Docoh
Loading...

Federal Home Loan Bank of Atlanta

Filed: 4 Mar 21, 1:59pm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

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

For the fiscal year ended December 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-51845
 ____________________________________ 
FEDERAL HOME LOAN BANK OF ATLANTA
(Exact name of registrant as specified in its charter)
Federally chartered corporation 56-6000442
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)

1475 Peachtree Street, NE, Atlanta, GA
(Address of principal executive offices)
30309
(Zip Code)

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨  Yes    x  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ¨  Yes   x  No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days.    x  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).    x  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 filerAccelerated filer
Non-accelerated filerxSmaller 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 Act).      Yes     No

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☑  

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
NoneN/AN/A

Registrant’s stock is not publicly traded and is only issued to members of the registrant. Such stock is issued and redeemed at par value, $100 per share, subject to certain regulatory and statutory limits. As of June 30, 2020, the aggregate par value of the stock held by current and former members of the registrant was $3,681,537,900. As of February 28, 2021, 30,451,499 total shares were outstanding, including mandatorily redeemable capital stock.








Table of Contents
 



Important Notice About Information in this Annual Report
In this annual report on Form 10-K (Report), unless the context suggests otherwise, references to the “Bank” mean the Federal Home Loan Bank of Atlanta. “FHLBanks” means the 11 district Federal Home Loan Banks, including the Bank, and “FHLBank System” means the FHLBanks and the Federal Home Loan Banks Office of Finance (Office of Finance), as regulated by the Federal Housing Finance Agency (Finance Agency). “FHLBank Act” means the Federal Home Loan Bank Act of 1932, as amended.
The information contained in this Report is accurate only as of the date of this Report and as of the dates specified herein.
The product and service names used in this Report are the property of the Bank and, in some cases, the other FHLBanks. Where the context suggests otherwise, the products, services, and company names mentioned in this Report are the property of their respective owners.

Special Cautionary Notice Regarding Forward-looking Statements

This Report includes statements describing anticipated developments, projections, estimates, or future predictions of the Bank that are “forward-looking statements” within the meaning of section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbor provided by the same regulations. These statements may use forward-looking terminology such as, but not limited to, “anticipates,” “believes,” “expects,” “plans,” “intends,” “may,” “could,” “estimates,” “assumes,” “should,” “will,” ”likely,” or their negatives or other variations on these terms. The Bank cautions that, by their nature, forward-looking statements are subject to a number of risks or uncertainties, including the risk factors set forth in Item 1ARisk Factors and the risks set forth below. Accordingly, the Bank cautions that actual results could differ materially from those expressed or implied in these forward-looking statements or could impact the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, the reader is cautioned not to place undue reliance on such statements. These forward-looking statements speak only as of the date they are made, and the Bank does not undertake to update any forward-looking statement herein or that may be made from time to time on its behalf.

Forward-looking statements in this report may include, among others, the Bank’s expectations for:

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

future performance, including profitability, dividends, retained earnings, developments, or market forecasts;

repurchases of stock in excess of a stockholder’s total stock investment requirement (excess stock);

credit losses on advances and investments in mortgage loans and mortgage-backed securities (MBS);

balance sheet changes and components thereof, such as changes in advances balances and the size of the Bank’s portfolio of investments in mortgage assets;

the Bank’s minimum retained earnings target;

the interest rate environment in which the Bank does business;

forward-looking accounting and financial statement effects; and

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

Actual results may differ from forward-looking statements for many reasons including, but not limited to:

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

4

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

changes in the financial health of the Bank’s members;

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

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

uncertainties related to the phase-out of the London Interbank Offered Rate (LIBOR) interest-rate benchmark;

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

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

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

competitive forces, including other sources of funding available to Bank members, and other entities borrowing funds in the capital markets;

the ability to attract and retain skilled individuals, including qualified executive officers;

the Bank’s ability to develop, implement, promote the efficient performance of, and support and safeguard, technology and information systems, including those provided by third-parties, sufficient to measure and effectively manage the risks of the Bank’s business without significant interruption;

