10-K 1 fhlb-atl10xk2012.htm 10-K FHLB-ATL 10-K 2012
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

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


For the fiscal year ended December 31, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
                                                                              For the transition period from to
Commission File Number: 000-51845
FEDERAL HOME LOAN BANK OF ATLANTA
(Exact name of registrant as specified in its charter)
Federally chartered corporation
 
56-6000442
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
1475 Peachtree Street, NE, Atlanta, Ga.
 
30309
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (404) 888-8000
____________________________

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class B Stock, par value $100
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨  Yes    x  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ¨  Yes   x  No
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 requirements for the past 90 days.     x Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
x  (Do not check if a smaller reporting company)
Smaller reporting company
¨

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

Registrant’s stock is not publicly traded and is only issued to members of the registrant. Such stock is issued and redeemed at par value, $100 per share, subject
to certain regulatory and statutory limits. At June 30, 2012, the aggregate par value of the stock held by current and former members of the registrant was
$5,122,672,700, and 51,226,727 total shares were outstanding as of that date. At February 28, 2013, 47,396,929 total shares were outstanding.





Table of Contents
 
 
PART I.
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
PART II.
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9
Item 9A.
Item 9B.
 
PART III.
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
PART IV.
 
Item 15.
 
 
 




Important Notice About Information in this Annual Report
In this annual report on Form 10-K (Report), unless the context suggests otherwise, references to the “Bank” mean the Federal Home Loan Bank of Atlanta. “FHLBanks” means the 12 district Federal Home Loan Banks, including the Bank, and “FHLBank System” means the FHLBanks and the Federal Home Loan Banks Office of Finance (Office of Finance), as regulated by the Federal Housing Finance Agency (Finance Agency). “FHLBank Act” means the Federal Home Loan Bank Act of 1932, as amended.
The information contained in this Report is accurate only as of the date of this Report and as of the dates specified herein.
The product and service names used in this Report are the property of the Bank and, in some cases, the other FHLBanks. Where the context suggests otherwise, the products, services, and company names mentioned in this Report are the property of their respective owners.

Special Cautionary Notice Regarding Forward-looking Statements

Some of the statements made in this Report may be “forward-looking statements” within the meaning of section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbor provided by the same. Forward-looking statements include statements with respect to the Bank’s beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties, and other factors, many of which may be beyond the Bank’s control and which may cause the Bank’s actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by the forward-looking statements. The reader can identify these forward-looking statements through the Bank’s use of words such as “may,” “will,” “anticipate,” “hope,” “project,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “point to,” “could,” “intend,” “seek,” “target,” and other similar words and expressions of the future. Such forward-looking statements include statements regarding any one or more of the following topics:

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

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

• forward-looking accounting and financial statement effects; and

• those other factors identified and discussed in the Bank’s public filings with the Securities and Exchange Commission (SEC).

It is important to note that the description of the Bank’s business is a statement about the Bank’s operations as of a specific date. It is not meant to be construed as a policy, and the Bank’s operations, including the portfolio of assets held by the Bank, are subject to reevaluation and change without notice.

The forward-looking statements may not be realized due to a variety of factors, including, without limitation, any one or more of the following factors:

• future economic and market conditions, including, for example, inflation and deflation, the timing and volume of market activity, general consumer confidence and spending habits, the strength of local economies in which the Bank conducts its business, and interest-rate changes that affect the housing markets;

• demand for Bank advances resulting from changes in members’ deposit flows and credit demands, as well as from changes in other sources of funding and liquidity available to members;

• volatility of market prices, rates, and indices that could affect the value of collateral held by the Bank as security for the obligations of Bank members and counterparties to derivatives and similar agreements;

• the risk of changes in interest rates on the Bank’s interest-rate sensitive assets and liabilities;


3


• changes in various governmental monetary or fiscal policies, as well as legislative and regulatory changes, including changes in accounting principles generally accepted in the United States of America (GAAP) and related industry practices and standards, or the application thereof;

• changes in the credit ratings of the U.S. government and/or the FHLBanks;

• political, national, and world events, including acts of war, terrorism, natural disasters or other catastrophic events, and legislative, regulatory, judicial, or other developments that affect the economy, the Bank’s market area, the Bank, its members, counterparties, its federal regulator, and/or investors in the consolidated obligations of the FHLBanks;

• competitive forces, including other sources of funding available to Bank members, other entities borrowing funds in the capital markets, and the ability to attract and retain skilled individuals;

• the Bank’s ability to develop, implement, promote the efficient performance of, and support technology and information systems, including the internet, sufficient to measure and effectively manage the risks of the Bank’s business;

• changes in investor demand for consolidated obligations of the FHLBanks and/or the terms of derivatives and similar agreements, including changes in investor preference and demand for certain terms of these instruments, which may be less attractive to the Bank, or which the Bank may be unable to offer;

• the Bank’s ability to introduce, support, and manage the growth of new products and services and to successfully manage the risks associated with those products and services;

• the Bank’s ability to successfully manage the risks associated with any new types of collateral securing advances;

• the availability from acceptable counterparties, upon acceptable terms, of options, interest-rate and currency swaps, and other derivative financial instruments of the types and in the quantities needed for investment funding and risk-management purposes;

• the uncertainty and costs of litigation, including litigation filed against one or more of the FHLBanks;

• changes in the FHLBank Act or Finance Agency regulations that affect FHLBank operations and regulatory oversight;

• adverse developments or events, including financial restatements, affecting or involving one or more other FHLBanks or the FHLBank System in general; and

• other factors and other information discussed herein under the caption “Risk Factors” and elsewhere in this Report, as well as information included in the Bank’s future filings with the SEC.
The forward-looking statements may not be realized due to a variety of factors, including, without limitation, those risk factors provided under Item 1A of this Report and in future reports and other filings made by the Bank with the SEC. The Bank operates in a changing economic environment, and new risk factors emerge from time to time. Management cannot accurately predict any new factors, nor can it assess the effect, if any, of any new factors on the business of the Bank or the extent to which any factor, or combination of factors, may cause actual results to differ from those implied by any forward-looking statements.
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 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 may be required by law.
 








4



PART I.

Item 1. Business.

Overview

The Bank is a federally chartered corporation organized in 1932 and one of 12 district FHLBanks. The FHLBanks, along with the Finance Agency and the Office of Finance, comprise the FHLBank System. The FHLBanks are U.S. government-sponsored enterprises (GSEs) organized under the authority of the FHLBank Act. Each FHLBank operates as a separate entity within a defined geographic district and has its own management, employees, and board of directors. The Bank's defined geographic district includes Alabama, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, and the District of Columbia.

The Bank is a cooperative owned by member institutions that are required to purchase capital stock in the Bank as a condition of membership. All federally insured depository institutions, insurance companies, and certified community development financial institutions (CDFIs) chartered in the Bank's defined geographic district and engaged in residential housing finance are eligible to apply for membership. The Bank's stock is owned entirely by current or former members, and certain non-members that own the Bank's capital stock as a result of a merger or acquisition of the Bank's member, and is not publicly traded. As of December 31, 2012, the Bank's membership totaled 1,018 financial institutions, comprising 724 commercial banks, 118 thrifts, 161 credit unions, 14 insurance companies, and one certified CDFI.

The primary function of the Bank is to provide readily available, competitively priced funding to these member institutions. The Bank serves the public by providing its member institutions with a source of liquidity, thereby enhancing the availability of credit for residential mortgages and targeted community development.

The primary source of funds for the Bank is proceeds from the sale to the public of FHLBank debt instruments, known as “consolidated obligations,” or “COs,” which are the joint and several obligations of all of the FHLBanks. Deposits, other borrowings, and the issuance of capital stock provide additional funds to the Bank. The Bank accepts deposits from both member and eligible non-member financial institutions and federal instrumentalities. The Bank also provides members and non-members with correspondent banking services such as cash management and other services, as discussed below.

The Bank is exempt from ordinary federal, state, and local taxation, except real property taxes, and it does not have any subsidiaries nor does it sponsor any off-balance sheet special purpose entities.

The Bank manages its operations as one business segment. Management and the Bank's board of directors review enterprise-wide financial information in order to make operating decisions and assess performance. As of December 31, 2012, the Bank had total assets of $123.7 billion, total advances of $87.5 billion, total mortgage loans held for portfolio of $1.2 billion, total COs of $114.7 billion, total deposits of $2.1 billion, and a retained earnings balance of $1.4 billion. The Bank's net income for the year ended December 31, 2012 was $270 million. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information regarding the Bank's financial condition, changes in financial condition, and results of operations.

The Finance Agency was established as the independent regulator of the FHLBanks effective July 30, 2008 with the passage of the Housing and Economic Recovery Act of 2008 (Housing Act). Pursuant to the Housing Act, all regulations, orders, determinations, and resolutions that were issued, made, prescribed, or allowed to become effective by the former Federal Housing Finance Board (Finance Board) will remain in effect until modified, terminated, set aside, or superseded by the Finance Agency Director, any court of competent jurisdiction, or operation of law. The Finance Agency's stated mission with respect to the FHLBanks is to provide effective supervision, regulation, and housing mission oversight of the FHLBanks to promote their safety and soundness, support housing finance and affordable housing, and support a stable and liquid mortgage market. The Office of Finance, a joint office of the FHLBanks, facilitates the issuance and servicing of the FHLBanks' debt instruments and prepares the combined quarterly and annual financial reports of the FHLBanks.

Products and Services

The Bank's products and services include the following:

Credit Products;
Community Investment Services; and
Cash Management and Other Services.

5



Credit Products

The credit products that the Bank offers to its members include advances and standby letters of credit.

Advances

Advances are the Bank's primary product. Advances are fully secured loans made to members and eligible housing finance agencies, called “housing associates” (non-members that are approved mortgagees under Title II of the National Housing Act). The carrying value of the Bank's outstanding advances was $87.5 billion and $87.0 billion as of December 31, 2012 and 2011, respectively, and advances represented 70.7 percent and 69.4 percent of total assets as of December 31, 2012 and 2011, respectively. Advances generated 30.2 percent, 23.2 percent, and 22.8 percent of total interest income for the years ended December 31, 2012, 2011, and 2010, respectively.

Advances serve as a funding source to the Bank's members for a variety of conforming and nonconforming mortgages. Thus, advances support important housing markets, including those focused on low- and moderate-income households. For those members that choose to sell or securitize their mortgages, advances can supply interim funding.

Generally, member institutions use the Bank's advances for one or more of the following purposes:
providing funding for single-family mortgages and multifamily mortgages held in the member's portfolio, including both conforming and nonconforming mortgages;

providing temporary funding during the origination, packaging, and sale of mortgages into the secondary market;

providing funding for commercial real estate loans;

assisting with asset-liability management by matching the maturity and prepayment characteristics of mortgage loans or adjusting the sensitivity of the member's balance sheet to interest-rate changes;

providing a cost-effective alternative to meet contingent liquidity needs; and

providing funding for community investment and economic development.

Pursuant to statutory and regulatory requirements, the Bank may make long-term advances only for the purpose of enabling a member to purchase or fund new or existing residential housing finance assets, which may include, for community financial institutions, defined small business loans, small farm loans, small agri-business loans, and community development loans. The Bank indirectly monitors the purpose for which members use advances through limitations on eligible collateral and as described below.
 
The Bank obtains a security interest in eligible collateral to secure a member's advance prior to the time the Bank originates or renews an advance. Eligible collateral is defined by the FHLBank Act, Finance Agency regulations, and the Bank's credit and collateral policy. The Bank requires its borrowers to execute an advances and security agreement that establishes the Bank's security interest in all collateral pledged by the borrower. The Bank perfects its security interest in collateral prior to making an advance to the borrower. As additional security for a member's indebtedness, the Bank has a statutory and contractual lien on the member's capital stock in the Bank. The Bank also may require additional or substitute collateral from a borrower, as provided in the FHLBank Act and the financing documents between the Bank and its borrowers.

The Bank assesses member creditworthiness and financial condition typically on a quarterly basis to determine the term and maximum dollar amount of advances the Bank will lend to a particular member. In addition, the Bank discounts eligible collateral and periodically revalues the collateral pledged by each member to secure its outstanding advances. The Bank has never experienced a credit loss on an advance.

The FHLBank Act affords any security interest granted to the Bank by any member of the Bank, or any affiliate of any such member, priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor), other than claims and rights of a party that (1) would be entitled to priority under otherwise applicable law; and (2) is an actual bona fide purchaser for value or is an actual secured party whose security interest is perfected in accordance with applicable state law.


6


Pursuant to its regulations, the Federal Deposit Insurance Corporation (FDIC) has recognized the priority of an FHLBank's security interest under the FHLBank Act, and the right of an FHLBank to require delivery of collateral held by the FDIC as receiver for a failed depository institution.

The Bank offers standard and customized advances to fit a variety of member needs. Generally, the Bank offers maturities as described below, but longer maturities are available subject to a member's financial condition and available funding. The Bank's advances include, among other products, the following:

Adjustable or variable rate indexed advances. Adjustable or variable rate indexed advances include:

Daily Rate Credit Advance (DRC Advance). The DRC Advance provides short-term funding with rate resets on a daily basis, similar to federal funds lines. The DRC Advance is available generally from one day to 24 months.

Adjustable Rate Credit Advance (ARC Advance). The ARC Advance is a long-term advance available for a term generally of up to 10 years with rate resets at specified intervals.

Capped and Floored Advances. The capped advance includes an interest-rate cap, while the floored advance includes an interest-rate floor. The interest rate on the advance adjusts according to the difference between the interest-rate cap/floor and the established index. The Bank offers this product with a maturity generally of one year to 10 years.

Float-to-Fixed Advance. This advance is an advance that floats to London Interbank Offered Rate (LIBOR) and changes to a predetermined fixed rate on a predetermined date prior to maturity. The Bank offers this product with a maturity generally of up to 20 years.

Fixed rate advances. Fixed rate advances include:

Fixed Rate Credit Advance (FRC Advance). The FRC Advance offers fixed-rate funds with principal due at maturity generally from one month to 10 years.

Callable Advance. The callable advance is a fixed-rate advance with a fixed maturity and the option for the member to prepay the advance on an option exercise date(s) before maturity without a fee. The options can be Bermudan (periodically during the life of the advance) or European (one-time). The Bank offers this product with a maturity generally of up to 10 years with options from three months to 10 years.

Expander Advance. The expander advance is a fixed-rate advance with a fixed maturity and an option by the borrower to increase the amount of the advance in the future at a predetermined interest rate. The option may be Bermudan or European. The Bank has established internal limits on the amount of such options that may be sold to mature in any given quarter. The Bank offers this product with a maturity generally of two years to 20 years with an option exercise date that can be set from one month to 10 years.

