quarter of 2019, compared to the same period in 2018.

The Bank’s interest-rate spread was 28 basis points for the first quarter of 2019 and 2018.

Business Outlook

The Bank’s business outlook remains largely unchanged from the discussion in the Bank’s Form 10-K. External factors, including changes in interest rates, liquidity levels and loan demand at member institutions, and the general state of the economy continue to impact the Bank’s overall business outlook and advances demand.

Management continues to be focused and engaged on developing and implementing an effective transition away from LIBOR. During the first quarter of 2019, the Bank adopted a formal multi-year LIBOR phase-out transition plan, which includes governance, risk management, legal, operational, systems and operations, and other aspects of planning for the transition.




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Table of Contents


Selected Financial Data

The following table presents a summary of certain financial information for the Bank for the periods presented (dollars in millions):
 
As of and for the Three Months Ended
 
March 31,
2019
 
December 31,
2018
 
September 30,
2018
 
June 30,
2018
 
March 31,
2018
Statements of Condition (at period end)
 
 
 
 
 
 
 
 
 
Total assets
$
138,940

 
$
154,476

 
$
155,591

 
$
154,171

 
$
140,460

Advances
90,929

 
108,462

 
109,746

 
104,537

 
91,733

Investments (1)
46,781

 
44,309

 
44,680

 
47,629

 
47,483

Mortgage loans held for portfolio
347

 
361

 
377

 
395

 
417

Allowance for credit losses on mortgage loans
(1
)
 
(1
)
 
(1
)
 
(1
)
 
(1
)
Interest-bearing deposits
1,163

 
1,176

 
965

 
1,069

 
1,213

Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
  Discount notes (2)
61,166

 
66,025

 
62,632

 
65,353

 
54,659

  Bonds (2)
69,186

 
79,114

 
83,761

 
79,812

 
77,160

Total consolidated obligations, net (2)
130,352

 
145,139

 
146,393

 
145,165

 
131,819

Mandatorily redeemable capital stock
1

 
1

 
2

 
2

 
3

Affordable Housing Program payable
89

 
85

 
85

 
80

 
80

Capital stock - putable
4,753

 
5,486

 
5,557

 
5,300

 
4,748

Retained earnings
2,126

 
2,110

 
2,104

 
2,079

 
2,052

Accumulated other comprehensive income
44

 
51

 
91

 
95

 
95

Total capital
6,923

 
7,647

 
7,752

 
7,474

 
6,895

Statements of Income (for the period ended)
 
 
 
 
 
 
 
 
 
Net interest income (3)
144

 
152

 
143

 
131

 
135

Net impairment losses recognized in earnings
(1
)
 
(2
)
 

 
(1
)
 

Net gains (losses) on trading securities
1

 
1

 

 
(1
)
 
(1
)
Net (losses) gains on derivatives and hedging activities (3)
(2
)
 
(20
)
 
13

 
14

 
22

Standby letters of credit fees
7

 
6

 
6

 
7

 
6

Other income
2

 
(1
)
 

 
2

 

Noninterest expense
39

 
38

 
44

 
33

 
35

Income before assessment
112

 
98

 
118

 
119

 
127

Affordable Housing Program assessment
11

 
10

 
11

 
12

 
13

Net income
101

 
88

 
107

 
107

 
114

Performance Ratios (%)
 
 
 
 
 
 
 
 
 
Return on equity (4)
5.72

 
4.73

 
5.68

 
5.73

 
6.01

Return on assets (5)
0.28

 
0.24

 
0.28

 
0.28

 
0.29

Net interest margin (6)
0.40

 
0.41

 
0.38

 
0.34

 
0.35

Regulatory capital ratio (at period end) (7)
4.95

 
4.92

 
4.92

 
4.79

 
4.84

Equity to assets ratio (8)
4.95

 
5.00

 
4.96

 
4.89

 
4.89

Dividend payout ratio (9)
84.73

 
92.42

 
77.16

 
74.36

 
56.86


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____________
(1) Investments consist of interest-bearing deposits, securities purchased under agreements to resell, federal funds sold, and securities classified as trading, available-for-sale, and held-to-maturity.
(2) The amounts presented are the Bank’s primary obligations on consolidated obligations outstanding. The par value of the FHLBanks’ outstanding consolidated obligations for which the Bank is jointly and severally liable was as follows (in millions):
March 31, 2019
$
880,223

December 31, 2018
886,081

September 30, 2018
872,256

June 30, 2018
914,286

March 31, 2018
887,057


(3) The Bank adopted new accounting guidance related to derivatives and hedging activities effective January 1, 2019. The impact of this guidance changed the presentation of net interest income as described in Note 13—Derivatives and Hedging Activities to the Bank’s interim financial statements.
(4) Calculated as net income, divided by average total equity.
(5) Calculated as net income, divided by average total assets.
(6) Net interest margin is net interest income as a percentage of average earning assets.
(7) Regulatory capital ratio is regulatory capital, which does not include accumulated other comprehensive income, but does include mandatorily redeemable capital stock, as a percentage of total assets as of period end.
(8) Calculated as average total equity, divided by average total assets.
(9) Calculated as dividends declared during the period divided by net income during the period.

Financial Condition

The following table presents the distribution of the Bank’s total assets, liabilities, and capital by major class as of the dates indicated (dollars in millions). These items are discussed in more detail below.
 
 
As of March 31, 2019
 
As of December 31, 2018
 
Increase (Decrease)
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
Amount
 
Percent
Advances
$
90,929

 
65.44
 
$
108,462

 
70.21
 
$
(17,533
)
 
(16.17
)
Investment securities
26,062

 
18.76
 
24,799

 
16.05
 
1,263

 
5.09

Other investments
20,719

 
14.91
 
19,510

 
12.63
 
1,209

 
6.20

Mortgage loans, net
346

 
0.25
 
360

 
0.23
 
(14
)
 
(3.88
)
Loan to another FHLBank

 
 
500

 
0.33
 
(500
)
 
(100.00
)
Other assets
884

 
0.64
 
845

 
0.55
 
39

 
4.78

Total assets
$
138,940

 
100.00
 
$
154,476

 
100.00
 
$
(15,536
)
 
(10.06
)
Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
  Discount notes
$
61,166

 
46.33
 
$
66,025

 
44.97
 
$
(4,859
)
 
(7.36
)
  Bonds
69,186

 
52.41
 
79,114

 
53.88
 
(9,928
)
 
(12.55
)
Deposits
1,163

 
0.88
 
1,176

 
0.80
 
(13
)
 
(1.07
)
Other liabilities
502

 
0.38
 
514

 
0.35
 
(12
)
 
(2.17
)
Total liabilities
$
132,017

 
100.00
 
$
146,829

 
100.00
 
$
(14,812
)
 
(10.09
)
Capital stock
$
4,753

 
68.66
 
$
5,486

 
71.74
 
$
(733
)
 
(13.35
)
Retained earnings
2,126

 
30.71
 
2,110

 
27.59
 
16

 
0.73

Accumulated other comprehensive income
44

 
0.63
 
51

 
0.67
 
(7
)
 
(13.44
)
Total capital
$
6,923

 
100.00
 
$
7,647

 
100.00
 
$
(724
)
 
(9.47
)

Advances

Total advances decreased by 16.2 percent as of March 31, 2019, compared to December 31, 2018. This decrease was primarily due to maturities that occurred during the period and a decrease in members’ liquidity needs during the quarter. A significant percentage of advances made during the fourth quarter of 2018 and the first quarter of 2019 were short-term advances.

As of March 31, 2019, 58.8 percent of the Bank’s advances were fixed-rate, compared to 59.6 percent as of December 31, 2018. However, the Bank may simultaneously enter into derivatives with the issuance of advances to convert the rates on them, in effect, into short-term variable interest rates, the majority of which are based on LIBOR. As of March 31, 2019 and December 31, 2018, 54.6 percent and 45.3 percent, respectively, of the Bank’s fixed-rate advances were swapped, and 0.15 percent and 0.47 percent, respectively, of the Bank’s variable-rate advances were swapped. The majority of the Bank’s variable-

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rate advances were indexed to LIBOR. The Bank also offers variable-rate advances that may be tied to other indices, such as the federal funds rate, prime rate, SOFR, or constant maturity swap rates.

The following table presents the par value of outstanding advances by product characteristics (dollars in millions).
 
As of March 31, 2019
 
As of December 31, 2018
 
Amount
 
Percent of Total
 
Amount
 
Percent of Total
Fixed rate (1)
$
51,184

 
56.49
 
$
62,458

 
57.61
Adjustable or variable-rate indexed
37,240

 
41.10
 
43,737

 
40.34
Principal reducing credit
1,181

 
1.30
 
1,232

 
1.14
Convertible
1,007

 
1.11
 
987

 
0.91
Total par value
$
90,612

 
100.00
 
$
108,414

 
100.00
____________ 
(1) 
Includes convertible advances whose conversion options have expired.

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

Investments

The following table presents more detailed information regarding investments held by the Bank (dollars in millions).
 
