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Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________ 
FORM 10-Q
_____________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018
OR 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-51845
 _____________________________________ 
FEDERAL HOME LOAN BANK OF ATLANTA
(Exact name of registrant as specified in its charter)
_____________________________________  
Federally chartered corporation
 
56-6000442
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
1475 Peachtree Street, NE, Atlanta, Georgia
 
30309
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (404) 888-8000
_____________________________________  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
x  
Smaller reporting company
¨
 
 
Emerging growth company
¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No

The number of shares outstanding of the registrant’s Class B Stock, par value $100, as of July 31, 2018 was 54,305,074.

Table of Contents


Table of Contents
 

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


Table of Contents


PART I. FINANCIAL INFORMATION.

Item 1. Financial Statements.
FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CONDITION
(Unaudited)
(In millions, except par value)

 
As of June 30, 2018
 
As of December 31, 2017
Assets
 
 
 
Cash and due from banks
$
804

 
$
2,357

Interest-bearing deposits (including deposits with other FHLBanks of $9 and $22 as of June 30, 2018 and December 31, 2017, respectively)
3,939

 
2,176

Securities purchased under agreements to resell
2,500

 
2,500

Federal funds sold
13,718

 
9,380

Investment securities:
 
 
 
    Trading securities
55

 
56

    Available-for-sale securities
1,001

 
1,104

    Held-to-maturity securities (fair value of $26,438 and $25,219 as of June 30, 2018 and December 31, 2017, respectively)
26,416

 
25,162

Total investment securities
27,472

 
26,322

Advances
104,537

 
102,440

Mortgage loans held for portfolio, net:
 
 
 
Mortgage loans held for portfolio
395

 
436

Allowance for credit losses on mortgage loans
(1
)
 
(1
)
Total mortgage loans held for portfolio, net
394

 
435

Loan to another FHLBank
—

 
200

Accrued interest receivable
297

 
208

Derivative assets
326

 
334

Premises and equipment, net
20

 
22

Other assets
164

 
192

Total assets
$
154,171

 
$
146,566

Liabilities
 
 
 
Interest-bearing deposits
$
1,069

 
$
1,177

Consolidated obligations, net:
 
 
 
Discount notes
65,353

 
50,139

Bonds
79,812

 
87,523

Total consolidated obligations, net
145,165

 
137,662

Mandatorily redeemable capital stock
2

 
1

Accrued interest payable
172

 
142

Affordable Housing Program payable
80

 
77

Derivative liabilities
23

 
21

Other liabilities
186

 
219

Total liabilities
146,697

 
139,299

Commitments and contingencies (Note 15)

 

Capital
 
 
 
Capital stock Class B putable ($100 par value) issued and outstanding shares:
 
 
 
Subclass B1 issued and outstanding shares: 9 and 8 as of June 30, 2018 and December 31, 2017, respectively
859

 
819

Subclass B2 issued and outstanding shares: 44 as of June 30, 2018 and December 31, 2017
4,441

 
4,335

Total capital stock Class B putable
5,300

 
5,154

Retained earnings:
 
 
 
Restricted
424

 
380

Unrestricted
1,655

 
1,623

Total retained earnings
2,079

 
2,003

Accumulated other comprehensive income
95

 
110

Total capital
7,474

 
7,267

Total liabilities and capital
$
154,171

 
$
146,566


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

3
Table of Contents


FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF INCOME
(Unaudited)
(In millions)
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Interest income
 
 
 
 
 
 
 
Advances
$
537

 
$
250

 
$
992

 
$
169

Prepayment fees, net
—

 
—

 
—

 
1

Interest-bearing deposits
17

 
6

 
31

 
11

Securities purchased under agreements to resell
11

 
3

 
17

 
4

Federal funds sold
59

 
28

 
108

 
47

Trading securities
1

 
3

 
1

 
6

Available-for-sale securities
26

 
27

 
52

 
54

Held-to-maturity securities
153

 
98

 
280

 
183

Mortgage loans
5

 
6

 
11

 
13

Total interest income
809

 
421

 
1,492

 
488

Interest expense
 
 
 
 
 
 
 
Consolidated obligations:
 
 
 
 
 
 
 
 Discount notes
282

 
103

 
506

 
171

 Bonds
392

 
202

 
712

 
401

Interest-bearing deposits
4

 
2

 
8

 
4

Total interest expense
678

 
307

 
1,226

 
576

Net interest income (expense)
131

 
114

 
266

 
(88
)
Noninterest income (loss)
 
 
 
 
 
 
 
Total other-than-temporary impairment losses
—

 
—

 
—

 
—

Net amount of impairment losses reclassified from accumulated other comprehensive income
(1
)
 
(2
)
 
(1
)
 
(2
)
Net impairment losses recognized in earnings
(1
)

(2
)

(1
)
 
(2
)
Net losses on trading securities
(1
)
 
(2
)
 
(2
)
 
(4
)
Net gains on derivatives and hedging activities
14

 
7

 
36

 
320

Standby letters of credit fees
7

 
7

 
13

 
14

Other
2

 
2

 
2

 
3

Total noninterest income
21


12


48

 
331

Noninterest expense
 
 
 
 
 
 
 
Compensation and benefits
19

 
18

 
39

 
37

Other operating expenses
9

 
8

 
18

 
17

Finance Agency
2

 
2

 
4

 
4

Office of Finance
1

 
1

 
3

 
3

Other
2

 
1

 
4

 
3

Total noninterest expense
33


30


68


64

Income before assessments
119

 
96

 
246

 
179

Affordable Housing Program assessments
12

 
10

 
25

 
18

Net income
$
107


$
86


$
221


$
161


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

4
Table of Contents


FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In millions)
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
107

 
$
86

 
$
221

 
$
161

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Net noncredit portion of other-than-temporary impairment losses on available-for-sale securities:
 
 
 
 
 
 
 
Net change in fair value on other-than-temporarily impaired available-for-sale securities
(2
)
 
6

 
(18
)
 
6

Reclassification of noncredit portion of impairment losses included in net income
1

 
2

 
1

 
2

Total net noncredit portion of other-than-temporary impairment losses on available-for-sale securities
(1
)
 
8

 
(17
)
 
8

Pension and postretirement benefit plans
1

 
—

 
2

 
1

Total other comprehensive income (loss)
—

 
8

 
(15
)
 
9

Total comprehensive income
$
107

 
$
94

 
$
206

 
$
170


The accompanying notes are an integral part of these financial statements


.

5
Table of Contents


FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CAPITAL
(Unaudited)
(In millions)
 
 
Capital Stock Class B Putable
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total Capital    
 
Shares        
 
Par Value
 
Restricted    
 
Unrestricted    
 
Total        
 
Balance, December 31, 2016
50

 
$
4,955

 
$
310

 
$
1,582

 
$
1,892

 
$
104

 
$
6,951

Issuance of capital stock
43

 
4,351

 
—

 
—

 
—

 
—

 
4,351

Repurchase/redemption of capital stock
(46
)
 
(4,610
)
 
—

 
—

 
—

 
—

 
(4,610
)
Net shares reclassified to mandatorily redeemable capital stock
—

 
(16
)
 
—

 
—

 
—

 
—

 
(16
)
Comprehensive income
—

 
—

 
33

 
128

 
161

 
9

 
170

Cash dividends on capital stock
—

 
—

 
—

 
(118
)
 
(118
)
 
—

 
(118
)
Balance, June 30, 2017
47

 
$
4,680

 
$
343

 
$
1,592

 
$
1,935

 
$
113

 
$
6,728

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
52

 
$
5,154

 
$
380

 
$
1,623

 
$
2,003

 
$
110

 
$
7,267

Issuance of capital stock
61

 
6,132

 
—

 
—

 
—

 
—

 
6,132

Repurchase/redemption of capital stock
(60
)
 
(5,953
)
 
—

 
—

 
—

 
—

 
(5,953
)
Net shares reclassified to mandatorily redeemable capital stock
—

 
(33
)
 
—

 
—

 
—

 
—

 
(33
)
Comprehensive income (loss)
—

 
—

 
44

 
177

 
221

 
(15
)
 
206

Cash dividends on capital stock
—

 
—

 
—

 
(145
)
 
(145
)
 
—

 
(145
)
Balance, June 30, 2018
53

 
$
5,300

 
$
424

 
$
1,655

 
$
2,079

 
$
95

 
$
7,474


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

6
Table of Contents


FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
 
 
For the Six Months Ended June 30,
 
2018
 
2017
Operating activities
 
 
 
Net income
$
221

 
$
161

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
70

 
(9
)
Net change in fair value adjustment on derivatives and related hedging activities
268

 
45

  Net change in fair value adjustment on trading securities
2

 
4

  Net impairment losses recognized in earnings
1

 
2

Net change in:
 
 
 
  Accrued interest receivable
(90
)
 
(28
)
  Other assets
30

 
(8
)
  Affordable Housing Program payable
3

 
1

  Accrued interest payable
30

 
(16
)
  Other liabilities
(34
)
 
(25
)
  Total adjustments
280

 
(34
)
Net cash provided by operating activities
501

 
127

Investing activities
 
 
 
Net change in:
 
 
 
  Interest-bearing deposits
(1,701
)
 
937

  Securities purchased under agreements to resell
—

 
(114
)
  Federal funds sold
(4,338
)
 
(3,604
)
  Loan to another FHLBank
200

 
—

Available-for-sale securities:
 
 
 
  Proceeds from principal collected
117

 
157

Held-to-maturity securities:
 
 
 
  Net change in short-term
—

 
(350
)
  Proceeds from principal collected
2,700

 
2,984

  Purchases of long-term
(3,956
)
 
(3,098
)
Advances:
 
 
 
  Proceeds from principal collected
229,834

 
180,752

  Made
(232,365
)
 
(173,649
)
Mortgage loans:
 
 
 
  Proceeds from principal collected
40

 
53

  Purchases from another FHLBank
—

 
(18
)
Proceeds from sale of foreclosed assets
1

 
2

Purchases of premises, equipment, and software
(2
)
 
(2
)
Net cash (used in) provided by investing activities
(9,470
)
 
4,050

 
 
 
 
 
 
 
 
 
 
 
 

7
Table of Contents


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

 
For the Six Months Ended June 30,
 
2018
 
2017
Financing activities
 
 
 
Net change in interest-bearing deposits
(141
)
 
250

Net payments on derivatives containing a financing element
(3
)
 
(16
)
Proceeds from issuance of consolidated obligations:
 
 
 
 Discount notes
554,778

 
363,936

 Bonds
40,185

 
24,983

Payments for debt issuance costs
(6
)
 
(4
)
Payments for maturing and retiring consolidated obligations:
 
 
 
 Discount notes
(539,662
)
 
(353,897
)
 Bonds
(47,737
)
 
(39,782
)
Proceeds from issuance of capital stock
6,132

 
4,351

Payments for repurchase/redemption of capital stock
(5,953
)
 
(4,610
)
Payments for repurchase/redemption of mandatorily redeemable capital stock
(32
)
 
(15
)
Cash dividends paid
(145
)
 
(118
)
Net cash provided by (used in) financing activities
7,416

 
(4,922
)
Net decrease in cash and due from banks
(1,553
)
 
(745
)
Cash and due from banks at beginning of the period
2,357

 
1,815

Cash and due from banks at end of the period
$
804

 
$
1,070

Supplemental disclosures of cash flow information:
 
 
 
 Cash paid for:
 
 
 
Interest
$
1,096

 
$
573

Affordable Housing Program assessments, net
$
21

 
$
16

 Noncash investing and financing activities:
 
 
 
Net shares reclassified to mandatorily redeemable capital stock
$
33

 
$
16

Transfers of mortgage loans to real estate owned
$
1

 
$
2


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

 


8
Table of Contents


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

Note 1—Basis of Presentation

The accompanying unaudited interim financial statements of the Federal Home Loan Bank of Atlanta (Bank) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). To prepare the financial statements in conformity with GAAP, management must make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and income and expenses during the reporting period. Actual results could be different from these estimates. The foregoing interim financial statements are unaudited; however, in the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the results for the interim periods, have been included. The results of operations for interim periods are not necessarily indicative of results to be expected for the year ending December 31, 2018, or for other interim periods. The unaudited interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2017, which are contained in the Bank’s 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 8, 2018 (Form 10-K).

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

Refer to Note 2—Summary of Significant Accounting Policies to the Bank’s 2017 audited financial statements for a description of all the Bank’s significant accounting policies. There have been no changes to these policies as of June 30, 2018.


9
Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


Note 2—Recently Issued and Adopted Accounting Guidance

The following tables provide a summary of accounting guidance issued by the Financial Accounting Standards Board that was adopted during 2018 or not yet adopted as of June 30, 2018, which may impact the Bank’s financial statements.

Recently Adopted Accounting Guidance
Accounting Standard Update (ASU)
 
Description
 
Effective Date
 
Effect on Financial Statements or Other Significant Matters
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
(ASU 2017-07)
 
This guidance requires entities to report the service cost component in the same line items as compensation cost on the income statement, while the other components of net benefit cost are required to be presented separately from the service cost component. Additionally, this guidance only allows the service cost component to be eligible for capitalization, when applicable.
 
January 1, 2018

 
The adoption of this guidance did not have a material impact on the Bank's financial condition or results of operations.
Classification of Certain Cash Receipts and Cash Payments
(ASU 2016-15)
 
This guidance is intended to reduce diversity in practice in how cash receipts and cash payments are presented and classified in the statement of cash flows for certain transaction.
 
January 1, 2018



 
Upon adoption, interest paid as reported in the supplemental disclosures of cash flow information increased by $144 for the six months ended June 30, 2017, relating to accreted interest on zero-interest debt instruments. However, the adoption of this guidance does not have any other effect on the Bank's financial condition, results of operations, or cash flows.
Recognition and Measurement of Financial Assets and Financial Liabilities
(ASU 2016-01)
 
This guidance amends certain requirements for accounting for the recognition and measurement of financial instruments. Most notably, this guidance revises the accounting for equity securities, financial instruments measured under the fair value option, and certain disclosure requirements for fair value of financial instruments.
 
January 1, 2018


 
The adoption of this guidance did not have an impact on the Bank's financial condition or results of operations.
Revenue From Contracts with Customers
(ASU 2014-09)
 
This guidance requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
 
January 1, 2018


 
Given that the majority of the Bank's financial instruments and other contractual rights that generate revenue are covered by other GAAP, the adoption of this guidance did not have an impact on the Bank’s financial condition or results of operations.












10
Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


Recently Issued Accounting Guidance
Accounting Standard Update (ASU)
 
Description
 
Effective Date
 
Effect on Financial Statements or Other Significant Matters
Targeted Improvements to Accounting for Hedging Activities
(ASU 2017-12)
 
This guidance amends the accounting for derivatives and hedging activities to better portray the economics of the transactions.
 
January 1, 2019

Early adoption is permitted
 
The Bank does not intend to adopt this guidance early. The Bank is in the process of evaluating this guidance, and its impact on the Bank’s financial condition and results of operations has not yet been determined.
Premium Amortization on Purchased Callable Debt Securities
(ASU 2017-08)
 
This guidance shortens the amortization period for certain callable debt securities held at a premium by requiring that the premium be amortized to the earliest call date, rather than contractual maturity.
 
January 1, 2019

Early adoption is permitted
 
The Bank does not intend to adopt this guidance early. The Bank is in the process of evaluating this guidance, but this guidance is not expected to have a material impact on the Bank’s financial condition or results of operations.
Measurement of Credit Losses on Financial Instruments
(ASU 2016-13)
 
This guidance replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects lifetime expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
 
January 1, 2020

Early adoption is permitted

 
The Bank does not intend to adopt this guidance early. While the Bank is in the process of evaluating this guidance, the Bank expects the adoption of this guidance may result in an increase in the allowance for credit losses. The effect on the Bank’s financial condition and results of operations will depend upon the composition of the financial assets held by the Bank at the adoption date, as well as the economic conditions and forecasts at that time.
Leases
(ASU 2016-02)
 
The guidance amends the accounting for leases. It will require lessees to recognize a right-of-use asset and lease liability for virtually all leases.
 
January 1, 2019

Early adoption is permitted

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


















11
Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)



Note 3—Trading Securities

Major Security Types. The following table presents trading securities.
 
As of June 30, 2018
 
As of December 31, 2017
Government-sponsored enterprises debt obligations
$
55

 
$
56


The following table presents net losses on trading securities.
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net losses on trading securities held at period end
$
(1
)
 
$
(2
)
 
$
(2
)
 
$
(4
)


Note 4—Available-for-sale Securities

Major Security Type. The following table presents information on private-label residential mortgage-backed securities (MBS) that are classified as available-for-sale.
 