Hybrid advances. The hybrid advance is a fixed- or variable-rate advance that allows the inclusion of interest-rate caps and/or floors. The Bank offers this product with a maturity generally of up to 10 years with options from three months to 10 years.

Convertible advances. In a convertible advance, the Bank purchases an option from the member that allows the Bank to modify the interest rate on the advance from fixed to variable on certain specified dates. The Bank's option can be Bermudan or European. The Bank offers this product with a maturity generally of up to 15 years with options from three months to 15 years.

Forward starting advances. With the forward starting advance, the borrower may enter into the terms of any structured advance, including the Fixed Rate Hybrid, ARC Advance, Expander Advance, or Float-to-Fixed Advance, with a future settlement date. Interest accrues beginning on the settlement date. A termination fee applies if the borrower voluntarily terminates the advance prior to the settlement date.


7


The following table sets forth the par value of outstanding advances by product characteristics (dollars in millions). See Note 10Advances to the audited financial statements for further information on the distinction between par value and carrying value of outstanding advances.

 
As of December 31,
 
2012
 
2011
 
Amount
 
Percent of Total  
 
Amount
 
Percent of Total  
Adjustable or variable rate indexed
$
11,678

 
13.92
 
$
10,977

 
13.29
Fixed rate (1)
40,503

 
48.29
 
37,038

 
44.86
Hybrid
24,352

 
29.04
 
25,082

 
30.38
Convertible
5,174

 
6.17
 
8,276

 
10.02
Amortizing (2)
2,163

 
2.58
 
1,196

 
1.45
Total par value
$
83,870

 
100.00
 
$
82,569

 
100.00
 ____________
(1) Includes convertible advances whose conversion options have expired.
(2) The Bank offers a fixed-rate advance that may be structured with principal amortization in either equal increments or similar to a mortgage.

The Bank establishes interest rates on advances using the Bank's cost of funds on COs and the interest-rate swap market. The Bank establishes an interest rate applicable to each type of advance each day and then adjusts those rates during the day to reflect changes in the cost of funds and interest rates.

The Bank includes prepayment fee provisions in most advance transactions. With respect to callable advances, prepayment fees apply to prepayments on a date other than an option exercise date(s). As required by Finance Agency regulations, the prepayment fee is intended to make the Bank economically indifferent to a borrower's decision to prepay an advance before maturity or, with respect to a callable advance, on a date other than an option exercise date.

The following table presents information on the Bank's 10 largest borrowers of advances (dollars in millions):
 
 
 
 
As of December 31, 2012
Institution
 
City, State
 
Advances
 Par Value
 
Percent of Total Advances
 
Weighted-average Interest
Rate
(%) (1)
 
 
Capital One, National Association
 
McLean, VA
 
$
15,419

 
18.38
 
0.30
Bank of America, National Association
 
Charlotte, NC
 
9,914

 
11.82
 
2.89
Branch Banking and Trust Company
 
Winston Salem, NC
 
9,079

 
10.83
 
3.01
Navy Federal Credit Union
 
Vienna, VA
 
8,354

 
9.96
 
3.05
Capital One Bank (USA), National Association
 
Glen Allen, VA
 
5,500

 
6.56
 
0.26
SunTrust Bank
 
Atlanta, GA
 
4,522

 
5.39
 
0.45
Compass Bank
 
Birmingham, AL
 
3,243

 
3.87
 
0.99
EverBank
 
Jacksonville, FL
 
3,030

 
3.61
 
1.72
BankUnited, National Association
 
Miami Lakes, FL
 
1,920

 
2.29
 
1.27
Pentagon Federal Credit Union
 
Alexandria, VA
 
1,506

 
1.80
 
4.07
Subtotal (10 largest borrowers)
 
 
 
62,487

 
74.51
 
1.71
Subtotal (all other borrowers)
 
 
 
21,383

 
25.49
 
2.37
Total par value
 
 
 
$
83,870

 
100.00
 
1.88
 ____________
(1) The average interest rate of the member's advance portfolio weighted by each advance's outstanding balance.

A description of the Bank's credit risk management and collateral valuation methodology as it relates to its advance activity is contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of OperationsRisk ManagementCredit Risk.


8


Standby Letters of Credit

The Bank provides members with irrevocable standby letters of credit to support certain obligations of the members to third parties. Members may use standby letters of credit for residential housing finance and community lending or for liquidity and asset-liability management. In particular, members often use standby letters of credit as collateral for deposits from public sector entities. Standby letters of credit are generally available for nonrenewable terms up to five years or for a one year term renewable annually with a final expiration date up to ten years after issuance. The Bank requires members to fully collateralize the face amount of any letter of credit issued by the Bank during the term of the letter of credit, and the Bank charges the member an annual fee based on the face amount of the letter of credit. If the Bank is required to make payment for a beneficiary's draw, these amounts must be reimbursed by the member immediately or, subject to the Bank's discretion, may be converted into an advance to the member. The Bank's underwriting and collateral requirements for standby letters of credit are the same as the underwriting and collateral requirements for advances. Letters of credit are not subject to activity-based capital stock purchase requirements. The Bank has never experienced a credit loss related to a standby letter of credit reimbursement obligation. Unlike advances, standby letters of credit are accounted for as contingent liabilities because a standby letter of credit may expire in accordance with its terms without ever being drawn upon by the beneficiary. The Bank had $17.7 billion and $21.5 billion of outstanding standby letters of credit as of December 31, 2012 and 2011, respectively.

Advances and Standby Letters of Credit Combined

The following table presents information on the Bank's 10 largest borrowers of advances and standby letters of credit combined (dollars in millions):

 
 
 
 
As of December 31, 2012
Institution
 
City, State
 
Advances Par Value and Standby Letters of Credit Balance
 
Percent of Total Advances Par Value and Standby Letters of Credit
Bank of America, National Association
 
Charlotte, NC
 
$
19,514

 
19.21
Capital One, National Association
 
McLean, VA
 
15,716

 
15.48
Branch Banking and Trust Company
 
Winston Salem, NC
 
9,094

 
8.95
Navy Federal Credit Union
 
Vienna, VA
 
8,354

 
8.23
Compass Bank
 
Birmingham, AL
 
7,426

 
7.31
SunTrust Bank
 
Atlanta, GA
 
5,818

 
5.73
Capital One Bank (USA), National Association
 
Glen Allen, VA
 
5,500

 
5.42
EverBank
 
Jacksonville, FL
 
3,030

 
2.98
BankUnited, National Association
 
Miami Lakes, FL
 
1,920

 
1.89
Pentagon Federal Credit Union
 
Alexandria, VA
 
1,506

 
1.48
Subtotal (10 largest borrowers)
 
 
 
77,878

 
76.68
Subtotal (all other borrowers)
 
 
 
23,679

 
23.32
Total advances par value and standby letters of credit
 
$
101,557

 
100.00


Community Investment Services

Each FHLBank contributes 10 percent of its annual regulatory income to its Affordable Housing Program (AHP), or such additional prorated sums as may be required to assure that the aggregate annual contribution of the FHLBanks is not less than $100 million. Regulatory income is defined as GAAP income before interest expense related to mandatorily redeemable capital stock and the assessment for AHP discussed under the heading Taxation/Assessments below.

AHP provides direct subsidy funds or subsidized advances to members to support the financing of rental and for-sale housing for very low-, low-, and moderate-income individuals and families. The Bank offers a competitive AHP, a set-aside AHP, and a discounted advance program that supports projects that provide affordable housing to those individuals and families. A description of each program is as follows:


9


the competitive AHP is offered annually through a competitive application process and provides funds for either rental or ownership projects submitted through member financial institutions;

the set-aside AHP currently consists of nine distinct products: First-time Homebuyer, Community Stability, Foreclosure Recovery, Energy Efficiency & Weatherization Rehabilitation, Accessibility Rehabilitation, Veterans Purchase, Returning Veterans Foreclosure, Veterans Rehabilitation, and Returning Veterans Rehabilitation. The set-aside AHP products are available on a first-come, first-served basis and provide funds through member financial institutions to be used for down payment, closing costs, and other costs associated with the purchase, purchase/rehabilitation, or rehabilitation of a home for families at or below 80 percent of the area median income; and

the discounted advance program consists of the Community Investment Program and the Economic Development Program, each of which provides the Bank's members with access to low-cost funding to create affordable rental and homeownership opportunities and to engage in commercial and economic development activities that benefit low- and moderate-income individuals and neighborhoods.

For the years ended December 31, 2012 and 2011, AHP assessments were $30 million and $21 million, respectively.

Cash Management and Other Services

The Bank provides a variety of services to help members meet day-to-day cash management needs. These services include cash management services that support member advance activity, such as daily investment accounts, automated clearing house transactions, and custodial mortgage accounts. In addition to cash management services, the Bank provides other noncredit services, including wire transfer services and safekeeping services. These cash management, wire transfer, and safekeeping services do not generate material amounts of income and are performed primarily as ancillary services for the Bank's members.

The Bank also acts as an intermediary for its members that have limited or no access to the capital markets but need to enter into derivatives. This service assists members with asset-liability management by giving them indirect access to the capital markets. These intermediary transactions involve the Bank entering into a derivative with a member and then entering into a mirror-image derivative with one of the Bank's approved counterparties. The derivatives entered into by the Bank as a result of its intermediary activities do not qualify for hedge accounting treatment and are separately marked to fair value through earnings. The Bank attempts to earn income from this service sufficient to cover its operating expenses through the minor difference in rates on these mirror-image derivatives. The net result of the accounting for these derivatives is not material to the operating results of the Bank. The Bank may require both the member and the counterparty to post collateral for any market value exposure that may exist during the life of the transaction. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of OperationsLegislative and Regulatory Updates for a discussion of new and pending regulations that may affect the Bank's ability to continue to act as an intermediary for its members in derivatives transactions.

Mortgage Loan Purchase Programs

Historically, the Bank offered mortgage loan purchase programs to members to provide them an alternative to holding mortgage loans in portfolio or selling them into the secondary market. The names of one program, the Mortgage Partnership Finance® Program,(1) “Mortgage Partnership Finance”, and “MPF” are registered trademarks of FHLBank Chicago. MPF® Program and the Mortgage Purchase Program (MPP) are authorized under applicable regulations. Under both the MPF Program and MPP, the Bank purchased loans directly from member participating financial institutions (PFIs). The loans consisted of one-to-four family residential properties with original maturities ranging from five years to 30 years. Depending upon the program, the acquired loans may have included qualifying conventional conforming, Federal Housing Administration (FHA) insured, and Veterans Administration (VA) guaranteed fixed-rate mortgage loans. The Bank also purchased participation interests in loans on affordable multifamily rental properties through its Affordable Multifamily Participation Program (AMPP).





____________
(1) "Mortgage Partnership Finance" and "MPF" are registered trademarks of FHLBank Chicago.


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FHLBank Chicago developed the MPF Program and, as the MPF provider, is responsible for providing transaction processing services, as well as developing and maintaining the underwriting criteria and program servicing guide. The Bank pays FHLBank Chicago a fee for providing these services. Conventional loans purchased from PFIs under the MPF Program are subject to varying levels of loss allocation and credit enhancement structures. FHA-insured and VA-guaranteed loans are not subject to the credit enhancement obligations applicable to conventional loans under the MPF Program. The Bank held $92 million and $123 million in FHA/VA loans under the MPF Program as of December 31, 2012 and 2011, respectively. As of December 31, 2012, three of the Bank's MPF PFIs, Branch Banking and Trust Company, SunTrust Bank, and Capital One, National Association, which like all PFIs are currently inactive, were among the Bank's top 10 borrowers.

The Bank operates its MPP independently of other FHLBanks, and therefore it has greater control over pricing, quality of customer service, relationship with any third-party service provider, and program changes. Certain benefits of greater Bank control include the Bank's ability to control operating costs and to manage its regulatory relationship directly with the Finance Agency. As of December 31, 2012, there were no MPP PFIs that were among the Bank's top 10 borrowers.

The Bank ceased purchasing new mortgage assets under MPF and MPP in 2008, and stopped purchasing participation interests under AMPP in 2006. The Bank purchased loans with contractual maturity dates extending out to 2038. The Bank plans to continue to support its existing MPP, MPF, and AMPP portfolios, which eventually will be reduced to zero in the ordinary course of the maturities and prepayments of the assets.

Regulatory interpretive guidance provides that an FHLBank may sell loans acquired through its mortgage loan purchase programs, so long as it also sells the related credit enhancement obligation. The Bank currently is not selling loans it has acquired through its mortgage loan purchase programs. 

Descriptions of the MPF Program and MPP underwriting and eligibility standards and credit enhancement structures are contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk.

Investments

The Bank maintains a portfolio of short- and long-term investments for liquidity purposes, to provide for the availability of funds to meet member credit needs and to provide additional earnings for the Bank. The Bank's short-term investments consist of interest-bearing deposits, certificates of deposit, securities purchased under agreements to resell, and overnight and term federal funds sold. The Bank's long-term investments consist of mortgage-backed securities (MBS) issued by GSEs or private label securities that, at purchase, carried the highest rating from Moody's Investors Service (Moody's) or Standard and Poor's Ratings Services (S&P), securities issued by the U.S. government or U.S. government agencies, state and local housing agency obligations, and COs issued by other FHLBanks. The long-term investment portfolio generally provides the Bank with higher returns than those available in short-term investments. As of December 31, 2012, 52.2 percent of the Bank's investments were in U.S. agency securities as discussed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of OperationsFinancial ConditionInvestments. Investments generated 61.9 percent, 68.0 percent, and 68.5 percent of total interest income for the years ended December 31, 2012, 2011 and 2010, respectively.

The Bank's MBS investment practice is to purchase MBS from a group of Bank-approved dealers, which may include “primary dealers.” Primary dealers are banks and securities brokerages that trade in U.S. government securities with the Federal Reserve System. The Bank does not purchase MBS from its members, except in the case in which a member or its affiliate is on the Bank's list of approved dealers. The Bank bases its investment decisions in all cases on the relative rates of return of competing investments and does not consider whether an MBS is being purchased from or issued by a member or an affiliate of a member. The MBS balance as of December 31, 2012 and 2011 included MBS with a carrying value of $2.5 billion and $3.0 billion, respectively, issued by one of the Bank's members and its affiliates with dealer relationships. See Note 6Available-for-sale Securities and Note 7Held-to-maturity Securities to the audited financial statements for a tabular presentation of the available-for-sale and held-to-maturity securities issued by members or affiliates of members.

Finance Agency regulations prohibit the Bank from investing in certain types of securities. These restrictions are set out in more detail in Item 7, Management's Discussion and Analysis of Financial Condition and Results of OperationsRisk ManagementCredit Risk.
 