 
 
 
Increase (Decrease)
 
As of March 31, 2019
 
As of December 31, 2018
 
Amount    
 
Percent    
Investment securities:
 
 
 
 
 
 
 
Government-sponsored enterprises debt obligations
$
3,228

 
$
2,727

 
$
501

 
18.38

U.S. Treasury obligations
999

 

 
999

 
100.00

State or local housing agency debt obligations
1

 
1

 

 

  Mortgage-backed securities:
 
 
 
 
 
 
 
U.S. agency obligations-guaranteed residential
112

 
118

 
(6
)
 
(5.63
)
Government-sponsored enterprises residential
8,991

 
9,304

 
(313
)
 
(3.35
)
Government-sponsored enterprises commercial
11,516

 
11,368

 
148

 
1.29

Private-label residential
1,215

 
1,281

 
(66
)
 
(5.18
)
Total mortgage-backed securities
21,834

 
22,071

 
(237
)
 
(1.08
)
Total investment securities
26,062

 
24,799


1,263

 
5.09

Other investments:
 
 
 
 
 
 
 
Interest-bearing deposits (1)
3,444

 
6,782

 
(3,338
)
 
(49.22
)
Securities purchased under agreements to resell
4,500

 
3,750

 
750

 
20.00

Federal funds sold
12,775

 
8,978

 
3,797

 
42.29

Total other investments
20,719

 
19,510

 
1,209

 
6.20

Total investments
$
46,781

 
$
44,309

 
$
2,472

 
5.58

____________ 
(1) 
Interest-bearing deposits include a $196 and $409 million business money market account with Branch Banking and Trust Company, one of the Bank’s 10 largest borrowers as of March 31, 2019 and December 31, 2018, respectively.

The increase in total investments was primarily due to an increase in total investment securities from December 31, 2018 to March 31, 2019, as the Bank positioned itself to meet new Finance Agency liquidity requirements. Additionally, the amount held in other investments increased and will vary each day based on the Bank’s liquidity needs as a result of advances demand, the earnings rates, and the availability of high quality counterparties in the federal funds market. The decrease in interest-

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bearing deposits and increase in federal funds sold was primarily due to a change in interpretation of regulatory guidance related to unsecured credit exposure.

The Finance Agency regulations prohibit an FHLBank from purchasing MBS and asset-backed securities if its investment in such securities would exceed 300 percent of the FHLBank’s previous month-end regulatory capital on the day it would purchase the securities. As of March 31, 2019, these investments were 316 percent of the Bank’s regulatory capital. These investments exceeded the 300 percent level due to a decrease in regulatory capital that resulted from a decrease in advances.
The Bank was in compliance with this regulatory requirement at the time of its MBS purchases and will not be required to sell any previously purchased MBS. However, the Bank was precluded from purchasing additional MBS until its MBS to regulatory capital declines below 300 percent. As of December 31, 2018, the Bank’s MBS to regulatory capital was 290 percent.

Mortgage Loans Held for Portfolio

The decrease in mortgage loans held for portfolio from December 31, 2018 to March 31, 2019 was primarily due to the maturity and prepayment of these assets during the period.
Members that sold mortgage loans to the Bank were located primarily in the southeastern United States; therefore, the Bank’s conventional mortgage loan portfolio was concentrated in that region as of March 31, 2019 and December 31, 2018. The following table presents the percentage of unpaid principal balance of conventional residential mortgage loans held for portfolio for the five largest state concentrations.
 
 
As of March 31, 2019
 
As of December 31, 2018
 
Percent of Total
 
Percent of Total
Florida
22.72

 
22.76

South Carolina
20.46

 
20.40

Virginia
11.21

 
11.23

Georgia
10.01

 
10.12

North Carolina
8.16

 
8.19

All other
27.44

 
27.30

Total
100.00

 
100.00


Consolidated Obligations

The Bank funds its assets primarily through the issuance of consolidated obligation bonds and consolidated obligation discount notes. The decrease in consolidated obligations from December 31, 2018 to March 31, 2019 was primarily a result of the decrease in advances outstanding during the period. Consolidated obligation issuances financed 93.8 percent of the $138.9 billion in total assets as of March 31, 2019, remaining relatively stable compared to the financing ratio of 94.0 percent as of December 31, 2018.
The Bank often simultaneously enters into derivatives with the issuance of consolidated obligation bonds to convert the interest rates, in effect, into short-term variable interest rates, usually based on LIBOR. As of March 31, 2019 and December 31, 2018, 77.9 percent and 80.7 percent, respectively, of the Bank’s fixed-rate consolidated obligation bonds were swapped. None of the Bank’s variable-rate consolidated obligation bonds or fixed-rate consolidated obligation discount notes were swapped as of March 31, 2019 and December 31, 2018.

Deposits

The Bank offers demand and overnight deposit programs to members and qualifying non-members primarily as a liquidity management service. In addition, a member that services mortgage loans may deposit funds in the Bank that are collected in connection with the mortgage loans, pending disbursement of those funds to the owners of the mortgage loans. For demand deposits, the Bank pays interest at the overnight rate. Most of these deposits represent member liquidity investments, which members may withdraw on demand. Therefore, the total account balance of the Bank’s deposits may fluctuate significantly. As a matter of prudence, the Bank typically invests deposit funds in liquid short-term assets. Member loan demand, deposit flows, and liquidity management strategies influence the amount and volatility of deposit balances carried with the Bank.


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Capital
The FHLBank Act and Finance Agency regulations specify that each FHLBank must meet certain minimum regulatory capital standards. The Bank was in compliance with these regulatory capital rules and requirements as shown in Note 11Capital and Mandatorily Redeemable Capital Stock to the Bank’s interim financial statements.
Finance Agency regulations establish criteria for four capital classifications, based on the amount and type of capital held by an FHLBank, as follows:
Adequately Capitalized - FHLBank meets or exceeds both risk-based and minimum capital requirements;
Undercapitalized - FHLBank does not meet one or both of its risk-based or minimum capital requirements;
Significantly Undercapitalized - FHLBank has less than 75 percent of one or both of its risk-based or minimum capital requirements; and
Critically Undercapitalized - FHLBank total capital is two percent or less of total assets.

Under the regulations, the Director of the Finance Agency (Director) will make a capital classification for each FHLBank at least quarterly and notify the FHLBank in writing of any proposed action and provide an opportunity for the FHLBank to submit information relevant to such action. The Director is permitted to make discretionary classifications. An FHLBank must provide written notice to the Finance Agency within 10 days of any event or development that has caused or is likely to cause its permanent or total capital to fall below the level required to maintain its most recent capital classification or reclassification. In the event that an FHLBank is not adequately capitalized, the regulations delineate the types of prompt corrective actions that the Director may order, including submission of a capital restoration plan by the FHLBank and restrictions on its dividends, stock redemptions, executive compensation, new business activities, or any other actions the Director determines will ensure safe and sound operations and capital compliance by the FHLBank. On March 26, 2019 the Bank received notification from the Director that, based on December 31, 2018 data, the Bank meets the definition of “adequately capitalized.”

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

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Results of Operations

The following is a discussion and analysis of the Bank’s results of operations for the first quarter of 2019 and 2018.

Net Income

The following table presents the Bank’s significant income items for the first quarter of 2019 and 2018, and provides information regarding the changes during those periods (dollars in millions). These items are discussed in more detail below.
 
 
For the Three Months Ended March 31,
 
Increase (Decrease)    
 
 
2019
 
2018
 
Amount
 
Percent
Net interest income
 
$
144

 
$
135

 
$
9

 
6.23

Noninterest income
 
7

 
27

 
(20
)
 
(72.52
)
Noninterest expense
 
39

 
35

 
4

 
9.51

Affordable Housing Program assessment
 
11

 
13

 
(2
)
 
(11.59
)
Net income
 
$
101

 
$
114

 
$
(13
)
 
(11.57
)


Net Interest Income

The primary source of the Bank’s earnings is net interest income. Net interest income equals interest earned on assets (including member advances, mortgage loans, MBS held in portfolio, and other investments), less the interest expense incurred on liabilities (including consolidated obligations, deposits, and other borrowings). Also included in net interest income are miscellaneous related items, such as prepayment fees, the amortization of debt issuance discounts, concession fees, and certain derivative instruments and hedging activities related adjustments. The Bank also recognizes significant improvements in expected cash flows related to other-than-temporary impairment securities through net interest income.

As discussed above, net interest income includes components of hedging activity. When hedging relationships qualify for hedge accounting, the interest components of the hedging derivatives will be reflected in interest income or expense. Beginning on January 1, 2019, the fair value gains and losses of derivatives and hedged items designated in fair value hedge relationships are also recognized in interest income or interest expense. Prior to January 1, 2019, the portion of fair value gains and losses of derivatives and hedged items representing hedge ineffectiveness were recorded in noninterest income. When a hedging relationship is discontinued, the cumulative fair value adjustment on the hedged item will be amortized into interest income or expense over the remaining life of the asset or liability. The impact of hedging on net interest income was a decrease of $4 million and $41 million for the first quarter of 2019 and 2018, respectively.

The following table presents spreads between the average yield on total interest-earning assets and the average cost of interest-bearing liabilities for the first quarter of 2019 and 2018 (dollars in millions). The interest-rate spread is affected by the inclusion or exclusion of net interest income or expense associated with the Bank’s derivatives. For example, as discussed above, when derivatives qualify for fair-value hedge accounting under GAAP, the interest income or expense associated with the derivatives is included in net interest income and in the calculation of interest-rate spread. When derivatives do not qualify for fair-value hedge accounting under GAAP, the interest income or expense associated with the derivatives is excluded from net interest income and from the calculation of interest-rate spread and is recorded in “Noninterest income (loss)” as “Net (losses) gains on derivatives and hedging activities.” Amortization associated with hedging-related basis adjustments is also reflected in net interest income, which affects interest-rate spread.