Amortized    
Cost
 
Other-than-temporary
Impairment
Recognized in
Accumulated Other
Comprehensive Income (1)
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair Value
As of June 30, 2018
$
884

 
$
—

 
$
117

 
$
—

 
$
1,001

As of December 31, 2017
$
970

 
$
1

 
$
135

 
$
—

 
$
1,104

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

The following table presents private-label residential MBS that are classified as available-for-sale with unrealized losses. The unrealized losses are aggregated by the length of time that the individual securities have been in a continuous unrealized loss position. 
 
Less than 12 Months
 
12 Months or More
 
Total
 
  Number of  
Positions
 
Estimated
  Fair  Value  
 
Gross
  Unrealized  
Losses
 
  Number of  
Positions
 
Estimated
  Fair  Value  
 
Gross
  Unrealized  
Losses
 
  Number of  
Positions
 
Estimated
  Fair  Value  
 
Gross
  Unrealized  
Losses
As of June 30, 2018
1

 
$
—

 
$
—

 
1

 
$
4

 
$
—

 
2

 
$
4

 
$
—

As of December 31, 2017
1

 
$
7

 
$
1

 
1

 
$
4

 
$
—

 
2

 
$
11

 
$
1



The following table presents private-label residential MBS that are classified as available-for-sale and issued by members or affiliates of members, all of which have been issued by Bank of America Corporation, Charlotte, NC.
 
Amortized  
Cost
 
Other-than-temporary
Impairment
Recognized in
Accumulated Other
Comprehensive Income (1)
 
Gross
  Unrealized  
Gains
 
Gross
  Unrealized  
Losses
 
Estimated
  Fair  Value  
As of June 30, 2018
$
593

 
$
—

 
$
89

 
$
—

 
$
682

As of December 31, 2017
$
638

 
$
1

 
$
104

 
$
—

 
$
741


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

12
Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


Note 5—Held-to-maturity Securities

Major Security Types. The following table presents held-to-maturity securities.
 
 
As of June 30, 2018
 
As of December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
State or local housing agency debt obligations
$
1

 
$
—

 
$
—

 
$
1

 
$
1

 
$
—

 
$
—

 
$
1

Government-sponsored enterprises debt obligations
4,362

 
8

 
3

 
4,367

 
5,350

 
8

 
6

 
5,352

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency obligations-guaranteed residential
136

 
2

 
—

 
138

 
157

 
2

 
—

 
159

Government-sponsored enterprises residential
10,112

 
67

 
58

 
10,121

 
9,357

 
65

 
24

 
9,398

Government-sponsored enterprises commercial
11,316

 
14

 
14

 
11,316

 
9,729

 
16

 
12

 
9,733

Private-label residential
489

 
7

 
1

 
495

 
568

 
8

 
—

 
576

Total
$
26,416

 
$
98

 
$
76

 
$
26,438

 
$
25,162

 
$
99

 
$
42

 
$
25,219



The following tables present held-to-maturity securities with unrealized losses. The unrealized losses are aggregated by major security type and by the length of time that the individual securities have been in a continuous unrealized loss position.
 
 
As of June 30, 2018
 
Less than 12 Months
 
12 Months or More
 
Total
 
Number of
Positions
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
State or local housing agency debt obligations
1

 
$
1

 
$
—

 
—

 
$
—

 
$
—

 
1

 
$
1

 
$
—

Government-sponsored enterprises debt obligations
2

 
148

 
2

 
4

 
1,038

 
1

 
6

 
1,186

 
3

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises residential
15

 
2,424

 
40

 
35

 
985

 
18

 
50

 
3,409

 
58

Government-sponsored enterprises commercial
54

 
3,495

 
6

 
7

 
836

 
8

 
61

 
4,331

 
14

Private-label residential
15

 
65

 
1

 
11

 
30

 
—

 
26

 
95

 
1

Total
87

 
$
6,133

 
$
49

 
57

 
$
2,889

 
$
27

 
144

 
$
9,022

 
$
76

 

13
Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


 
As of December 31, 2017
 
Less than 12 Months
 
12 Months or More
 
Total
 
Number of
Positions
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
State or local housing agency debt obligations
1

 
$
1

 
$
—

 
—

 
$
—

 
$
—

 
1

 
$
1

 
$
—

Government-sponsored enterprises debt obligations
6

 
996

 
1

 
5

 
1,495

 
5

 
11

 
2,491

 
6

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises residential
12

 
1,466

 
11

 
40

 
1,154

 
13

 
52

 
2,620

 
24

Government-sponsored enterprises commercial
16

 
1,209

 
5

 
7

 
1,029

 
7

 
23

 
2,238

 
12

Private-label residential
7

 
19

 
—

 
16

 
70

 
—

 
23

 
89

 
—

Total
42

 
$
3,691

 
$
17

 
68

 
$
3,748

 
$
25

 
110

 
$
7,439

 
$
42



Redemption Terms. The following table presents the amortized cost and estimated fair value of held-to-maturity securities by contractual maturity. MBS are not presented by contractual maturity because their actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
 
As of June 30, 2018
 
As of December 31, 2017
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Non-mortgage-backed securities:
 
 
 
 
 
 
 
Due in one year or less
$
1,825

 
$
1,824

 
$
2,913

 
$
2,909

Due after one year through five years
2,072

 
2,074

 
1,972

 
1,975

Due after five years through 10 years
406

 
410

 
406

 
409

Due after 10 years
60

 
60

 
60

 
60

Total non-mortgage-backed securities
4,363

 
4,368

 
5,351

 
5,353

Mortgage-backed securities
22,053

 
22,070

 
19,811

 
19,866

Total
$
26,416

 
$
26,438

 
$
25,162

 
$
25,219



The following table presents private-label residential MBS that are classified as held-to-maturity and issued by members or affiliates of members, all of which have been issued by Bank of America Corporation, Charlotte, NC.
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
As of June 30, 2018
 
$
107

 
$
1

 
$
—

 
$
108

As of December 31, 2017
 
$
125

 
$
1

 
$
—

 
$
126




Note 6—Other-than-temporary Impairment

The Bank evaluates its individual available-for-sale and held-to-maturity securities holdings in an unrealized loss position for other-than-temporary impairment on a quarterly basis. As part of this process, the Bank considers its intent to sell each debt security and whether it is more likely than not that the Bank will be required to sell the security before its anticipated recovery of its amortized cost basis. If either of these conditions is met, the Bank recognizes the maximum impairment loss in earnings, which is equal to the entire difference between the security’s amortized cost basis and its fair value as of the Statements of

14
Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


Condition dates. For securities in an unrealized loss position that meet neither of these conditions, the Bank evaluates whether there is other-than-temporary impairment by performing an analysis to determine if any of these securities will incur a credit loss, which could be up to the difference between the security’s amortized cost basis and its fair value.

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

Non-private-label MBS. The unrealized losses related to U.S. agency MBS are caused by interest rate changes, not credit quality. These securities are guaranteed by government agencies or government-sponsored enterprises, and the Bank does not expect these securities to be settled at a price less than their amortized cost basis. In addition, the Bank does not intend to sell these investments, and it is not more likely than not that the Bank will be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. The Bank does not consider these investments to be other-than temporarily impaired as of June 30, 2018.

Private-label MBS. To assess whether the entire amortized cost basis of its private-label MBS will be recovered, the Bank performs a cash flow analysis for each of its private-label MBS using two third-party models.

The first third-party model considers borrower characteristics and the particular attributes of the loans underlying the Bank’s securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults, and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas, which are based upon an assessment of the individual housing markets. The Bank’s housing price forecast as of June 30, 2018, included a short-term housing price forecast with projected changes ranging from a decrease of eight percent to an increase of 13 percent over the 12 month period beginning April 1, 2018. For the vast majority of markets, the projected short-term housing price changes range from an increase of two percent to seven percent. Thereafter, a unique path is projected for each geographic area based on an internally developed framework derived from historical data.

The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults, and loss severities, were then input into a second model. The second model allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules.

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

The following table presents a summary of the significant inputs used to measure the amount of the credit loss recognized in earnings for those securities for which an other-than-temporary impairment was determined to have occurred during the three month period ended June 30, 2018, as well as related current credit enhancement.
 
 
Significant Inputs - Weighted Average (%)
 
 
Classification of Securities (1)
 
Prepayment Rates
 
Default Rates
 
Loss Severities
 
Current Credit Enhancement (%)
Prime
 
13.74
 
16.91
 
20.97
 
5.56
___________
(1) The classification of securities is based on current characteristics and performance, which may be different from the securities’ classification as determined
by the originator at the time of origination.


15
Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


The following table presents a roll-forward of the amount of credit losses on the Bank’s investment securities recognized in earnings during the life of the securities for which a portion of the other-than-temporary loss was previously recognized in accumulated other comprehensive income.
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Balance, beginning of period
$
378

 
$
440

 
$
394

 
$
455

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

 
2

 
1

 
2

Increase in cash flows expected to be collected, (accreted as interest income over the remaining lives of the applicable securities)
(16
)
 
(16
)
 
(32
)
 
(31
)
Balance, end of period
$
363

 
$
426

 
$
363

 
$
426



Note 7—Advances

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

 
As of June 30, 2018
 
As of December 31, 2017
Due in one year or less
$
73,530

 
$
60,795

Due after one year through two years
9,868

 
10,779

Due after two years through three years
6,189

 
14,210

Due after three years through four years
3,310

 
4,162

Due after four years through five years
4,587

 
3,729

Due after five years
7,295

 
8,574

Total par value
104,779

 
102,249

Discount on AHP (1) advances
(4
)
 
(4
)
Discount on EDGE (2) advances
(2
)
 
(3
)
Hedging adjustments
(236
)
 
198

Total
$
104,537

 
$
102,440


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

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

 
As of June 30, 2018
 
As of December 31, 2017
Due or convertible in one year or less
$
73,897

 
$
60,984

Due or convertible after one year through two years
10,043

 
10,846

Due or convertible after two years through three years
6,219

 
14,326

Due or convertible after three years through four years
3,316

 
4,184

Due or convertible after four years through five years
4,555

 
3,695

Due or convertible after five years
6,749

 
8,214

Total par value
$
104,779

 
$
102,249




16
Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


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

 
As of June 30, 2018
 
As of December 31, 2017
Fixed-rate:
 
 
 
 Due in one year or less
$
38,442

 
$
37,107

 Due after one year
21,158

 
22,044

Total fixed-rate
59,600

 
59,151

Variable-rate:
 
 
 
 Due in one year or less
35,088

 
23,687

 Due after one year
10,091

 
19,411

Total variable-rate
45,179

 
43,098

Total par value
$
104,779

 
$
102,249



Credit Risk. The Bank’s potential credit risk from advances is concentrated in commercial banks, savings institutions, and credit unions and further is concentrated in certain larger borrowing relationships. The concentration of the Bank’s advances to its 10 largest borrowers was $75,898 and $71,440 as of June 30, 2018 and December 31, 2017, respectively. This concentration represented 72.4 percent and 69.9 percent of total advances outstanding as of June 30, 2018 and December 31, 2017, respectively.
Based on the collateral pledged as security for advances, the Bank’s credit analysis of members’ financial condition, and prior repayment history, no allowance for credit losses on advances was deemed necessary by the Bank as of June 30, 2018 and December 31, 2017. No advance was past due as of June 30, 2018 and December 31, 2017.

Note 8—Mortgage Loans Held for Portfolio

The following table presents information on mortgage loans held for portfolio by contractual maturity at the time of purchase.
 
 
As of June 30, 2018
 
As of December 31, 2017
Medium-term (15 years or less)
 
$
12

 
$
19

Long-term (greater than 15 years)
 
383

 
417

Total unpaid principal balance
 
395

 
436

Premiums
 
2

 
2

Discounts
 
(2
)
 
(2
)
Total
 
$
395

 
$
436




The following table presents the unpaid principal balance of mortgage loans held for portfolio by collateral or guarantee type.
 
 
As of June 30, 2018
 
As of December 31, 2017
Conventional mortgage loans
 
$
370

 
$
409

Government-guaranteed or insured mortgage loans
 
25

 
27

Total unpaid principal balance
 
$
395

 
$
436



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


17
Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


Note 9—Allowance for Credit Losses

The following table presents the activity in the allowance for credit losses related to conventional residential mortgage loans.
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Balance, beginning of period
 
$
1

 
$
1

 
$
1

 
$
1

Provision for credit losses
 
—

 
—

 
—

 
—

Balance, end of period
 
$
1

 
$
1

 
$
1

 
$
1


The following table presents the recorded investment in conventional residential mortgage loans by impairment methodology.
 
 
As of June 30, 2018
 
As of December 31, 2017
Allowance for credit losses:
 
 
 
 
   Collectively evaluated for impairment
 
$
1

 
$
1

Recorded investment:
 
 
 
 
   Individually evaluated for impairment
 
$
11

 
$
11

   Collectively evaluated for impairment
 
361

 
400

Total recorded investment
 
$
372

 
$
411



Key credit quality indicators for mortgage loans include the migration of past due mortgage loans, nonaccrual mortgage loans, and mortgage loans in process of foreclosure. The following tables present the Bank’s recorded investment in mortgage loans by these key credit quality indicators.
 
As of June 30, 2018
 
Conventional Residential Mortgage Loans
 
Government-guaranteed or Insured Residential Mortgage Loans
 
Total
Past due 30-59 days
$
9

 
$
2

 
$
11

Past due 60-89 days
4

 
1

 
5

Past due 90 days or more
7

 
1

 
8

Total past due mortgage loans
20

 
4

 
24

Total current mortgage loans
352

 
21

 
373

Total mortgage loans (1)
$
372

 
$
25

 
$
397

Other delinquency statistics:
 
 
 
 
 
  In process of foreclosure (2)
$
4

 
$
—

 
$
4

  Seriously delinquent rate (3)
2.23
%
 
2.52
%
 
2.25
%
  Past due 90 days or more and still accruing interest (4)
$
—

 
$
1

 
$
1

  Mortgage loans on nonaccrual status (5)
$
7

 
$
—

 
$
7

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


18
Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


 
As of December 31, 2017
 
Conventional Residential Mortgage Loans
 
Government-guaranteed or Insured Residential Mortgage Loans
 
Total
Past due 30-59 days
$
14

 
$
3

 
$
17

Past due 60-89 days
7

 
1

 
8

Past due 90 days or more
12

 
—

 
12

Total past due mortgage loans
33

 
4

 
37

Total current mortgage loans
378

 
23

 
401

Total mortgage loans (1)
$
411

 
$
27

 
$
438

Other delinquency statistics:
 
 
 
 
 
  In process of foreclosure (2)
$
6

 
$
—

 
$
6

  Seriously delinquent rate (3)
3.51
%
 
1.33
%
 
3.37
%
Past due 90 days or more and still accruing interest (4)
$
—

 
$
—

 
$
—

  Mortgage loans on nonaccrual status (5)
$
12

 
$
—

 
$
12

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

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

Note 10—Consolidated Obligations

Consolidated obligations, consisting of consolidated obligation bonds and discount notes, are the joint and several obligations of the 11 Federal Home Loan Banks (FHLBanks) and are backed only by the financial resources of the FHLBanks. The Federal Home Loan Banks Office of Finance (Office of Finance) tracks the amount of debt issued on behalf of each FHLBank. In addition, the Bank separately tracks its specific portion of consolidated obligations for which it is the primary obligor and records it as a liability.
Interest-rate Payment Terms. The following table presents the Bank’s consolidated obligation bonds by interest-rate payment type. 
 
As of June 30, 2018
 
As of December 31, 2017
Fixed-rate
$
19,422

 
$
19,978

Step up/down
2,519

 
1,864

Simple variable-rate
58,109

 
65,760

Total par value
$
80,050

 
$
87,602




19
Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


Redemption Terms. The following table presents the Bank’s participation in consolidated obligation bonds outstanding by year of contractual maturity.
 
 
As of June 30, 2018
 
As of December 31, 2017
 
Amount
 
Weighted-
average
Interest Rate (%)    
 
Amount
 
Weighted-
average
Interest Rate (%)    
Due in one year or less
$
57,462

 
1.90
 
$
60,410

 
1.34
Due after one year through two years
12,308

 
1.95
 
17,826

 
1.41
Due after two years through three years
3,599

 
1.91
 
3,351

 
1.67
Due after three years through four years
1,336

 
1.89
 
1,287

 
1.72
Due after four years through five years
4,210

 
2.33
 
3,503

 
2.21
Due after five years
1,135

 
3.11
 
1,225

 
3.03
Total par value
80,050

 
1.94
 
87,602

 
1.43
Premiums
10

 
 
 
14

 
 
Discounts
(10
)
 
 
 
(10
)
 
 
Hedging adjustments
(238
)
 
 
 
(83
)
 
 
Total
$
79,812

 
 
 
$
87,523

 
 


The following table presents the Bank’s consolidated obligation bonds outstanding by call feature.
 