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

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

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

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

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

membership changes, including changes resulting from mergers or changes in the principal place of business of Bank members, which could result in decreased advances or other business from such members;

changes in the FHLBank Act or Finance Agency regulations that affect FHLBank operations and regulatory oversight or changes in other statutes or regulations applicable to the FHLBanks; and

adverse developments or events affecting or involving one or more other FHLBanks or the FHLBank System in general.
These risk factors are not exhaustive. New risk factors may emerge from time to time. The Bank cannot predict such new risk factors nor can it assess the impact, if any, of such new risk factors on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those implied by any forward-looking statements.
5


 








PART I

Item 1. Business.

Overview

General. The Bank is a federally chartered corporation that was organized in 1932 and is one of 11 district FHLBanks. The FHLBanks, along with the Office of Finance, comprise the FHLBank System. The FHLBanks are U.S. government-sponsored enterprises (GSEs) organized under the authority of the FHLBank Act. Each FHLBank operates as a separate entity within a defined geographic district and has its own management, employees, and board of directors. The Bank’s defined geographic district includes Alabama, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, and the District of Columbia. The Bank is supervised and regulated by the Finance Agency, an independent federal agency in the executive branch of the United States government.

Cooperative. The Bank is a cooperative owned by member institutions that are required to purchase capital stock in the Bank as a condition of membership. Federally insured depository institutions, insurance companies, privately insured state-chartered credit unions, and community development financial institutions (CDFIs) located in the Bank’s defined geographic district and engaged in residential housing finance are eligible to apply for membership. The Bank’s capital stock is not publicly traded and is owned entirely by current or former members and certain non-members that own the Bank’s capital stock as a result of a merger with or acquisition of a Bank member. The Bank’s membership totaled 824 financial institutions, comprised of 456 commercial banks, 236 credit unions, 63 savings institutions, 56 insurance companies, and 13 CDFIs as of December 31, 2020.

Business Model. As a cooperative, the Bank’s customers are also its owners. The Bank strategically focuses on positioning itself with its membership in a number of ways to enhance their total value in the cooperative by providing readily available, competitively priced funding to its member institutions, a potential return on investments, support for community investment activities, and other credit and noncredit products and services, including education opportunities on a range of topics. The Bank serves the public by providing its member institutions with a source of liquidity, thereby enhancing the availability of credit for residential mortgages and targeted community developments. The Bank primarily supports this mission by offering collateralized loans, known as advances, to its members.

The Bank’s primary source of funds is proceeds from the sale of FHLBank debt instruments to the public. These debt instruments, known as “consolidated obligations,” are the joint and several obligations of all the FHLBanks. Because of the FHLBanks’ GSE status, the FHLBanks are generally able to raise funds at favorable rates. The Bank’s cooperative ownership structure allows the Bank to pass along the benefit of these low funding rates to its members. The U.S. government does not guarantee the debt securities or other obligations of the Bank or the FHLBank System.

Business. The Bank manages its operations as one business segment. Management and the Bank’s board of directors review enterprise-wide financial information in order to make operating decisions and assess performance.

In 2015, the Finance Agency issued an Advisory Bulletin providing guidance on FHLBank core mission achievement. The Advisory Bulletin provides that when developing its strategic business plan with respect to core mission, FHLBanks should consider the guidelines established in the Advisory Bulletin. Pursuant to the Advisory Bulletin, the Finance Agency will assess each FHLBank’s core mission achievement by evaluating its core mission asset ratio, calculated as the ratio of primary mission assets, which include advances and acquired member assets, to consolidated obligations. This ratio is calculated annually at year-end, using annual average par values. Based on this ratio, the Finance Agency has provided the following expectations and framework for each FHLBank’s strategic plan:

when the ratio is at least 70 percent or higher, the strategic plan should include an assessment of the FHLBank’s prospects for maintaining this level;
6


when the ratio is at least 55 percent but less than 70 percent, the strategic plan should explain the FHLBank’s plan to bring the ratio closer to the preferred ratio; and

when the ratio is below 55 percent, the strategic plan should include an explanation of the circumstances that caused the ratio to be at that level and detailed plans to increase the ratio. If the FHLBank maintains a ratio below 55 percent over the course of several consecutive reviews, then the board of directors should consider possible strategic alternatives.