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The Bank’s interest-rate spread was 28 basis points for both the first quarter of 2019 and the first quarter of 2018.
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended March 31,
 
2019(1)
 
2018(1)
 
Average  Balance
 
Interest
 
Yield/    
Rate
(%)
 
Average  Balance
 
Interest
 
Yield/    
Rate
(%)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (2)
$
4,474

 
$
28

 
2.51
 
$
3,111

 
$
14

 
1.87
Securities purchased under agreements to resell
4,344

 
26

 
2.45
 
1,685

 
6

 
1.47
Federal funds sold
12,753

 
78

 
2.47
 
13,132

 
49

 
1.51
Investment securities (3)
24,571

 
196

 
3.24
 
26,023

 
153

 
2.39
Advances
97,492

 
656

 
2.73
 
112,253

 
455

 
1.64
Mortgage loans (4)
353

 
4

 
5.15
 
426

 
6

 
5.45
Loans to other FHLBanks
11

 

 
3.71
 
8

 

 
2.73
Total interest-earning assets
143,998

 
988

 
2.78
 
156,638

 
683

 
1.77
Allowance for credit losses on mortgage loans
(1
)
 
 
 
 
 
(1
)
 
 
 
 
Other assets
1,041

 
 
 
 
 
1,243

 
 
 
 
Total assets
$
145,038

 
 
 
 
 
$
157,880

 
 
 
 
Liabilities and Capital
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (5)
$
1,077

 
6

 
2.33
 
$
1,085

 
4

 
1.33
Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
Discount notes
61,603

 
372

 
2.45
 
64,115

 
224

 
1.42
Bonds
74,414

 
466

 
2.54
 
84,230

 
320

 
1.54
Other borrowings
8

 

 
3.26
 
4

 

 
5.21
Total interest-bearing liabilities
137,102

 
844

 
2.50
 
149,434

 
548

 
1.49
Other liabilities
762

 
 
 
 
 
733

 
 
 
 
Total capital
7,174

 
 
 
 
 
7,713

 
 
 
 
Total liabilities and capital
$
145,038

 
 
 
 
 
$
157,880

 
 
 
 
Net interest income and net yield on interest-earning assets
 
 
$
144

 
0.40
 
 
 
$
135

 
0.35
Interest-rate spread
 
 
 
 
0.28
 
 
 
 
 
0.28
Average interest-earning assets to interest-bearing liabilities
 
 
 
 
105.03
 
 
 
 
 
104.82
____________ 
(1) 
For 2019, interest amounts reported for advances and consolidated obligation bonds include realized and unrealized gains (losses) on hedged items and derivatives in qualifying hedge relationships. Prior period interest amounts do not conform to new hedge accounting guidance adopted January 1, 2019.
(2) 
Includes amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative counterparties.
(3) 
Includes trading securities at fair value and available-for-sale securities at amortized cost.
(4) 
Nonperforming mortgage loans are included in average balances used to determine average rate.
(5) 
Includes amounts recognized for the right to return cash collateral received under master netting agreements with derivative counterparties.


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Net interest income for the periods presented was affected by changes in average balances (volume changes) and changes in average rates (rate changes) of interest-earning assets and interest-bearing liabilities. The following table presents the extent to which volume changes and rate changes affected the Bank’s interest income and interest expense (in millions). As presented in the table below, the overall change in net interest income during the first quarter of 2019, compared to the same period in 2018, was primarily rate related.
 
 
For the Three Months Ended March 31,
 
 
2019 vs. 2018
 
 
Volume (1)
 
Rate (1)
 
Increase (Decrease)    
Increase (decrease) in interest income:
 
 
 
 
 
 
 Interest-bearing deposits
 
$
8

 
$
6

 
$
14

 Securities purchased under agreements to resell
 
14

 
6

 
20

 Federal funds sold
 
(1
)
 
30

 
29

 Investment securities
 
(9
)
 
52

 
43

 Advances
 
(67
)
 
268

 
201

    Mortgage loans
 
(1
)
 
(1
)
 
(2
)
Total
 
(56
)
 
361

 
305

Increase (decrease) in interest expense:
 
 
 
 
 
 
 Interest-bearing deposits
 

 
2

 
2

Consolidated obligations, net:
 
 
 
 
 
 
     Discount notes
 
(9
)
 
157

 
148

     Bonds
 
(41
)
 
187

 
146

Total
 
(50
)
 
346

 
296

(Decrease) increase in net interest income
 
$
(6
)
 
$
15

 
$
9

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

Noninterest Income (Loss)

The following table presents the components of noninterest income (dollars in millions).
 
 
For the Three Months Ended March 31,
 
Increase (Decrease)
 
 
2019(1)
 
2018(1)
 
Amount
 
Percent
Net impairment losses recognized in earnings
 
$
(1
)
 
$

 
$
(1
)
 
(50.26
)
Net gains (losses) on trading securities
 
1

 
(1
)
 
2

 
235.32

Net (losses) gains on derivatives and hedging activities
 
(2
)
 
22

 
(24
)
 
(107.61
)
Standby letters of credit fees
 
7

 
6

 
1

 
2.97

Other
 
2

 

 
2

 
534.51

Total noninterest income
 
$
7

 
$
27

 
$
(20
)
 
(72.52
)
____________
(1) For 2019, amounts reported exclude realized and unrealized gains (losses) on hedged items and derivatives in qualifying hedge relationships. Prior period amounts do not conform to new hedge accounting guidance adopted January 1, 2019.

Beginning on January 1, 2019, changes in fair value of the derivative hedging instrument and the hedged item attributable to the hedged risk for designated fair value hedges are recorded in net interest income in the same line as the earnings effect of the hedged item. Prior to January 1, 2019, for fair value hedges, any hedge ineffectiveness (which represented the amount by which the change in the fair value of the derivative differed from the change in the fair value of the hedge item) was recorded in noninterest income as net gains (losses) on derivatives and hedging activities.

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The following tables present the net effect of derivatives and hedging activity on the Bank’s results of operations (in millions).
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended March 31, 2019 (1)
 
Advances
 
Investments
 
Consolidated
Obligation
Bonds
 
Balance Sheet
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
Gains (losses) on designated fair value hedges
$
5

 
$

 
$
(4
)
 
$

 
$
1

Amortization or accretion of hedging activities in net interest income (2)
(7
)
 

 

 

 
(7
)
Net interest settlements included in net interest income (3)
20

 

 
(18
)
 

 
2

Total effect on net interest income
$
18

 
$

 
$
(22
)
 
$

 
$
(4
)
Net losses on derivatives:
 
 
 
 
 
 
 
 
 
 Losses on derivatives not receiving hedge accounting including net interest settlements
$

 
$
(1
)
 
$

 
$
(1
)
 
$
(2
)
Total net losses on derivatives

 
(1
)
 

 
(1
)
 
(2
)
Net gains on trading securities (4)

 
1

 

 

 
1

Total effect on noninterest income
$

 
$

 
$

 
$
(1
)
 
$
(1
)
____________
(1) 
For 2019, amounts reported include realized and unrealized gains (losses) on hedged items and derivatives in qualifying hedge relationships as part of net interest income.
(2) 
Represents the amortization or accretion of hedging fair value adjustments for both open and closed hedge positions.
(3) 
Represents interest income or expense on derivatives included in net interest income.
(4) 
Includes only those gains or losses on trading securities or financial instruments held at fair value that have an economic derivative “assigned;” therefore, this line item may not agree to the income statement.
 
For the Three Months Ended March 31, 2018(1)
 
Advances
 
Investments
 
Consolidated
Obligation
Bonds
 
Consolidated Obligation Discount Notes
 
Balance Sheet
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
 
 
Amortization or accretion of hedging activities in net interest income(2)
$
(11
)
 
$

 
$

 
$

 
$

 
$
(11
)
Net interest settlements included in net interest income (3)
(33
)
 

 
4

 
(1
)
 

 
(30
)
Total effect on net interest income
$
(44
)
 
$

 
$
4

 
$
(1
)
 
$

 
$
(41
)
Net gains on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
 
 
 Gains on fair value hedges
$
14

 
$

 
$
5

 
$

 
$

 
$
19

 Gains on derivatives not receiving hedge accounting including net interest settlements

 
1

 

 

 
2

 
3

Total net gains on derivatives and hedging activities
14

 
1

 
5

 

 
2

 
22

Net losses on trading securities (4)

 
(1
)
 

 

 

 
(1
)
Total effect on noninterest income
$
14

 
$

 
$
5

 
$

 
$
2

 
$
21

____________ 
(1) 
For 2019, amounts reported include realized and unrealized gains (losses) on hedged items and derivatives in qualifying hedge relationships as part of net interest income. Prior period amounts do not conform to new hedge accounting guidance adopted January 1, 2019.
(2) 
Represents the amortization or accretion of hedging fair value adjustments for both open and closed hedge positions.
(3) 
Represents interest income or expense on derivatives included in net interest income.
(4) 
Includes only those gains or losses on trading securities or financial instruments held at fair value that have an economic derivative “assigned;” therefore, this line item may not agree to the income statement.

Noninterest Expense and Affordable Housing Program (AHP) Assessment

Total noninterest expense remained relatively stable for the first quarter of 2019, compared to the same period in 2018.