 
As of June 30, 2018
 
As of December 31, 2017
Noncallable
$
70,108

 
$
79,847

Callable
9,942

 
7,755

Total par value
$
80,050

 
$
87,602



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

 
As of June 30, 2018
 
As of December 31, 2017
Due or callable in one year or less
$
66,324

 
$
66,715

Due or callable after one year through two years
10,673

 
17,071

Due or callable after two years through three years
1,664

 
2,362

Due or callable after three years through four years
641

 
612

Due or callable after four years through five years
289

 
308

Due or callable after five years
459

 
534

Total par value
$
80,050

 
$
87,602



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

20
Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


The following table presents the Bank’s participation in consolidated obligation discount notes.
 
 
Book Value
 
Par Value
 
Weighted-average
Interest Rate (%)
As of June 30, 2018
$
65,353

 
$
65,523

 
1.85
As of December 31, 2017
$
50,139

 
$
50,217

 
1.21


Note 11—Capital and Mandatorily Redeemable Capital Stock

Capital. The following table presents the Bank’s compliance with the Federal Housing Finance Agency’s (Finance Agency) regulatory capital rules and requirements.
 
 
As of June 30, 2018
 
As of December 31, 2017
 
Required    
 
Actual        
 
Required    
 
Actual        
Risk-based capital
$
1,741

 
$
7,381

 
$
1,581

 
$
7,157

Total regulatory capital ratio
4.00
%
 
4.79
%
 
4.00
%
 
4.88
%
Total regulatory capital (1)
$
6,167

 
$
7,381

 
$
5,863

 
$
7,157

Leverage capital ratio
5.00
%
 
7.18
%
 
5.00
%
 
7.33
%
Leverage capital
$
7,709

 
$
11,071

 
$
7,328

 
$
10,736

____________
(1) Total regulatory capital does not include accumulated other comprehensive income, but does include mandatorily redeemable capital stock.
Mandatorily Redeemable Capital Stock. The following table presents the activity in mandatorily redeemable capital stock.

 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Balance, beginning of period
$
3

 
$
1

 
$
1

 
$
1

Net reclassification from capital during the period
1

 
8

 
33

 
16

Repurchase/redemption of mandatorily redeemable capital stock
(2
)
 
(7
)
 
(32
)
 
(15
)
Balance, end of period
$
2

 
$
2

 
$
2


$
2



The following table presents the amount of mandatorily redeemable capital stock by year of redemption. The year of redemption in the table is the end of the five-year redemption period, or with respect to activity-based stock, the later of the expiration of the five-year redemption period or the activity’s maturity date.
 
 
As of June 30, 2018
 
As of December 31, 2017
Due in one year or less
$
1

 
$
1

Due after two years through three years
1

 
—

Total
$
2

 
$
1




21
Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


Note 12—Accumulated Other Comprehensive Income

The following tables present the components comprising accumulated other comprehensive income.
 
Pension and
Postretirement
Benefits
 
Noncredit Portion
of Other-than-
temporary
Impairment  Losses
on Available-for-
sale Securities
 
Total  Accumulated
Other
Comprehensive
Income
Balance, March 31, 2017
$
(19
)
 
$
124

 
$
105

Other comprehensive income before reclassifications:
 
 
 
 
 
     Net change in fair value
—

 
6

 
6

Reclassification from accumulated other comprehensive income to net income:
 
 
 
 
 
     Noncredit other-than-temporary impairment losses
—

 
2

 
2

Net current period other comprehensive income
—

 
8

 
8

Balance, June 30, 2017
$
(19
)
 
$
132

 
$
113

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

 
$
95

Other comprehensive income before reclassifications:
 
 
 
 
 
     Net change in fair value
—

 
(2
)
 
(2
)
Reclassification from accumulated other comprehensive income to net income:
 
 
 
 
 
     Noncredit other-than-temporary impairment losses
—

 
1

 
1

     Amortization of pension and postretirement (1)
1

 
—

 
1

Net current period other comprehensive income (loss)
1

 
(1
)
 
—

Balance, June 30, 2018
$
(22
)
 
$
117

 
$
95

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

 
Pension and
Postretirement
Benefits
 
Noncredit Portion
of Other-than-
temporary
Impairment  Losses
on Available-for-
sale Securities
 
Total  Accumulated
Other
Comprehensive
Income
Balance, December 31, 2016
$
(20
)
 
$
124

 
$
104

Other comprehensive income before reclassifications:
 
 
 
 
 
     Net change in fair value
—

 
6

 
6

Reclassification from accumulated other comprehensive income to net income:
 
 
 
 
 
     Noncredit other-than-temporary impairment losses
—

 
2

 
2

     Amortization of pension and postretirement (1)
1

 
—

 
1

Net current period other comprehensive income
1

 
8

 
9

Balance, June 30, 2017
$
(19
)
 
$
132

 
$
113

 
 
 
 
 
 
Balance, December 31, 2017
$
(24
)
 
$
134

 
$
110

Other comprehensive income before reclassifications:
 
 
 
 
 
     Net change in fair value
—

 
(18
)
 
(18
)
Reclassification from accumulated other comprehensive income to net income:
 
 
 
 
 
     Noncredit other-than-temporary impairment losses
—

 
1

 
1

     Amortization of pension and postretirement (1)
2

 
—

 
2

Net current period other comprehensive income (loss)
2

 
(17
)
 
(15
)
Balance, June 30, 2018
$
(22
)
 
$
117

 
$
95


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


22
Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


Note 13—Derivatives and Hedging Activities

Nature of Business Activity

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

The Bank enters into derivatives to manage the interest-rate risk exposure that is inherent in its otherwise unhedged assets and funding sources, to achieve the Bank’s risk management objectives, and to act as an intermediary between its members and counterparties. The Bank transacts most of its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute consolidated obligations. The Bank’s over-the-counter derivative transactions may either be (1) uncleared derivatives, which are executed bilaterally with a counterparty; or (2) cleared derivatives, which are cleared through a Futures Commission Merchant (clearing agent) with a Derivatives Clearing Organization (Clearinghouse). Once a derivatives transaction has been accepted for clearing by a Clearinghouse, the derivatives transaction is novated, and the executing counterparty is replaced with the Clearinghouse as the counterparty. The Bank is not a derivatives dealer and does not trade derivatives for short-term profit. For additional information on the Bank’s derivatives and hedging activities, see Note 17—Derivatives and Hedging Activities to the 2017 audited financial statements contained in the Bank’s Form 10-K.

Financial Statement Effect and Additional Financial Information

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

The following table presents the notional amount, fair value of derivative instruments, and total derivative assets and liabilities. Total derivative assets and liabilities include the effect of netting adjustments and cash collateral. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest.
 
 
As of June 30, 2018
 
As of December 31, 2017
 
Notional
Amount of Derivatives    
 
Derivative Assets    
 
Derivative Liabilities    
 
Notional
Amount of Derivatives    
 
Derivative Assets    
 
Derivative Liabilities    
Derivatives in hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
  Interest-rate swaps (1)
$
44,375

 
$
45

 
$
175

 
$
45,057

 
$
198

 
$
359

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
  Interest-rate swaps (1)
949

 
2

 
16

 
876

 
9

 
9

  Interest-rate caps or floors
10,584

 
3

 
2

 
13,000

 
2

 
1

Total derivatives not designated as hedging instruments
11,533

 
5

 
18

 
13,876

 
11

 
10

Total derivatives before netting and collateral adjustments
$
55,908

 
50

 
193

 
$
58,933

 
209

 
369

Netting adjustments and cash collateral (2)
 
 
276

 
(170
)
 
 
 
125

 
(348
)
Derivative assets and derivative liabilities
 
 
$
326

 
$
23

 
 
 
$
334

 
$
21

___________
(1) Includes variation margin for daily settled contracts of negative $193 as of June 30, 2018 and $107 as of December 31, 2017.
(2) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions, and also cash collateral and related accrued interest held or placed with the same clearing agents and/or counterparty. Cash collateral posted and related accrued interest was $446 and $507 as of June 30, 2018 and December 31, 2017, respectively. Cash collateral received and related accrued interest was less than $1 and $34 as of June 30, 2018 and December 31, 2017, respectively.


23
Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


The following table presents the components of net gains on derivatives and hedging activities as presented on the Statements of Income.
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Derivatives and hedged items in fair value hedging relationships:
 
 
 
 
 
 
 
 
  Interest-rate swaps
 
$
15

 
$
9

 
$
34

 
$
323

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

 
1

 
4

 
3

  Interest-rate caps or floors
 
(1
)
 
(2
)
 
—

 
(3
)
  Net interest settlements
 
—

 
(2
)
 
(1
)
 
(4
)
Total net gains (losses) related to derivatives not designated as hedging instruments
 
—

 
(3
)
 
3

 
(4
)
Other (1)
 
(1
)
 
1

 
(1
)
 
1

Net gains on derivatives and hedging activities
 
$
14

 
$
7

 
$
36

 
$
320


____________
(1) 
Consists of price alignment amount on derivatives for which variation margin is characterized as daily settled contract.

The following tables present, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Bank’s net interest income.
 
 
For the Three Months Ended June 30,
 
 
2018
 
2017
Hedged Item Type
 
Gains (Losses) on Derivative       
 
Gains (Losses) on Hedged Item  
 
Net Fair Value
Hedge Ineffectiveness
 
Effect of Derivatives on Net Interest Income (1)
 
Gains (Losses) on Derivative       
 
Gains (Losses) on Hedged Item  
 
Net Fair Value
Hedge Ineffectiveness
 
Effect of Derivatives on Net Interest Income (1)
Advances
 
$
116

 
$
(92
)
 
$
24

 
$
(1
)
 
$
(51
)
 
$
60

 
$
9

 
$
(67
)
Consolidated obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bonds
 
(28
)
 
20

 
(8
)
 
(15
)
 
8

 
(8
)
 
—

 
20

Discount notes
 
1

 
(2
)
 
(1
)
 
(1
)
 
—

 
—

 
—

 
—

Total
 
$
89

 
$
(74
)
 
$
15

 
$
(17
)
 
$
(43
)
 
$
52

 
$
9

 
$
(47
)

____________
(1) 
The net interest on derivatives in fair value hedge relationships is presented in the interest income or expense line item of the respective hedged item.

 
 
For the Six Months Ended June 30,
 
 
2018
 
2017
Hedged Item Type
 
Gains (Losses) on Derivative       
 
Gains (Losses) on Hedged Item  
 
Net Fair Value
Hedge Ineffectiveness
 
Effect of Derivatives on Net Interest Income (1)
 
Gains (Losses) on Derivative       
 
Gains (Losses) on Hedged Item  
 
Net Fair Value
Hedge Ineffectiveness
 
Effect of Derivatives on Net Interest Income (1)
Advances
 
$
453

 
$
(415
)
 
$
38

 
$
(34
)
 
$
374

 
$
(49
)
 
$
325

 
$
(144
)
Consolidated obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bonds
 
(159
)
 
156

 
(3
)
 
(11
)
 
(22
)
 
20

 
(2
)
 
52

Discount notes
 
1

 
(2
)
 
(1
)
 
(2
)
 
3

 
(3
)
 
—

 
(3
)
Total
 
$
295

 
$
(261
)
 
$
34

 
$
(47
)
 
$
355

 
$
(32
)
 
$
323

 
$
(95
)
____________
(1) 
The net interest on derivatives in fair value hedge relationships is presented in the interest income or expense line item of the respective hedged item.


24
Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


Managing Credit Risk on Derivatives

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

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

Certain of the Bank’s uncleared derivative instruments contain provisions that require the Bank to post additional collateral with its counterparties if there is deterioration in the Bank’s credit rating. If the Bank’s credit rating is lowered by a nationally recognized statistical rating organization (NRSRO), the Bank may be required to deliver additional collateral on uncleared derivative instruments in net liability positions. The aggregate fair value of all uncleared derivative instruments with credit-risk-related contingent features that were in a net liability position (before cash collateral and related accrued interest) as of June 30, 2018 was $6, for which the Bank had no collateral posted as of June 30, 2018. If the Bank’s credit ratings had been lowered from its current rating to the next lower rating that would have triggered additional collateral to be delivered, the Bank would have been required to deliver an additional $1 of collateral at fair value to its uncleared derivative counterparties as of June 30, 2018.

For cleared derivatives, the Clearinghouse is the Bank’s counterparty. The Clearinghouse notifies the clearing agent of the required initial and variation margin, and the clearing agent notifies the Bank. The Bank currently utilizes the following two Clearinghouses for all cleared derivative transactions: LCH Ltd. and CME Clearing. Effective January 16, 2018, LCH Ltd. made certain amendments to its rulebook, changing the legal characterization of variation margin payments to be daily settlement payments, rather than collateral. CME Clearing made the same change to its rulebook on January 3, 2017.
Variation margin on daily settled contracts is netted directly against the derivative’s gross recognized amount. At both Clearinghouses, initial margin is considered cash collateral. Because the Bank is required to post initial and variation margin through the clearing agent to the Clearinghouse, it exposes the Bank to institutional credit risk if the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties, and collateral/payments is posted daily through a clearing agent for changes in the fair value of cleared derivatives. The Bank has analyzed the enforceability of offsetting rights incorporated in its cleared derivative transactions and determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable law upon an event of default, including a bankruptcy, insolvency, or similar proceeding involving the Clearinghouse or the Bank’s clearing agent, or both. Based on this analysis, the Bank presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular Clearinghouse.

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


25
Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


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

 
As of June 30, 2018
 
As of December 31, 2017
 
Derivative Assets
 
Derivative Liabilities
 
Derivative Assets
 
Derivative Liabilities
Gross recognized amount:
 
 
 
 
 
 
 
     Uncleared derivatives
$
48

 
$
188

 
$
19

 
$
106

     Cleared derivatives
2

 
5

 
190

 
263

Total gross recognized amount
50

 
193

 
209

 
369

Gross amounts of netting adjustments and cash collateral:
 
 
 
 
 
 
 
     Uncleared derivatives
(45
)
 
(165
)
 
(17
)
 
(85
)
     Cleared derivatives
321

 
(5
)
 
142

 
(263
)
Total gross amounts of netting adjustments and cash collateral
276

 
(170
)
 
125

 
(348
)
Net amounts after netting adjustments and cash collateral:
 
 
 
 
 
 
 
     Uncleared derivatives
3

 
23

 
2

 
21

     Cleared derivatives
323

 
—

 
332

 
—

Total net amounts after netting adjustments and cash collateral
326

 
23

 
334

 
21

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

 
—

 
—

 
—

     Cleared derivatives
—

 
—

 
—

 
—

Total cannot be sold or repledged (1)
—

 
—

 
—

 
—

Net unsecured amounts: (1)
 
 
 
 
 
 
 
    Uncleared derivatives
3

 
23

 
2

 
21

    Cleared derivatives
323

 
—

 
332

 
—

Total net unsecured amount (1)
$
326

 
$
23

 
$
334

 
$
21

____________ 
(1) The Bank had net credit exposure of $1 and $226 as of June 30, 2018 and December 31, 2017, respectively, due to instances where the Bank’s pledged collateral to a counterparty exceeds the Bank’s net derivative liability position.


Note 14—Estimated Fair Values

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

A fair value hierarchy is used to prioritize the inputs of valuation techniques used to measure fair value. The inputs are evaluated, and an overall level for the fair value measurement is determined. This overall level is an indication of how market-observable the fair value measurement is and defines the level of disclosure. In order to determine the fair value or the exit price, entities must determine the unit of account, highest and best use, principal market, and market participants. These determinations allow the reporting entity to define the inputs for fair value and level of hierarchy.

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


26
Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. The Bank carried grantor trust assets at fair value hierarchy Level 1 as of June 30, 2018 and December 31, 2017.

Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. The Bank carried trading securities and derivatives at fair value hierarchy Level 2 as of June 30, 2018 and December 31, 2017.

Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are supported by limited market activity and reflect the entity’s own assumptions. The Bank carried available-for-sale securities at fair value hierarchy Level 3 as of June 30, 2018 and December 31, 2017.

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

For financial instruments carried at fair value, the Bank reviews the fair value hierarchy classification of financial assets and liabilities on a quarterly basis. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities within the fair value hierarchy. Such reclassifications are reported as transfers in/out at fair value as of the beginning of the quarter in which the changes occur. There were no such transfers during the periods presented.
Estimated Fair Value Measurements on a Recurring Basis. The following tables present, for each fair value hierarchy level, the Bank’s financial assets and liabilities that are measured at fair value on a recurring basis on its Statements of Condition.
 