Prior to June 20, 2011, Finance Agency regulations further limited the Bank's investment in MBS and asset-backed securities by requiring that the total carrying value of MBS owned by the Bank not exceed 300 percent of the Bank's previous month-end total capital, as defined by regulation, plus mandatorily redeemable capital stock on the day it purchases the securities. Effective June 20, 2011, the value of securities used in the 300 percent of capital limit calculation was changed from carrying

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value to amortized historical cost for securities classified as held-to-maturity or available-for-sale, and fair value for securities classified as trading. For discussion regarding the Bank's compliance with this regulatory requirement, refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of OperationsFinancial ConditionInvestments.

The Bank periodically invests in the outstanding COs issued by other FHLBanks as a part of its investment strategy. The terms of these investment COs generally are similar to the terms of COs issued by the Bank. At the time of such investment decision, however, indebtedness of the Bank may not be available for repurchase. The purchase of these investments is funded by a pool of liabilities and capital of the Bank and is not funded by specific or “matched” COs issued by the Bank. The Bank purchases COs issued by other FHLBanks through third-party dealers as long-term investments, consistent with Finance Agency regulations and guidance. These investments provide a relatively predictable source of liquidity while at the same time maximizing earnings and the Bank's leveraged capital ratio. The Bank purchases long-term debt issued by other GSEs for the same reason, and generally the rates of return on such other long-term debt are similar to those on COs of the same maturity. As of December 31, 2012 and 2011, the Bank held one inverse variable-rate CO bond of which the Federal Home Loan Bank of Chicago was the primary obligor. The carrying value of this CO bond as of December 31, 2012 and 2011was $77 million and $82 million, respectively.

The Bank is subject to credit and market risk on its investments. For discussion as to how the Bank manages these risks, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of OperationsRisk Management.

Funding Sources

Consolidated Obligations

COs, consisting of bonds and discount notes, are the joint and several obligations of the FHLBanks, backed only by the financial resources of the FHLBanks. COs are not obligations of the U.S. government, and the United States does not guarantee the COs. The Office of Finance has responsibility for facilitating and executing the issuance of COs for all the FHLBanks. It also services all outstanding debt. The Bank is primarily liable for its portion of COs (i.e., those issued on its behalf); however, the Bank is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on COs of all the FHLBanks. If the principal or interest on any CO issued on behalf of the Bank is not paid in full when due, the Bank may not pay any extraordinary expenses or pay dividends to, or redeem or repurchase shares of stock from, any member of the Bank. The Finance Agency may at any time require any FHLBank to make principal or interest payments due on any COs, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation.

To the extent that an FHLBank makes any payment on a CO on behalf of another FHLBank, the paying FHLBank is entitled to reimbursement from the noncomplying FHLBank. However, if the Finance Agency determines that the noncomplying FHLBank is unable to satisfy its obligations, the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank's participation in all COs outstanding or on any other basis the Finance Agency may determine.

Consolidated obligations are issued with either fixed-rate coupon payment terms or variable-rate coupon payment terms that may use a variety of indices for interest-rate resets, primarily LIBOR. When consolidated obligations are issued with variable-rate coupon payment terms that use the federal funds rate, the Bank typically simultaneously enters into derivatives that effectively convert the federal funds rate to LIBOR. From time to time, the Bank may also issue COs indexed to the federal funds rate. The effective federal funds rate is based upon transactional data relating to the federal funds sold market. In the aggregate, the FHLBanks may comprise a significant percentage of the federal funds sold market at any one time; however, each FHLBank manages its investment portfolio separately.

Finance Agency regulations also state that the Bank must maintain the following types of assets free from any lien or pledge in an aggregate amount at least equal to the amount of the Bank's portion of the COs outstanding, provided that any assets that are subject to a lien or pledge for the benefit of the holders of any issue of COs shall be treated as if they were assets free from any lien or pledge for purposes of this negative pledge requirement:

cash;

obligations of, or fully guaranteed by, the United States;
 
secured advances;

mortgages that have any guaranty, insurance, or commitment from the United States or any agency of the United States;

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investments described in Section 16(a) of the FHLBank Act which, among other items, includes securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located; and

other securities that have been assigned a rating or assessment by a nationally recognized statistical rating organization (NRSRO) that is equivalent to or higher than the rating or assessment assigned by that NRSRO to the COs.

The following table presents the Bank's compliance with this requirement (in millions):

 
 
Outstanding Debt
 
Aggregate Unencumbered Assets
As of December 31, 2012
 
$
114,684

 
$
123,523

As of December 31, 2011
 
114,992

 
125,061


Consolidated Obligation Bonds. Consolidated obligation bonds satisfy longer-term funding requirements. Typically, the maturity of these securities ranges from one year to 10 years, but the maturity is not subject to any statutory or regulatory limit. Consolidated obligation bonds can be issued and distributed through negotiated or competitively bid transactions with approved underwriters or selling group members. The FHLBanks also use the TAP issue program for fixed-rate, noncallable bonds. Under this program, the FHLBanks offer debt obligations at specific maturities that may be reopened daily, generally during a three-month period through competitive auctions. The goal of the TAP program is to aggregate frequent smaller issues into a larger bond issue that may have greater market liquidity.

Consolidated Obligation Discount Notes. Through the Office of Finance, the FHLBanks also issue consolidated obligation discount notes to provide short-term funds for advances to members, for the Bank's short-term investments, and for the Bank's variable-rate and convertible advance programs. These securities have maturities up to 366 days and are offered daily through a consolidated obligation discount-note selling group. Discount notes are issued at a discount and mature at par.

Certification and Reporting Obligations. Under Finance Agency regulations, before the end of each calendar quarter and before paying any dividends for that quarter, the president of the Bank must certify to the Finance Agency that, based upon known current facts and financial information, the Bank will remain in compliance with applicable liquidity requirements and will remain capable of making full and timely payment of all current obligations (which includes the Bank's obligation to pay principal and interest on COs issued on its behalf through the Office of Finance) coming due during the next quarter. The Bank is required to provide notice to the Finance Agency upon the occurrence of any of the following:

the Bank is unable to provide the required certification;

the Bank projects at any time that it will fail to comply with its liquidity requirements or will be unable to meet all of its current obligations due during the quarter;

the Bank actually fails to comply with its liquidity requirements or to meet all of its current obligations due during the quarter; or

the Bank negotiates to enter or enters into an agreement with one or more other FHLBanks to obtain financial assistance to meet its current obligations due during the quarter.

The Bank must file a CO payment plan for Finance Agency approval upon the occurrence of any of the following:
 
the Bank becomes a noncomplying FHLBank as a result of failing to provide a required certification related to liquidity requirements and ability to meet all current obligations;

the Bank becomes a noncomplying FHLBank as a result of being required to provide notice to the Finance Agency of certain matters related to liquidity requirements or inability to meet current obligations; or

the Finance Agency determines that the Bank will cease to be in compliance with its liquidity requirements or will lack the capacity to meet all of its current obligations due during the quarter.

Regulations permit a noncompliant FHLBank to continue to incur and pay normal operating expenses in the regular course of business. However, a noncompliant FHLBank may not incur or pay any extraordinary expenses, declare or pay dividends, or

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redeem any capital stock until such time as the Finance Agency has approved the FHLBank's CO payment plan or inter-FHLBank assistance agreement or has ordered another remedy, and the noncompliant FHLBank has paid all its direct obligations.

The Bank, working through the Office of Finance, is able to customize COs to meet investor demands. Customized features can include different indices and embedded derivatives. These customized features are offset predominately by derivatives to reduce the market risk associated with the COs.

Deposits

The FHLBank Act allows the Bank to accept deposits from its members, any institution for which it is providing correspondent services, other FHLBanks, or other governmental instrumentalities. Deposits provide some of the Bank's funding resources while also giving members a low-risk earning asset that satisfies their regulatory liquidity requirements. As of December 31, 2012 and 2011, the Bank had demand and overnight deposits of $2.1 billion and $2.7 billion, respectively.

To support its member deposits, the FHLBank Act requires the Bank to have as a reserve an amount equal to or greater than its current deposits from members. These reserves are required to be invested in obligations of the United States, deposits in eligible banks or trust companies, or certain advances with maturities not exceeding five years. As of December 31, 2012 and 2011, the Bank had excess deposit reserves of $79.5 billion and $76.1 billion, respectively.

Capital and Capital Rules

The Bank must comply with regulatory requirements for total capital, leverage capital, and risk-based capital.
To satisfy these capital requirements, the Bank maintains a capital plan, as last amended by the board of directors on May 13, 2011. Each member's minimum stock requirement is an amount equal to the sum of a “membership” stock component and an “activity-based” stock component under the plan. The FHLBank Act and applicable regulations require that the minimum stock requirement for members must be sufficient to enable the Bank to meet its minimum leverage and risk-based capital requirements. If necessary, the Bank may adjust the minimum stock requirement from time to time within the ranges established in the capital plan. Each member is required to comply promptly with any adjustment to the minimum stock requirement.

As of December 31, 2012, the membership stock requirement was 0.15 percent (15 basis points) of the member's total assets, subject to a cap of $26 million. On January 31, 2013, the board of directors approved a reduction in the membership stock requirement to 0.12 percent (12 basis points) of the member's total assets, subject to a cap of $20 million, effective March 22, 2013.

As of December 31, 2012, the activity-based stock requirement was the sum of the following:

4.50 percent of the member's outstanding par value of advances; and

8.00 percent of any outstanding targeted debt/equity investment (such as multifamily residential mortgage loan assets) sold by the member to the Bank on or after December 17, 2004.

In addition, the activity-based stock requirement may include a percentage of any outstanding balance of acquired member assets (such as single-family residential mortgage loan assets), although this percentage was set at zero as of December 31, 2012. As of December 31, 2012, all of the Bank's multifamily residential mortgage loan assets had been acquired from a non-member; therefore, the 8.00 percent activity-based stock requirement did not apply with respect to those multifamily residential mortgage loan assets.

Although applicable regulations allow the Bank to issue Class A stock or Class B stock, or both, to its members, the Bank's capital plan allows it to issue only Class B stock.

The Bank has established a capital management plan to help preserve the value of the members' investment in the Bank and reasonably mitigate the effect on capital of unanticipated operating and accounting events. For additional information regarding the Bank's capital and capital requirements, as well as information regarding the Bank's retained earnings and dividends, refer to Item 5, Market for Registrant's Common Equity - Related Stockholder Matters and Issuer Purchases of Equity Securities; Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Capital; and Note 15 - Capital and Mandatorily Redeemable Capital Stock to the Bank's audited financial statements.

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Derivatives

Finance Agency regulations and the Bank's Risk Management Policy (RMP) establish guidelines for derivatives. These policies and regulations prohibit trading in or the speculative use of these instruments and limit permissible credit risk arising from these instruments. The Bank enters into derivatives only to manage the interest-rate risk exposures inherent in otherwise unhedged assets and funding positions, and to achieve the Bank's risk management objectives. These derivatives consist of interest-rate swaps (including callable swaps and putable swaps), swaptions, interest-rate cap and floor agreements, and forward contracts. Generally, the Bank uses derivatives in its overall interest-rate risk management to accomplish one or more of the following objectives:

reduce the interest-rate net sensitivity of COs, advances, investments, and mortgage loans by, in effect, converting them to a short-term interest rate, usually based on LIBOR;

manage embedded options in assets and liabilities;

hedge the market value of existing assets or liabilities; and

hedge the duration risk of pre-payable instruments.

The total notional amount of the Bank's outstanding derivatives was $124.7 billion and $139.7 billion as of December 31, 2012 and 2011, respectively. The contractual or notional amount of a derivative is not a measure of the amount of credit risk from that transaction. Rather, the notional amount serves as a basis for calculating periodic interest payments or cash flows.

The Bank may enter into derivatives concurrently with the issuance of COs with embedded options. Issuing bonds while simultaneously entering into derivatives in effect converts fixed-rate liabilities into variable-rate liabilities. The continued attractiveness of such debt depends on price relationships in both the bond market and derivatives markets. If conditions in these markets change, the Bank may alter the types or terms of the bonds issued. Similarly, the Bank may enter into derivatives in conjunction with the origination of advances with embedded options. Issuing fixed-rate advances while simultaneously entering into derivatives in effect converts fixed-rate advances into variable-rate earning assets.

The Bank is subject to credit risk in all derivatives due to potential nonperformance by the derivative counterparty. For further discussion as to how the Bank manages its credit risk and market risk on its derivatives, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of OperationRisk Management. For further discussion as to the possible impact of new and pending regulations regarding derivatives, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of OperationsLegislative and Regulatory Update.

Competition

Advances. A number of factors affect demand for the Bank's advances, including, but not limited to, the availability and cost of other sources of liquidity for the Bank's members, such as demand deposits, brokered deposits and the repurchase market. The Bank individually competes with other suppliers of secured and unsecured wholesale funding. Such other suppliers may include investment banks, commercial banks, and in certain circumstances, other FHLBanks. Smaller members may have access to alternative funding sources through sales of securities under agreements to repurchase, while larger members may have access to all the alternatives listed above. Large members also may have independent access to the national and global credit markets. The availability of alternative funding sources to members can significantly influence the demand for the Bank's advances and can vary as a result of a number of factors, including market conditions, members' creditworthiness, and availability of collateral.

Members continue to experience significant levels of liquidity in part due to higher FDIC deposit insurance limits which in 2010 were permanently increased to $250,000 per depositor, and the extension of the FDIC Transaction Account Guaranty Program, which provided depositors with unlimited coverage for qualifying noninterest-bearing accounts through December 31, 2012. Further, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) repealed the statutory prohibition against the payment of interest on commercial demand deposits, effective July 21, 2011. Members' ability to pay interest on their commercial demand deposit accounts may increase their ability to attract or retain customer deposits, which could further increase their liquidity and reduce their demand for advances. In addition, the FDIC issued a final rule on February 25, 2011 to revise the assessment system applicable to FDIC insured financial institutions. Among other things, the rule now includes FHLBank advances in certain members' assessment base, and eliminates an adjustment to the base assessment rate paid for secured liabilities, including FHLBank advances. To the extent that these changes result in increased

15


assessments and thus indirectly increase the cost of advances for some members, it may negatively impact their demand for advances. Recent legislative proposals to develop a U.S. covered bond market could enhance the attractiveness of covered bonds as an alternative funding source for members, although it is unclear the extent to which these proposals will progress during 2013.