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The Bank records AHP assessment expense at a rate of 10 percent of income before assessment, excluding interest expense on mandatorily redeemable capital stock.

Liquidity and Capital Resources
Liquidity is necessary to satisfy members’ borrowing needs on a timely basis, repay maturing and called consolidated obligations, and meet other obligations and operating requirements. Many members rely on the Bank as a source of standby liquidity, so the Bank attempts to be in a position to meet member funding needs on a timely basis. The Bank is required to maintain liquidity in accordance with the FHLBank Act, Finance Agency regulations, and policies established by the Bank’s management and board of directors. In addition, the Finance Agency, at times, has issued guidance and expectations to the FHLBanks related to liquidity.
Liquidity Reserves for Deposits. Finance Agency regulations require the Bank to hold a total amount of cash, obligations of the U.S., and advances with maturities of less than five years, in an amount not less than the amount of total member deposits. The Bank has complied with this requirement during the first quarter of 2019.
Operational Liquidity. In order to ensure adequate operational liquidity (generally, the ready cash and borrowing capacity available to meet the Bank’s intraday needs) each day, Bank policy establishes a daily liquidity target based upon member deposit levels and current day liability maturities and asset settlements. The Bank met this liquidity requirement throughout the first quarter of 2019.
Contingent Liquidity. Finance Agency regulations require the Bank to maintain contingent liquidity in an amount sufficient to meet its liquidity needs for five business days if it is unable to access the capital markets. The Bank met these regulatory liquidity requirements during the first quarter of 2019.
Additional Liquidity Guidance. On August 23, 2018, the Finance Agency issued a final Advisory Bulletin on FHLBank liquidity (Liquidity Guidance AB) that communicates the Finance Agency’s expectations with respect to the maintenance of sufficient liquidity to enable the Bank to provide advances and letters of credit for members during a sustained capital market disruption, assuming no access to capital markets and assuming renewal of all maturing advances for a period of between ten to thirty calendar days. Contemporaneously with the issuance of the Liquidity Guidance AB, the Finance Agency issued a supervisory letter that identifies initial thresholds for measures of liquidity within the established ranges set forth in the Liquidity Guidance AB.
The Liquidity Guidance AB sets forth the Finance Agency’s expectations for how the Bank may best measure and maintain sufficient liquidity, including specific metrics that are commensurate with the Bank’s funds management strategies. These metrics include a cash flow scenario, on a daily basis, that projects forward the number of days for which the Bank should maintain positive cash balances assuming the renewal of all maturing advances and the maintenance of a liquidity reserve for outstanding letters of credit. These metrics also include a funding gap measurement of the difference between assets and liabilities that are scheduled to mature during a specified period, expressed as a percentage of the Bank’s total assets to reduce the liquidity risks associated with a mismatch in asset and liability maturities, including an undue reliance on short-term debt funding, which may increase debt rollover risk.
Portions of the Liquidity Guidance AB were implemented on December 31, 2018 and March 31, 2019, with full implementation to take place on December 31, 2019. The Bank has increased the amount of liquid assets it holds to meet this guidance, and anticipates a further increase to meet the full implementation expectations at December 31, 2019.
Sources of Liquidity. The Bank’s principal source of liquidity is consolidated obligation debt instruments. To provide additional liquidity, the Bank also may use other short-term borrowings, such as federal funds purchased, securities sold under agreements to repurchase, and loans from other FHLBanks. The Bank’s consolidated obligations are not obligations of the United States and are not guaranteed by either the United States or any government agency, but have historically received the same credit rating as the government bond credit rating of the United States. As a result, the Bank generally has comparatively stable access to funding through a diverse investor base at relatively favorable spreads to U.S. Treasury rates. The Bank’s income and liquidity would be adversely affected if it were not able to access the capital markets at competitive rates for an extended period.
The Bank maintained continual access to funding and adapted its debt issuance to meet the needs of its members throughout the first three months of 2019. The Bank’s short-term funding was generally driven by member demand and was achieved through the issuance of consolidated discount notes and short-term consolidated bonds during the first three months of 2019. Access to short-term debt markets has been reliable because investors, driven by increased liquidity preferences and risk aversion,

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including the effects of money market fund reform, have sought the Bank’s short-term debt as an asset of choice, which has led to advantageous funding opportunities and increased utilization of debt maturing in one year or less.
The Bank is focused on maintaining an adequate liquidity balance and a funding balance between its financial assets and financial liabilities and the FHLBanks work collectively to manage the system-wide liquidity and funding needs.  Management and the FHLBanks jointly monitor the combined refinancing risk primarily by tracking the maturities of financial assets and financial liabilities. The Bank monitors the funding balance between financial assets and financial liabilities and is committed to prudent risk management practices.  In managing and monitoring the amounts of assets that require refunding, the Bank considers contractual maturities of its financial assets, as well as certain assumptions regarding expected cash flows (i.e. estimated prepayments and scheduled amortizations). External factors including Bank member borrowing needs, supply and demand in the debt markets, and other factors may also affect the liquidity balances and the funding balance between financial assets and financial liabilities. See the notes to the Bank’s interim financial statements for more information regarding contractual maturities of certain of the Bank’s financial assets and liabilities.
Contingency plans are in place that prioritize the allocation of liquidity resources in the event of operational disruptions at the Bank or the Office of Finance. Under the FHLBank Act, the Secretary of Treasury has the authority, at his discretion, to purchase consolidated obligations up to an aggregate amount of $4.0 billion. No borrowings under this authority have been outstanding since 1977.

Off-balance Sheet Commitments

The Bank’s primary off-balance sheet commitments are as follows:
the Bank’s joint and several liability for all FHLBank consolidated obligations; and
the Bank’s outstanding commitments arising from standby letters of credit.
Should an FHLBank be unable to satisfy its payment obligation under a consolidated obligation for which it is the primary obligor, any of the other FHLBanks, including the Bank, could be called upon to repay all or any part of such payment obligation, as determined or approved by the Finance Agency. As of March 31, 2019 and December 31, 2018, none of the other FHLBanks defaulted on their consolidated obligations; the Finance Agency was not required to allocate any obligation among the FHLBanks; and no amount of the joint and several obligation was fixed. Accordingly, the Bank has not recognized a liability for its joint and several obligations related to other FHLBanks’ consolidated obligations as of March 31, 2019 and December 31, 2018. As of March 31, 2019, the FHLBanks had $1.0 trillion in aggregate par value of consolidated obligations issued and outstanding, $130.7 billion of which was attributable to the Bank. No FHLBank has ever defaulted on its principal or interest payments under any consolidated obligation, and the Bank has never been required to make payments under any consolidated obligation as a result of the failure of another FHLBank to meet its obligations.
The Bank generally requires standby letters of credit to contain language permitting the Bank, upon annual renewal dates and prior notice to the beneficiary, to choose not to renew the standby letter of credit, which effectively terminates the standby letter of credit prior to its scheduled final expiration date. Based on the creditworthiness of the member applicant and appropriate additional fees, the Bank may issue standby letters of credit that have terms of longer than one year without annual renewals or that have no stated maturity and are subject to renewal on an annual basis.
Commitments to extend credit, including standby letters of credit, are agreements to lend. The Bank issues a standby letter of credit on behalf of a member in exchange for a fee. A member may use these standby letters of credit to facilitate a financing arrangement. Management regularly reviews its standby letter of credit pricing in light of several factors, including the Bank’s potential liquidity needs related to draws on its standby letters of credit. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to have an allowance for credit losses for these unfunded standby letters of credit as of March 31, 2019.
Refer to Note 15—Commitments and Contingencies to the Bank’s interim financial statements for more information about the Bank’s outstanding standby letters of credit.

Contractual Obligations

As of March 31, 2019, there has been no material change outside the ordinary course of business in the Bank’s contractual obligations as reported in the Bank’s Form 10-K.

Legislative and Regulatory Developments

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

Interim Final Rule on Margin and Capital Requirements for Covered Swap Entities. On March 19, 2019, the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Farm Credit

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Administration and the Finance Agency (collectively, the Agencies) jointly adopted interim final rules (the Interim Rule) amending the Agencies’ regulations that established minimum margin and capital requirements (the Margin Rules) for registered swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants (Covered Swap Entities) under the jurisdiction of one of the Agencies. The Interim Rule was adopted to assist Covered Swap Entities and their counterparties upon the expected withdrawal, currently delayed until October 31, 2019, of the United Kingdom (UK) from the European Union (EU), commonly referred to as “Brexit.” If the UK withdraws from the EU without a negotiated agreement between the UK and the EU, Covered Swap Entities located within the UK may not be authorized to continue providing certain financial services to swap counterparties that are located in the EU. The Interim Rule would permit Covered Swap Entities located within the UK to transfer their non-cleared swap portfolios to affiliates or other related entities located within the EU or the United States without subjecting legacy swaps (those swaps entered into before the compliance date of the Margin Rules) to the margin requirements of the Margin Rules, provided that the transfer is made within a year of a non-negotiated Brexit and there are no other amendments to the transactions.
The Bank has UK-based non-cleared swap counterparties that may choose to transfer their non-cleared swap portfolios, including any such swaps with the Bank, to a related entity in the EU or the United States.  If any of the Bank’s legacy non-cleared swaps are transferred in accordance with the Interim Rule, those swaps would retain legacy status under the Margin Rules.
On April 1, 2019, the Commodity Futures Trading Commission (CFTC) adopted its own version of the Interim Rule, which is substantially similar to the Agencies’ Interim Rule, but which applies to Covered Swap Entities that are not subject to the jurisdiction of one of the Agencies. Comments on the Interim Rule were due April 18, 2019 and are due on the CFTC’s version of the Interim Rule on May 31, 2019. The Bank does not expect this rule (or the CFTC’s version of the Interim Rule) to materially affect its financial condition or results of operations.