 
As of June 30, 2018
 
Fair Value Measurements Using
 
Netting Adjustments and Cash Collateral (1)
 
 
 
Level 1        
 
Level 2        
 
Level 3        
 
Total
Assets
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
  Government-sponsored enterprises debt obligations
$
—

 
$
55

 
$
—

 
$
—

 
$
55

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

 
—

 
1,001

 
—

 
1,001

Derivative assets:
 
 
 
 
 
 
 
 
 
  Interest-rate related
—

 
50

 
—

 
276

 
326

Grantor trust (included in Other assets)
52

 
—

 
—

 
—

 
52

Total assets at fair value
$
52

 
$
105

 
$
1,001

 
$
276

 
$
1,434

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
Interest-rate related
$
—

 
$
193

 
$
—

 
$
(170
)
 
$
23

Total liabilities at fair value
$
—

 
$
193

 
$
—

 
$
(170
)
 
$
23

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

27
Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


 
As of December 31, 2017
 
Fair Value Measurements Using
 
Netting Adjustments and Cash Collateral (1)
 
 
 
Level 1        
 
Level 2        
 
Level 3        
 
Total
Assets
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
  Government-sponsored enterprises debt obligations
$
—

 
$
56

 
$
—

 
$
—

 
$
56

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

 
—

 
1,104

 
—

 
1,104

Derivative assets:
 
 
 
 
 
 
 
 
 
  Interest-rate related
—

 
209

 
—

 
125

 
334

Grantor trust (included in Other assets)
48

 
—

 
—

 
—

 
48

Total assets at fair value
$
48

 
$
265

 
$
1,104

 
$
125

 
$
1,542

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
Interest-rate related
$
—

 
$
369

 
$
—

 
$
(348
)
 
$
21

Total liabilities at fair value
$
—

 
$
369

 
$
—

 
$
(348
)
 
$
21

____________ 
(1)Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions, and also cash collateral and related accrued interest held or placed with the same clearing agents and/or counterparty.
The following table presents a reconciliation of available-for-sale securities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Balance, beginning of period
$
1,053

 
$
1,289

 
$
1,104

 
$
1,345

Total (losses) gains realized and unrealized: (1)
 
 
 
 
 
 
 
  Included in net impairment losses recognized in earnings
(1
)
 
(2
)
 
(1
)
 
(2
)
     Included in other comprehensive income
(1
)
 
8

 
(17
)
 
8

     Accretion of credit losses in net interest income
16

 
16

 
32

 
31

Settlements
(66
)
 
(86
)
 
(117
)
 
(157
)
Balance, end of period
$
1,001

 
$
1,225

 
$
1,001

 
$
1,225

____________ 
(1) Related to available-for-sale securities held at period end.

Described below are the Bank’s fair value measurement methodologies for financial assets and liabilities that are measured at fair value on a recurring or nonrecurring basis on the Statements of Condition and categorized within Level 2 and Level 3 of the fair value hierarchy.

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

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

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


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


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

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

Multiple third-party vendor prices were received for a majority of the Bank’s investment securities holdings, and the final prices for those securities were computed by averaging the prices received as of June 30, 2018 and December 31, 2017. Based on the Bank’s review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or the Bank’s additional analysis in those instances in which there were outliers or significant yield variances), the Bank believes that its final prices are representative of the prices that would have been received if the assets had been sold at the measurement date (i.e., exit prices) and further, that the fair value measurements are classified appropriately in the fair value hierarchy. Based on the lack of significant market activity for private-label MBS, the fair value measurement for those securities were classified as Level 3 within the fair value hierarchy as of June 30, 2018 and December 31, 2017.

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

Derivative instruments are transacted primarily in the institutional dealer market and priced with observable market assumptions at a mid-market valuation point. The Bank does not provide a credit valuation adjustment based on aggregate exposure by derivative counterparty when measuring the fair value of its derivatives. This is because the collateral provisions pertaining to the Bank’s derivatives obviate the need to provide such a credit valuation adjustment. The fair values of the Bank’s derivatives take into consideration the effects of legally enforceable master netting agreements, where applicable, that allow the Bank to settle positive and negative positions and offset cash collateral with the same counterparty on a net basis. The Bank and each uncleared derivative counterparty have collateral thresholds that take into account both the Bank’s and the counterparty’s credit ratings. As a result of these practices and agreements, the Bank has concluded that the impact of the credit differential between the Bank and its derivative counterparties was mitigated to an immaterial level, and no further adjustments were deemed necessary to the recorded fair values of derivative assets and liabilities on the Statements of Condition as of June 30, 2018 and December 31, 2017.

The following estimated fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank as of June 30, 2018 and December 31, 2017. Although the Bank uses its best judgment in estimating the fair values of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for a portion of the Bank’s financial instruments, in certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. Therefore, these estimated fair values are not necessarily indicative of the amounts that would be realized in current market transactions although they do reflect the Bank’s judgment of how a market participant would estimate the fair value. The fair value tables presented below do not represent an estimate of the overall fair value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.

29
Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


The following tables present the carrying values and estimated fair values of the Bank’s financial instruments.
 
As of June 30, 2018
 
 
 
Estimated Fair Value
 
Carrying Value
 
Total        
 
Level 1        
 
Level 2        
 
Level 3        
 
Netting Adjustments and Cash Collateral (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 Cash and due from banks
$
804

 
$
804

 
$
804

 
$
—

 
$
—

 
$
—

 Interest-bearing deposits
3,939

 
3,939

 
—

 
3,939

 
—

 
—

 Securities purchased under agreements to resell
2,500

 
2,500

 
—

 
2,500

 
—

 
—

 Federal funds sold
13,718

 
13,718

 
—

 
13,718

 
—

 
—

 Trading securities
55

 
55

 
—

 
55

 
—

 
—

 Available-for-sale securities
1,001

 
1,001

 
—

 
—

 
1,001

 
—

 Held-to-maturity securities
26,416

 
26,438

 
—

 
25,943

 
495

 
—

 Advances
104,537

 
104,551

 
—

 
104,551

 
—

 
—

 Mortgage loans held for portfolio, net
394

 
414

 
—

 
414

 
—

 
—

 Accrued interest receivable
297

 
297

 
—

 
297

 
—

 
—

 Derivative assets
326

 
326

 
—

 
50

 
—

 
276

    Grantor trust assets (included in Other assets)
52

 
52

 
52

 
—

 
—

 
—

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 Interest-bearing deposits
1,069

 
1,069

 
—

 
1,069

 
—

 
—

 Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
Discount notes
65,353

 
65,350

 
—

 
65,350

 
—

 
—

Bonds
79,812

 
79,793

 
—

 
79,793

 
—

 
—

 Mandatorily redeemable capital stock
2

 
2

 
2

 
—

 
—

 
—

 Accrued interest payable
172

 
172

 
—

 
172

 
—

 
—

 Derivative liabilities
23

 
23

 
—

 
193

 
—

 
(170
)
____________ 
(1) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions, and also cash collateral and related accrued interest held or placed with the same clearing agents and/or counterparty.

30
Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


 
As of December 31, 2017
 
 
 
Estimated Fair Value
 
Carrying Value
 
Total        
 
Level 1        
 
Level 2        
 
Level 3        
 
Netting Adjustments and Cash Collateral (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 Cash and due from banks
$
2,357

 
$
2,357

 
$
2,357

 
$
—

 
$
—

 
$
—

 Interest-bearing deposits
2,176

 
2,176

 
—

 
2,176

 
—

 
—

 Securities purchased under agreements to resell
2,500

 
2,500

 
—

 
2,500

 
—

 
—

 Federal funds sold
9,380

 
9,380

 
—

 
9,380

 
—

 
—

 Trading securities
56

 
56

 
—

 
56

 
—

 
—

 Available-for-sale securities
1,104

 
1,104

 
—

 
—

 
1,104

 
—

 Held-to-maturity securities
25,162

 
25,219

 
—

 
24,643

 
576

 
—

 Advances
102,440

 
102,446

 
—

 
102,446

 
—

 
—

 Mortgage loans held for portfolio, net
435

 
467

 
—

 
467

 
—

 
—

 Loan to another FHLBank
200

 
200

 
—

 
200

 
—

 
—

 Accrued interest receivable
208

 
208

 
—

 
208

 
—

 
—

 Derivative assets
334

 
334

 
—

 
209

 
—

 
125

    Grantor trust assets (included in Other assets)
48

 
48

 
48

 
—

 
—

 
—

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 Interest-bearing deposits
1,177

 
1,177

 
—

 
1,177

 
—

 
—

 Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
Discount notes
50,139

 
50,132

 
—

 
50,132

 
—

 
—

Bonds
87,523

 
87,501

 
—

 
87,501

 
—

 
—

 Mandatorily redeemable capital stock
1

 
1

 
1

 
—

 
—

 
—

 Accrued interest payable
142

 
142

 
—

 
142

 
—

 
—

 Derivative liabilities
21

 
21

 
—

 
369

 
—

 
(348
)
____________ 
(1)Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions, and also cash collateral and related accrued interest held or placed with the same clearing agents and/or counterparty.

Note 15—Commitments and Contingencies

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

The par value of the other FHLBanks’ outstanding consolidated obligations for which the Bank is jointly and severally liable was $914,286 and $896,441 as of June 30, 2018 and December 31, 2017, respectively, exclusive of the Bank’s own outstanding consolidated obligations. None of the other FHLBanks defaulted on their consolidated obligations, the Finance Agency was not required to allocate any obligation among the FHLBanks, and no amount of the joint and several obligation was fixed as of June 30, 2018 and December 31, 2017. Accordingly, the Bank has not recognized a liability for its joint and several obligation related to the other FHLBanks’ consolidated obligations as of June 30, 2018 and December 31, 2017.

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


The following table presents the Bank’s outstanding commitments, which represent off-balance sheet obligations.
 
 
As of June 30, 2018
 
As of December 31, 2017
 
 
Expire Within One Year
 
Expire After One Year
 
Total
 
Expire Within One Year
 
Expire After One Year
 
Total
Standby letters of credit (1)
 
$
9,933

 
$
16,040

 
$
25,973

 
$
9,520

 
$
20,669

 
$
30,189

Commitments to fund additional advances
 
10

 
—

 
10

 
—

 
—

 
—

Unsettled consolidated obligation bonds, at par (2)
 
765

 
—

 
765

 
3

 
—

 
3

____________
(1) 
“Expire Within One Year” includes 15 standby letters of credit for a total of $61 and 16 standby letters of credit for a total of $59 as of June 30, 2018 and December 31, 2017, respectively, which have no stated maturity date and are subject to renewal on an annual basis.
(2) 
Expiration is based on settlement period rather than underlying contractual maturity of consolidated obligations.
The Bank monitors the creditworthiness of its standby letters of credit based on an evaluation of the member. In addition, standby letters of credit are fully collateralized from the time of issuance. The Bank has established parameters for the measurement, review, classification, and monitoring of credit risk related to these standby letters of credit that result in an internal credit rating, which focuses primarily on an institution’s overall financial health and takes into account the quality of assets, earnings, and capital position. In general, borrowers categorized into the highest risk rating category have more restrictions on the types of collateral that they may use to secure standby letters of credit, may be required to maintain higher collateral maintenance levels and deliver loan collateral, and may face more stringent collateral reporting requirements.
The carrying value of the guarantees related to standby letters of credit is recorded in “Other liabilities” on the Statements of Condition and amounted to $84 and $119 as of June 30, 2018 and December 31, 2017, respectively. Based on the Bank’s credit analyses and collateral requirements, the Bank does not deem it necessary to record any additional liability on the Statements of Condition for these commitments.
The Bank is subject to legal proceedings arising in the normal course of business. After consultation with legal counsel, management does not anticipate, as of the date of the financial statements, that the ultimate liability, if any, arising out of these matters will have a material effect on the Bank’s financial condition or results of operations.

Note 16—Transactions with Shareholders

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

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


32
Table of Contents
FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions)


Shareholder Concentrations. The Bank considers shareholder concentration as members or non-members with regulatory capital stock outstanding in excess of 10 percent of the Bank’s total regulatory capital stock. The following tables present transactions with shareholders whose holdings of regulatory capital stock exceed 10 percent of total regulatory capital stock outstanding.
 
As of June 30, 2018
 
Regulatory Capital Stock Outstanding
 
Percent of Total Regulatory Capital Stock Outstanding
 
Par Value of Advances
 
Percent of Total Par Value of Advances
 
Interest-bearing Deposits
 
Percent of Total Interest-bearing Deposits
Bank of America, National Association
$
1,503

 
28.35
 
$
35,010

 
33.41
 
$
—

 
0.01

 
As of December 31, 2017
 
Regulatory Capital Stock Outstanding
 
Percent of Total Regulatory Capital Stock Outstanding
 
Par Value of Advances
 
Percent of Total Par Value of Advances
 
Interest-bearing Deposits
 
Percent of Total Interest-bearing Deposits
Bank of America, National Association
$
908

 
17.61
 
$
21,010

 
20.55
 
$
—

 
0.01
Navy Federal Credit Union
675

 
13.09
 
15,530

 
15.19
 
195

 
16.58


Note 17—Subsequent Events

On July 26, 2018, the Bank's board of directors approved a cash dividend for the second quarter of 2018. The Bank paid the second quarter 2018 dividend on August 3, 2018, in the amount of $82.


33
Table of Contents


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

Forward-Looking Information

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

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

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

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

The discussion presented below provides an analysis of the Bank’s financial condition as of June 30, 2018 and December 31, 2017, and results of operations for the second quarter and first six months of 2018 and 2017. Management’s discussion and analysis should be read in conjunction with the financial statements and accompanying notes presented elsewhere in this report, as well as the Bank’s audited financial statements for the year ended December 31, 2017.

Executive Summary

Financial Condition

As of June 30, 2018, total assets were $154.2 billion, an increase of $7.6 billion, or 5.19 percent, from December 31, 2017. This increase was primarily due to a $6.1 billion, or 43.4 percent, increase in other investments, and a $2.1 billion, or 2.05 percent, increase in advances.

As of June 30, 2018, total liabilities were $146.7 billion, an increase of $7.4 billion, or 5.31 percent, from December 31, 2017. This increase was primarily due to a $7.5 billion, or 5.45 percent, increase in consolidated obligations as a result of increased funding and liquidity needs during this period.

As of June 30, 2018, total capital was $7.5 billion, an increase of $207 million, or 2.85 percent, from December 31, 2017. This increase was primarily due to an increase in the Bank’s retained earnings and subclass B2 activity-based capital stock resulting from an increase in the total outstanding advances during this period.

Results of Operations

The Bank recorded net income of $107 million for the second quarter of 2018, an increase of $21 million, or 25.5 percent, from net income of $86 million for the same period in 2017. The Bank recorded net income of $221 million for the first six months

34
Table of Contents


of 2018, an increase of $60 million, or 37.8 percent, from net income of $161 million for the same period in 2017. This increase in net income was primarily due to an increase in interest rates during the periods.

Net interest income was $131 million for the second quarter of 2018, an increase of $17 million, or 14.3 percent, from net interest income of $114 million for the same period in 2017. This increase in net interest income was primarily due to an increase in interest rates during the period.

Net interest income was $266 million for the first six months of 2018, an increase of $354 million from net interest expense of $88 million for the same period in 2017. This increase in net interest income was primarily due to prepayments of previously restructured and redesignated advances that occurred during the first quarter of 2017. These prepayments resulted in $302 million of accelerated amortization, which decreased net interest income for the first six months of 2017. This decrease in net interest income was offset by a corresponding increase in net gains on derivatives and hedging activities, reported in noninterest income. The remaining change in net interest income for the period was primarily due to an increase in interest rates during the period.

One way in which the Bank analyzes its performance is by comparing its annualized return on average equity (ROE) to three-month average London Interbank Offered Rate (LIBOR). The Bank has chosen to measure ROE as a spread to average three-month LIBOR because the Bank has significant assets and liabilities priced to average three-month LIBOR. The Bank’s ROE was 5.73 percent for the second quarter of 2018, compared to 4.99 percent for the same period in 2017. The increase in ROE was primarily due to the increase in net income during the period. ROE spread to three-month average LIBOR was 339 basis points for the second quarter of 2018, compared to 378 basis points for the same period in 2017. The decrease in the ROE spread to three-month average LIBOR was primarily due to the increase in three-month average LIBOR during the second quarter of 2018, compared to the same period in 2017.

The Bank's annualized ROE was 5.87 percent for the first six months of 2018, compared to 4.64 percent for the same period in 2017. The increase in ROE was primarily due to an increase in net income during the period. ROE spread to three-month average LIBOR was 374 basis points for the first six months of 2018, compared to 350 basis points for the same period in 2017. The increase in the ROE spread to three-month average LIBOR was primarily due to the increase in ROE.

The Bank’s interest-rate spread was 25 basis points for the second quarter of 2018, compared to 30 basis points for the same period in 2017. The decrease in the Bank’s interest-rate spread for the second quarter of 2018, compared to the same period in 2017, was due to the increase in interest rates having more of an impact on interest-bearing liabilities than on interest-earning assets. The Bank’s interest-rate spread was 27 basis points for the first six months of 2018, compared to a negative 17 basis points for the same period in 2017. The increase in the Bank’s interest-rate spread for the first six months of 2018, compared to the same period in 2017, was primarily due to the prepayment of previously restructured and redesignated advances discussed above, which decreased net interest income in 2017.