The Bank’s core mission activities primarily include the issuance of advances. The Bank’s core mission asset ratio was 65.8 and 70.9 percent as of December 31, 2020 and 2019, respectively. The decrease in advances and compliance with regulatory liquidity guidance, which required the Bank to hold an additional amount of liquid assets, impacted this ratio in 2020. The Bank has developed a plan to bring its core mission asset ratio closer to the preferred ratio.

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

For additional information regarding the Bank’s financial condition, changes in financial condition, and results of operations, refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.


Products and Services

The Bank’s products and services include the following:

Credit Products;

Community Investment Services; and

Cash Management and Other Services.

Credit Products

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

Advances

Advances are the Bank’s primary product. Advances are fully secured loans made to members and eligible housing finance agencies, authorities, and organizations called “housing associates” (non-members that are approved mortgagees under Title II of the National Housing Act). The carrying value of the Bank’s outstanding advances was $52.2 billion and $97.2 billion as of December 31, 2020 and 2019, respectively, and advances represented 56.5 percent and 64.8 percent of total assets as of December 31, 2020 and 2019, respectively. Advances generated 68.1 percent, 65.5 percent, and 67.0 percent of total interest income for the years ended December 31, 2020, 2019, and 2018, respectively.

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

Generally, member institutions use the Bank’s advances for one or more of the following purposes:

providing funding for mortgages held in the member’s portfolio, including both conforming and nonconforming mortgages;

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

providing funding for commercial real estate loans;

assisting with asset-liability management by matching the maturity and prepayment characteristics of mortgage loans or adjusting the sensitivity of the member’s balance sheet to interest-rate changes;
7


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

providing funding for community investment and economic development.

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

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

The FHLBank Act affords any security interest granted to the Bank by any member of the Bank, or any affiliate of any such member, priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor), other than 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. Pursuant to its regulations, the Federal Deposit Insurance Corporation (FDIC) has recognized the priority of an FHLBank’s security interest under the FHLBank Act and the right of an FHLBank to require delivery of collateral held by the FDIC, as receiver, for a failed depository institution. Most members provide the Bank with a blanket lien covering substantially all of the member’s real estate-related assets and their consent for the Bank to file a financing statement evidencing the blanket lien. Based on the blanket lien, the financing statement and the statutory preferences, the Bank normally does not take control of collateral, other than securities collateral, pledged by blanket lien borrowers. With respect to non-blanket lien borrowers (typically insurance companies, CDFIs, and housing associates), and given the interaction with certain state insurance laws with the FHLBank Act, the Bank takes delivery of all of those members’ pledged collateral.

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

Adjustable- or variable-rate indexed advances. Adjustable- or variable-rate indexed advances include the following:

Daily Rate Credit Advance (DRC Advance). The DRC Advance provides short-term funding with rate resets on a daily basis, similar to federal funds lines. The DRC Advance is available generally from one day to 12 months.

Adjustable Rate Credit Advance (ARC Advance). The ARC Advance is an advance that floats to an index and provides intermediate and long-term funding with rate resets at specified intervals. The ARC Advance is available for a term generally of up to 10 years.

8

Floating-to-Fixed Advance. This is an advance that floats to an index and changes to a predetermined fixed rate on a predetermined date prior to maturity. The Bank offers this product with a maturity generally of up to 15 years.

Fixed-rate advances. Fixed-rate advances include the following:

Fixed Rate Credit Advance (FRC Advance). The FRC Advance offers fixed-rate funds with principal due at maturity generally from one month to 20 years. The Bank allows for the inclusion of interest-rate caps and/or floors in certain FRC Advances with terms of 12 months or greater and a par value of $1 million or more.