Risk Management

The Bank’s lending, investment and funding activities, and use of derivative hedge instruments expose the Bank to a number of risks. A robust risk management framework aligns risk-taking activities with the Bank’s strategies and risk appetite. A risk management framework also balances risks and rewards. The Bank’s risk management framework consists of risk governance, risk appetite, and risk management policies.

The Bank’s board of directors and management recognize that risks are inherent to the Bank’s business model and that the process of establishing a risk appetite does not imply that the Bank seeks to mitigate or eliminate all risk. By defining and managing to a specific risk appetite, the board of directors and management ensure that there is a common understanding of the Bank’s desired risk profile, which enhances strategic and tactical decisions. Additionally, the Bank aspires to (1) sustain a corporate culture of transparency, integrity, and adherence to legal and ethical obligations; and (2) achieve and exceed best practices in governance, ethics, and compliance.

The Bank’s board of directors and management have established a risk appetite statement and risk metrics for controlling and escalating actions based on the continuing objectives that represent the foundation of the Bank’s strategic and tactical planning, as described in the Bank’s Form 10-K.

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

Credit Risk

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

Advances

Secured advances to member financial institutions account for the largest category of Bank assets; thus, advances are a major source of the Bank’s credit risk exposure. The Bank uses a risk-focused approach to credit and collateral underwriting. The Bank attempts to reduce credit risk on advances by monitoring the financial condition of borrowers and the quality and value of the assets that borrowers pledge as eligible collateral.
The Bank utilizes a credit risk rating system for its members, which focuses primarily on an institution’s overall financial health and takes into account the quality of assets, earnings, and capital position. The Bank assigns each borrower that is an insured depository institution or an insurance company a credit risk rating from one to 10 according to the relative amount of credit risk that such borrower poses to the Bank (one being the least amount of credit risk and 10 the greatest amount of credit risk). In general, borrowers in category 10 may have more restrictions on the types of collateral they may use to secure advances, may be required to maintain higher collateral maintenance levels and deliver loan collateral, may be restricted from obtaining further advances, and may face more stringent collateral reporting requirements. At times, based upon the Bank’s assessment of a borrower and its collateral, the Bank may place more restrictive requirements on a borrower than those generally applicable to borrowers with the same rating. The Bank assigns each borrower that is not an insured depository institution or insurance company, such as housing associates, community development financial institutions, and corporate credit unions, a risk level rating based on a risk matrix developed for each entity type. Each matrix has risk levels that generally correspond to the one to 10 credit risk rating for insured depository institutions and insurance companies. Development of these risk matrices for borrowers that are not insured depository institutions or insurance companies enables the Bank to monitor and analyze the financial condition of these borrowers in a more consistent and complete manner. The par value of advances to these institutions totaled $615 million as of March 31, 2019. Management and the board also monitor the Bank’s concentration in secured credit and letters of credit exposure to individual borrowers.

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The following table presents the number of borrowers and the par value of advances outstanding to borrowers with the specified ratings as of the specified dates (dollars in millions).
 
 
 
As of March 31, 2019
 
As of December 31, 2018
Rating                 
 
Number of        
Borrowers
 
Par Value of Outstanding        
Advances
 
Number of        
Borrowers
 
Par Value of Outstanding        
Advances
1
 
88

 
$
2,336

 
97

 
$
2,176

2
 
55

 
16,637

 
50

 
18,472

3
 
61

 
7,681

 
75

 
22,207

4
 
103

 
51,873

 
104

 
60,897

5
 
44

 
10,688

 
57

 
3,083

6
 
16

 
307

 
13

 
361

7
 
6

 
60

 
9

 
140

8
 
2

 
223

 
3

 
262

9
 
7

 
124

 
6

 
190

10
 
5

 
68

 
5

 
85


The Bank establishes a credit limit for each borrower. The credit limit is not a committed line of credit, but rather an indication of the borrower’s general borrowing capacity with the Bank. The Bank determines the credit limit in its sole and absolute discretion by evaluating a wide variety of factors that indicate the borrower’s overall creditworthiness. The credit limit is generally expressed as a percentage equal to the ratio of the borrower’s total liabilities to the Bank (including the face amount of outstanding standby letters of credit, the par value of outstanding advances, and the total exposure of the Bank to the borrower under any derivative contract) to the borrower’s total assets. Generally, borrowers are held to a credit limit of no more than 30 percent. However, the Bank’s board of directors, or a relevant committee thereof, may approve a higher limit at its discretion, and such borrowers may be subject to certain additional collateral, reporting, and maintenance requirements. Five borrowers have been approved for a credit limit higher than 30 percent, and their total outstanding advance and standby letters of credit balance was $24.3 billion and $1.6 billion, respectively, as of March 31, 2019.
The Bank obtains collateral on advances to protect against losses, but Finance Agency regulations permit the Bank to accept only certain types of collateral. Each borrower must maintain an amount of qualifying collateral that, when discounted to the lendable collateral value (LCV), is equal to at least 100 percent of the borrower’s outstanding par value of all advances and other liabilities from the Bank. The LCV is the value that the Bank assigns to each type of qualifying collateral for purposes of determining the amount of credit that such qualifying collateral will support. For each type of qualifying collateral, the Bank discounts the market value of the qualifying collateral to calculate the LCV. The Bank regularly reevaluates the appropriate level of discounting. The Bank had rights to collateral on a borrower-by-borrower basis with an estimated value equal to or greater than its outstanding extension of credit as of March 31, 2019 and December 31, 2018. The following table presents information about the types of collateral held for the Bank’s advances (dollars in millions).

 
Total Par 
Value of
Outstanding Advances
 
LCV of 
Collateral 
Pledged by Members
 
First Mortgage 
Collateral (%)
 
Securities 
Collateral (%)
 
Other Real Estate Related Collateral (%)
As of March 31, 2019
$
90,612

 
$
337,935

 
64.28
 
9.62
 
26.10
As of December 31, 2018
108,414

 
338,362

 
64.96
 
8.85
 
26.19
For purposes of determining each member’s LCV, the Bank estimates the current market value of all residential first mortgage loans, commercial real estate loans, home equity loans, and lines of credit pledged as collateral based on information provided by the member on its loan portfolio or on individual loans through the regular collateral reporting process. The estimated market value is discounted to account for the (1) price volatility of loans, (2) model data uncertainty, and (3) estimated liquidation and servicing costs in the event of the member’s default. Market values, and thus LCVs, change monthly. The use of this market-based valuation methodology allows the Bank to establish its collateral discounts with greater precision and to provide greater transparency with respect to the valuation of collateral pledged for advances and other credit products offered by the Bank.
The FHLBank Act affords any security interest granted to the Bank by any member of the Bank, or any affiliate of any such member, priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor) other than the claims and rights of a party that (1) would be entitled to priority under otherwise

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applicable law; and (2) is an actual bona fide purchaser for value or is an actual secured party whose security interest is perfected in accordance with applicable state law.
In its history, the Bank has never experienced a credit loss on an advance. In consideration of this and the Bank’s policies and practices detailed above, the Bank has not established an allowance for credit losses on advances as of March 31, 2019 and December 31, 2018.

Investments

The Bank is subject to credit risk on unsecured investments, such as interest-bearing deposits and federal funds sold. These investments are generally transacted with government agencies and large financial institutions that are considered to be of investment quality. The Finance Agency defines investment quality as a security with adequate financial backing, so that full and timely payment of principal and interest on such security is expected, and there is minimal risk that the timely payment of principal and interest would not occur because of adverse changes in economic and financial conditions during the projected life of the security.
In addition to Finance Agency regulations, the Bank has established guidelines approved by its board of directors regarding unsecured extensions of credit, with respect to term limits and eligible counterparties.
Finance Agency regulations prohibit the Bank from investing in any of the following securities:
instruments, such as common stock, that represent an ownership interest in an entity, other than stock in small business investment companies, or certain investments targeted to low-income people or communities;
instruments issued by non-United States entities, other than those issued by United States branches and agency offices of foreign commercial banks;
debt instruments that are not of investment quality, other than certain investments targeted to low-income people or communities and instruments that the Bank determined became less than investment quality because of developments or events that occurred after purchase by the Bank;
whole mortgages or other whole loans, other than the following: (1) those acquired under the Bank’s mortgage purchase programs; (2) certain investments targeted to low-income people or communities; (3) certain marketable direct obligations of state, local, or tribal government units or agencies that are of investment quality; (4) MBS or asset-backed securities that are backed by manufactured housing loans or home equity loans; and (5) certain foreign housing loans that are authorized under section 12(b) of the FHLBank Act;
interest-only or principal-only stripped MBS, collateralized mortgage obligations (CMOs), collateralized debt obligations, and real estate mortgage investment conduits (REMICs);
residual-interest or interest-accrual classes of CMOs and REMICs;
fixed-rate or variable-rate MBS, CMOs, and REMICs that are at rates equal to their contractual cap on the trade date and that have average lives that vary by more than six years under an assumed instantaneous interest-rate change of 300 basis points; and
non-U.S. dollar denominated securities.