Business Outlook

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

Given the large proportion of short-term advances outstanding, the Bank expects that advance balances will continue fluctuating during the remainder of 2018 as a result of scheduled repayments and prepayments. Money market fund industry demand for short-term government-sponsored enterprises debt should continue to be strong. Earnings on the Bank’s investment portfolio will continue to be affected by tighter interest-rate spreads on new investments as older investments prepay or mature.



35
Table of Contents


Selected Financial Data

The following table presents a summary of certain financial information for the Bank for the periods presented (dollars in millions):
 
As of and for the Three Months Ended
 
June 30,
2018
 
March 31,
2018
 
December 31,
2017
 
September 30,
2017
 
June 30,
2017
Statements of Condition (at period end)
 
 
 
 
 
 
 
 
 
Total assets
$
154,171

 
$
140,460

 
$
146,566

 
$
143,924

 
$
133,677

Advances
104,537

 
91,733

 
102,440

 
99,812

 
91,590

Mortgage loans held for portfolio
395

 
417

 
436

 
462

 
487

Allowance for credit losses on mortgage loans
(1
)
 
(1
)
 
(1
)
 
(1
)
 
(1
)
Investments (1)
47,629

 
47,483

 
40,378

 
41,564

 
39,752

Loan to another FHLBank
—

 
—

 
200

 
250

 
—

Interest-bearing deposits
1,069

 
1,213

 
1,177

 
1,080

 
1,370

Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
  Discount notes (2)
65,353

 
54,659

 
50,139

 
49,727

 
51,355

  Bonds (2)
79,812

 
77,160

 
87,523

 
85,517

 
73,822

Total consolidated obligations, net (2)
145,165

 
131,819

 
137,662

 
135,244

 
125,177

Mandatorily redeemable capital stock
2

 
3

 
1

 
3

 
2

Affordable Housing Program payable
80

 
80

 
77

 
72

 
71

Capital stock - putable
5,300

 
4,748

 
5,154

 
5,041

 
4,680

Retained earnings
2,079

 
2,052

 
2,003

 
1,972

 
1,935

Accumulated other comprehensive income
95

 
95

 
110

 
123

 
113

Total capital
7,474

 
6,895

 
7,267

 
7,136

 
6,728

Statements of Income (for the period ended)
 
 
 
 
 
 
 
 
 
Net interest income
131

 
135

 
122

 
123

 
114

Net impairment losses recognized in earnings
(1
)
 
—

 
—

 
—

 
(2
)
Net losses on trading securities
(1
)
 
(1
)
 
—

 
(1
)
 
(2
)
Net gains on derivatives and hedging activities
14

 
22

 
10

 
11

 
7

Standby letters of credit fees
7

 
6

 
6

 
6

 
7

Other income
2

 
—

 
2

 
2

 
2

Noninterest expense
33

 
35

 
36

 
36

 
30

Income before assessments
119

 
127

 
104

 
105

 
96

Affordable Housing Program assessments
12

 
13

 
11

 
10

 
10

Net income
107

 
114

 
93

 
95

 
86

Performance Ratios (%)
 
 
 
 
 
 
 
 
 
Return on equity (3)
5.73

 
6.01

 
5.16

 
5.46

 
4.99

Return on assets (4)
0.28

 
0.29

 
0.26

 
0.27

 
0.25

Net interest margin (5)
0.34

 
0.35

 
0.35

 
0.35

 
0.34

Regulatory capital ratio (at period end) (6)
4.79

 
4.84

 
4.88

 
4.87

 
4.95

Equity to assets ratio (7)
4.89

 
4.89

 
4.97

 
4.97

 
4.98

Dividend payout ratio (8)
74.36

 
56.86

 
66.83

 
61.59

 
70.52


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Table of Contents


____________
(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):
June 30, 2018
$
914,286

March 31, 2018
887,057

December 31, 2017
896,441

September 30, 2017
893,364

June 30, 2017
886,258


(3) Calculated as net income, divided by average total equity.
(4) Calculated as net income, divided by average total assets.
(5) Net interest margin is net interest income as a percentage of average earning assets.
(6) Regulatory capital ratio is regulatory capital, which does not include accumulated other comprehensive income, but does include mandatorily redeemable capital stock, as a percentage of total assets as of period end.
(7) Calculated as average total equity, divided by average total assets.
(8) Calculated as dividends declared during the period divided by net income during the period.

Financial Condition

The following table presents the distribution of the Bank’s total assets, liabilities, and capital by major class as of the dates indicated (dollars in millions). These items are discussed in more detail below.
 
 
As of June 30, 2018
 
As of December 31, 2017
 
Increase (Decrease)
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
Amount
 
Percent
Advances
$
104,537

 
67.81
 
$
102,440

 
69.89
 
$
2,097

 
2.05

Investment securities
27,472

 
17.82
 
26,322

 
17.96
 
1,150

 
4.37

Other investments
20,157

 
13.07
 
14,056

 
9.59
 
6,101

 
43.40

Mortgage loans, net
394

 
0.26
 
435

 
0.30
 
(41
)
 
(9.43
)
Loan to another FHLBank
—

 
—
 
200

 
0.14
 
(200
)
 
(100.00
)
Other assets
1,611

 
1.04
 
3,113

 
2.12
 
(1,502
)
 
(48.25
)
Total assets
$
154,171

 
100.00
 
$
146,566

 
100.00
 
$
7,605

 
5.19

Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
  Discount notes
$
65,353

 
44.55
 
$
50,139

 
35.99
 
$
15,214

 
30.34

  Bonds
79,812

 
54.41
 
87,523

 
62.83
 
(7,711
)
 
(8.81
)
Deposits
1,069

 
0.73
 
1,177

 
0.85
 
(108
)
 
(9.17
)
Other liabilities
463

 
0.31
 
460

 
0.33
 
3

 
0.60

Total liabilities
$
146,697

 
100.00
 
$
139,299

 
100.00
 
$
7,398

 
5.31

Capital stock
$
5,300

 
70.91
 
$
5,154

 
70.93
 
$
146

 
2.82

Retained earnings
2,079

 
27.82
 
2,003

 
27.56
 
76

 
3.83

Accumulated other comprehensive income
95

 
1.27
 
110

 
1.51
 
(15
)
 
(13.82
)
Total capital
$
7,474

 
100.00
 
$
7,267

 
100.00
 
$
207

 
2.85


Advances

Total advances increased by 2.05 percent as of June 30, 2018, compared to December 31, 2017. A significant percentage of advances made during the first six months of 2018 were short-term advances.

As of June 30, 2018, 56.9 percent of the Bank’s advances were fixed-rate, compared to 57.9 percent as of December 31, 2017. However, the Bank may simultaneously enter into derivatives with the issuance of advances to convert the rates on them, in effect, into short-term variable interest rates, the majority of which are based on LIBOR. As of June 30, 2018 and December 31, 2017, 42.9 percent and 42.1 percent, respectively, of the Bank’s fixed-rate advances were swapped, and 0.91 percent and 0.27 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 that may be tied to other indices, such as the federal funds rate, prime rate, or constant maturity swap rates.


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Table of Contents


The following table presents the par value of outstanding advances by product characteristics (dollars in millions).
 
As of June 30, 2018
 
As of December 31, 2017
 
Amount
 
Percent of Total
 
Amount
 
Percent of Total
Fixed rate (1)
$
37,632

 
35.92
 
$
42,984

 
42.04
Adjustable or variable-rate indexed
45,124

 
43.06
 
38,344

 
37.50
Hybrid
20,116

 
19.20
 
18,901

 
18.48
Convertible
648

 
0.62
 
693

 
0.68
Principal reducing credit
1,259

 
1.20
 
1,327

 
1.30
Total par value
$
104,779

 
100.00
 
$
102,249

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

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

Investments

The following table presents more detailed information regarding investments held by the Bank (dollars in millions).
 
 
 
 
Increase (Decrease)
 
As of June 30, 2018
 
As of December 31, 2017
 
Amount    
 
Percent    
Investment securities:
 
 
 
 
 
 
 
State or local housing agency debt obligations
$
1

 
$
1

 
$
—

 
—

Government-sponsored enterprises debt obligations
4,417

 
5,406

 
(989
)
 
(18.30
)
  Mortgage-backed securities:
 
 
 
 
 
 
 
U.S. agency obligations-guaranteed residential
136

 
157

 
(21
)
 
(13.01
)
Government-sponsored enterprises residential
10,112

 
9,357

 
755

 
8.07

Government-sponsored enterprises commercial
11,316

 
9,729

 
1,587

 
16.31

Private-label residential
1,490

 
1,672

 
(182
)
 
(10.88
)
Total mortgage-backed securities
23,054

 
20,915

 
2,139

 
10.23

Total investment securities
27,472

 
26,322

 
1,150

 
4.37

Other investments:
 
 
 
 
 
 
 
Interest-bearing deposits (1)
3,939

 
2,176

 
1,763

 
81.02

Securities purchased under agreements to resell
2,500

 
2,500

 
—

 
—

Federal funds sold
13,718

 
9,380

 
4,338

 
46.25

Total other investments
20,157

 
14,056

 
6,101

 
43.40

Total investments
$
47,629

 
$
40,378

 
$
7,251

 
17.96

____________ 
(1) 
Interest-bearing deposits include a $405 million and $401 million business money market account with Branch Banking and Trust Company as of June 30, 2018 and December 31, 2017, respectively. Interest-bearing deposits also included a $46 million business money market account with United Bank as of June 30, 2018 and December 31, 2017. Branch Banking and Trust Company and United Bank were one of the Bank’s 10 largest borrowers as of June 30, 2018 and December 31, 2017.

The increase in total investments was primarily due to an increase other investments from December 31, 2017 to June 30, 2018. The amount held in other investments will vary each day based on the Bank’s liquidity requirements as a result of advances demand, the earnings rates, and the availability of high quality counterparties in the federal funds market.


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Table of Contents


The Finance Agency regulations prohibit an FHLBank from purchasing MBS and asset-backed securities if its investment in such securities would exceed 300 percent of the FHLBank’s previous month-end regulatory capital on the day it would purchase the securities. As of June 30, 2018, these investments were 311 percent of the Bank’s regulatory capital. The Bank was in compliance with this regulatory requirement at the time of its MBS purchases and will not be required to sell any previously purchased MBS. However, the Bank was precluded from purchasing additional MBS until its MBS to regulatory capital declines below 300 percent. As of December 31, 2017, the Bank’s MBS to regulatory capital was 290 percent.

Mortgage Loans Held for Portfolio

The decrease in mortgage loans held for portfolio from December 31, 2017 to June 30, 2018, was primarily due to the maturity and prepayment of these assets during the period.
Members that sold mortgage loans to the Bank were located primarily in the southeastern United States; therefore, the Bank’s conventional mortgage loan portfolio was concentrated in that region as of June 30, 2018 and December 31, 2017. The following table presents the percentage of unpaid principal balance of conventional residential mortgage loans held for portfolio for the five largest state concentrations.
 
 
As of June 30, 2018
 
As of December 31, 2017
 
Percent of Total
 
Percent of Total
Florida
22.69

 
23.14

South Carolina
20.57

 
20.80

Georgia
10.13

 
10.22

Virginia
10.96

 
10.70

North Carolina
8.35

 
8.62

All other
27.30

 
26.52

Total
100.00

 
100.00




Consolidated Obligations

The Bank funds its assets primarily through the issuance of consolidated obligation bonds and consolidated obligation discount notes. The increase in consolidated obligations from December 31, 2017 to June 30, 2018 was primarily a result of increased funding and liquidity needs during the period. Consolidated obligation issuances financed 94.2 percent of the $154.2 billion in total assets as of June 30, 2018, remaining relatively stable compared to the financing ratio of 93.9 percent as of December 31, 2017.
The Bank often simultaneously enters into derivatives with the issuance of consolidated obligation bonds to convert the interest rates, in effect, into short-term variable interest rates, usually based on LIBOR. As of June 30, 2018 and December 31, 2017, 82.1 percent and 80.8 percent, respectively, of the Bank’s fixed-rate consolidated obligation bonds were swapped. None of the Bank’s variable-rate consolidated obligation bonds were swapped as of June 30, 2018 and December 31, 2017. As of June 30, 2018 and December 31, 2017, 0.46 percent and 4.78 percent, respectively, of the Bank’s fixed-rate consolidated obligation discount notes were swapped.

Deposits

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

To support its member deposits, the FHLBank Act requires the Bank to have an amount equal to or greater than the current deposits received from its members as a reserve. These reserves are required to be invested in obligations of the United States, deposits in eligible banks or trust companies, or advances with maturities not exceeding five years. The Bank was in compliance with this depository liquidity requirement as of June 30, 2018.

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Table of Contents



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

Under the regulations, the Director of the Finance Agency (Director) will make a capital classification for each FHLBank at least quarterly and notify the FHLBank in writing of any proposed action and provide an opportunity for the FHLBank to submit information relevant to such action. The Director is permitted to make discretionary classifications. An FHLBank must provide written notice to the Finance Agency within 10 days of any event or development that has caused or is likely to cause its permanent or total capital to fall below the level required to maintain its most recent capital classification or reclassification. In the event that an FHLBank is not adequately capitalized, the regulations delineate the types of prompt corrective actions that the Director may order, including submission of a capital restoration plan by the FHLBank and restrictions on its dividends, stock redemptions, executive compensation, new business activities, or any other actions the Director determines will ensure safe and sound operations and capital compliance by the FHLBank. On June 7, 2018 the Bank received notification from the Director that, based on March 31, 2018 data, the Bank meets the definition of “adequately capitalized.”

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

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Table of Contents


Results of Operations

The following is a discussion and analysis of the Bank’s results of operations for the second quarter and first six months of 2018 and 2017.

Net Income

The following table presents the Bank’s significant income items for the second quarter and first six months of 2018 and 2017, and provides information regarding the changes during those periods (dollars in millions). These items are discussed in more detail below.

 
 
For the Three Months Ended June 30,
 
Increase (Decrease)
 
For the Six Months Ended June 30,
 
Increase (Decrease)    
 
 
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
Net interest income (expense)
 
$
131

 
$
114

 
$
17

 
14.28

 
$
266

 
$
(88
)
 
$
354

 
402.67

Noninterest income
 
21

 
12

 
9

 
77.21

 
48

 
331

 
(283
)
 
(85.59
)
Noninterest expense
 
33

 
30

 
3

 
3.80

 
68

 
64

 
4

 
3.91

Affordable Housing Program assessments
 
12

 
10

 
2

 
25.50

 
25

 
18

 
7

 
37.74

Net income
 
$
107

 
$
86

 
$
21

 
25.51

 
$
221

 
$
161

 
$
60

 
37.75


Net Interest Income

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

As discussed above, net interest income includes components of hedging activity. When hedging relationships qualify for hedge accounting, the interest components of the hedging derivatives will be reflected in interest income or expense. When a hedging relationship is discontinued, the cumulative fair value adjustment on the hedged item will be amortized into interest income or expense over the remaining life of the asset or liability. The impact of hedging on net interest income was a decrease of $29 million and $62 million for the second quarter of 2018 and 2017, respectively, and a decrease of $70 million and $423 million for the first six months of 2018 and 2017, respectively.

The increase in net interest income during the second quarter of 2018, compared to the same period in 2017, was primarily due to an increase in interest rates during the period.

The increase in net interest income during the first six months of 2018, compared to the same period in 2017, was primarily due to restructured and redesignated advances that were prepaid prior to their maturity during the first quarter of 2017. These prepayments resulted in $302 million of accelerated amortization, which reduced net interest income during the first quarter of 2017 and was offset by a corresponding increase in net gains on derivatives and hedging activities, reflected in noninterest income. These prepayments of previously restructured and redesignated advances primarily relate to a single member institution. The remaining change in net interest income for the period was primarily due to an increase in interest rates during the period.


41
Table of Contents


The following tables present spreads between the average yield on total interest-earning assets and the average cost of interest-bearing liabilities for the second quarter and first six months of 2018 and 2017 (dollars in millions). The interest-rate spread is affected by the inclusion or exclusion of net interest income or expense associated with the Bank’s derivatives. For example, as discussed above, if the derivatives qualify for fair-value hedge accounting under GAAP, the interest income or expense associated with the derivatives is included in net interest income and in the calculation of interest-rate spread. If the derivatives do not qualify for fair-value hedge accounting under GAAP, the interest income or expense associated with the derivatives is excluded from net interest income and from the calculation of interest-rate spread and is recorded in “Noninterest income (loss)” as “Net gains on derivatives and hedging activities.” Amortization associated with some hedging-related basis adjustments is also reflected in net interest income, which affects interest-rate spread.

The Bank’s interest-rate spread was 25 basis points and 27 basis points, respectively, for the second quarter and first six months of 2018, compared to 30 basis points and negative 17 basis points, respectively, for the same periods in 2017. The decrease in the Bank’s interest-rate spread for the second quarter of 2018, compared to the same period in 2017, was due to the increase in interest rates having more of an impact on interest-bearing liabilities than on interest-earning assets. The increase in the Bank’s interest-rate spread for the first six months of 2018, compared to the same period in 2017, was primarily due to the prepayment of previously restructured and redesignated advances discussed above, which decreased net interest income in 2017.
 