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

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

Principal Reducing Credit Advance (PRC Advance). The PRC Advance is a fixed-rate advance with a final maturity generally of up to 20 years and predetermined principal reductions on specific dates. The reduction schedule is predetermined by the borrower and may be scheduled on a monthly, quarterly, semi-annual, or annual basis. Amortization options include equal payments or structures similar to a mortgage.

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

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

The following table presents the par value of outstanding advances by product characteristics (dollars in millions). See Note 9Advances to the Bank’s 2020 audited financial statements for further information on the distinction between par value and carrying value of outstanding advances.
As of December 31,
 20202019
 AmountPercent of Total  AmountPercent of Total  
Fixed rate (1)
$33,816 66.77 $57,711 59.83 
Adjustable or variable-rate indexed10,678 21.09 33,412 34.64 
Convertible5,316 10.50 4,261 4.42 
Principal reducing credit833 1.64 1,072 1.11 
Total par value$50,643 100.00 $96,456 100.00 
 ____________
(1) Includes convertible advances whose conversion options have expired.

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

The Bank includes prepayment fee provisions in most advance transactions. With respect to callable advances, prepayment fees apply to prepayments on dates other than option exercise dates. The Bank also offers variable-rate prepayable advances, in which prepayment fees apply to prepayments made on dates other than certain specified dates. As required by Finance Agency
9

regulations, the prepayment fee is intended to make the Bank financially indifferent to a borrower’s decision to prepay an advance before maturity or, with respect to a callable advance, on a date other than an option exercise date.

The following table presents information on the Bank’s 10 largest borrowers of advances (dollars in millions):
As of December 31, 2020
InstitutionStateAdvances
Par Value
Percent of Total Advances
Weighted-average Interest
Rate
(%) (1)
TIAA, FSBFlorida$7,571 14.95 1.44 
Bank of America, National AssociationNorth Carolina7,507 14.83 0.28 
Navy Federal Credit UnionVirginia6,495 12.83 2.43 
Pentagon Federal Credit UnionVirginia3,804 7.51 1.37 
Truist BankNorth Carolina3,455 6.82 1.45 
BankUnited, National AssociationFlorida3,121 6.16 0.46 
Fidelity & Guaranty Life Insurance CompanyMaryland1,206 2.38 2.12 
City National Bank of FloridaFlorida1,200 2.37 0.71 
Amerant Bank, National AssociationFlorida1,050 2.07 1.20 
Raymond James Bank, National AssociationFlorida850 1.68 0.38 
Subtotal (10 largest borrowers)36,259 71.60 1.25 
Subtotal (all other borrowers)14,384 28.40 1.42 
Total par value$50,643 100.00 1.30 
 ____________
(1) The average interest rate of the member’s advance portfolio weighted by each advance’s outstanding balance.

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

Standby Letters of Credit

The Bank issues irrevocable standby letters of credit on behalf of its members to support certain obligations of the members to third-party beneficiaries. Members may use standby letters of credit for residential housing financing and community lending or for liquidity and asset-liability management. In particular, members often use standby letters of credit as collateral for deposits from public sector entities. Standby letters of credit are generally available for nonrenewable terms of up to five years or for one-year terms that are renewable annually with a final expiration date of up to 10 years after issuance. The Bank requires members to fully collateralize the face amount of any standby letter of credit issued by the Bank during the term of the standby letter of credit. The Bank also charges members a fee based on the face amount of the standby letter of credit. If the Bank is required to make a payment for a beneficiary’s draw, the amount must be reimbursed by the member immediately or, subject to the Bank’s discretion, may be converted into an advance to the member. The Bank’s underwriting and collateral requirements for standby letters of credit are the same as they are for advances. Standby letters of credit are not currently subject to a specific activity-based capital stock purchase requirement. The Bank has never experienced a credit loss related to a standby letter of credit reimbursement obligation. Unlike advances, standby letters of credit are accounted for as financial guarantees because a standby letter of credit may expire in accordance with its terms without being drawn upon by the beneficiary. The Bank had $16.0 billion and $32.5 billion of outstanding standby letters of credit as of December 31, 2020 and 2019, respectively.