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


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The Bank only enters into investments with U.S. counterparties or U.S. branch offices of foreign banks that have been approved by the Bank through its internal approval process, but the Bank may still have exposure to foreign entities if a counterparty’s parent entity is located in another country. The following tables present the Bank’s gross exposure, by instrument type, according to the location of the parent company of the counterparty (in millions).
 
As of March 31, 2019
 
Federal Funds Sold         
 
Interest-bearing  
Deposits
 
Net Derivative Exposure (1)    
 
Total 
Australia
$
750

 
$

 
$

 
$
750

Austria
1,205

 

 

 
1,205

Canada
200

 

 

 
200

Finland
605

 

 

 
605

France
1,100

 

 
5

 
1,105

Germany
2,510

 

 

 
2,510

Netherlands
500

 

 

 
500

Norway
1,300

 

 

 
1,300

Sweden
250

 

 

 
250

Switzerland

 

 
9

 
9

United States of America
4,355

 
3,444

 
41

 
7,840

Total
$
12,775

 
$
3,444

 
$
55

 
$
16,274

____________ 
(1) Amounts do not reflect collateral; see the table under Risk Management–Credit Risk–Derivatives below for a breakdown of the credit ratings of and the Bank’s credit exposure to derivative counterparties, including net exposure after collateral.
 
As of December 31, 2018
 
Federal Funds Sold         
 
Interest-bearing  
Deposits
 
Net Derivative Exposure (1)     
 
Total 
Australia
$
1,965

 
$

 
$

 
$
1,965

Austria
400

 

 

 
400

Canada
1,935

 

 

 
1,935

Finland
500

 

 

 
500

France

 

 
3

 
3

Germany
1,640

 

 

 
1,640

Netherlands
588

 

 

 
588

Norway
375

 

 

 
375

Switzerland

 

 
3

 
3

United States of America
1,575

 
6,782

 
2

 
8,359

Total
$
8,978

 
$
6,782

 
$
8

 
$
15,768

____________ 
(1) Amounts do not reflect collateral; see the table under Risk Management–Credit Risk–Derivatives below for a breakdown of the credit ratings of and the Bank’s credit exposure to derivative counterparties, including net exposure after collateral.

The Bank experienced an increase in unsecured credit exposure in its investment portfolio related to non-U.S. government and non-U.S. government agency counterparties from $15.7 billion as of December 31, 2018 to $16.2 billion as of March 31, 2019. As of March 31, 2019, there were no counterparties that had greater than 10 percent of the total unsecured credit exposure to non-U.S. government or non-U.S. government agencies counterparties. As of March 31, 2019, this unsecured credit portfolio consisted primarily of federal funds sold with overnight maturities.

The Bank’s RMP permits the Bank to invest in U.S. agency (i.e., Fannie Mae, Freddie Mac and Ginnie Mae) obligations including the following: (1) CMOs and REMICS that are backed by such securities; and (2) other MBS, CMOs, and REMICS that are of sufficient investment quality, which are typically have the highest ratings issued by S&P or Moody’s at the time of purchase. The private-label MBS purchased by the Bank originally attained their triple-A ratings through credit enhancements, which primarily consisted of the subordination of the claims of the other tranches of these securities. In addition to NRSRO ratings, the Bank considers a variety of credit quality factors when analyzing potential investments, such as collateral performance, marketability, asset class considerations, local and regional economic conditions, and the financial health of the underlying issuer.


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The following tables present information on the credit ratings of the Bank’s investments held as of March 31, 2019 and December 31, 2018 (in millions), based on their credit ratings as of March 31, 2019 and December 31, 2018, respectively. The credit ratings reflect the lowest long-term credit ratings as reported by an NRSRO.
 
 
 
As of March 31, 2019
 
 
 
 
 
Carrying Value (1)
 
 
 
 
 
Investment Grade
 
Below Investment Grade
 
 
 
AAA
 
AA
 
A
 
BBB
 
BB
 
B
 
CCC
 
CC
 
D
 
Unrated
 
Total
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises debt obligations
$

 
$
3,228

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
3,228

U.S. Treasury obligations

 
999

 

 

 

 

 

 

 

 

 
999

State or local housing agency debt obligations

 
1

 

 

 

 

 

 

 

 

 
1

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

 
112

 

 

 

 

 

 

 

 

 
112

Government-sponsored enterprises residential

 
8,991

 

 

 

 

 

 

 

 

 
8,991

Government-sponsored enterprises commercial
444

 
11,072

 

 

 

 

 

 

 

 

 
11,516

Private-label residential

 
76

 
94

 
102

 
113

 
39

 
234

 
42

 
62

 
453

 
1,215

Total mortgage-backed securities
444

 
20,251

 
94

 
102

 
113

 
39

 
234

 
42

 
62

 
453

 
21,834

Total investment securities
444


24,479


94


102


113


39


234


42


62


453


26,062

Other investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits

 
924

 
2,473

 
47

 

 

 

 

 

 

 
3,444

Securities purchased under agreements to resell

 
1,500

 
2,000

 
1,000

 

 

 

 

 

 

 
4,500

Federal funds sold

 
3,305

 
8,445

 
1,025

 

 

 

 

 

 

 
12,775

Total other investments


5,729


12,918


2,072














20,719

Total investments
$
444


$
30,208


$
13,012


$
2,174


$
113


$
39


$
234


$
42


$
62


$
453


$
46,781

____________
(1) Investment amounts noted in the above table represent the carrying value and do not include related accrued interest receivable of $45 million as of March 31, 2019.

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As of December 31, 2018
 
 
 
 
 
Carrying Value (1)
 
 
 
 
 
Investment Grade
 
Below Investment Grade
 
 
 
 
 
AAA
 
AA
 
A
 
BBB
 
BB
 
B
 
CCC
 
CC
 
D
 
Unrated
 
Total
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State or local housing agency debt obligations
$

 
$
1

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
1

Government-sponsored enterprises debt obligations

 
2,727

 

 

 

 

 

 

 

 

 
2,727

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

 
118

 

 

 

 

 

 

 

 

 
118

Government-sponsored enterprises residential

 
9,304

 

 

 

 

 

 

 

 

 
9,304

Government-sponsored enterprises commercial
522

 
10,846

 

 

 

 

 

 

 

 

 
11,368

Private-label residential

 
77

 
92

 
112

 
119

 
50

 
246

 
44

 
68

 
473

 
1,281

Total mortgage-backed securities
522

 
20,345

 
92

 
112

 
119

 
50

 
246

 
44

 
68

 
473

 
22,071

Total investment securities
522

 
23,073

 
92

 
112

 
119

 
50

 
246

 
44

 
68

 
473

 
24,799

Other investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits

 
2,032

 
4,703

 
47

 

 

 

 

 

 

 
6,782

Securities purchased under agreements to resell

 
750

 
2,000

 
1,000

 

 

 

 

 

 

 
3,750

Federal funds sold

 
2,865

 
4,668

 
1,445

 

 

 

 

 

 

 
8,978

Total other investments


5,647


11,371


2,492














19,510

Total investments
$
522

 
$
28,720

 
$
11,463

 
$
2,604

 
$
119

 
$
50

 
$
246

 
$
44

 
$
68

 
$
473

 
$
44,309

____________
(1) Investment amounts noted in the above table represent the carrying value and do not include related accrued interest receivable of $42 million as of December 31, 2018.

Securities Purchased Under Agreements to Resell

Securities purchased under agreements to resell are considered collateralized financing arrangements and effectively represent short-term loans transacted with counterparties that the Bank considers to be of investment quality. The terms of these loans are structured such that if the fair value of the underlying securities decreases below the fair value required as collateral, the counterparty must place an equivalent amount of additional securities as collateral or remit an equivalent amount of cash. If an agreement to resell is deemed to be impaired, the difference between the fair value of the collateral and the amortized cost of the agreement is recognized in earnings. Based upon the collateral held as security, the Bank determined that no allowance for credit losses was needed for the securities purchased under agreements to resell as of March 31, 2019 and December 31, 2018.

Non-MBS Held-to-maturity Securities

The unrealized losses related to non-MBS held-to-maturity securities are caused by interest-rate changes. These losses are considered temporary as the Bank expects to recover the entire amortized cost basis on its non-MBS held-to-maturity securities in unrealized loss positions and neither intends to sell these securities nor considers it more likely than not that it will be required to sell these securities before its anticipated recovery of each security's remaining amortized cost basis. As a result, Bank does not consider these non-MBS held-to-maturity securities to be other-than-temporarily impaired as of March 31, 2019.
 
Non-Private-label MBS
The unrealized losses related to government-sponsored enterprise MBS are caused by interest-rate changes. Because these securities are guaranteed by government-sponsored enterprises, it is expected that these securities would not be settled at a price less than the amortized cost basis. The Bank does not consider these investments to be other-than-temporarily impaired as of March 31, 2019 because the decline in fair value is attributable to changes in interest rates and not credit quality; the Bank does not intend to sell the investments; and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity.


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Private-label MBS

For disclosure purposes, the Bank classifies private-label MBS as either prime or Alt-A based upon the overall credit quality of the underlying loans as determined by the originator at the time of origination, unless otherwise noted. Although there is no universally accepted definition of Alt-A, generally, loans with credit characteristics that range between prime and subprime are classified as Alt-A. Participants in the mortgage market have used the Alt-A classification principally to describe loans for which the underwriting process has been streamlined in order to reduce the documentation requirements of the borrower or allow for alternative documentation.