For the Three Months Ended June 30,
 
2018
 
2017
 
Average  Balance
 
Interest
 
Yield/    
Rate
(%)
 
Average  Balance
 
Interest
 
Yield/    
Rate
(%)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (1)
$
3,803

 
$
17

 
1.76
 
$
1,603

 
$
6

 
1.52
Securities purchased under agreements to resell
2,555

 
11

 
1.78
 
1,268

 
3

 
0.92
Federal funds sold
12,867

 
59

 
1.84
 
11,428

 
28

 
0.99
Investment securities (2)
27,306

 
180

 
2.62
 
26,385

 
128

 
1.94
Advances
105,080

 
537

 
2.05
 
94,457

 
250

 
1.06
Mortgage loans (3)
406

 
5

 
5.23
 
499

 
6

 
5.25
Total interest-earning assets
152,017

 
809

 
2.13
 
135,640

 
421

 
1.25
Allowance for credit losses on mortgage loans
(1
)
 
 
 
 
 
(1
)
 
 
 
 
Other assets
1,033

 
 
 
 
 
1,936

 
 
 
 
Total assets
$
153,049

 
 
 
 
 
$
137,575

 
 
 
 
Liabilities and Capital
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (4)
$
1,083

 
4

 
1.66
 
$
1,170

 
2

 
0.86
Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
Discount notes
62,237

 
282

 
1.81
 
51,881

 
103

 
0.80
Bonds
81,520

 
392

 
1.93
 
76,790

 
202

 
1.05
Other borrowings
5

 
—

 
3.95
 
8

 
—

 
2.22
Total interest-bearing liabilities
144,845

 
678

 
1.88
 
129,849

 
307

 
0.95
Other liabilities
718

 
 
 
 
 
880

 
 
 
 
Total capital
7,486

 
 
 
 
 
6,846

 
 
 
 
Total liabilities and capital
$
153,049

 
 
 
 
 
$
137,575

 
 
 
 
Net interest income and net yield on interest-earning assets
 
 
$
131

 
0.34
 
 
 
$
114

 
0.34
Interest-rate spread
 
 
 
 
0.25
 
 
 
 
 
0.30
Average interest-earning assets to interest-bearing liabilities
 
 
 
 
104.95
 
 
 
 
 
104.46
____________ 
(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 mortgage 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.

42
Table of Contents



 
For the Six Months Ended June 30,
 
2018
 
2017
 
Average  Balance
 
Interest
 
Yield/    
Rate
(%)
 
Average  Balance
 
Interest
 
Yield/    
Rate
(%)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (1)
$
3,459

 
$
31

 
1.81
 
$
1,667

 
$
11

 
1.35

Securities purchased under agreements to resell
2,122

 
17

 
1.66
 
981

 
4

 
0.84

Federal funds sold
12,999

 
108

 
1.67
 
10,912

 
47

 
0.87

Investment securities (2)
26,668

 
333

 
2.51
 
26,160

 
243

 
1.87

Advances
108,647

 
992

 
1.84
 
98,402

 
170

 
0.35

Mortgage loans (3)
416

 
11

 
5.34
 
512

 
13

 
5.24

Loans to other FHLBanks
4

 
—

 
2.73
 
—

 
—

 
—

Total interest-earning assets
154,315

 
1,492

 
1.95
 
138,634

 
488

 
0.71

Allowance for credit losses on mortgage loans
(1
)
 
 
 
 
 
(1
)
 
 
 
 
Other assets
1,137

 
 
 
 
 
1,939

 
 
 
 
Total assets
$
155,451

 
 
 
 
 
$
140,572

 
 
 
 
Liabilities and Capital
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (4)
$
1,084

 
8

 
1.49
 
$
1,171

 
4

 
0.74

Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
Discount notes
63,171

 
506

 
1.61
 
48,455

 
171

 
0.71

Bonds
82,867

 
712

 
1.73
 
82,995

 
401

 
0.97

Other borrowings
5

 
—

 
4.51
 
5

 
—

 
2.92

Total interest-bearing liabilities
147,127

 
1,226

 
1.68
 
132,626

 
576

 
0.88

Other liabilities
725

 
 
 
 
 
959

 
 
 
 
Total capital
7,599

 
 
 
 
 
6,987

 
 
 
 
Total liabilities and capital
$
155,451

 
 
 
 
 
$
140,572

 
 
 
 
Net interest income (expense) and net yield on interest-earning assets
 
 
$
266

 
0.35
 
 
 
$
(88
)
 
(0.13
)
Interest-rate spread
 
 
 
 
0.27
 
 
 
 
 
(0.17
)
Average interest-earning assets to interest-bearing liabilities
 
 
 
 
104.89
 
 
 
 
 
104.53

____________ 
(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 mortgage 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.


43
Table of Contents


Net interest income for the periods presented was affected by changes in average balances (volume changes) and changes in average rates (rate changes) of interest-earning assets and interest-bearing liabilities. The following table presents the extent to which volume changes and rate changes affected the Bank’s interest income and interest expense (in millions). As presented in the table below, the overall changes in net interest income during the second quarter and first six months of 2018, compared to the same periods in 2017, were primarily rate related.
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2018 vs. 2017
 
2018 vs. 2017
 
 
Volume (1)
 
Rate (1)
 
Increase (Decrease)    
 
Volume (1)
 
Rate (1)
 
Increase (Decrease)    
Increase (decrease) in interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 Interest-bearing deposits
 
$
10

 
$
1

 
$
11

 
$
15

 
$
5

 
$
20

 Securities purchased under agreements to resell
 
4

 
4

 
8

 
7

 
6

 
13

 Federal funds sold
 
4

 
27

 
31

 
11

 
50

 
61

 Investment securities
 
5

 
47

 
52

 
5

 
85

 
90

 Advances
 
31

 
256

 
287

 
19

 
803

 
822

    Mortgage loans
 
(1
)
 
—

 
(1
)
 
(2
)
 
—

 
(2
)
Total
 
53

 
335

 
388

 
55

 
949

 
1,004

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

 
2

 
2

 
—

 
4

 
4

Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
 
 
     Discount notes
 
25

 
154

 
179

 
65

 
270

 
335

     Bonds
 
13

 
177

 
190

 
(1
)
 
312

 
311

Total
 
38

 
333

 
371

 
64

 
586

 
650

Increase (decrease) in net interest income
 
$
15

 
$
2

 
$
17

 
$
(9
)
 
$
363

 
$
354

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

Noninterest Income (Loss)

The following table presents the components of noninterest income (dollars in millions).
 
 
 
For the Three Months Ended June 30,
 
Increase (Decrease)
 
For the Six Months Ended June 30,
 
Increase (Decrease)
 
 
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
Net impairment losses recognized in earnings
 
$
(1
)
 
$
(2
)
 
$
1

 
84.51

 
$
(1
)
 
$
(2
)
 
$
1

 
59.75

Net losses on trading securities
 
(1
)
 
(2
)
 
1

 
70.66

 
(2
)
 
(4
)
 
2

 
60.42

Net gains on derivatives and hedging activities
 
14

 
7

 
7

 
128.01

 
36

 
320

 
(284
)
 
(88.67
)
Standby letters of credit fees
 
7

 
7

 
—

 
(9.46
)
 
13

 
14

 
(1
)
 
(7.71
)
Other
 
2

 
2

 
—

 
(55.39
)
 
2

 
3

 
(1
)
 
(70.86
)
Total noninterest income
 
$
21

 
$
12

 
$
9

 
77.21

 
$
48

 
$
331

 
$
(283
)
 
(85.59
)


The decrease in total noninterest income during the first six months of 2018, compared to the same period in 2017, was primarily due to restructured and redesignated advances that were prepaid prior to their maturity during the first quarter of 2017, which resulted in $302 million of accelerated amortization. This accelerated amortization reduced net interest income during the first quarter of 2017 and was offset by a corresponding increase in net gains on derivatives and hedging activities.


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The following tables present the net effect of derivatives and hedging activity on the Bank’s results of operations (in millions).

 
For the Three Months Ended June 30, 2018
 
Advances
 
Investments
 
Consolidated
Obligation
Bonds
 
Consolidated Obligation Discount Notes
 
Balance Sheet
 
Other (4)
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization or accretion of hedging activities in net interest income (1)
$
(12
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(12
)
Net interest settlements included in net interest income (2)
(1
)
 
—

 
(15
)
 
(1
)
 
—

 
—

 
(17
)
Total effect on net interest income
$
(13
)
 
$
—

 
$
(15
)
 
$
(1
)
 
$
—

 
$
—

 
$
(29
)
Net gains on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 Gains (losses) on fair value hedges
$
24

 
$
—

 
$
(8
)
 
$
(1
)
 
$
—

 
—

 
$
15

 Gains (losses) on derivatives not receiving hedge accounting including net interest settlements
—

 
1

 
—

 
—

 
(1
)
 
—

 
—

Price alignment amount on derivatives
—

 
—

 
—

 
—

 
—

 
(1
)
 
(1
)
Total net gains on derivatives and hedging activities
24

 
1

 
(8
)
 
(1
)
 
(1
)
 
(1
)
 
14

Net losses on trading securities (3)
—

 
—

 
—

 
—

 
—

 
—

 
—

Total effect on noninterest income
$
24

 
$
1

 
$
(8
)
 
$
(1
)
 
$
(1
)
 
$
(1
)
 
$
14

____________
(1) 
Represents the amortization or accretion of hedging fair value adjustments for both open and closed hedge positions.
(2) 
Represents interest income or expense on derivatives included in net interest income.
(3) 
Includes only those gains or losses on trading securities or financial instruments held at fair value that have an economic derivative “assigned”, therefore, this line item may not agree to the income statement.
(4) Amount in “Other” includes the price alignment amount on derivatives for which variation margin is characterized as daily settled contract.


 
For the Three Months Ended June 30, 2017
 
Advances
 
Investments
 
Consolidated
Obligation
Bonds
 
Balance Sheet
 
Other (4)
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
 
 
Amortization or accretion of hedging activities in net interest income(1)
$
(16
)
 
$
—

 
$
1

 
$
—

 
$
—

 
$
(15
)
Net interest settlements included in net interest income (2)
(67
)
 
—

 
20

 
—

 
—

 
(47
)
Total effect on net interest income
$
(83
)
 
$
—

 
$
21

 
$
—

 
$
—

 
$
(62
)
Net gains on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
 
 
Gains on fair value hedges
$
9

 
$
—

 
$
—

 
$
—

 
$
—

 
$
9

Losses on derivatives not receiving hedge accounting including net interest settlements
—

 
(1
)
 
—

 
(2
)
 
—

 
(3
)
Price alignment amount on derivatives
—

 
—

 
—

 
—

 
1

 
1

Total net gains (losses) on derivatives and hedging activities
9

 
(1
)
 
—

 
(2
)
 
1

 
7

Net losses on trading securities (3)
—

 
(2
)
 
—

 
—

 
—

 
(2
)
Total effect on noninterest income
$
9

 
$
(3
)
 
$
—

 
$
(2
)
 
$
1

 
$
5

____________
(1) 
Represents the amortization or accretion of hedging fair value adjustments for both open and closed hedge positions.
(2) 
Represents interest income or expense on derivatives included in net interest income.
(3) 
Includes only those gains or losses on trading securities or financial instruments held at fair value that have an economic derivative “assigned”, therefore, this line item may not agree to the income statement.
(4) Amount in “Other” includes the price alignment amount on derivatives for which variation margin is characterized as daily settled contract.

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For the Six Months Ended June 30, 2018
 
Advances
 
Investments
 
Consolidated
Obligation
Bonds
 
Consolidated Obligation Discount Notes
 
Balance Sheet
 
Other (4)
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization or accretion of hedging activities in net interest income (1)
$
(23
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(23
)
Net interest settlements included in net interest income (2)
(34
)
 
—

 
(11
)
 
(2
)
 
—

 
—

 
(47
)
Total effect on net interest income
$
(57
)
 
$
—

 
$
(11
)
 
$
(2
)
 
$
—

 
$
—

 
$
(70
)
Net gains on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 Gains (losses) on fair value hedges
$
38

 
$
—

 
$
(3
)
 
$
(1
)
 
$
—

 
$
—

 
$
34

 Gains on derivatives not receiving hedge accounting including net interest settlements
—

 
2

 
—

 
—

 
1

 
—

 
3

Price alignment amount on derivatives
—

 
—

 
—

 
—

 
—

 
(1
)
 
(1
)
Total net gains on derivatives and hedging activities
38

 
2

 
(3
)
 
(1
)
 
1

 
(1
)
 
36

Net losses on trading securities (3)
—

 
(1
)
 
—

 
—

 
—

 
—

 
(1
)
Total effect on noninterest income
$
38

 
$
1

 
$
(3
)
 
$
(1
)
 
$
1

 
$
(1
)
 
$
35

____________
(1) 
Represents the amortization or accretion of hedging fair value adjustments for both open and closed hedge positions.
(2) 
Represents interest income or expense on derivatives included in net interest income.
(3) 
Includes only those gains or losses on trading securities or financial instruments held at fair value that have an economic derivative “assigned;” therefore, this line item may not agree to the income statement.
(4) Amount in “Other” includes the price alignment amount on derivatives for which variation margin is characterized as daily settled contract.

 
For the Six Months Ended June 30, 2017
 
Advances
 
Investments
 
Consolidated
Obligation
Bonds
 
Consolidated Obligation Discount Notes
 
Balance Sheet
 
Other (4)
 
Total
Net interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization or accretion of hedging activities in net interest expense (1)
$
(330
)
 
$
—

 
$
2

 
$
—

 
$
—

 
$
—

 
$
(328
)
Net interest settlements included in net interest expense (2)
(144
)
 
—

 
52

 
(3
)
 
—

 
—

 
(95
)
Total effect on net interest expense
$
(474
)
 
$
—

 
$
54

 
$
(3
)
 
$
—

 
$
—

 
$
(423
)
Net gains on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 Gains (losses) on fair value hedges
$
325

 
$
—

 
$
(2
)
 
$
—

 
$
—

 
$
—

 
$
323

 Losses on derivatives not receiving hedge accounting including net interest settlements
—

 
(1
)
 
—

 
—

 
(3
)
 
—

 
(4
)
Price alignment amount on derivatives
—

 
—

 
—

 
—

 
—

 
1

 
1

Total net gains on derivatives and hedging activities
325

 
(1
)
 
(2
)
 
—

 
(3
)
 
1

 
320

Net losses on trading securities (3)
—

 
(4
)
 
—

 
—

 
—

 
—

 
(4
)
Total effect on noninterest income
$
325

 
$
(5
)
 
$
(2
)
 
$
—

 
$
(3
)
 
$
1

 
$
316

____________ 
(1) 
Represents the amortization or accretion of hedging fair value adjustments for both open and closed hedge positions.
(2) 
Represents interest income or expense on derivatives included in net interest income.
(3) 
Includes only those gains or losses on trading securities or financial instruments held at fair value that have an economic derivative “assigned;” therefore, this line item may not agree to the income statement.
(4) Amount in “Other” includes the price alignment amount on derivatives for which variation margin is characterized as daily settled contract.

Noninterest Expense and Assessments

Total noninterest expense remained relatively stable for the second quarter and first six months of 2018, compared to the same periods in 2017. The change in assessments during the period was due to a change in income before assessments. If income before assessments increases (decreases), then assessments increase (decrease).

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Liquidity and Capital Resources
Liquidity is necessary to satisfy members’ borrowing needs on a timely basis, repay maturing and called consolidated obligations, and meet other obligations and operating requirements. Many members rely on the Bank as a source of standby liquidity, so the Bank attempts to be in a position to meet member funding needs on a timely basis. The Bank complies with operational liquidity and contingent liquidity, as well as other regulatory requirements. The Bank also performs a separate and independent measure of liquidity, a 45-day liquidity measurement, to validate the level of liquidity reserves.
Finance Agency regulations require the Bank to maintain operational liquidity (generally, the ready cash and borrowing capacity available to meet the Bank’s intraday needs) and contingent liquidity in an amount sufficient to meet its liquidity needs for five business days if it is unable to access the capital markets. The Bank met these regulatory liquidity requirements throughout the first six months of 2018. The Finance Agency has also provided liquidity guidance to the FHLBanks generally to provide ranges of days for which each FHLBank should maintain positive cash balances based upon different assumptions and scenarios. The Bank has operated within these ranges since the Finance Agency issued this guidance.
The Bank has established an internal liquidity measurement separate from the Finance Agency requirements described above. The Bank performs a supplemental analysis to confirm that liquidity reserves are sufficient to service debt obligations for at least 45 days. This analysis assumes no access to debt market issuance and other management assumptions, which are completely independent of the operational and contingent liquidity calculation measured above. The Bank met its 45 day internal liquidity goal throughout the first six months of 2018.
The Bank’s principal source of liquidity is consolidated obligation debt instruments. To provide additional liquidity, the Bank also may use other short-term borrowings, such as federal funds purchased, securities sold under agreements to repurchase, and loans from other FHLBanks. The Bank’s consolidated obligations are not obligations of the United States and are not guaranteed by either the United States or any government agency, but have historically received the same credit rating as the government bond credit rating of the United States. As a result, the Bank generally has comparatively stable access to funding through a diverse investor base at relatively favorable spreads to U.S. Treasury rates. The Bank’s income and liquidity would be adversely affected if it were not able to access the capital markets at competitive rates for an extended period.