10

Advances and Standby Letters of Credit Combined

The following table presents information on the Bank’s 10 largest borrowers of advances and standby letters of credit combined (dollars in millions):
As of December 31, 2020
InstitutionStateAdvances Par Value and Standby Letters of Credit BalancePercent of Total Advances Par Value and Standby Letters of Credit
Bank of America, National AssociationNorth Carolina$10,615 15.92 
TIAA, FSBFlorida7,671 11.50 
Navy Federal Credit UnionVirginia6,503 9.75 
BBVA USAAlabama6,499 9.75 
Pentagon Federal Credit UnionVirginia3,903 5.85 
Truist BankNorth Carolina3,482 5.22 
BankUnited, National AssociationFlorida3,121 4.68 
City National Bank of FloridaFlorida1,780 2.67 
Cadence Bank, N.A.Georgia1,421 2.13 
Fidelity & Guaranty Life Insurance CompanyMaryland1,206 1.81 
Subtotal (10 largest borrowers)46,201 69.28 
Subtotal (all other borrowers)20,483 30.72 
Total advances par value and standby letters of credit$66,684 100.00 

Community Investment Services

The Bank’s Affordable Housing Program (AHP) provides no-cost or low-cost funds in the form of a direct subsidy or a subsidized advance to members to support the financing of rental and for-sale housing for very low-, low-, and moderate-income households. The Bank offers the AHP General Fund and AHP Homeownership Set-aside programs. Additionally, the Community Investment Cash Advance (CICA) program is offered to members in the form of a discounted advance program that supports projects that provide affordable housing and economic development benefiting those households. A description of each program is as follows:

the AHP General Fund is offered annually through a competitive application process and provides funds for either new construction or rehabilitation rental or ownership real estate projects submitted through member financial institutions;

the AHP Homeownership Set-aside program provides funds that can be used by homebuyers for down payment, closing costs, and other costs associated with the purchase, purchase/rehabilitation, or rehabilitation if homes for households at or below 80 percent of the area median income. The funds are available on a first-come, first-served basis through member financial institutions and available through the following distinct products: First-time Homebuyer, Community Partners, Community Rebuild and Restore, and Coronavirus Disease 2019 (COVID-19) Structured Partnership Product; and

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

Each FHLBank must set aside 10 percent of its income subject to assessment for AHP, or such additional prorated sums as may be required so that the aggregate annual contribution of the FHLBanks is not less than $100 million. The aggregate annual contribution of the FHLBanks exceeded $100 million for the years ended December 31, 2020, 2019, and 2018. For purposes of the AHP calculation, each FHLBank’s income subject to assessment is defined as the individual FHLBank’s net income before assessments, plus interest expense related to mandatorily redeemable capital stock. The assessment for AHP is further discussed under the Taxation/Assessments heading below. The Bank’s AHP assessments were $28 million, $41 million, and $46 million for the years ended December 31, 2020, 2019, and 2018, respectively.

11

In December 2020, the Board approved the Bank’s 2021 Targeted Community Lending Plan (TCLP) which provided an assessment of the community lending and housing related market conditions in the Bank’s district, the emerging trends arising from these conditions and the Bank’s strategic response to these market conditions. The Bank’s strategic response is reflected via the goals, strategies, tactics and measures of success in three areas: products; services; and knowledge sharing. With respect to products, the TCLP addresses the AHP, CICA program, and voluntary programs. There are no new programs in the 2021 TCLP however, there are new application scoring criteria under the AHP General Fund; new products under the AHP Homeownership Set-Aside program; and an elimination of the Community Heroes voluntary program. The TCLP also includes the annual AHP allocation policy. With respect to Services, the TCLP continues the Bank’s focus on its CRA Center of Excellence; outreach to minority serving organizations, and leveraging the Bank’s products to enhance the capacity of shareholder CDFIs, low-income designated credit unions, and minority depository institutions.