Debt Issuance. The Bank competes with Fannie Mae, Freddie Mac, and other GSEs, as well as corporate, sovereign, and supranational entities for funds raised through the issuance of unsecured debt in the national and global debt markets. Increases in the supply of competing debt products may, in the absence of increases in demand, result in higher debt costs or lesser amounts of debt issued at the same cost than otherwise would be the case. In addition, the availability and cost of funds raised through the issuance of certain types of unsecured debt may be affected adversely by regulatory initiatives that tend to reduce investments by certain depository institutions in unsecured debt with greater price volatility or interest-rate sensitivity than fixed-rate, fixed-maturity instruments of the same maturity. Further, a perceived or actual higher level of government support for other GSEs may increase demand for their debt securities relative to similar FHLBank securities.

Interest-rate Exchange Agreements. The sale of callable debt and the simultaneous execution of callable interest-rate swaps that mirror the debt have been important sources of competitive funding for the Bank. As such, the availability of markets for callable debt and interest-rate swaps may be an important determinant of the Bank's relative cost of funds. There is considerable competition among high credit quality issuers in the markets for these instruments.

Regulatory Oversight, Audits, and Examinations

The Finance Agency supervises and regulates the FHLBanks. The Finance Agency is responsible for ensuring that (1) the FHLBanks operate in a safe and sound manner, including maintenance of adequate capital and internal controls; (2) the operations and activities of the FHLBanks foster liquid, efficient, competitive and resilient national housing finance markets; (3) the FHLBanks comply with applicable laws and regulations; and (4) the FHLBanks carry out their housing finance mission through authorized activities that are consistent with the public interest. In this capacity, the Finance Agency issues regulations and policies that govern, among other things, the permissible activities, powers, investments, risk-management practices, and capital requirements of the FHLBanks, and the authorities and duties of FHLBank directors. The Finance Agency conducts annual, on-site examinations of the Bank as well as periodic off-site reviews. In addition, the Bank must submit to the Finance Agency monthly financial information on the condition and results of operations of the Bank.

In 2006, in accordance with the Finance Board's regulation, the Bank registered its Class B stock with the SEC under Section 12(g)(1) of the Securities Exchange Act of 1934, as amended (Exchange Act). The Housing Act codified the regulatory requirement that each FHLBank register a class of its common stock under Section 12(g) of the Exchange Act. As a result of this registration, the Bank is required to comply with the disclosure and reporting requirements of the Exchange Act and to file with the SEC annual, quarterly, and current reports, as well as meet other SEC requirements, subject to certain exemptive relief obtained from the SEC and under the Housing Act.

The Government Corporation Control Act provides that, before a government corporation (which includes each of the FHLBanks) issues and offers obligations to the public, the Secretary of the Treasury shall prescribe (1) the form, denomination, maturity, interest rate, and conditions of the obligations; (2) the time and manner in which issued; and (3) the selling price. Under the FHLBank Act, the Secretary of the Treasury has the authority, at his or her discretion, to purchase COs up to an aggregate principal amount of $4.0 billion. No borrowings under this authority have been outstanding since 1977. The U.S. Department of the Treasury (Treasury) receives the Finance Agency's annual report to Congress, weekly reports reflecting securities transactions of the FHLBanks, and other reports reflecting the operations of the FHLBanks.

The Comptroller General has authority under the FHLBank Act to audit or examine the Finance Agency and the Bank and to decide the extent to which they fairly and effectively fulfill the purposes of the FHLBank Act. Furthermore, the Government Corporation Control Act provides that the Comptroller General may review any audit of the financial statements conducted by an independent registered public accounting firm. If the Comptroller General conducts such a review, he or she must report the results and provide his or her recommendations to Congress, the Office of Management and Budget, and the FHLBank in question. The Comptroller General also may conduct his or her own audit of any financial statements of the Bank.

The Bank has an internal audit department, the Bank's board of directors has an audit committee, and an independent registered public accounting firm audits the annual financial statements of the Bank. The independent registered public accounting firm conducts these audits following the standards of the Public Company Accounting Oversight Board (United States) and Government Auditing Standards issued by the Comptroller General. The Finance Agency receives the Bank's Report and audited financial statements. The Bank must submit annual management reports to Congress, the President of the United States, the Office of Management and Budget, and the Comptroller General. These reports include audited financial statements, a

16


statement of internal accounting and administrative control systems, and the report of the independent registered public accounting firm on the financial statements.

Personnel

As of December 31, 2012, the Bank employed 338 full-time and 11 part-time employees.

Taxation/Assessments

The Bank is exempt from ordinary federal, state, and local taxation except for real property tax; however, the Bank was obligated to make quarterly payments to REFCORP through the second quarter of 2011. On August 5, 2011, the Finance Agency certified that the FHLBanks had fully satisfied their REFCORP obligation with their payment on July 15, 2011. Prior to the satisfaction of the FHLBanks' REFCORP obligation, each FHLBank was required to make payments to REFCORP equivalent to 20 percent of annual GAAP net income before REFCORP assessments and after payment of AHP assessments.

Each year the Bank must set aside for its AHP 10 percent of its annual regulatory income, or such prorated sums as may be required to assure that the aggregate contribution of the FHLBanks is not less than $100 million. If an FHLBank experienced a regulatory loss for a full year, the FHLBank would have no obligation to the AHP for that year, since each FHLBank's required annual AHP contribution is limited to its annual regulatory income. Because the REFCORP assessment reduced the amount of regulatory income used to calculate the AHP assessment, it had the effect of reducing the total amount of funds allocated to the AHP.

REFCORP has been designated as the calculation agent for AHP and REFCORP assessments. The combined REFCORP and AHP assessments for the Bank were $30 million, $43 million, and $100 million for the years ended December 31, 2012, 2011, and 2010, respectively.

Item 1A.    Risk Factors.

The following discussion summarizes some of the more important risks that the Bank faces. This discussion is not exhaustive, and there may be other risks that the Bank faces, which are not described below. These risks should be read in conjunction with the other information included in this Report, including, without limitation, in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, the financial statements and notes, and “Special Cautionary Notice Regarding Forward-looking Statements.” The risks described below, if realized, could negatively affect the Bank's business operations, financial condition, and future results of operations and, among other things, could result in the Bank's inability to pay dividends on its capital stock.

The Bank is subject to a complex body of laws and regulations, which could change in a manner detrimental to the Bank's operations.

The FHLBanks are GSEs, organized under the authority of the FHLBank Act, and governed by federal laws and regulations as adopted and applied by the Finance Agency. From time to time, Congress has amended the FHLBank Act in ways that have affected the rights and obligations of the FHLBanks and the manner in which the FHLBanks carry out their housing finance mission and business operations. New or modified legislation enacted by Congress or regulations adopted by the Finance Agency could have a negative effect on the Bank's ability to conduct business or on the cost of doing business.

Changes in regulatory requirements could result in, among other things, an increase in the FHLBanks' cost of funding and regulatory compliance, a change in permissible business activities, or a decrease in the size, scope, or nature of the FHLBanks' lending activities, which could affect the Bank's financial condition and results of operations.

The statutory and regulatory framework under which most financial institutions, including the Bank, operate will change substantially over the next several years as a result of the enactment of the Dodd-Frank Act and subsequent implementing regulations. Refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of OperationsLegislative and Regulatory Developments for a discussion of recent legislative and regulatory activity that could affect the Bank.


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The Bank is jointly and severally liable for payment of principal and interest on the COs issued by the other FHLBanks.

Each of the FHLBanks relies upon the issuance of COs as a primary source of funds. COs are the joint and several obligations of all of the FHLBanks, backed only by the financial resources of the FHLBanks. Accordingly, the Bank is jointly and severally liable with the other FHLBanks for the COs issued by the FHLBanks through the Office of Finance, regardless of whether the Bank receives all or any portion of the proceeds from any particular issuance of COs.

The Finance Agency by regulation may require any FHLBank to make principal or interest payments due on any CO at any time, whether or not the FHLBank that was the primary obligor has defaulted on the payment of that obligation. The Finance Agency may allocate the liability among one or more FHLBanks on a pro rata basis or on any other basis the Finance Agency may determine. Accordingly, the Bank could incur significant liability beyond its primary obligation under COs due to the failure of other FHLBanks to meet their obligations, which could negatively affect the Bank's financial condition and results of operations.

The Bank's funding depends upon its ability to regularly access the capital markets.

The Bank seeks to be in a position to meet its members' credit and liquidity needs and pay its obligations without maintaining excessive holdings of low-yielding liquid investments or being forced to incur unnecessarily high borrowing costs. The Bank's primary source of funds is the sale of COs in the capital markets, including the short-term discount note market. The Bank's ability to obtain funds through the sale of COs depends in part on prevailing conditions in the capital markets (including investor demand), such as the effects of any reduced liquidity in financial markets, which are beyond the Bank's control.

Changes in the Bank's credit ratings may adversely affect the Bank's ability to issue COs on acceptable terms, and such changes may be outside the Bank's control due to changes in the U.S. sovereign ratings.

The Bank is rated Aaa with a negative outlook by Moody's and AA+ with a negative outlook by S&P. In addition, the COs of the FHLBanks are rated Aaa with a negative outlook/P-1 by Moody's and AA+/A-1+ by S&P. Historically, the Bank and the FHLBanks' COs enjoyed the highest ratings from Moody's and S&P; however, the credit rating agencies view these ratings as constrained by the sovereign credit of the U.S., which is beyond the Bank's control, and in the third quarter of 2011, the credit rating agencies revised their ratings for the individual FHLBanks and the COs concurrently with their downgrades of the U.S. credit rating. These ratings are subject to further revision or withdrawal at any time by the rating agencies; therefore, the Bank may not be able to maintain these credit ratings. Further negative ratings actions or negative guidance, as a consequence of U.S. debt levels and/or political efforts to resolve U.S. fiscal policy, may adversely affect the Bank's cost of funds and ability to issue COs on acceptable terms, trigger additional collateral requirements under the Bank's derivative contracts, and reduce the attractiveness of the Bank's standby letters of credit, which could have a negative effect on the Bank's financial condition and results of operations, including the Bank's ability to make advances on acceptable terms, pay dividends, or redeem or repurchase capital stock.

Competition for advances, and refinancing risk on short-term advances, could have an adverse effect on earnings.

Advances represent the Bank's primary product offering. For the year ended December 31, 2012, advances represented 70.7 percent of the Bank's total assets. The Bank competes with other suppliers of wholesale funding, including investment banks, commercial banks, and in certain circumstances, other FHLBanks, which provide secured and unsecured loans to the Bank's members. From time to time, these alternative funding sources may offer more favorable terms on their loans than the Bank does on its advances. During 2012, the Bank's members continued to experience high deposit levels, which reduces member demand for advances. Any change made by the Bank in the pricing of its advances in an effort to effectively compete with these competitive funding sources may decrease the Bank's profitability on advances, which could have a material adverse effect on the Bank's financial condition and results of operations, including dividend yields to members.

The prolonged low interest rate environment has resulted in an increased concentration of short-term advances. For the year ended December 31, 2012, advances due in one year or less comprised 49.5 percent of the Bank's total advances. If members do not extend or renew these short-term advances as they come due, the Bank may experience a significant reduction in advances, which could have a material adverse effect on the Bank's financial condition and results of operations.

18



The Bank is exposed to risks because of customer concentration.

The Bank is subject to customer concentration risk as a result of the Bank's reliance on a relatively small number of member institutions for a large portion of the Bank's total advances and resulting interest income. As of December 31, 2012, Capital One, National Association and Capital One Bank (USA), National Association together accounted for $20.9 billion, or 24.9 percent, of the Bank's total advances then outstanding. The Bank's largest borrower as of December 31, 2011 was Bank of America, National Association, which accounted for $16.0 billion, or 19.4 percent, respectively, of the Bank's total advances then outstanding. In addition, as of December 31, 2012 and 2011, 10 of the Bank's member institutions (including Capital One, National Association, Capital One Bank (USA), National Association, and Bank of America, National Association) collectively accounted for $62.5 billion and $57.0 billion, respectively, of the Bank's total advances then outstanding, which represented 74.5 percent and 69.0 percent, respectively, of the Bank's total advances then outstanding. If, for any reason, the Bank were to lose, or experience a decrease in the amount of, its business relationships with its largest borrower or a combination of several of its large borrowers - whether as the result of any such member becoming a party to a merger or other transaction, or as a result of market conditions, competition or otherwise - the Bank's financial condition and results of operations could be negatively affected.

Changes in interest rates could significantly affect the Bank's earnings.

Like many financial institutions, the Bank realizes income primarily from the spread between interest earned on the Bank's outstanding loans and investments and interest paid on the Bank's borrowings and other liabilities. Although the Bank uses a number of measures to monitor and manage changes in interest rates, the Bank may experience “gaps” in the interest-rate sensitivities of its assets and liabilities resulting from both duration and convexity mismatches. The existence of gaps in interest-rate sensitivities means that either the Bank's interest-bearing liabilities will be more sensitive to changes in interest rates than its interest-earning assets, or vice versa. In either case, if interest rates move contrary to the Bank's position, any such gap could adversely affect the net present value of the Bank's interest-sensitive assets and liabilities, which could negatively affect the Bank's financial condition and results of operations.

The prolonged period of low interest rates could negatively impact the Bank's earnings and dividend yield as the Bank's interest rate spread remains low and the Bank's higher yielding assets mature or prepay in a low yield environment. Refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Net Interest Income for further discussion of the Bank's yield on assets, interest-rate spread, and reinvestment risk.

Prepayment or refinancing of mortgage assets, as well as foreclosure prevention efforts such as principal writedowns, could affect earnings.

The Bank invests in both MBS and whole mortgage loans. Changes in interest rates can significantly affect the prepayment patterns of these assets, and such prepayment patterns could affect the Bank's earnings. In the Bank's experience, it is difficult to hedge prepayment risk in mortgage loans. Therefore, prepayments of mortgage assets could have an adverse effect on the income of the Bank.

In 2012, the Finance Agency, Fannie Mae, and Freddie Mac announced a series of changes that were intended to assist more eligible borrowers who can benefit from refinancing their home mortgages, including lowering or eliminating certain risk-based fees, removing the current 125 percent loan-to-value ceiling on fixed-rate mortgages that are purchased by Fannie Mae and Freddie Mac, waiving certain representations and warranties, and eliminating the need for a new property appraisal. Other federal agencies have implemented other programs during the past few years intended to prevent foreclosure. These programs focus on lowering a home owner's monthly payments through mortgage modifications or refinancings, providing temporary reductions or suspensions of mortgage payments, and helping homeowners transition to more affordable housing. Other proposals such as expansive principal writedowns or principal forgiveness (including new short-sale/deed in lieu of foreclosure programs recently discussed), or converting delinquent borrowers into renters and conveying the properties to investors, have gained some popularity as well. If the Finance Agency requires the Bank to offer a similar refinancing option for investments in whole mortgage loans, the Bank's income from those investments could decline.