The Bank maintained continual access to funding and adapted its debt issuance to meet the needs of its members throughout the first six months of 2018. The Bank’s short-term funding was generally driven by member demand and was achieved through the issuance of consolidated discount notes and short-term consolidated bonds during the first six months of 2018. Access to short-term debt markets has been reliable because investors, driven by increased liquidity preferences and risk aversion, including the effects of money market fund reform, have sought the Bank’s short-term debt as an asset of choice, which has led to advantageous funding opportunities and increased utilization of debt maturing in one year or less.

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


Off-balance Sheet Commitments

The Bank’s primary off-balance sheet commitments are as follows:
•
the Bank’s joint and several liability for all FHLBank consolidated obligations; and
•
the Bank’s outstanding commitments arising from standby letters of credit.

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Should an FHLBank be unable to satisfy its payment obligation under a consolidated obligation for which it is the primary obligor, any of the other FHLBanks, including the Bank, could be called upon to repay all or any part of such payment obligation, as determined or approved by the Finance Agency. As of June 30, 2018 and December 31, 2017, none of the other FHLBanks defaulted on their consolidated obligations; the Finance Agency was not required to allocate any obligation among the FHLBanks; and no amount of the joint and several obligation was fixed. Accordingly, the Bank has not recognized a liability for its joint and several obligations related to other FHLBanks’ consolidated obligations as of June 30, 2018 and December 31, 2017. As of June 30, 2018, the FHLBanks had $1.1 trillion in aggregate par value of consolidated obligations issued and outstanding, $145.6 billion of which was attributable to the Bank. No FHLBank has ever defaulted on its principal or interest payments under any consolidated obligation, and the Bank has never been required to make payments under any consolidated obligation as a result of the failure of another FHLBank to meet its obligations.
The Bank generally requires standby letters of credit to contain language permitting the Bank, upon annual renewal dates and prior notice to the beneficiary, to choose not to renew the standby letter of credit, which effectively terminates the standby letter of credit prior to its scheduled final expiration date. Based on the creditworthiness of the member applicant and appropriate additional fees, the Bank may issue standby letters of credit that have terms of longer than one year without annual renewals or that have no stated maturity and are subject to renewal on an annual basis.
Commitments to extend credit, including standby letters of credit, are agreements to lend. The Bank issues a standby letter of credit on behalf of a member in exchange for a fee. A member may use these standby letters of credit to facilitate a financing arrangement. Management regularly reviews its standby letter of credit pricing in light of several factors, including the Bank’s potential liquidity needs related to draws on its standby letters of credit. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to have an allowance for credit losses for these unfunded standby letters of credit as of June 30, 2018.
Refer to Note 15—Commitments and Contingencies to the Bank’s interim financial statements for more information about the Bank’s outstanding standby letters of credit.

Contractual Obligations

As of June 30, 2018, there has been no material change outside the ordinary course of business in the Bank’s contractual obligations as reported in the Bank’s Form 10-K.

Legislative and Regulatory Developments

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

Adoption of Single-Counterparty Credit Limits for Bank Holding Companies and Foreign Banking Organizations by Board of Governors of the Federal Reserve System. The Board of Governors of the Federal Reserve System has adopted a final rule establishing single-counterparty credit limits applicable to bank holding companies and foreign banking organizations with total consolidated assets of $250 billion or more, including global systemically important bank holding companies (“GSIBs”) in the United States. These entities are considered to be “covered companies” under the rule. The FHLBanks are themselves exempt from the limits and reporting requirements contained in this rule. However, credit exposure to individual FHLBanks must be monitored, and reported on as required, by any entity that is a covered company under this rule.
Under the final rule, a covered company and its subsidiaries may not have aggregate net credit exposure to an FHLBank and (in certain cases) economically interdependent entities in excess of 25% of the company’s tier 1 capital. Such credit exposure does not include advances from an FHLBank, but generally includes collateral pledged to an FHLBank in excess of a covered company’s outstanding advances.
With respect to the FHLBanks’ consolidated obligations held by a covered company, the company must monitor, and report on as required, its credit exposure for such obligations. It is not clear if the Federal Reserve will require consolidated obligations to be aggregated with other exposures to an FHLBank or the FHLBank System.
The final rule, which is effective October 5, 2018, gives major covered companies (i.e., the GSIBs) until January 1, 2020 to comply; all other covered companies will have until July 1, 2020 to comply.
The Bank is continuing to study the overall effect of the rule, but does not believe it will materially affect the Bank’s financial condition or results of operations.


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Table of Contents


Risk Management

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

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

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

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

Credit Risk

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

Advances

Secured advances to member financial institutions account for the largest category of Bank assets; thus, advances are a major source of the Bank’s credit risk exposure. The Bank uses a risk-focused approach to credit and collateral underwriting. The Bank attempts to reduce credit risk on advances by monitoring the financial condition of borrowers and the quality and value of the assets that borrowers pledge as eligible collateral.
The Bank utilizes a credit risk rating system for its members, which focuses primarily on an institution’s overall financial health and takes into account the quality of assets, earnings, and capital position. The Bank assigns each borrower that is an insured depository institution or an insurance company a credit risk rating from one to 10 according to the relative amount of credit risk that such borrower poses to the Bank (one being the least amount of credit risk and 10 the greatest amount of credit risk). In general, borrowers in category 10 may have more restrictions on the types of collateral they may use to secure advances, may be required to maintain higher collateral maintenance levels and deliver loan collateral, may be restricted from obtaining further advances, and may face more stringent collateral reporting requirements. At times, based upon the Bank’s assessment of a borrower and its collateral, the Bank may place more restrictive requirements on a borrower than those generally applicable to borrowers with the same rating. The Bank assigns each borrower that is not an insured depository institution or insurance company, such as housing associates, community development financial institutions, and corporate credit unions, a risk level rating based on a risk matrix developed for each entity type. Each matrix has risk levels that generally correspond to the one to 10 credit risk rating for insured depository institutions and insurance companies. Development of these risk matrices for borrowers that are not insured depository institutions or insurance companies enables the Bank to monitor and analyze the financial condition of these borrowers in a more consistent and complete manner. The par value of advances to these institutions totaled $865 million as of June 30, 2018.

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The following table presents the number of borrowers and the par value of advances outstanding to borrowers with the specified ratings as of the specified dates (dollars in millions).
 
 
 
As of June 30, 2018
 
As of December 31, 2017
Rating                 
 
Number of        
Borrowers
 
Par Value of Outstanding        
Advances
 
Number of        
Borrowers
 
Par Value of Outstanding        
Advances
1
 
86

 
$
1,325

 
16

 
$
2,380

2
 
52

 
15,775

 
51

 
20,549

3
 
60

 
12,352

 
84

 
53,972

4
 
110

 
65,750

 
79

 
6,366

5
 
72

 
7,379

 
104

 
13,557

6
 
17

 
445

 
60

 
3,021

7
 
8

 
379

 
28

 
740

8
 
9

 
268

 
10

 
321

9
 
6

 
82

 
9

 
139

10
 
9

 
159

 
12

 
180


The Bank establishes a credit limit for each borrower. The credit limit is not a committed line of credit, but rather an indication of the borrower’s general borrowing capacity with the Bank. The Bank determines the credit limit in its sole and absolute discretion by evaluating a wide variety of factors that indicate the borrower’s overall creditworthiness. The credit limit is generally expressed as a percentage equal to the ratio of the borrower’s total liabilities to the Bank (including the face amount of outstanding standby letters of credit, the par value of outstanding advances, and the total exposure of the Bank to the borrower under any derivative contract) to the borrower’s total assets. Generally, borrowers are held to a credit limit of no more than 30 percent. However, the Bank’s board of directors, or a relevant committee thereof, may approve a higher limit at its discretion, and such borrowers may be subject to certain additional collateral, reporting, and maintenance requirements. Five borrowers have been approved for a credit limit higher than 30 percent, and their total outstanding advance and standby letters of credit balance was $21.4 billion and $2.2 billion, respectively, as of June 30, 2018.
The Bank obtains collateral on advances to protect against losses, but Finance Agency regulations permit the Bank to accept only certain types of collateral. Each borrower must maintain an amount of qualifying collateral that, when discounted to the lendable collateral value (LCV), is equal to at least 100 percent of the borrower’s outstanding par value of all advances and other liabilities from the Bank. The LCV is the value that the Bank assigns to each type of qualifying collateral for purposes of determining the amount of credit that such qualifying collateral will support. For each type of qualifying collateral, the Bank discounts the market value of the qualifying collateral to calculate the LCV. The Bank regularly reevaluates the appropriate level of discounting. The following table presents information about the types of collateral held for the Bank’s advances (dollars in millions).

 
Total Par 
Value of
Outstanding Advances
 
LCV of 
Collateral 
Pledged by Members
 
First Mortgage 
Collateral (%)
 
Securities 
Collateral (%)
 
Other Real Estate Related Collateral (%)
As of June 30, 2018
$
104,779

 
$
339,322

 
64.77
 
8.63
 
26.60
As of December 31, 2017
102,249

 
330,093

 
67.96
 
5.43
 
26.61
For purposes of determining each member’s LCV, the Bank estimates the current market value of all residential first mortgage loans, commercial real estate loans, home equity loans, and lines of credit pledged as collateral based on information provided by the member on its loan portfolio or on individual loans through the regular collateral reporting process. The estimated market value is discounted to account for the (1) price volatility of loans, (2) model data uncertainty, and (3) estimated liquidation and servicing costs in the event of the member’s default. Market values, and thus LCVs, change monthly. The use of this market-based valuation methodology allows the Bank to establish its collateral discounts with greater precision and to provide greater transparency with respect to the valuation of collateral pledged for advances and other credit products offered by the Bank.
The FHLBank Act affords any security interest granted to the Bank by any member of the Bank, or any affiliate of any such member, priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor) other than the claims and rights of a party that (1) would be entitled to priority under otherwise 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.

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In its history, the Bank has never experienced a credit loss on an advance. In consideration of this and the Bank’s policies and practices detailed above, the Bank has not established an allowance for credit losses on advances as of June 30, 2018 and December 31, 2017.

Investments

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

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


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The Bank only enters into investments with U.S. counterparties or U.S. branch offices of foreign banks that have been approved by the Bank through its internal approval process, but the Bank may still have exposure to foreign entities if a counterparty’s parent entity is located in another country. The following tables present the Bank’s gross exposure, by instrument type, according to the location of the parent company of the counterparty (in millions).
 
As of June 30, 2018
 
Federal Funds Sold         
 
Interest-bearing  
Deposits
 
Net Derivative Exposure (1)    
 
Total 
Australia
$
1,505

 
$
—

 
$
—

 
$
1,505

Austria
370

 
—

 
—

 
370

Canada
1,878

 
—

 
—

 
1,878

France
800

 
—

 
—

 
800

Germany
2,670

 
—

 
—

 
2,670

Netherlands
1,335

 
—

 
—

 
1,335

Norway
1,125

 
—

 
—

 
1,125

Sweden
2,315

 
—

 
—

 
2,315

United States of America
1,720

 
3,939

 
3

 
5,662

Total
$
13,718

 
$
3,939

 
$
3

 
$
17,660

____________ 
(1) Amounts do not reflect collateral; see the table under Risk Management–Credit Risk–Derivatives below for a breakdown of the credit ratings of and the Bank’s credit exposure to derivative counterparties, including net exposure after collateral.
 
As of December 31, 2017
 
Federal Funds Sold         
 
Interest-bearing  
Deposits
 
Net Derivative Exposure (1)     
 
Total 
Australia
$
1,920

 
$
—

 
$
—

 
$
1,920

Austria
640

 
—

 
—

 
640

Canada
1,250

 
—

 
—

 
1,250

France
100

 
—

 
—

 
100

Germany
350

 
—

 
—

 
350

Netherlands
1,255

 
—

 
—

 
1,255

Norway
1,125

 
—

 
—

 
1,125

Sweden
750

 
—

 
—

 
750

Switzerland
—

 
—

 
33

 
33

United States of America
1,990

 
2,176

 
—

 
4,166

Total
$
9,380

 
$
2,176

 
$
33

 
$
11,589

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

The Bank experienced an increase in unsecured credit exposure in its investment portfolio related to non-U.S. government and non-U.S. government agency counterparties from $11.5 billion as of December 31, 2017 to $17.6 billion as of June 30, 2018. As of June 30, 2018, there were no counterparties that had greater than 10 percent of the total unsecured credit exposure to non-U.S. government or non-U.S. government agencies counterparties. As of June 30, 2018, this unsecured credit portfolio consisted primarily of federal funds sold with overnight maturities.

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


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The following tables present information on the credit ratings of the Bank’s investments held as of June 30, 2018 and December 31, 2017 (in millions), based on their credit ratings as of June 30, 2018 and December 31, 2017, respectively. The credit ratings reflect the lowest long-term credit ratings as reported by an NRSRO.
 
 
 
As of June 30, 2018
 
 
 
 
 
Carrying Value (1)
 
 
 
 
 
Investment Grade
 
Below Investment Grade
 
 
 
AAA
 
AA
 
A
 
BBB
 
BB
 
B
 
CCC
 
CC
 
D
 
Unrated
 
Total
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State or local housing agency debt obligations
$
—

 
$
1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1

Government-sponsored enterprises debt obligations
—

 
4,417

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
4,417

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

 
136

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
136

Government-sponsored enterprises residential
—

 
10,112

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
10,112

Government-sponsored enterprises commercial
569

 
10,747

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
11,316

Private-label residential
—

 
—

 
21

 
192

 
207

 
107

 
667

 
50

 
109

 
137

 
1,490

Total mortgage-backed securities
569

 
20,995

 
21

 
192

 
207

 
107

 
667

 
50

 
109

 
137

 
23,054

Total investment securities
569

 
25,413

 
21

 
192

 
207

 
107

 
667

 
50

 
109

 
137

 
27,472

Other investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
—

 
9

 
3,884

 
46

 
—

 
—

 
—

 
—

 
—

 
—

 
3,939

Securities purchased under agreements to resell
—

 
—

 
1,500

 
1,000

 
—

 
—

 
—

 
—

 
—

 
—

 
2,500

Federal funds sold
—

 
4,220

 
8,958

 
540

 
—

 
—

 
—

 
—

 
—

 
—

 
13,718

Total other investments
—


4,229


14,342


1,586


—


—


—


—


—


—


20,157

Total investments
$
569


$
29,642


$
14,363


$
1,778


$
207


$
107


$
667


$
50


$
109


$
137


$
47,629

____________
(1) Investment amounts noted in the above table represent the carrying value and do not include related accrued interest receivable of $45 million as of June 30, 2018.

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As of December 31, 2017
 
 
 
 
 
Carrying Value (1)
 
 
 
 
 
Investment Grade
 
Below Investment Grade
 
 
 
 
 
AAA
 
AA
 
A
 
BBB
 
BB
 
B
 
CCC
 
CC
 
C
 
D
 
Unrated
 
Total
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State or local housing agency debt obligations
$
—

 
$
1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1

Government-sponsored enterprises debt obligations
—

 
5,406

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
5,406

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

 
157

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
157

Government-sponsored enterprises residential
—

 
9,357

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
9,357

Government-sponsored enterprises commercial
577

 
9,152

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
9,729

Private-label residential
—

 
1

 
15

 
206

 
261

 
131

 
659

 
56

 
9

 
246

 
88

 
1,672

Total mortgage-backed securities
577

 
18,667

 
15

 
206

 
261

 
131

 
659

 
56

 
9

 
246

 
88

 
20,915

Total investment securities
577

 
24,074

 
15

 
206

 
261

 
131

 
659

 
56

 
9

 
246

 
88

 
26,322

Other investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
—

 
1,729

 
401

 
46

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2,176

Securities purchased under agreements to resell
—

 
1,500

 
1,000

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2,500

Federal funds sold
—

 
2,670

 
5,050

 
1,660

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
9,380

Total other investments
—


5,899


6,451


1,706


—


—


—


—


—


—


—


14,056

Total investments
$
577

 
$
29,973

 
$
6,466

 
$
1,912

 
$
261

 
$
131

 
$
659

 
$
56

 
$
9

 
$
246

 
$
88

 
$
40,378

____________
(1) Investment amounts noted in the above table represent the carrying value and do not include related accrued interest receivable of $36 million as of December 31, 2017.