The following table presents information, based on investment ratings, on the Bank’s private-label MBS as of March 31, 2019 (dollars in millions).
 
Prime
 
Alt-A
 
Total
Investment Ratings:
 
 
 
 
 
AA
$
76

 
$

 
$
76

A
94

 

 
94

BBB
97

 
5

 
102

BB
105

 
9

 
114

B
13

 
26

 
39

CCC
145

 
127

 
272

CC
27

 
22

 
49

D
65

 

 
65

Unrated
498

 
1

 
499

Total unpaid principal balance
$
1,120

 
$
190

 
$
1,310

Amortized cost
$
997

 
$
153

 
$
1,150

Gross unrealized losses
$
(1
)
 
$

 
$
(1
)
Fair value
$
1,057

 
$
161

 
$
1,218

Other-than-temporary impairment (Year-to-date):
 
 
 
 
 
Total other-than-temporary impairment losses
$

 
$

 
$

Net amount of impairment losses reclassified from accumulated other
comprehensive income

(1
)
 

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

 
$
(1
)
Weighted average percentage of fair value to unpaid principal balance
94.43
%
 
84.76
%
 
93.03
%
Original weighted average credit support
9.57
%
 
24.89
%
 
11.78
%
Weighted average credit support
5.94
%
 
9.25
%
 
6.42
%
Weighted average collateral delinquency
10.50
%
 
14.85
%
 
11.13
%

The following table presents a summary of the significant inputs used to evaluate each of the Bank’s private-label MBS for other-than-temporary impairment as of March 31, 2019.
 
 
Significant Inputs - Weighted Average (%)
 
Classification of Securities (1)
 
Prepayment Rate
 
Default Rates
 
Loss Severities
 
Current Credit Enhancement (%)
 Prime
 
16.29
 
7.54
 
25.10
 
9.07
 Alt-A
 
14.36
 
18.04
 
37.00
 
3.85
Total
 
15.31
 
12.89
 
31.16
 
6.42
____________
(1) The classification of securities is based on current characteristics and performance, which may be different from the securities’ classification as determined by the originator at the time of origination.

In addition to the cash flow analysis of the Bank’s private-label MBS under a base case (best estimate) housing price scenario, a cash flow analysis was also performed based on a housing price scenario that is more adverse than the base case (adverse case housing price scenario). This more stressful scenario was primarily based on a short-term housing forecast, which was five percentage points lower than the base case, followed by a recovery path with annual rates of housing price growth that included rates which were 33 percent lower than the base case. The results of the adverse case housing price scenario was the same as the base case housing price scenario.


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

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

Derivatives

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

The Bank’s over-the-counter derivative transactions may either be (1) uncleared derivatives, which are executed bilaterally with a counterparty; or (2) cleared derivatives, which are cleared through a clearing agent with a Clearinghouse. Once a derivative transaction has been accepted for clearing by a Clearinghouse, the derivative transaction is novated, and the executing counterparty is replaced with the Clearinghouse as the counterparty.

For uncleared derivatives, the Bank is subject to nonperformance by counterparties. The Bank generally requires collateral on uncleared derivative transactions. A counterparty must deliver collateral to the Bank if the total market value of the Bank’s exposure to that counterparty rises above a specific trigger point. As a result, the Bank does not anticipate any credit losses on its uncleared derivatives as of March 31, 2019.

Certain of the Bank’s uncleared derivative instruments contain provisions that require the Bank to post additional collateral with its counterparties if there is a deterioration in the Bank’s credit rating. If the Bank’s credit rating had been lowered from its current rating to the next lower rating, the Bank would have been required to deliver $1 million of collateral at fair value to its uncleared derivative counterparties as of March 31, 2019.

For cleared derivatives, the Bank is subject to credit risk due to nonperformance by the Clearinghouse and clearing agent. The requirement that the Bank post initial and variation margin through the clearing agent, to the Clearinghouse, exposes the Bank to institutional credit risk in the event that the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives mitigates credit risk exposure because a central counterparty is substituted for individual counterparties, and collateral is posted daily for changes in the value of cleared derivatives through a clearing agent. This does introduce, however, a risk of concentration among the limited number of Clearinghouses and clearing agents. The Bank actively monitors Clearinghouses and clearing agents. An annual review of the Bank’s Clearinghouses is performed, and the Bank also monitors its exposure to Clearinghouses on a monthly basis. The Bank currently has the following two approved Clearinghouses: CME Clearing and LCH Ltd. The Bank also monitors the clearing agents through its unsecured credit system, and the Bank subjects these clearing agents to the same limits as other bilateral derivative counterparties. The parent companies of the clearing agents are monitored through annual reviews, as well as through the Bank’s daily monitoring tools, which include reviewing equity triggers, debt triggers, and credit default swap spread triggers. In addition, exposures to the clearing agents are monitored daily on a swap counterparty report. The Bank currently has the following three approved clearing agents: Credit Suisse Securities (USA) LLC, Morgan Stanley & Co. LLC, and Goldman Sachs & Co. The Bank does not anticipate any credit losses on its cleared derivatives as of March 31, 2019.

The contractual or notional amount of derivative transactions reflects the involvement of the Bank in the various classes of financial instruments; however, the Bank’s maximum credit risk with respect to derivative transactions, is the estimated cost of replacing the derivative transactions if there is default, less the value of any related collateral, including initial and variation margin. In determining maximum credit risk, the Bank considers accrued interest receivables and payables, as well as the netting requirements to net assets and liabilities.

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The following tables present information on the credit ratings of, and the Bank’s credit exposure to, its derivative counterparties (in millions). The credit ratings reflect the lowest long-term credit rating by an NRSRO.
 
 
As of March 31, 2019
 
 
Notional Amount
 
Net Derivatives Fair Value Before Collateral
 
Cash Collateral Pledged To (From) Counterparty
 
Other Collateral Pledged To (From) Counterparty
 
Net Credit Exposure to Counterparties
Non-member counterparties:
 
 
 
 
 
 
 
 
 
 
  Asset positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
    Double-A
 
$
2,703

 
$

 
$

 
$

 
$

    Single-A
 
7,228

 
19

 
(19
)
 

 

    Triple-B
 
4,727

 
2

 
(2
)
 

 

 Cleared derivatives
 
25,679

 
34

 
322

 

 
356

  Liability positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
    Single-A
 
6,586

 
(20
)
 
22

 

 
2

    Cleared derivatives
 
5,863

 

 
22

 

 
22

Total derivative positions with non-member counterparties to which the Bank had credit exposure
 
52,786

 
35

 
345

 

 
380

Member institutions (1)
 
148

 
1

 

 
(1
)
 

Total
 
$
52,934

 
$
36

 
$
345

 
$
(1
)
 
$
380

____________ 
(1) Collateral held with respect to derivatives with member institutions where the Bank is acting as an intermediary represents the amount of eligible collateral physically held by or on behalf of the Bank or collateral assigned to the Bank, as evidenced by a written security agreement, and held by the member institution for the benefit of the Bank.
 
 
As of December 31, 2018
 
 
Notional Amount
 
Net Derivatives Fair Value Before Collateral
 
Cash Collateral Pledged To (From) Counterparty
 
Net Credit Exposure to Counterparties
Non-member counterparties:
 
 
 
 
 
 
 
 
  Asset positions with credit exposure:
 
 
 
 
 
 
 
 
    Double-A
 
$
698

 
$

 
$

 
$

    Single-A
 
5,425

 
6

 
(6
)
 

    Triple-B
 
4,471

 
2

 
(2
)
 

    Cleared derivatives
 
969

 

 
3

 
3

  Liability positions with credit exposure:
 
 
 
 
 
 
 
 
    Double-A
 
615

 
(1
)
 
1

 

    Single-A
 
4,816

 
(28
)
 
29

 
1

    Triple-B
 
4,608

 
(41
)
 
41

 

    Cleared derivatives
 
32,523

 
(33
)
 
343

 
310

Total derivative positions with non-member counterparties to which the Bank had credit exposure
 
54,125

 
(95
)
 
409

 
314

Member institutions (1)
 
3

 

 

 

Total
 
$
54,128

 
$
(95
)
 
$
409

 
$
314

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



55

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Mortgage Loan Programs

The Bank seeks to manage the credit risk associated with the Mortgage Purchase Program (MPP) and the Mortgage Partnership Finance® Program (MPF® Program or MPF) by maintaining underwriting and eligibility standards and structuring possible losses into several layers to be shared with the participating financial institutions.
The allowance for credit losses on MPF loans was $1 million as of March 31, 2019 and December 31, 2018.

Critical Accounting Policies and Estimates

A detailed description of the Bank’s critical accounting policies and estimates is contained in the Bank’s Form 10-K. There have been no material changes to these policies and estimates during the periods presented, except for policy updates related to new accounting guidance for derivatives and hedging activities, which is described in Note 13Derivatives and Hedging Activities to the Bank’s interim financial statements.

Recently Issued and Adopted Accounting Guidance

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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

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


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Table of Contents


The following table presents the notional amounts of derivative financial instruments (in millions). The category “Fair value hedges” represents hedge strategies for which hedge accounting is achieved. The category “Non-qualifying hedges” represents hedge strategies for which the derivatives are not in designated hedging relationships that formally meet the hedge accounting requirements under GAAP.
 