19


Further, settlements announced in 2013 and 2012 with the banking regulators, the federal government and the nation's largest mortgage servicers and states attorneys' general are also likely to focus on loan modifications and principal writedowns. In late January 2013 the Treasury department announced that it is expanding refinancing programs for homeowners whose mortgages are greater than their home value to include mortgages underlying private-label MBS. These programs, proposals, and settlements could negatively impact investments in MBS, including the timing and amount of cash flows the Bank realizes from those investments. Additional developments could result in further increases to loss projections from these investments. Additionally, these developments could result in a significant number of prepayments on mortgage loans underlying investments in agency MBS. If that should occur, these investments would be paid off in advance of original expectations, subjecting the Bank to resulting premium acceleration and reinvestment risk.

The Bank's exposure to credit risk could have an adverse effect on the Bank's financial condition and results of operations.

The Bank assumes secured and unsecured credit risk exposure associated with the risk of default by, or insolvency of, a borrower or counterparty. Any substantial devaluation of collateral, failure to properly perfect the Bank's security interest in collateral, an inability to liquidate collateral, or any disruptions in the servicing of collateral in the event of a default could create credit losses for the Bank.

The Bank invests in U.S. agency (Fannie Mae, Freddie Mac, and Ginnie Mae) MBS and has historically invested in private-label MBS rated AAA by S&P or Fitch Ratings or Aaa by Moody's at the time of purchase. As of December 31, 2012, a substantial portion of the Bank's MBS portfolio consisted of private-label MBS. Market prices for many of these private-label MBS have deteriorated since 2007. Given continued uncertainty in market conditions and the significant judgments involved in determining market value, there is a risk that further declines in fair value in the Bank's MBS portfolio may occur and that the Bank may record additional other-than-temporary impairment losses in future periods, which could materially adversely affect the Bank's earnings and retained earnings and the value of Bank membership.

The insolvency or other inability of a significant counterparty to perform its obligations could adversely affect the Bank.
The Bank assumes credit risk when entering into securities transactions, money market transactions, supplemental mortgage insurance agreements, and derivative contracts with counterparties. The Bank routinely executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. The insolvency or other inability of a significant counterparty to perform its obligations under a derivative contract or other agreement could have an adverse effect on the Bank's financial condition and results of operations. The Bank's credit risk may be exacerbated based on market movements that impact the value of the derivative positions, the failure of a counterparty to return collateral owed by the counterparty to the Bank, or when the collateral pledged to the Bank cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to the Bank.

The Bank uses master derivative contracts that contain provisions that require the Bank to net the exposure under all transactions with the counterparty to one amount to calculate collateral requirements. At times, the Bank enters into derivative contracts with U.S. branches or agency offices of foreign commercial banks in jurisdictions in which it is uncertain whether the netting provisions would be enforceable in the event of insolvency of the foreign commercial bank. Although the Bank attempts to monitor the creditworthiness of all counterparties, it is possible that the Bank may not be able to terminate the agreement with a foreign commercial bank before the counterparty would become subject to an insolvency proceeding.

The Bank relies upon derivative instruments to reduce its interest-rate risk associated with certain assets and liabilities on the Bank's balance sheet, including MBS and advances, and the Bank may be required to change its investment strategies and advance product offerings if it is not able to enter into effective derivative instruments on acceptable terms.

The Bank uses derivative instruments to attempt to reduce its interest-rate risk and mortgage prepayment risk. The Bank determines the nature and quantity of hedging transactions based on various factors, including market conditions and the expected volume and terms of advances. As a result, the Bank's effective use of these instruments depends on the ability of the Bank to determine the appropriate hedging positions in light of the Bank's assets, liabilities, and prevailing and anticipated market conditions. In addition, the effectiveness of the Bank's hedging strategy depends upon the Bank's ability to enter into these instruments with acceptable parties, upon terms satisfactory to the Bank, and in the quantities necessary to hedge the Bank's corresponding obligations. If the Bank is unable to manage its hedging positions properly or is unable to enter into hedging instruments upon acceptable terms, the Bank may be unable to manage its interest-rate and other risks, or may be required to change its investment strategies and advance product offerings, which could affect the Bank's financial condition and results of operations.


20


Refer to the information set forth in Item 7, Management's Discussion and Analysis of Financial Condition and Results of OperationsResults of Operations-Derivatives and Hedging Activities, for a discussion of the effect of the Bank's use of derivative instruments on the Bank's net income, and Management's Discussion and Analysis of Financial Condition and Results of OperationsLegislative and Regulatory Developments for a discussion of the new statutory and regulatory requirements for derivative transactions under the Dodd-Frank Act.

The financial models and the underlying assumptions used to value financial instruments may differ materially from actual results.

The degree of judgment in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market parameters. If market quotes are not available, fair values are based on discounted cash flows using market estimates of interest rates and volatility or on dealer prices or prices of similar instruments. Pricing models and their underlying assumptions are based on the Bank's best estimates for discount rates, prepayments, market volatility, and other factors. These assumptions may have a significant effect on the reported fair values of assets and liabilities, including derivatives, the related income and expense, and the expected future behavior of assets and liabilities. While models used by the Bank to value instruments and measure risk exposures are subject to periodic validation by independent parties, rapid changes in market conditions could impact the value of the Bank's instruments, as well as the Bank's financial condition and results of operations. Models are inherently imperfect predictors of actual results because they are based on assumptions about future performance. Changes in any models or in any of the assumptions, judgments, or estimates used in the models may cause the results generated by the model to be materially different from actual results.

The Bank may not be able to pay dividends at rates consistent with target ratios.

The Bank's board of directors may declare dividends on the Bank's capital stock, payable to members, from the Bank's unrestricted retained earnings and current net earnings. The Bank's ability to pay dividends also is subject to statutory and regulatory liquidity requirements. For example, the Bank has adopted a capital management plan to address regulatory guidance issued to all FHLBanks regarding retained earnings. The Bank's capital management plan requires the Bank to establish a target amount of retained earnings by considering factors such as forecasted income, mark-to-market adjustments on derivatives and trading securities, market risk, operational risk, and credit risk, all of which may be influenced by events beyond the Bank's control. Events such as changes in interest rates, collateral value, credit quality of members, and any future other-than-temporary impairment losses may affect the adequacy of the Bank's retained earnings and may require the Bank to reduce its dividends from its target ratios or suspend dividends altogether to achieve and maintain the targeted amount of retained earnings.

An economic downturn or natural disaster in the Bank's region could adversely affect the Bank's profitability and financial condition.

Economic recession over a prolonged period or other unfavorable economic conditions in the Bank's region (including on a state or local level) could have an adverse effect on the Bank's business, including the demand for Bank products and services, and the value of the Bank's collateral securing advances, investments, and mortgage loans held in portfolio. Portions of the Bank's region also are subject to risks from hurricanes, tornadoes, floods or other natural disasters. These natural disasters, including those resulting from significant climate changes, could damage or dislocate the facilities of the Bank's members, may damage or destroy collateral that members have pledged to secure advances or the mortgages the Bank holds for portfolio, or the livelihood of borrowers of the Bank's members, or otherwise could cause significant economic dislocation in the affected areas of the Bank's region.

The Bank relies heavily upon information systems and other technology.

The Bank relies heavily upon information systems and other technology to conduct and manage its business. The Bank owns some of these systems and technology, and third parties own and provide to the Bank some of the systems and technology. To the extent that the Bank experiences a failure or interruption in any of these systems or other technology, including as the result of any “cyberattacks” or other breaches of technology security, the Bank may be unable to conduct and manage its business effectively, including, without limitation, its hedging and advances activities. The Bank can make no assurance that it will be able to prevent, timely and adequately address, or mitigate the negative effects of, any such failure or interruption. Any failure or interruption could significantly harm the Bank's customer relations, risk management, and profitability, which could have a negative effect on the Bank's financial condition and results of operations.




21



Item 1B.    Unresolved Staff Comments.

None.

Item 2.    Properties.

The Bank owns approximately 235,514 square feet of office space at 1475 Peachtree Street, NE, Atlanta, Georgia 30309. The Bank occupies approximately 208,776 square feet of this space, and approximately 26,738 square feet of this space was leased to a single tenant until the expiration of this lease on December 31, 2012. The annual rental income from this lease is not material to the Bank's results of operations. The Bank leases 11,093 square feet of office space in an off-site backup facility located in Marietta, Georgia and 384 square feet of off-site backup space in Norcross, Georgia for the Bank's disaster recovery data center. The Bank also leases 3,337 square feet of office space located in Washington, D.C. The Bank believes these facilities are well maintained and are adequate for the purposes for which they currently are used.

Item 3.
Legal Proceedings.
MBS Litigation
On January 18, 2011, the Bank filed a complaint in the State Court of Fulton County, Georgia against Countrywide Financial Corporation (n/k/a/ Bank of America Home Loans), Countywide Securities Corporation, Countrywide Home Loans, Inc., Bank of America Corporation (as successor to the Countrywide defendants), J.P. Morgan Securities, LLC (f/k/a J.P. Morgan Securities, Inc. and Bear Stearns & Co., Inc.) and UBS Securities, LLC, et al. The Bank’s claims arise from material misrepresentations in the offering documents of thirty private-label MBS sold to the Bank. The Bank’s complaint alleges that the Countrywide Defendants (Countrywide Financial Corporation, Countrywide Securities Corporation, and Countrywide Home Loans, Inc.) and J.P. Morgan Securities, LLC violated the Georgia RICO (Racketeer Influenced and Corrupt Organizations) Act. The complaint further alleges that those defendants, as well as UBS Securities, LLC, committed fraud and negligent misrepresentation in violation of Georgia law, and that Bank of America Corporation is liable to the Bank as a successor to the Countrywide Defendants. The Bank is seeking monetary damages and other relief as compensation for losses it has incurred in connection with the purchase of these private-label MBS.
On May 19, 2011, the defendants filed a joint motion to dismiss; the Bank filed its opposition on July 8, 2011. No order has been issued by the court in response to this motion. On February 14, 2013, the court denied a separate motion to dismiss filed by UBS Securities, LLC. The original action is styled Federal Home Loan Bank of Atlanta v. Countrywide Financial Corp. et al., Civil Action File No. 11EV011779-01G. The court had entered a scheduling order that set trial for October 2013. The parties have moved to adjust that schedule and although no new schedule has been entered, the Bank expects that the trial of the original action will be deferred until 2014.
On March 1, 2012, the court granted a motion to sever the Bank’s claims against the J.P. Morgan entities so that these claims will proceed in a separate action. The severed action is styled Federal Home Loan Bank of Atlanta v. J.P. Morgan Securities, LLC, et al., Civil Action File No. 11EV011779-02G. The court has entered a scheduling order that sets trial in the severed action for November 2014.
MBS Proposed Settlement
In a separate matter, on January 21, 2011, the Bank (together with certain other private-label MBS holders collectively comprising greater than 25 percent of the voting rights with respect to certain private-label MBS) instructed The Bank of New York Mellon, in its capacity as indenture trustee, to pursue enforcement of seller representations and warranties concerning the eligibility of mortgages for securitization in certain Countrywide-issued private-label MBS. On June 29, 2011, a proposed settlement was announced between the trustee and certain Countrywide affiliates with respect to nearly all trust-related claims arising out of these private-label MBS, and the Bank and other investors (Institutional Investors) filed a Notice of Petition to intervene with the Supreme Court of the State of New York, County of New York in support of final court approval of this settlement. The Supreme Court of the State of New York, County of New York has entered a scheduling order that establishes May 30, 2013 for the start of a final hearing on the proposed settlement. It is not certain at this time whether the settlement will ultimately be approved, the timing of any final settlement or the amount of any distribution the Bank may receive as part of a final settlement.
Other
The Bank is subject to other various legal proceedings and actions from time to time in the ordinary course of its business. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of those

22


matters presently known to the Bank will have a material adverse effect on the Bank’s financial condition or results of operations.
 
Item 4.    Mine Safety Disclosure.

Not applicable.

PART II.

Item 5.
Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Bank's members own substantially all of the capital stock of the Bank. Former members, and certain non-members that own the Bank's capital stock as a result of a merger or acquisition of the Bank's member, own the remaining capital stock to support business transactions still carried on the Bank's balance sheet. The Bank's stock is not publicly traded or quoted, and there is no established marketplace for it, nor does the Bank expect a market to develop. The FHLBank Act and the Bank's capital plan prohibit the trading of its capital stock, except in connection with merger or acquisition activity.

A member may request in writing that the Bank redeem its excess capital stock at par value. Any such redemption request is subject to a five year redemption period after the Bank receives the request, subject to certain regulatory requirements and to the satisfaction of any ongoing stock investment requirements applicable to the member. In addition, any member may withdraw from membership upon five years written notice to the Bank. Subject to the member's satisfaction of any outstanding indebtedness and other statutory requirements, the Bank shall redeem at par value the member's capital stock upon withdrawal from membership. The Bank, in its discretion, may repurchase shares held by a member in excess of its required stock holdings, subject to certain limitations and thresholds in the Bank's capital plan. Prior to November 20, 2012, the Bank repurchased excess capital stock based on quarterly determinations. On November 20, 2012, the Bank began repurchasing activity-based excess capital stock on a daily basis. The Bank repurchased $1.2 billion, $478 million, and $888 million of excess capital stock during the second, third, and fourth quarters of 2012, respectively. The Bank repurchased $927 million, $513 million, and $612 million of excess capital stock during the second, third, and fourth quarters of 2011, respectively. The par value of all capital stock is $100 per share, and the operating threshold for daily excess capital stock repurchases is $100 thousand. As of February 28, 2013, the Bank had 1,026 member and non-member shareholders and 47 million shares of its capital stock outstanding (including mandatorily redeemable shares).

The Bank declares and pays any dividends only after net income is calculated for the preceding quarter. The Bank declared quarterly cash dividends in 2012 and 2011 as outlined in the table below (dollars in millions).

 
 
2012
 
2011
Quarter
 
Amount
 
Annualized Rate (%)(1)
 
Amount
 
Annualized Rate (%)(2)
First
 
$
18

 
1.23
 
$
15

 
0.79
Second
 
22

 
1.51
 
14

 
0.81
Third
 
19

 
1.47
 
13

 
0.76
Fourth
 
30

 
2.43
 
12

 
0.80
____________
(1) Dividend rate was equal to the average three-month LIBOR for the preceding quarter plus 75, 100, 100, and 200 basis points for the first, second, third, and fourth quarters of 2012, respectively.
(2) Dividend rate was equal to the average three-month LIBOR for the preceding quarter plus 50 basis points.