Securities Purchased Under Agreements to Resell

Securities purchased under agreements to resell are considered collateralized financing arrangements and effectively represent short-term loans transacted with counterparties that the Bank considers to be of investment quality. The terms of these loans are structured such that if the fair value of the underlying securities decreases below the fair value required as collateral, the counterparty must place an equivalent amount of additional securities as collateral or remit an equivalent amount of cash. If an agreement to resell is deemed to be impaired, the difference between the fair value of the collateral and the amortized cost of the agreement is recognized in earnings. Based upon the collateral held as security, the Bank determined that no allowance for credit losses was needed for the securities purchased under agreements to resell as of June 30, 2018 and December 31, 2017.

Non-Private-label MBS
The unrealized losses related to U.S. agency and government-sponsored enterprise MBS are caused by interest rate changes. Because these securities are guaranteed by government agencies or government-sponsored enterprises, it is expected that these securities would not be settled at a price less than the amortized cost basis. The Bank does not consider these investments to be other-than-temporarily impaired as of June 30, 2018 because the decline in fair value is attributable to changes in interest rates and not credit quality; the Bank does not intend to sell the investments; and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity.


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Table of Contents


Private-label MBS

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

The following table presents information, based on investment ratings, on the Bank’s private-label MBS as of June 30, 2018 (dollars in millions).
 
Prime
 
Alt-A
 
Total
Investment Ratings:
 
 
 
 
 
A
$
21

 
$
—

 
$
21

BBB
185

 
6

 
191

BB
197

 
10

 
207

B
79

 
28

 
107

CCC
598

 
140

 
738

CC
32

 
24

 
56

D
114

 
—

 
114

Unrated
148

 
1

 
149

Total unpaid principal balance
$
1,374

 
$
209

 
$
1,583

Amortized cost
$
1,204

 
$
169

 
$
1,373

Gross unrealized losses
$
(1
)
 
$
—

 
$
(1
)
Fair value
$
1,310

 
$
186

 
$
1,496

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

 
$
—

 
$
—

Net amount of impairment losses reclassified from accumulated other
comprehensive income

(1
)
 
—

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

 
$
(1
)
Weighted average percentage of fair value to unpaid principal balance
95.36
%
 
88.48
%
 
94.45
%
Original weighted average credit support
9.42
%
 
24.71
%
 
11.44
%
Weighted average credit support
5.85
%
 
10.02
%
 
6.41
%
Weighted average collateral delinquency
10.87
%
 
16.38
%
 
11.60
%

The following table presents a summary of the significant inputs used to evaluate each of the Bank’s private-label MBS for other-than-temporary impairment as of June 30, 2018.
 
 
Significant Inputs - Weighted Average (%)
 
Classification of Securities (1)
 
Prepayment Rate
 
Default Rates
 
Loss Severities
 
Current Credit Enhancement (%)
 Prime
 
16.19
 
7.93
 
25.03
 
8.93
 Alt-A
 
13.94
 
20.47
 
37.49
 
3.79
Total
 
15.07
 
14.13
 
31.19
 
6.39
____________
(1) The classification of securities is based on current characteristics and performance, which may be different from the securities’ classification as determined by the originator at the time of origination.

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


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

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

Derivatives

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

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

For uncleared derivatives, the Bank is subject to nonperformance by counterparties. The Bank generally requires collateral on uncleared derivative transactions. A counterparty must deliver collateral to the Bank if the total market value of the Bank’s exposure to that counterparty rises above a specific trigger point. As a result, the Bank does not anticipate any credit losses on its uncleared derivatives as of June 30, 2018.

Certain of the Bank’s uncleared derivative instruments contain provisions that require the Bank to post additional collateral with its counterparties if there is a deterioration in the Bank’s credit rating. If the Bank’s credit rating had been lowered from its current rating to the next lower rating that would have triggered additional collateral to be delivered, the Bank would have been required to deliver up to an additional $1 million of collateral at fair value to its uncleared derivative counterparties as of June 30, 2018.

For cleared derivatives, the Bank is subject to credit risk due to nonperformance by the Clearinghouse and clearing agent. The requirement that the Bank post initial and variation margin through the clearing agent, to the Clearinghouse, exposes the Bank to institutional credit risk in the event that the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives mitigates credit risk exposure because a central counterparty is substituted for individual counterparties, and collateral is posted daily for changes in the value of cleared derivatives through a clearing agent. This does introduce, however, a risk of concentration among the limited number of Clearinghouses and clearing agents. The Bank actively monitors Clearinghouses and clearing agents. An annual review of the Bank’s Clearinghouses is performed, and the Bank also monitors its exposure to Clearinghouses on a monthly basis. The Bank currently has the following two approved Clearinghouses: CME Clearing and LCH Ltd. Effective January 3, 2017, CME Clearing made certain amendments to its rulebook changing the legal characterization of variation margin payments to be daily settled payments, rather than collateral. Similarly, beginning January 16, 2018, variation margin for all LCH Ltd. derivative transactions were considered daily settled payments. Variation margin on daily settled contracts is netted directly against the derivative’s gross recognized amount. At both Clearinghouses, initial margin is considered cash collateral. The Bank also monitors the clearing agents through its unsecured credit system, and the Bank subjects these clearing agents to the same limits as other bilateral derivative counterparties. The parent companies of the clearing agents are monitored through annual reviews, as well as through the Bank’s daily monitoring tools, which include reviewing equity triggers, debt triggers, and credit default swap spread triggers. In addition, exposures to the clearing agents are monitored daily on a swap counterparty report. The Bank currently has the following three approved clearing agents: Credit Suisse Securities (USA) LLC, Morgan Stanley & Co. LLC, and Goldman Sachs & Co. The Bank does not anticipate any credit losses on its cleared derivatives as of June 30, 2018.


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The contractual or notional amount of derivative transactions reflects the involvement of the Bank in the various classes of financial instruments; however, the Bank’s maximum credit risk with respect to derivative transactions, is the estimated cost of replacing the derivative transactions if there is default, less the value of any related collateral, including initial and variation margin. In determining maximum credit risk, the Bank considers accrued interest receivables and payables, as well as the netting requirements to net assets and liabilities.
The following tables present information on the credit ratings of, and the Bank’s credit exposure to, its derivative counterparties (in millions). The credit ratings reflect the lowest long-term credit rating by an NRSRO.
 
 
As of June 30, 2018
 
 
Notional Amount
 
Net Derivatives Fair Value Before Collateral
 
Cash Collateral Pledged To (From) Counterparty
 
Net Credit Exposure to Counterparties
Non-member counterparties:
 
 
 
 
 
 
 
 
  Asset positions with credit exposure:
 
 
 
 
 
 
 
 
    Single-A
 
$
4,361

 
$
1

 
$
—

 
$
1

    Triple-B
 
5,294

 
1

 
—

 
1

 Cleared derivatives
 
20,531

 
1

 
292

 
293

  Liability positions with credit exposure:
 
 
 
 
 
 
 
 
    Double-A
 
1,085

 
(7
)
 
7

 
—

    Single-A
 
6,038

 
(21
)
 
22

 
1

    Triple-B
 
132

 
(1
)
 
1

 
—

    Cleared derivatives
 
10,168

 
(4
)
 
34

 
30

Total derivative positions with non-member counterparties to which the Bank had credit exposure
 
$
47,609

 
$
(30
)
 
$
356

 
$
326


 
 
As of December 31, 2017
 
 
Notional Amount
 
Net Derivatives Fair Value Before Collateral
 
Cash Collateral Pledged To (From) Counterparty
 
Net Credit Exposure to Counterparties
Non-member counterparties:
 
 
 
 
 
 
 
 
  Asset positions with credit exposure:
 
 
 
 
 
 
 
 
    Cleared derivatives
 
$
3,625

 
$
33

 
$
(9
)
 
$
24

  Liability positions with credit exposure:
 
 
 
 
 
 
 
 
    Double-A
 
500

 
—

 
—

 
—

    Single-A
 
5,689

 
(21
)
 
22

 
1

    Triple-B
 
6,699

 
(4
)
 
4

 
—

    Cleared derivatives
 
28,843

 
(106
)
 
415

 
309

Total derivative positions with non-member counterparties to which the Bank had credit exposure
 
45,356

 
(98
)
 
432

 
334

Member institutions (1)
 
3

 
—

 
—

 
—

Total
 
$
45,359

 
$
(98
)
 
$
432

 
$
334

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



57
Table of Contents


Mortgage Loan Programs

The Bank seeks to manage the credit risk associated with the Mortgage Purchase Program (MPP) and the Mortgage Partnership Finance® Program (MPF® Program or MPF) by maintaining underwriting and eligibility standards and structuring possible losses into several layers to be shared with the participating financial institutions. In some cases, a portion of the credit support for MPP and MPF loans is provided under a primary and/or supplemental mortgage insurance policy. Currently, 10 mortgage insurance companies provide primary and/or supplemental mortgage insurance for mortgage loans in which the Bank has a retained interest. As of June 30, 2018, seven of the Bank’s 10 mortgage insurance providers have been rated below “AA” by one or more NRSROs for their claims paying ability or insurer financial strength, and three are no longer rated. Ratings downgrades imply an increased risk that these mortgage insurers may be unable to fulfill their obligations to pay claims that may be made under the insurance policies. The Bank holds additional risk-based capital to mitigate the incremental risk, if any, that results from the supplemental mortgage insurance providers.
The allowance for credit losses on MPF loans was $1 million as of June 30, 2018 and December 31, 2017.

Critical Accounting Policies and Estimates

A detailed description of the Bank’s critical accounting policies and estimates is contained in the Bank’s Form 10-K. There have been no material changes to these policies and estimates during the periods presented.

Recently Issued and Adopted Accounting Guidance

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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

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


58
Table of Contents


The following table presents the notional amounts of derivative financial instruments (in millions). The category “Fair value hedges” represents hedge strategies for which hedge accounting is achieved. The category “Non-qualifying hedges” represents hedge strategies for which the derivatives are not in designated hedging relationships that formally meet the hedge accounting requirements under GAAP.
 
 
 
 
 
 
As of June 30, 2018
 
As of December 31, 2017
Hedged Item / Hedging Instrument
 
Hedging Objective
 
Hedge
Accounting
Designation
 
Notional Amount
 
Notional Amount
Advances
 
 
 
 
 
 
 
 
Pay fixed, receive variable interest-rate swap (without options)
 
Converts the advance’s fixed rate to a variable-rate index.
 
Fair value
hedges
 
$
4,164

 
$
4,722

Pay fixed, receive variable interest-rate swap (with options)
 
Converts the advance’s fixed rate to a variable-rate index and offsets option risk in the advance.
 
Fair value
hedges
 
21,469

 
20,182

Pay variable with embedded features, receive variable interest-rate swap (non-callable)
 
Reduces interest rate sensitivity and repricing gaps by converting the advance’s variable rate to a different variable-rate index and/or offsets embedded option risk in the advance.
 
Fair value
hedges
 
410

 
118

 
 
 
 
Total
 
26,043

 
25,022

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

 
56

Consolidated Obligation Bonds
 
 
 
 
 
 
 
 
Receive fixed, pay variable interest-rate swap (without options)
 
Converts the bond’s fixed rate to a variable-rate index.
 
Fair value
hedges
 
8,470

 
10,067

Receive fixed, pay variable interest-rate swap (with options)
 
Converts the bond’s fixed rate to a variable-rate index and offsets option risk in the bond.
 
Fair value
hedges
 
9,567

 
7,585

 
 
 
 
Total
 
18,037

 
17,652

Consolidated Obligation Discount Notes
 
 
 
 
 
 
 
 
Receive fixed, pay variable interest-rate swap
 
Converts the discount note’s fixed rate to a variable-rate index.
 
Fair value
hedges
 
296

 
2,383

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

 
105

Interest-rate cap or floor
 
Protects against changes in income of certain assets due to changes in interest rates.
 
Non-qualifying hedges
 
10,500

 
13,000

 
 
 
 
Total
 
10,600

 
13,105

Intermediary Positions and Other
 
 
 
 
 
 
Pay fixed, receive variable interest-rate swap, and receive fixed, pay variable interest-rate swap
 
To offset interest-rate swaps executed with members by executing interest-rate swaps with derivatives counterparties.
 
Non-qualifying
hedges
 
793

 
715

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

 
—

 
 
 
 
Total
 
876

 
715

Total notional amount
 
 
 
 
 
$
55,908

 
$
58,933



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Interest-rate Risk Exposure Measurement

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

Bank policy requires the Bank to maintain its effective duration of equity within a range of +5 years to -5 years, assuming current interest rates, and within a range of +7 years to -7 years, assuming an instantaneous parallel increase or decrease in market interest rates of 200 basis points.

The following table presents the Bank’s effective duration exposure measurements as calculated in accordance with Bank policy (in years). 
 
As of June 30, 2018
 
As of December 31, 2017
 
Up 200 Basis Points    
 
Current    
 
Down 200 Basis
 Points (1)    
 
Up 200 Basis Points    
 
Current
 
Down 200 Basis 
Points (1)    
Assets
0.25

 
0.17

 
0.12

 
0.27

 
0.19

 
0.16

Liabilities
0.16

 
0.17

 
0.17

 
0.15

 
0.17

 
0.17

Equity
2.07

 
0.17

 
(0.80
)
 
2.54

 
0.51

 
0.07

Effective duration gap
0.09

 
—

 
(0.05
)
 
0.12

 
0.02

 
(0.01
)
____________ 
(1) 
The “down 200 basis points” scenarios shown above are considered to be “constrained shocks,” intended to prevent the possibility of negative interest rates when a designated low rate environment exists.

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

The following table presents the Bank’s market value of equity measurements as calculated in accordance with Bank policy (in millions). 
 
As of June 30, 2018
 
As of December 31, 2017
 
Up 200 Basis Points    
 
Current
 
Down 200 Basis Points (1)    
 
Up 200 Basis Points    
 
Current
 
Down 200 Basis Points (1)  
Assets
$
153,244

 
$
153,888

 
$
154,569

 
$
145,420

 
$
146,087

 
$
147,041

Liabilities
145,899

 
146,386

 
146,884

 
138,283

 
138,732

 
139,131

Equity
7,345

 
7,502

 
7,685

 
7,137

 
7,355

 
7,910

____________ 
(1) 
The “down 200 basis points” scenarios shown above are considered to be “constrained shocks,” intended to prevent the possibility of negative interest rates when a designated low rate environment exists.


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Item 4. Controls and Procedures.

Disclosure Controls and Procedures

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

As of June 30, 2018, the Bank’s management, with the participation of the Certifying Officers, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures. Based on that evaluation, the Certifying Officers have concluded that the Bank’s disclosure controls and procedures (as defined in Rules 13a-15(a) and 15d-15(e) under the Exchange Act) were effective to provide reasonable assurance that information required to be disclosed by the Bank in the reports that it files or submits under the Exchange Act (1) is accumulated and communicated to the Certifying Officers, as appropriate, to allow timely decisions regarding required disclosure; and (2) is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms.

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

Changes in Internal Control Over Financial Reporting

During the second quarter of 2018, there were no changes in the Bank’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.


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PART II. OTHER INFORMATION.

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

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

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

Not applicable.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosure.

Not applicable.


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Table of Contents


Item 5. Other Information.

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

PwC has advised the Bank that for the six months ended June 30, 2018, certain covered persons had borrowing relationships with one Bank member (referred below as the “Lender”) who owned more than 10 percent of the Bank’s capital stock, which could call into question PwC’s independence with respect to the Bank. The Bank is providing this disclosure to explain the facts and circumstances, as well as PwC’s and the Audit Committee’s conclusions, concerning PwC’s objectivity and impartiality with respect to the audit of the Bank.

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

Additionally, the Audit Committee of the Bank assessed PwC’s ability to perform an objective and impartial audit, including consideration of the ownership structure of the Bank, the limited voting rights of the Bank’s members and the composition of the board of directors. In addition to the above listed considerations, the Audit Committee considered the following:
•
although the Lender owned more than 10 percent of the Bank’s capital stock, the Lender’s voting rights are less than 10 percent;
•
as of June 30, 2018 and December 31, 2017, no officer or director of the Lender served on the board of directors of the Bank; and
•
the Lender is subject to the same terms and conditions for conducting business with the Bank as any other member.

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


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


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SIGNATURES

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

 
 
Federal Home Loan Bank of Atlanta
 
 
 
Date:
August 9, 2018
By /s/ W. Wesley McMullan                   
 
 
    Name: W. Wesley McMullan
    Title: President and Chief Executive Officer
 
 
 
Date:
August 9, 2018
By /s/ Kirk R. Malmberg                        
 
 
    Name: Kirk R. Malmberg
    Title: Executive Vice President and Chief Financial Officer



65