 
 
 
 
 
As of March 31, 2019
 
As of December 31, 2018
Hedged Item / Hedging Instrument
 
Hedging Objective
 
Hedge
Accounting
Designation
 
Notional Amount
 
Notional Amount
Advances
 
 
 
 
 
 
 
 
Pay fixed, receive variable interest-rate swap (without options)
 
Converts the advance’s fixed rate to a variable-rate index.
 
Fair value
hedges
 
$
3,814

 
$
3,716

Pay fixed, receive variable interest-rate swap (with options)
 
Converts the advance’s fixed rate to a variable-rate index and offsets option risk in the advance.
 
Fair value
hedges
 
25,347

 
25,590

Pay variable with embedded features, receive variable interest-rate swap (non-callable)
 
Reduces interest rate sensitivity and repricing gaps by converting the advance’s variable rate to a different variable-rate index and/or offsets embedded option risk in the advance.
 
Fair value
hedges
 
56

 
206

 
 
 
 
Total
 
29,217

 
29,512

Investments
 
 
 
 
 
 
 
 
Pay fixed, receive variable interest-rate swap
 
Converts the investment’s fixed rate to a variable-rate index.
 
Non-qualifying
hedges
 
56

 
56

Consolidated Obligation Bonds
 
 
 
 
 
 
 
 
Receive fixed, pay variable interest-rate swap (without options)
 
Converts the bond’s fixed rate to a variable-rate index.
 
Fair value
hedges
 
5,205

 
6,791

Receive fixed, pay variable interest-rate swap (with options)
 
Converts the bond’s fixed rate to a variable-rate index and offsets option risk in the bond.
 
Fair value
hedges
 
16,368

 
14,124

 
 
 
 
Total
 
21,573

 
20,915

Balance Sheet
 
 
 
 
 
 
 
 
Pay fixed, receive variable interest-rate swap
 
Converts the asset or liability fixed rate to a variable-rate index.
 
Non-qualifying
hedges
 
100

 
100

Interest-rate cap or floor
 
Protects against changes in income of certain assets due to changes in interest rates.
 
Non-qualifying hedges
 
8,000

 
8,000

 
 
 
 
Total
 
8,100

 
8,100

Intermediary Positions and Other
 
 
 
 
 
 
Pay fixed, receive variable interest-rate swap, and receive fixed, pay variable interest-rate swap
 
To offset interest-rate swaps executed with members by executing interest-rate swaps with derivatives counterparties.
 
Non-qualifying
hedges
 
501

 
852

Interest-rate cap or floor
 
To offset interest-rate caps or floors executed with members by executing interest-rate caps or floors with derivatives counterparties.
 
Non-qualifying hedges
 
83

 
83

 
 
 
 
Total
 
584

 
935

Total notional amount
 
 
 
 
 
$
59,530

 
$
59,518



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Table of Contents


Interest-rate Risk Exposure Measurement

The Bank measures interest-rate risk exposure by various methods. The primary methods used are (1) calculating the effective duration of assets, liabilities, and equity under various scenarios; and (2) calculating the theoretical market value of equity. Effective duration, normally expressed in years or months, measures the price sensitivity of the Bank’s interest-bearing assets and liabilities to changes in interest rates. As effective duration lengthens, market-value changes become more sensitive to interest-rate changes. The Bank employs sophisticated modeling systems to measure effective duration.

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

The following table presents the Bank’s effective duration exposure measurements as calculated in accordance with Bank policy (in years). 
 
As of March 31, 2019
 
As of December 31, 2018
 
Down 200 Basis
 Points    
 
Current    
 
Up 200 Basis Points    
 
Down 200 Basis
 Points    
 
Current
 
Up 200 Basis Points    
Assets
0.25

 
0.25

 
0.31

 
0.14

 
0.20

 
0.25

Liabilities
0.31

 
0.31

 
0.27

 
0.25

 
0.25

 
0.21

Equity
(0.94
)
 
(0.91
)
 
1.10

 
(1.95
)
 
(0.80
)
 
0.99

Effective duration gap
(0.06
)
 
(0.06
)
 
0.04

 
(0.11
)
 
(0.05
)
 
0.04


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

The following table presents the Bank’s market value of equity measurements as calculated in accordance with Bank policy (in millions). 
 
As of March 31, 2019
 
As of December 31, 2018
 
Down 200 Basis
 Points    
 
Current    
 
Up 200 Basis Points    
 
Down 200 Basis
 Points    
 
Current
 
Up 200 Basis Points    
Assets
$
138,866

 
$
138,246

 
$
137,472

 
$
154,492

 
$
153,977

 
$
153,290

Liabilities
132,207

 
131,391

 
130,638

 
147,120

 
146,378

 
145,710

Equity
6,659

 
6,855

 
6,834

 
7,372

 
7,599

 
7,580



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Table of Contents


Item 4. Controls and Procedures.

Disclosure Controls and Procedures

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

As of March 31, 2019, the Bank’s management, with the participation of the Certifying Officers, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures. Based on that evaluation, the Certifying Officers have concluded that the Bank’s disclosure controls and procedures (as defined in Rules 13a-15(a) and 15d-15(e) under the Exchange Act) were effective to provide reasonable assurance that information required to be disclosed by the Bank in the reports that it files or submits under the Exchange Act (1) is accumulated and communicated to the Certifying Officers, as appropriate, to allow timely decisions regarding required disclosure; and (2) is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms.

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

Changes in Internal Control Over Financial Reporting

During the first quarter of 2019, there were no changes in the Bank’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.


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Table of Contents


PART II. OTHER INFORMATION.

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

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

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

Not applicable.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosure.

Not applicable.


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Table of Contents


Item 5. Other Information.

PricewaterhouseCoopers LLP (PwC) serves as the independent registered public accounting firm for the Bank. Rule 201(c)(1)(ii)(A) of Regulation S-X (the Loan Rule) prohibits an accounting firm, such as PwC, from having certain financial relationships with its audit clients and affiliated entities. Specifically, the Loan Rule provides, in relevant part, that an accounting firm generally would not be independent if it or a covered person in the firm receives a loan from a lender that is a “record or beneficial owner of more than 10 percent of the audit client’s equity securities.” A covered person in the firm includes personnel on the audit engagement team, personnel in the chain of command, partners and managers who provide 10 or more hours of non-audit services to the audit client, and partners in the office where the lead engagement partner practices in connection with the client.

PwC has advised the Bank that for the quarter ended March 31, 2019, certain covered persons had borrowing relationships with one Bank member (referred below as the “Lender”) who owns more than 10 percent of the Bank’s capital stock, which could call into question PwC’s independence with respect to the Bank. The Bank is providing this disclosure to explain the facts and circumstances, as well as PwC’s and the Audit Committee’s conclusions, concerning PwC’s objectivity and impartiality with respect to the audit of the Bank.

PwC advised the Audit Committee of the Bank that it believes that, in light of the facts of this borrowing relationship, its ability to exercise objective and impartial judgment on all matters encompassed within PwC’s audit engagement has not been impaired and that a reasonable investor with knowledge of all relevant facts and circumstances would reach the same conclusion. PwC has advised the Audit Committee that this conclusion is based in part on the following considerations:
the PwC professionals are required to disclose any relationships that may raise issues about objectivity, confidentiality, independence conflicts, or favoritism; and
the Lender has not made any attempt to influence the conduct of the Bank’s audit or the objectivity and impartiality of any member of PwC’s audit engagement team.

Additionally, the Audit Committee of the Bank assessed PwC’s ability to perform an objective and impartial audit, including consideration of the ownership structure of the Bank, the limited voting rights of the Bank’s members and the composition of the board of directors. In addition to the above listed considerations, the Audit Committee considered the following:
although the Lender owned more than 10 percent of the Bank’s capital stock, the Lender’s voting rights are less than 10 percent;
as of March 31, 2019 and December 31, 2018, no officer or director of the Lender served on the board of directors of the Bank; and
the Lender is subject to the same terms and conditions for conducting business with the Bank as any other member.

Based on the Audit Committee’s evaluation, the Audit Committee has concluded that PwC’s ability to exercise objective and impartial judgment on all issues encompassed within PwC’s audit engagement has not been impaired.


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Table of Contents


Item 6. Exhibits. The exhibits listed below are being filed with or incorporated by reference as a part of this Report:
Exhibit No.
 
Description
 
Form
 
Exhibit
 
Dated Filed
 
 
 
 
 
 
 
 
3.1
 
 
8-K
 
3.1
 
10/26/2012
3.2
 
 
8-K
 
3.2
 
4/4/2018
4.1
 
 
8-K
 
99.2
 
8/5/2011
31.1
 
 
 
 
 
 
 
31.2
 
 
 
 
 
 
 
32.1
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. +
 
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document. +
 
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document. +
 
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document. +
 
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document. +
 
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document. +
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
+ Furnished herewith
 
 
 
 
 
 


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Table of Contents



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
Federal Home Loan Bank of Atlanta
 
 
 
Date:
May 9, 2019
By /s/ W. Wesley McMullan
 
 
    Name: W. Wesley McMullan
    Title: President and Chief Executive Officer
 
 
 
Date:
May 9, 2019
By /s/ Kirk R. Malmberg
 
 
    Name: Kirk R. Malmberg
    Title: Executive Vice President and Chief Financial Officer



63