Cash Management and Other Services

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

The Bank also acts as an intermediary to meet certain derivatives needs of its smaller members that have limited or no access to the capital markets. This service assists members with asset-liability management by giving them indirect access to the capital markets. These intermediary transactions involve the Bank entering into a derivative with a member and then entering into a mirror-image derivative with one of the Bank’s approved counterparties. The derivatives entered into by the Bank as a result of its intermediary activities do not qualify for hedge accounting treatment and are separately marked to fair value through earnings. The Bank attempts to earn income from this service sufficient to cover its operating expenses through the minor difference in rates on these mirror-image derivatives. The net result of the accounting for these derivatives is not material to the operating results of the Bank. The Bank may require both the member and the counterparty to post collateral for any market value exposure that may exist during the life of the transaction. The Bank has ceased offering intermediated swaps that contain a LIBOR leg, as the Bank transitions away from LIBOR as a benchmark interest rate.

Mortgage Loan Purchase Programs

The Bank’s mortgage loan purchase programs provided members an alternative to holding mortgage loans in a portfolio or selling them into the secondary market. Prior to 2008, the Bank purchased loans directly from member participating financial institutions (PFIs) through the Mortgage Partnership Finance® Program (MPF® Program), a program developed by FHLBank Chicago and the Mortgage Purchase Program (MPP), a program separately established by the Bank. The Bank ceased directly purchasing new mortgage assets under these mortgage programs in 2008. However, the Bank continues to support its existing MPP and MPF Program mortgage loan portfolios. The Bank may also acquire fixed-rate residential mortgage loans through participation in eligible mortgage loans purchased from other FHLBanks.

MPF Program

From time to time, the Bank had offered various products to members through the MPF Program. FHLBank Chicago, as the MPF provider, is responsible for providing transaction processing services, as well as developing and maintaining the underwriting criteria and program servicing guide. The Bank pays FHLBank Chicago a fee for providing these services. Conventional loans purchased from PFIs under the MPF Program are subject to varying levels of loss allocation and credit enhancement structures. Federal Housing Administration (FHA)-insured and Department of Veterans Affairs (VA)-guaranteed loans are not subject to the credit enhancement obligations applicable to conventional loans under the MPF Program. The PFI may retain the right and responsibility for servicing the loans or sell the servicing rights, and the PFI may be required to repurchase a loan in the event of a breach of eligibility requirement or other warranty.

The Bank maintains a portfolio of mortgage loans that were historically purchased directly from PFIs and are recorded on the balance sheet. One of the Bank’s PFIs under the traditional MPF products, Truist Bank, was among the Bank’s top 10 borrowers as of December 31, 2020.

Mortgage Partnership Finance® Program, “Mortgage Partnership Finance®”, and “MPF®” are registered trademarks of FHLBank Chicago.

12

MPP

The Bank’s MPP is independent of other FHLBanks’ mortgage loan programs. Therefore, the Bank has greater control over pricing, quality of customer service, relationships with any third-party service providers, and program changes. Certain benefits of greater Bank control include the Bank’s ability to control operating costs and to manage its regulatory relationship directly with the Finance Agency. There were no MPP PFIs that were among the Bank’s top 10 borrowers as of December 31, 2020.

The MPF Program and MPP are authorized under applicable regulations. Regulatory interpretive guidance provides that an FHLBank may sell loans acquired through its mortgage loan purchase programs so long as it also sells the related credit enhancement obligation. The Bank currently is not selling loans it has acquired through these mortgage loan purchase programs. The contractual maturity dates of some of the purchased loans extend out to 2047.