The Bank may pay dividends on its capital stock only out of its unrestricted retained earnings account or out of its current net earnings. The Bank's board of directors has discretion to declare or not declare dividends and to determine the rate of any dividends declared. The Bank's board of directors may neither declare nor require the Bank to pay dividends when it is not in compliance with all of its capital requirements or if, after giving effect to the dividend, the Bank would fail to meet any of its capital requirements or it is determined that the dividend would create a financial safety and soundness issue for the Bank.

The Finance Agency prohibits any FHLBank from issuing dividends in the form of stock or otherwise issuing new "excess stock" if that FHLBank has excess stock greater than one percent of that FHLBank's total assets or if issuing such dividends or new excess stock would cause that FHLBank to exceed the one percent excess stock limitation. Excess stock is FHLBank capital stock not required to be held by the member to meet its minimum stock requirement under an FHLBank's capital plan. As of December 31, 2012, the Bank's excess capital stock did not exceed one percent of its total assets. Historically, the Bank

23


has not issued dividends in the form of stock or issued new "excess stock," and a member's existing excess activity-based stock is applied to any activity-based stock requirements related to new advances.

The Bank's board of directors has adopted a capital management plan that includes a targeted amount of retained earnings separate and apart from the restricted retained earnings account. For further discussion of the Bank's capital management plan, dividends and the Joint Capital Agreement pursuant to which the restricted retained earnings account was established, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Capital.

Because only member, former member, and certain non-member institutions, not individuals, may own the Bank's capital stock, the Bank has no equity compensation plans.

The Bank also issues standby letters of credit in the ordinary course of its business. From time to time, the Bank provides standby letters of credit to support members' obligations, members' letters of credit or obligations issued to support unaffiliated, third-party offerings of notes, bonds, or other securities. The Bank issued $6.3 billion, $13.1 billion, and $10.9 billion in letters of credit in 2012, 2011, and 2010, respectively. To the extent that these letters of credit are securities for purposes of the Securities Act of 1933, the issuance of the letter of credit by the Bank is exempt from registration pursuant to section 3(a)(2) thereof.


24


Item 6.     Selected Financial Data.

The following selected historical financial data of the Bank should be read in conjunction with the audited financial statements and related notes thereto, and with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, which are included elsewhere in this Report. The following data, insofar as it relates to each of the years 2008 to 2012, have been derived from annual financial statements, including the statements of condition as of December 31, 2012 and 2011 and the related statements of income for the years ended December 31, 2012, 2011, and 2010 and notes thereto appearing elsewhere in this Report. The financial information presented in the following table, and in the financial statements included in this Report, is not necessarily indicative of the financial condition or results of operations of any other interim or yearly periods (dollars in millions):
 
As of and for the Years Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
Statements of Condition (at year end)
 
 
 
 
 
 
 
 
 
Total assets
$
123,705

 
$
125,270

 
$
131,798

 
$
151,311

 
$
208,564

Investments (1)
30,454

 
36,138

 
39,879

 
32,940

 
38,376

Mortgage loans held for portfolio
1,255

 
1,639

 
2,040

 
2,523

 
3,252

Allowance for credit losses on mortgage loans
(11
)
 
(6
)
 
(1
)
 
(1
)
 
(1
)
Advances
87,503

 
86,971

 
89,258

 
114,580

 
165,856

REFCORP prepayment

 

 

 

 
14

Interest-bearing deposits
2,094

 
2,655

 
3,093

 
2,989

 
3,573

Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
  Discount notes
31,737

 
24,330

 
23,915

 
17,127

 
55,195

  Bonds
82,947

 
90,662

 
95,198

 
121,450

 
138,181

Total consolidated obligations, net (2)
114,684

 
114,992

 
119,113

 
138,577

 
193,376

Mandatorily redeemable capital stock
40

 
286

 
529

 
188

 
44

Affordable Housing Program payable
80

 
109

 
126

 
125

 
139

 Payable to REFCORP

 

 
20

 
21

 

Capital stock - putable
4,898

 
5,718

 
7,224

 
8,124

 
8,463

Retained earnings
1,435

 
1,254

 
1,124

 
873

 
435

Accumulated other comprehensive loss
(58
)
 
(411
)
 
(402
)
 
(744
)
 
(5
)
Total capital
6,275

 
6,561

 
7,946

 
8,253

 
8,893

Statements of Income (for the year ended)
 
 
 
 
 
 
 
 
 
Net interest income
376

 
459

 
544

 
397

 
841

Provision for credit losses
6

 
5

 

 

 

Net impairment losses recognized in earnings
(16
)
 
(118
)
 
(143
)
 
(316
)
 
(186
)
Net (losses) gains on trading securities
(67
)
 
2

 
31

 
(135
)
 
200

Net gains (losses) on derivatives and hedging activities
117

 
(9
)
 
8

 
543

 
(229
)
Letters of credit fees
18

 
19

 
14

 
7

 
4

Other income (3)
3

 
2

 
3

 
3

 
1

Noninterest expense (4)
125

 
123

 
79

 
113

 
286

Income before assessments
300

 
227

 
378

 
386

 
345

Assessments (5)
30

 
43

 
100

 
103

 
91

Net income
270

 
184

 
278

 
283

 
254

Performance Ratios (%)
 
 
 
 
 
 
 
 
 
Return on equity (6)
4.26

 
2.52

 
3.42

 
3.58

 
2.95

Return on assets (7)
0.22

 
0.15

 
0.19

 
0.16

 
0.13

Net interest margin (8)
0.31

 
0.37

 
0.38

 
0.22

 
0.42

Regulatory capital ratio (at year end) (9)
5.15

 
5.79

 
6.74

 
6.07

 
4.29

Equity to assets ratio (10)
5.25

 
5.91

 
5.63

 
4.34

 
4.25

Dividend payout ratio (11)
32.82

 
29.48

 
9.63

 
8.51

 
113.36


25


____________
(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):
December 31, 2012
$
574,257

December 31, 2011
578,118

December 31, 2010
678,528

December 31, 2009
793,314

December 31, 2008
1,060,410


(3) 
Other income includes service fees and other.
(4) 
For the year ended December 31, 2010, amount includes $51 million which represents the reversal of a portion of the provision for credit losses established on a receivable due from Lehman Brothers Special Financing Inc. (LBSF). For the year ended December 31, 2008, amount includes $170 million which represents provision for credit losses established on a receivable due from LBSF.
(5) 
On August 5, 2011, the Finance Agency certified that the FHLBanks have satisfied their REFCORP obligation.
(6) 
Calculated as net income divided by average total equity.
(7) 
Calculated as net income divided by average total assets.
(8) 
Net interest margin is net interest income as a percentage of average earning assets.
(9) 
Regulatory capital ratio is regulatory capital stock plus retained earnings as a percentage of total assets at year end.
(10) 
Calculated as average equity divided by average total assets.
(11) 
Calculated as dividends declared during the year divided by net income during the year.


Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis relates to the Bank's financial condition as of December 31, 2012 and 2011, and results of operations for the years ended December 31, 2012, 2011, and 2010. This section explains the changes in certain key items in the Bank's financial statements from year to year, the primary factors driving those changes, the Bank's risk management processes and results, known trends or uncertainties that the Bank believes may have a material effect on the Bank's future performance, as well as how certain accounting principles affect the Bank's financial statements.

This discussion should be read in conjunction with the Bank's audited financial statements and related notes for the year ended December 31, 2012 included in Item 8 of this Report. Readers also should review carefully “Special Cautionary Notice Regarding Forward-looking Statements” and Item 1A, Risk Factors, for a description of the forward-looking statements in this Report and a discussion of the factors that might cause the Bank's actual results to differ, perhaps materially, from these forward-looking statements.

Executive Summary
Financial Condition
As of December 31, 2012, total assets were $123.7 billion, a decrease of $1.6 billion, or 1.25 percent, from December 31, 2011. This decrease was primarily due to a $5.7 billion, or 15.7 percent, decrease in total investments. The decrease in total investments was primarily due to a $5.4 billion decrease in federal funds sold as further discussed in Management's Discussion and AnalysisFinancial ConditionInvestments below.
As of December 31, 2012, total liabilities were $117.4 billion, a decrease of $1.3 billion, or 1.08 percent from December 31, 2011. This decrease was primarily due to decreases in COs, mandatorily redeemable capital stock, and interest-bearing deposits.
As of December 31, 2012, total capital was $6.3 billion, a decrease of $286 million, or 4.35 percent, from December 31, 2011. This decrease was primarily due to the repurchase of $2.6 billion in excess capital stock, excluding capital stock classified as mandatorily redeemable capital stock, partially offset by the issuance of $1.8 billion of capital stock related to new advance activity, an increase in retained earnings due to the recording of $270 million in net income, offset by the payment of $89 million in dividends, and a $353 million decrease in accumulated other comprehensive loss during the year.



26


Results of Operations
The Bank recorded net income of $270 million for 2012, an increase of $86 million, or 46.9 percent, from net income of $184 million for 2011. The increase in net income was primarily due to a $159 million increase in noninterest income, partially offset by a $83 million decrease in net interest income. These items are discussed in more detail in Management’s Discussion and Analysis—Results of Operations below.
One way in which the Bank analyzes its performance is by comparing its annualized return on equity (ROE) to three-month average LIBOR. The Bank’s ROE was 4.26 percent for 2012, compared to 2.52 percent for 2011. ROE increased for 2012, compared to 2011, primarily as a result of an increase in net income, and a decrease in average total capital during the year. ROE spread to three-month average LIBOR increased to 383 basis points for 2012, compared to 218 basis points for 2011. The increase in the ROE spread to LIBOR was primarily due to the increase in ROE.
The Bank’s interest rate spread was 27 basis points and 32 basis points for 2012 and 2011, respectively. The decrease in the Bank’s interest rate spread for 2012, compared to 2011, was primarily due to a decrease in yield on the Bank’s long-term investment portfolio during the year.
Business Outlook
During 2012, the Bank reported net income, paid dividends each quarter, returned to daily excess stock repurchases, and experienced a decrease in other-than-temporary impairment losses recognized in earnings. The Bank focuses on maintaining an advances-driven, conservative-risk, steady-return business model, which has kept the Bank in strong financial condition despite some continuing volatility in the capital markets and the prolonged low interest rate environment.
The Bank expects that general market conditions may continue to pose some challenges for the Bank in 2013. The prolonged low interest rate environment has resulted in borrowers shifting toward more short-term advances. Although the Bank experienced an overall increase in advances during 2012 compared to 2011, the higher proportion of short-term advances subjects the Bank to increased refinancing risk. In addition, members continue to experience high levels of liquidity and low loan demand, which may reduce overall member demand for advances. The continued low rate environment also creates challenges for the Bank's investment portfolio, as higher-yielding investments mature or prepay in an environment with few attractive reinvestment opportunities. The Bank expects these trends to continue while interest rates remain low. The compression of all spreads during 2012 due to the low rate environment resulted in significant deterioration of swapped funding costs during the fourth quarter of 2012; these spreads seem to have stabilized in the beginning of 2013.
 
 


27


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 December 31,
 
 
 
 
 
2012
 
2011
 
Increase (Decrease)
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
Amount
 
Percent
Advances
$
87,503

 
70.73

 
$
86,971

 
69.43

 
$
532

 
0.61

Long-term investments
21,414

 
17.31

 
21,655

 
17.29

 
(241
)
 
(1.11
)
Short-term investments
9,040

 
7.31

 
14,483

 
11.56

 
(5,443
)
 
(37.58
)
Mortgage loans, net
1,244

 
1.01

 
1,633

 
1.30

 
(389
)
 
(23.78
)
Other assets
4,504

 
3.64

 
528

 
0.42

 
3,976

 
751.46

Total assets
$
123,705

 
100.00

 
$
125,270

 
100.00

 
$
(1,565
)
 
(1.25
)
Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
  Discount notes
$
31,737

 
27.03

 
$
24,330

 
20.50

 
$
7,407

 
30.45

  Bonds
82,947

 
70.64

 
90,662

 
76.37

 
(7,715
)
 
(8.51
)
Deposits
2,094

 
1.78

 
2,655

 
2.24

 
(561
)
 
(21.14
)
Other liabilities
652

 
0.55

 
1,062

 
0.89

 
(410
)
 
(38.67
)
Total liabilities
$
117,430

 
100.00

 
$
118,709

 
100.00

 
$
(1,279
)
 
(1.08
)
Capital stock
$
4,898

 
78.05

 
$
5,718

 
87.15

 
$
(820
)
 
(14.34
)
Retained earnings
1,435

 
22.87

 
1,254

 
19.11

 
181

 
14.49

Accumulated other comprehensive loss
(58
)
 
(0.92
)
 
(411
)
 
(6.26
)
 
353

 
85.91

Total capital
$
6,275

 
100.00

 
$
6,561

 
100.00

 
$
(286
)
 
(4.35
)

Advances

The following table sets forth the Bank's advances outstanding by year of maturity and the related weighted- average interest rate (dollars in millions):
 
As of December 31,
 
2012
 
2011
 
Amount
 
Weighted-average Interest Rate (%)
 
Amount
 
Weighted-average Interest Rate (%)
Overdrawn demand deposit accounts
$
2

 
5.36
 
$
3

 
5.36
Due in one year or less
41,482

 
1.05
 
36,542

 
1.41
Due after one year through two years
7,915

 
2.15
 
11,173

 
3.38
Due after two years through three years
4,735

 
2.17
 
7,851

 
2.89
Due after three years through four years
5,821

 
2.01
 
3,881

 
3.48
Due after four years through five years
8,758

 
2.17
 
5,836

 
2.53
Due after five years
15,157

 
3.80
 
17,283

 
4.21
Total par value
83,870

 
1.90
 
82,569

 
2.58
Discount on AHP advances
(11
)
 
 
 
(12
)
 
 
Discount on EDGE advances
(8
)
 
 
 
(10
)
 
 
Hedging adjustments
3,658

 
 
 
4,431

 
 
Deferred commitment fees
(6
)
 
 
 
(7
)
 
 
Total
$
87,503

 
 
 
$
86,971

 
 
Advances outstanding as of December 31, 2012 were relatively stable compared to December 31, 2011. As a result of the prolonged low interest rate environment, the majority of new advances are short-term advances. As of December 31, 2012, 85.5

28


percent of the Bank's advances were fixed-rate. However, the Bank often simultaneously enters into derivatives with the issuance of advances to convert their rates, in effect, into a short-term variable interest rate, usually based on LIBOR. As of December 31, 2012 and 2011, 52.8 percent and 65.7 percent, respectively, of the Bank's fixed-rate advances were swapped and 28.8 percent and 9.79 percent, respectively, of the Bank's variable-rate advances were swapped. The majority of the Bank's variable-rate advances were indexed to LIBOR. The Bank also offers variable-rate advances tied to the federal funds rate, prime rate, and constant maturity swap rates.