Investments

The Bank maintains a portfolio of investment securities and other investments for liquidity purposes to provide for the availability of funds to meet member credit needs and to provide additional earnings for the Bank. As of December 31, 2020, the Bank’s investment securities consist of MBS issued by GSEs or U.S. government agencies; securities issued by the U.S. government or U.S. government agencies; and state and local housing agency obligations. The Bank ceased purchasing private-label MBS in 2008 and in January 2020 the Bank sold its private-label residential MBS portfolio. The investment securities portfolio generally provides the Bank with higher returns than those available in other permissible investments. The Bank’s other investments may consist of interest-bearing deposits, overnight and term federal funds sold, and securities purchased under agreements to resell. U.S. Treasury obligations, U.S. agency, and GSE securities were 60.4 percent and 53.9 percent of the Bank’s total investments as of December 31, 2020 and 2019, respectively, as discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of OperationsFinancial ConditionInvestments. Investments generated 30.9 percent, 34.0 percent, and 32.4 percent of total interest income for the years ended December 31, 2020, 2019, and 2018, respectively.

The Bank’s MBS investment practice is to purchase MBS from a group of Bank-approved dealers, which may include “primary dealers.” Primary dealers are banks and securities brokerages that trade in U.S. government securities with the Federal Reserve System. The Bank does not purchase MBS from its members, except in the case in which a member or its affiliate is on the Bank’s list of approved dealers. In all cases, the Bank bases its investment decisions on the relative rates of return of competing investments and does not consider whether an MBS is being purchased from or issued by a member or an affiliate of a member. The MBS balance included a carrying value of $0 and $552 million of MBS that were issued by one of the Bank’s members or an affiliate of a member as of December 31, 2020 and 2019, respectively. See Note 6Available-for-sale Securities and Note 7Held-to-maturity Securities to the Bank’s 2020 audited financial statements for a tabular presentation of the available-for-sale and held-to-maturity securities issued by members or affiliates of members.

Finance Agency regulations prohibit the Bank from investing in certain types of securities. These restrictions are discussed in more detail in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of OperationsRisk ManagementCredit RiskInvestments.
Finance Agency regulations prohibit an FHLBank from purchasing MBS and asset-backed securities if its investment in such securities exceeds 300 percent of the FHLBank’s previous month-end regulatory capital on the day it purchases the securities. Regulatory capital is defined as the sum of permanent capital, the amount paid-in for Class A stock (if any), the amount of the Bank’s general allowance for losses (if any), and the amount of any other instruments identified in the capital plan and approved by the Finance Agency. For discussion regarding the Bank’s compliance with this regulatory requirement, refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of OperationsFinancial ConditionInvestments.
The Bank is subject to credit and market risk on its investments. For discussion as to how the Bank manages these risks, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of OperationsRisk ManagementCredit RiskInvestments.







13







Funding Sources

Consolidated Obligations

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

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

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

cash;

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

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

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

The Bank was in compliance with this Finance Agency regulation as of December 31, 2020 and 2019.

Consolidated obligations are issued with either fixed- or variable-rate coupon payment terms that may use a variety of indices, such as Secured Overnight Financing Rate (SOFR) and Overnight Index Swap (OIS). The Bank, working through the Office of Finance, is able to customize consolidated obligations to meet investor demands. Customized features can include different indices and embedded derivatives. The Bank offsets these customized features predominantly by derivatives to reduce the market risk associated with the consolidated obligations.
Consolidated Obligation Bonds. Consolidated obligation bonds satisfy longer-term funding requirements. Typically, the maturity of these securities ranges from one year to 10 years, but the maturity is not subject to any statutory or regulatory limit. Consolidated obligation bonds can be issued and distributed through negotiated or competitively bid transactions with approved underwriters or selling group members. The FHLBanks also use the TAP issue program for fixed-rate, noncallable bonds. Under this program, the FHLBanks offer debt obligations at specific maturities that may be reopened daily, generally during a three-month period through competitive auctions. The goal of the TAP program is to aggregate frequent smaller issues into a
14

larger bond issue that may have greater market liquidity.