The concentration of the Bank's advances to its 10 largest borrowing member institutions as of December 31, 2012 is contained in Item 1, Business—Credit Products—Advances. Management believes that the Bank holds sufficient collateral, on a member-specific basis, to secure the advances to all borrowers, including these 10 institutions, and the Bank does not expect to incur any credit losses on these advances.

Supplementary financial data on the Bank's advances is set forth under Item 8, Financial Statements and Supplementary Information.

Investments
The following table sets forth more detailed information regarding short- and long-term investments held by the Bank (dollars in millions):
 
 
As of December 31,
 
Increase (Decrease)
 
2012
 
2011
 
Amount    
 
Percent    
Short-term investments:
 
 
 
 
 
 
 
Interest-bearing deposits (1)
$
1,005

 
$
1,203

 
$
(198
)
 
(16.45
)
Certificates of deposit
550

 
650

 
(100
)
 
(15.38
)
Securities purchased under agreements to resell
250

 

 
250

 
*

Federal funds sold
7,235

 
12,630

 
(5,395
)
 
(42.72
)
Total short-term investments
9,040

 
14,483

 
(5,443
)
 
(37.58
)
Long-term investments:
 
 
 
 
 
 
 
State or local housing agency debt obligations
108

 
103

 
5

 
3.71

U.S. government agency debt obligations
4,501

 
4,228

 
273

 
6.47

Mortgage-backed securities:
 
 
 
 
 
 
 
U.S. government agency securities
11,385

 
10,689

 
696

 
6.52

Private-label
5,420

 
6,635

 
(1,215
)
 
(18.31
)
Total mortgage-backed securities
16,805

 
17,324

 
(519
)
 
(2.99
)
Total long-term investments
21,414

 
21,655

 
(241
)
 
(1.11
)
Total investments
$
30,454

 
$
36,138

 
$
(5,684
)
 
(15.73
)
____________ 
(1) 
As of December 31, 2012 and 2011, interest-bearing deposits includes a $1.0 billion and $1.2 billion, respectively, business money market account with Branch Banking and Trust Company, one of the Bank’s ten largest borrowers. One of the Bank’s member directors is a senior executive vice president of Branch Banking and Trust Company and was elected chairman of the Bank's board of directors effective January 1, 2013. Pursuant to Finance Agency regulation, the Bank’s member directors serve as officers or directors of a Bank member, and the Bank may enter into business transactions with such members from time to time in the ordinary course of business.
* Not meaningful

The decrease in short-term investments from December 31, 2011 to December 31, 2012 was primarily due to a decrease in federal funds sold. The amount held in federal funds sold will vary each day based on the federal funds rates, the Bank’s liquidity requirements, and the availability of high quality counterparties in the federal funds market. Throughout 2012, the Federal Reserve paid interest on required and excess reserves balances held by depository institutions at a rate of 0.25 percent. An increase in bank reserves combined with the rate of interest paid on those reserves at the Federal Reserve has contributed to a decline in the volume of transactions taking place in the overnight federal funds market. The Bank has also made a decision to limit its exposure in the unsecured credit market, which has also resulted in a decrease in federal funds sold. Consistent with its decision to reduce its unsecured credit exposure, beginning in the third quarter of 2012 the Bank purchased securities under agreements to resell (reverse repurchase agreements). Additionally, federal funds sold decreased as the Bank increased its cash reserves balance at the Federal Reserve by approximately $4.1 billion during the fourth quarter of 2012 in preparation to meet the needs of its members pending the result of the potential "fiscal cliff" at the beginning of 2013.

29


The Finance Agency limits an FHLBank’s investment in MBS and asset-backed securities by requiring that the total amortized historical costs for these securities classified as held-to-maturity or available-for-sale, and fair value for MBS securities classified as trading owned by the FHLBank, generally may not exceed 300 percent of the FHLBank’s previous month-end total capital, as defined by regulation, plus its mandatorily redeemable capital stock on the day it purchases the securities. These investments amounted to 264 percent and 244 percent of total capital plus mandatorily redeemable capital stock as of December 31, 2012 and 2011, respectively. The Bank was below its target range of 250 percent to 275 percent as of December 31, 2011 due to a lack of quality MBS at attractive prices during the year and due to the Bank’s high level of excess capital stock; however, the Bank was within its target range as of December 31, 2012 due to a decrease in total capital as a result of the repurchase of $2.9 billion in excess capital stock during 2012 and a return to daily repurchases of excess capital stock in the fourth quarter of 2012. The Bank suspended new purchases of private-label MBS beginning in the first quarter of 2008, resulting in a greater percentage of U.S. government agency MBS as of December 31, 2012 compared to December 31, 2011. Refer to Note 6—Available-for-sale Securities and Note 7—Held-to-maturity Securities to the Bank’s audited financial statements for information on securities with unrealized losses as of December 31, 2012 and 2011.
The Bank evaluates its individual investment securities for other-than-temporary impairment on at least a quarterly basis, as described in Note 8—Other-than-temporary Impairment to the Bank’s audited financial statements. For a discussion regarding impairment losses recognized in earnings during the reported periods see Management’s Discussion and Analysis—Results of Operations—Noninterest Income (Loss) below.

Mortgage Loans Held for Portfolio
The decrease in mortgage loans held for portfolio from December 31, 2011 to December 31, 2012 was due to the maturity and prepayment of these assets during the year. The Bank ceased purchasing new mortgage assets in 2008.
As of December 31, 2012 and 2011, the Bank’s conventional mortgage loan portfolio was concentrated in the southeastern United States because those members selling loans to the Bank were located primarily in that region. The following table provides the percentage of unpaid principal balance of conventional single-family residential mortgage loans held for portfolio for the five largest state concentrations.
 
 
As of December 31,
 
2012
 
2011
 
Percent of Total
 
Percent of Total
Florida
26.15

 
23.17

South Carolina
24.12

 
24.61

Georgia
14.34

 
14.45

North Carolina
11.48

 
12.99

Virginia
8.34

 
8.90

All other
15.57

 
15.88

Total
100.00

 
100.00


Supplementary financial data on the Bank's mortgage loans is set forth under Item 8, Financial Statements and Supplementary Data—Supplementary Financial Information (Unaudited).

Consolidated Obligations
The Bank funds its assets primarily through the issuance of consolidated obligation bonds and, to a lesser extent, consolidated obligation discount notes. As of December 31, 2012, CO issuances financed 92.7 percent of the $123.7 billion in total assets, remaining relatively stable from the financing ratio of 91.8 percent as of December 31, 2011.
COs outstanding as of December 31, 2012 were relatively stable compared to December 31, 2011. As of December 31, 2012 and December 31, 2011, COs outstanding were primarily fixed-rate. However, the Bank often simultaneously enters into derivatives with the issuance of CO bonds to convert the interest rates, in effect, into short-term variable interest rates, usually based on LIBOR. As of December 31, 2012 and 2011, 81.4 percent and 81.9 percent, respectively, of the Bank’s fixed-rate CO bonds were swapped and 1.57 percent and 6.42 percent, respectively, of the Bank’s variable-rate CO bonds were swapped. As of December 31, 2012 the Bank had no fixed-rate CO discount notes that were swapped to a variable rate. As of December 31, 2011, 4.64 percent of the Bank’s fixed-rate CO discount notes were swapped to a variable rate.
As of December 31, 2012, callable CO bonds constituted 12.2 percent of the total par value of CO bonds outstanding, compared to 32.0 percent as of December 31, 2011. This decrease was due to market conditions during 2012 that favored the

30


issuance of swapped fixed maturity debt to replace called CO bonds. The derivatives that the Bank may employ to hedge against the interest-rate risk associated with the Bank’s callable CO bonds are callable by the counterparty; if the call feature of the derivative is exercised, the Bank in turn will generally call the hedged CO bond. These call features pose risk that the Bank could be required to refinance a substantial portion of outstanding liabilities during times of decreasing interest rates. With pricing on swapped fixed maturity debt at historic lows during 2012, the Bank replaced swapped callable debt with swapped fixed maturity debt to reduce the Bank’s level of refunding risk. Current market conditions no longer favor swapped fixed maturity debt. Call options on unhedged callable CO bonds generally are exercised when the bond can be replaced at a lower economic cost.
Supplementary financial data on the Bank's short-term borrowings is set forth under Item 8, Financial Statements and Supplementary Data—Supplementary Financial Information (Unaudited).
Deposits
The Bank offers demand and overnight deposit programs to members primarily as a liquidity management service. In addition, a member that services mortgage loans may deposit in the Bank funds collected in connection with the mortgage loans, pending disbursement of those funds to the owners of the mortgage loan. For demand deposits, the Bank pays interest at the overnight rate. Most of these deposits represent member liquidity investments, which members may withdraw on demand. Therefore, the total account balance of the Bank’s deposits may be volatile. As a matter of prudence, the Bank typically invests deposit funds in liquid short-term assets. Member loan demand, deposit flows, and liquidity management strategies influence the amount and volatility of deposit balances carried with the Bank. Total deposits decreased as of December 31, 2012 compared to December 31, 2011.

Capital
The decrease in total capital from December 31, 2011 to December 31, 2012 was primarily due to the repurchase of $2.6 billion in excess capital stock, excluding capital stock classified as mandatorily redeemable capital stock, partially offset by the issuance of $1.8 billion of activity-based capital stock and $41 million of membership capital stock, and a $353 million decrease in accumulated other comprehensive loss during the year. The decrease in accumulated other comprehensive loss was primarily due to improvements in the fair value of the Bank’s available-for-sale securities.
The FHLBank Act and Finance Agency regulations specify that each FHLBank must meet certain minimum regulatory capital standards. The Bank must maintain (1) total capital in an amount equal to at least four percent of its total assets; (2) weighted leverage capital in an amount equal to at least five percent of its total assets; and (3) permanent capital in an amount equal to at least its regulatory risk-based capital requirement. Permanent capital is defined by the FHLBank Act and applicable regulations as the sum of paid-in capital for Class B stock and retained earnings. Mandatorily redeemable capital stock is considered capital for regulatory purposes. These regulatory capital requirements, and the Bank's compliance with these requirements, are shown in detail in Note 15Capital and Mandatorily Redeemable Capital Stock to the Bank's audited financial statements.
Finance Agency regulations establish criteria based on the amount and type of capital held by an FHLBank for four capital classifications as follows:
Adequately Capitalized - FHLBank meets both risk-based and minimum capital requirements;
Undercapitalized - FHLBank does not meet one or both of its risk-based or minimum capital requirements;
Significantly Undercapitalized - FHLBank has less than 75 percent of one or both of its risk-based or minimum capital requirements; and
Critically Undercapitalized - FHLBank total capital is two percent or less of total assets.
Under the regulations, the Director of the Finance Agency (Director) will make a capital classification for each FHLBank at least quarterly and notify the FHLBank in writing of any proposed action and provide an opportunity for the FHLBank to submit information relevant to such action. The Director is permitted to make discretionary classifications. An FHLBank must provide written notice to the Finance Agency within 10 days of any event or development that has caused or is likely to cause its permanent or total capital to fall below the level required to maintain its most recent capital classification or reclassification. The regulations delineate the types of prompt corrective actions the Director may order in the event an FHLBank is not adequately capitalized, including submission of a capital restoration plan by the FHLBank and restrictions on its dividends, stock redemptions, executive compensation, new business activities, or any other actions the Director determines will ensure safe and sound operations and capital compliance by the FHLBank. On December 21, 2012, the Bank received notification from the Director that, based on September 30, 2012 data, the Bank meets the definition of “adequately capitalized.”

31


As of December 31, 2012, the Bank had capital stock subject to mandatory redemption from 17 members and former members, consisting of B1 membership stock and B2 activity-based capital stock, compared to 68 members and former members as of December 31, 2011, consisting of B1 membership capital stock and B2 activity-based capital stock. The decrease in capital stock subject to mandatory redemption from 2011 to 2012 is primarily due to the decrease in member failures during the same period. The Bank is not required to redeem or repurchase such capital stock until the expiration of the five-year redemption period or, with respect to activity-based capital stock, until the later of the expiration of the five-year redemption period or the activity no longer remains outstanding. The Bank, in its discretion, may repurchase excess capital stock subject to certain limitations and thresholds in the Bank's capital plan.
Prior to November 20, 2012, the Bank made its determination regarding the repurchase of excess capital stock on a quarterly basis, after financial results were known for the preceding quarter. On November 19, 2012, the Bank repurchased all membership excess capital stock and activity-based excess capital stock. Shareholders with excess capital stock on the repurchase date were not permitted to opt out of the repurchase. Effective November 20, 2012, the Bank began repurchasing activity-based excess capital stock on a daily basis. The operational threshold for daily excess stock repurchases is $100 thousand. The change to daily excess stock repurchases helps reduce the volatility of capital stock balances due to large advance maturities and reduces pressure on the Bank to invest large amounts of capital in a low rate environment.
In 2011, the FHLBanks entered into a Joint Capital Agreement which is intended to enhance the capital position of each FHLBank and the safety and soundness of the FHLBank System. The intent of the Joint Capital Agreement is to allocate that portion of each FHLBank’s earnings historically paid to satisfy its REFCORP obligation to a restricted retained earnings account at that FHLBank. These restricted retained earnings are not available to pay dividends. Each FHLBank amended its capital plan to implement the provisions of the Joint Capital Agreement. The Finance Agency approved the capital plan amendments and certified satisfaction of the REFCORP obligation on August 5, 2011. In accordance with the Joint Capital Agreement, starting in the third quarter of 2011, each FHLBank contributes 20 percent of its net income to a restricted retained earnings account until the account balance equals at least one percent of such FHLBank's average balance of outstanding COs for the previous quarter.
The Bank assesses the adequacy of its retained earnings under a stress testing methodology that largely mirrors the comprehensive capital analysis and review methodology used by the Federal Reserve. This stress testing includes a highly stressed scenario and an extremely stressed scenario, each over a two year horizon. This assessment considers pessimistic assumptions about forecasted income, mark-to-market adjustments on derivatives and trading securities, credit risk, and operational risk.
Under its capital management plan, the Bank targets a capital-to-assets ratio of 4.75 percent to 5.25 percent, and retained earnings equal to the restricted retained earnings account balance plus the extremely stressed scenario losses. The Bank also attempts to maintain additional retained earnings equal to two quarters of dividends, based on the current dividend rate and current stock balance. The Bank believes that daily excess stock repurchases and consistent dividends gives members greater certainty, which in turn may have a positive impact on members' appetite for advances. The Bank targets a dividend rate of LIBOR plus 50-150 basis points; however, any quarterly dividend determination is subject to the Bank's actual financial performance, its ability to maintain adequate retained earnings, and the discretion of the Bank's board of directors. The Bank paid $30 million in dividends during the fourth quarter of 2012.


Results of Operations

The following is a discussion and analysis of the Bank's results of operations for the years ended December 31, 2012, 2011, and 2010.


32


Net Income
The following table sets forth the Bank’s significant income items for the years ended December 31, 2012, 2011, and 2010, and provides information regarding the changes during the periods (dollars in millions). These items are discussed in more detail below.
 
 
 
 
 
 
 
 
Increase (Decrease)    
 
For the Years Ended December 31,
 
2012 vs. 2011
 
2011 vs. 2010
 
2012
 
2011
 
2010
 
Amount
 
Percent
 
Amount
 
Percent
Net interest income
$
376

 
$
459

 
$
544

 
$
(83
)
 
(18.01
)
 
$
(85
)
 
(15.64
)
Provision for credit losses
6

 
5

 

 
1

 
26.57

 
5

 
*

Noninterest income (loss)
55

 
(104
)
 
(87
)
 
159

 
153.25

 
(17
)
 
(18.80
)
Noninterest expense
125

 
123

 
79

 
2

 
0.87

 
44

 
57.40

Total assessments
30

 
43

 
100

 
(13
)
 
(29.08
)
 
(57
)
 
(57.37
)
Net income
$
270

 
$
184

 
$
278

 
$
86

 
46.94

 
$
(94
)
 
(33.73
)
____________
*Not meaningful

Net Interest Income
The primary source of the Bank’s earnings is net interest income. Net interest income equals interest earned on assets (including member advances, mortgage loans, MBS held in portfolio, and other investments), less the interest expense incurred on liabilities (including COs, deposits, and other borrowings). Also included in net interest income are miscellaneous related items such as prepayment fees earned and the amortization of debt issuance discounts, concession fees, and certain derivative instruments and hedging activities related adjustments.
The decrease in net interest income during 2012, compared to 2011, was primarily due to a 58 basis points decrease in yield on the Bank’s long-term investments portfolio during the year. The yield on the Bank’s long-term investment portfolio continued to decline primarily due to the maturity or prepayment of higher yielding investments and the purchase of lower yielding instruments. The Bank believes this trend is likely to continue in the current prolonged low interest rate environment.
The decrease in net interest income during 2011, compared to 2010, was primarily due to a 94 basis point decrease in yield on the Bank's long-term investments and a decrease in interest earned on advances due to a decrease in the average balance of advances outstanding during 2011 compared to 2010.
The following table summarizes key components of net interest income for the years presented (in millions):

 
For the Years Ended December 31,
 
2012
 
2011
 
2010
Interest income:
 
 
 
 
 
   Advances
$
294

 
$
258

 
$
320

   Investments
603

 
754

 
960

   Mortgage loans held for portfolio
76

 
97

 
121

Total interest income
973

 
1,109

 
1,401

 
 
 
 
 
 
Interest expense:
 
 
 
 
 
   Consolidated obligations
593

 
645

 
852

   Deposits
1

 
1

 
3

   Mandatorily redeemable capital stock
3

 
4

 
2

Total interest expense
597

 
650

 
857

Net interest income
$
376

 
$
459

 
$
544




33


As discussed above, net interest income also includes components of hedging activity. When a hedging relationship is discontinued, the cumulative fair value adjustment on the hedged item will be amortized into interest income or expense over the remaining life of the asset or liability. Also, when hedging relationships qualify for hedge accounting, the interest components of the hedging derivatives will be reflected in interest income or expense. As shown in the table summarizing the net effect of derivatives and hedging activity on the Bank’s results of operations, the impact of hedging on interest income was a decrease of $1.0 billion, $1.4 billion and $2.1 billion during the years ended December 31, 2012, 2011, and 2010, 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 years ended December 31, 2012 , 2011, and 2010, (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, if the derivatives qualify for fair-value hedge accounting under GAAP, the net interest income or expense associated with the derivative is included in net interest income and in the calculation of interest-rate spread. If the derivatives do not qualify for fair-value hedge accounting under GAAP, the net interest income or expense associated with the derivatives is excluded from net interest income and the calculation of the interest-rate spread. Amortization associated with some hedging-related basis adjustments is also reflected in net interest income, which affects interest-rate spread.

 
For the Years Ended December 31,
 
2012
 
2011
 
2010
 
Average        
Balance
 
Interest
 
Yield/    
Rate
(%)
 
Average        
Balance
 
Interest
 
Yield/    
Rate
(%)
 
Average        
Balance
 
Interest
 
Yield/    
Rate
(%)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (1)
$
4,279

 
$
7

 
0.17
 
$
3,599

 
$
4

 
0.12
 
$
3,655

 
$
7

 
0.18
Certificates of deposit
702

 
2

 
0.30
 
909

 
2

 
0.23
 
1,146

 
4

 
0.33
Securities purchased under agreements to resell
293

 
1

 
0.20
 

 

 
 

 

 
Federal funds sold
10,356

 
18

 
0.17
 
14,483

 
24

 
0.16
 
13,302

 
31

 
0.23
Long-term investments (2)
21,333

 
575

 
2.69
 
22,160

 
724

 
3.27
 
21,814

 
918

 
4.21
Advances
81,857

 
294

 
0.36
 
79,848

 
258

 
0.32
 
100,948

 
320

 
0.32
Mortgage loans held for portfolio (3)
1,438

 
76

 
5.33
 
1,829

 
97

 
5.32
 
2,300

 
121

 
5.25
Loans to other FHLBanks
1

 

 
0.12
 
2

 

 
0.14
 
1

 

 
0.19
Total interest-earning assets
120,259

 
973

 
0.81
 
122,830

 
1,109

 
0.90
 
143,166

 
1,401

 
0.98
Allowance for credit losses on mortgage loans
(9
)
 
 
 
 
 
(1
)
 
 
 
 
 
(1
)
 
 
 
 
Other assets
799

 
 
 
 
 
844

 
 
 
 
 
1,013

 
 
 
 
Total assets
$
121,049

 
 
 
 
 
$
123,673

 
 
 
 
 
$
144,178

 
 
 
 
Liabilities and Capital
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (4)
$
2,482

 
1

 
0.05
 
$
2,851

 
1

 
0.04
 
$
3,142

 
3

 
0.09
Short-term borrowings
22,316

 
25

 
0.11
 
18,960

 
17

 
0.09
 
19,486

 
29

 
0.15
Long-term debt
85,550

 
568

 
0.66
 
89,896

 
628

 
0.70
 
107,614

 
823

 
0.76
Other borrowings
154

 
3

 
1.92
 
421

 
4

 
0.92
 
443

 
2

 
0.38
Total interest-bearing liabilities
110,502

 
597

 
0.54
 
112,128

 
650

 
0.58
 
130,685

 
857

 
0.66
Other liabilities
4,195

 
 
 
 
 
4,230

 
 
 
 
 
5,372

 
 
 
 
Total capital
6,352

 
 
 
 
 
7,315

 
 
 
 
 
8,121

 
 
 
 
Total liabilities and capital
$
121,049

 
 
 
 
 
$
123,673

 
 
 
 
 
$
144,178

 
 
 
 
Net interest income and net yield on interest-earning assets
 
 
$
376

 
0.31
 
 
 
$
459

 
0.37
 
 
 
$
544

 
0.38
Interest rate spread
 
 
 
 
0.27
 
 
 
 
 
0.32
 
 
 
 
 
0.32
Average interest-earning assets to interest-bearing liabilities
 
 
 
 
108.83
 
 
 
 
 
109.54
 
 
 
 
 
109.55
____________ 
(1) 
Includes amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative counterparties.
(2) 
Includes trading securities at fair value and available-for-sale securities at amortized cost.
(3) 
Nonperforming loans are included in average balances used to determine average rate.
(4) 
Includes amounts recognized for the right to return cash collateral received under master netting agreements with derivative counterparties.



34


Net interest income for the years presented was affected by changes in average balances (volume change) and changes in average rates (rate change) of interest-earning assets and interest-bearing liabilities. The following table presents the extent to which volume changes and rate changes affected the Bank’s interest income and interest expense (in millions). As noted in the table below, the overall change in net interest income in 2012 and 2011, was primarily rate related.
 
 
2012 vs. 2011
 
2011 vs. 2010
 
Volume (1)
 
Rate (1)
 
Increase (Decrease)    
 
Volume (1)
 
Rate (1)
 
Increase (Decrease)
Increase (decrease) in interest income:
 
 
 
 
 
 
 
 
 
 
 
 Interest-bearing deposits
$
1

 
$
2

 
$
3

 
$

 
$
(3
)
 
$
(3
)
 Certificates of deposit
(1
)
 
1

 

 
(1
)
 
(1
)
 
(2
)
 Securities purchased under agreements to resell
1

 

 
1

 

 

 

 Federal funds sold
(7
)
 
1

 
(6
)
 
3

 
(10
)
 
(7
)
 Long-term investments
(26
)
 
(123
)
 
(149
)
 
15

 
(209
)
 
(194
)
 Advances
6

 
30

 
36

 
(68
)
 
6

 
(62
)
    Mortgage loans held for portfolio
(21
)
 

 
(21
)
 
(25
)
 
1

 
(24
)
Total
(47
)
 
(89
)
 
(136
)
 
(76
)
 
(216
)
 
(292
)
Increase (decrease) in interest expense:
 
 
 
 
 
 
 
 
 
 
 
 Interest-bearing deposits

 

 

 

 
(2
)
 
(2
)
 Short-term borrowings
3

 
5

 
8

 

 
(12
)
 
(12
)
 Long-term debt
(29
)
 
(31
)
 
(60
)
 
(128
)
 
(67
)
 
(195
)
 Other borrowings
(4
)
 
3

 
(1
)
 

 
2

 
2

Total
(30
)
 
(23
)
 
(53
)
 
(128
)
 
(79
)
 
(207
)
(Decrease) increase in net interest income
$
(17
)
 
$
(66
)
 
$
(83
)
 
$
52

 
$
(137
)
 
$
(85
)
____________ 
(1) 
Volume change is calculated as the change in volume multiplied by the previous rate, while rate change is the change in rate multiplied by the previous volume. The rate/volume change, change in rate multiplied by change in volume, is allocated between volume change and rate change at the ratio each component bears to the absolute value of its total.
Noninterest Income (Loss)
The following table presents the components of noninterest income (loss) (dollars in millions):
 
 
 
 
 
 
 
 
Increase (Decrease)
 
For the Years Ended December 31,
 
2012 vs. 2011
 
2011 vs. 2010
 
2012
 
2011
 
2010
 
Amount
 
Percent
 
Amount
 
Percent
Net impairment losses recognized in earnings
$
(16
)
 
$
(118
)
 
$
(143
)
 
$
102

 
86.01

 
$
25

 
17.63

Net (losses) gains on trading securities
(67
)
 
2

 
31

 
(69
)
 
*

 
(29
)
 
(93.72
)
Net gains (losses) on derivatives and hedging activities
117

 
(9
)
 
8

 
126

 
*

 
(17
)
 
(221.16
)
Letters of credit
18

 
19

 
14

 
(1
)
 
(6.41
)
 
5

 
35.56

Other
3

 
2

 
3

 
1

 
80.93

 
(1
)
 
(30.17
)
Total noninterest income (loss)
$
55

 
$
(104
)
 
$
(87
)
 
$
159

 
153.25

 
$
(17
)
 
(18.80
)
____________
*Not meaningful

The change in total noninterest income (loss) noted in the above table was primarily due to net impairment losses recognized in earnings, adjustments required to report trading securities at fair value, and derivatives and hedging activities. Credit-related other-than-temporary impairment losses during the reported periods reflect the impact of estimated losses on loan collateral underlying certain private-label MBS. Each quarter, the Bank updates its other-than-temporary impairment analysis to reflect current housing market conditions, changes in anticipated housing market conditions, observed and anticipated borrower behavior, and updated information on the loans supporting the Bank’s private-label MBS. Factors that affected projected borrower default rates and projected loan loss severity include the impact of inventories of unsold homes on current and forecasted housing prices, the overall health of the economy and unemployment levels. As discussed in Note 8—Other-than-temporary Impairment of the Bank’s audited financial statements, the housing price forecast as of December 31, 2012 was stabilizing with home price changes for the fourth quarter of 2012 ranging from declines of two percent to increases of two percent. Beginning in 2013, home prices are projected to recover or continue to recover.


35


Substantially all of the Bank's trading securities are fixed interest-rate securities and 99.9 percent were swapped to a variable rate. Long-term interest rates were relatively stable during 2012 resulting in net losses of $67 million on trading securities. These losses were offset by gains of $59 million on derivatives in non-qualifying hedges related to the Bank's trading securities which are reported as part of net gains (losses) on derivatives and hedging activities, resulting in net losses of $8 million on trading securities during 2012. There was a decrease in long-term interest rates during 2011 resulting in net gains of $2 million on trading securities during 2011. Additionally, there were gains of $15 million on non-qualifying hedges related to the Bank's trading securities, resulting in gains of $17 million on trading securities during 2011.

Net gains (losses) on derivatives and hedging activities increased during 2012, compared to 2011, primarily due to an increase in income associated with amortization on redesignated advances that is offset by a decrease in income due to amortization associated with de-designated advances in net interest income. There was also a decrease in the loss associated with interest on stand-alone derivatives that was partially offset by an increase in income associated with the derivatives hedging trading securities. The increase in net gains (losses) on derivatives and hedging activities was partially offset by a $20.1 million reduction in 2012 due to the Bank's switching from LIBOR to Overnight Index Swap (OIS) discounting on collateralized derivatives effective December 31, 2012.

The increase in total noninterest loss during 2011, compared to 2010, was primarily due to a decrease in net (losses) gains on derivatives and hedging activities due to a decrease in hedging and stand alone related income partially offset by an increase in income associated with derivatives hedging trading securities. Noninterest loss also increased in 2011 compared to 2010 due to a decrease in the fair value of trading securities, partially offset by lower credit related other-than-temporary impairment losses in 2011 compared to 2010.

The following tables summarize the net effect of derivatives and hedging activity on the Bank’s results of operations (in millions): 
 
For the Year Ended December 31, 2012
 
Advances
 
Investments
 
Consolidated
Obligation
Bonds
 
Consolidated
Obligation
Discount
Notes
 
Balance
Sheet