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

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

the Bank is unable to provide the required certification;

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

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

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

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

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

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

Regulations permit a noncompliant FHLBank to continue to incur and pay normal operating expenses in the regular course of business. However, a noncompliant FHLBank may not incur or pay any extraordinary expenses, declare or pay dividends, or redeem any capital stock until the Finance Agency has approved the FHLBank’s consolidated obligation payment plan or inter-FHLBank assistance agreement or has ordered another remedy, and the noncompliant FHLBank has paid all its direct obligations.

Deposits

The FHLBank Act allows the Bank to accept deposits from its members, any institution for which it is providing correspondent services, other FHLBanks, or other governmental instrumentalities. Deposits provide some of the Bank’s funding resources while also giving members a low-risk earning asset that satisfies their regulatory liquidity requirements. The Bank had demand and overnight deposits of $2.0 billion and $1.5 billion as of December 31, 2020 and 2019, respectively.

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 had excess deposit reserves of $42.6 billion and $98.5 billion as of December 31, 2020 and 2019, respectively.

15

Capital and Capital Rules

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

As of December 31, 2020, the membership stock requirement was 0.09 percent (nine basis points) of the member’s total assets, subject to a cap of $15 million.

As of December 31, 2020, the activity-based stock requirement was the sum of the following:

4.25 percent of the member’s outstanding par value of advances; and

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

On January 29, 2021, the board of directors approved an adjustment to the membership stock requirement to 0.05 percent (five basis points) of the member’s total assets, and an adjustment of the cap to $16.20 million, as well as an adjustment to the activity-based stock requirement to 3.75 percent of the member’s outstanding par value of advances. These changes become effective March 19, 2021.

In addition, the activity-based stock requirement may include a percentage of any outstanding balance of acquired member assets (such as residential mortgage loan assets), although this percentage was set at zero as of December 31, 2020. The Bank did not have any multifamily residential mortgage loan assets purchased from members or other targeted debt or equity investments outstanding; therefore, the 8.00 percent activity-based stock requirement was inapplicable as of December 31, 2020. Currently, the Bank does not have a capital stock requirement for the issuance of standby letters of credit. The Bank has received regulatory communication relating to the inclusion of an activity stock requirement for standby letters of credit, the specific terms of which are being assessed by the Bank, and any such requirement will need to be included in an amended capital plan, which would require both approval of the Bank’s board of directors and the Finance Agency.

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

The Bank’s financial management policy contains provisions to help preserve the value of the members’ investment in the Bank and reasonably mitigate the effect on capital of unanticipated operating and accounting events. For additional information regarding the Bank’s capital and capital requirements, as well as information regarding the Bank’s retained earnings and dividends, refer to Item 5, Market for Registrant’s Common EquityRelated Stockholder Matters and Issuer Purchases of Equity Securities; Item 7, Management’s Discussion and Analysis of Financial Condition and Results of OperationsFinancial ConditionCapital; and Note 12Capital and Mandatorily Redeemable Capital Stock to the Bank’s 2020 audited financial statements.

Derivatives

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

16

preserve a favorable interest-rate spread between the yield of an asset (e.g., an advance) and the cost of the related liability (e.g., the consolidated obligation bond used to fund the advance) by converting both fixed-rate instruments to a variable rate using interest-rate swaps;

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

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

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

protect the value of existing asset or liability positions;

manage embedded options in assets and liabilities; and

achieve overall asset/liability management objectives.

The total notional amount of the Bank’s outstanding derivatives was $35.1 billion and $81.2 billion as of December 31, 2020 and 2019, respectively. The contractual or notional amount of a derivative is not a measure of the amount of credit risk from that transaction; rather, the notional amount serves as a basis for calculating periodic interest payments or cash flows.

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

The Bank is subject to credit risk in all derivatives due to potential nonperformance by the derivative counterparty. For further discussion as to how the Bank manages its credit risk and market risk on its derivatives, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of OperationRisk Management.

Competition

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

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

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

17


Regulatory Oversight, Audits, and Examinations

The Bank’s business is subject to extensive regulation and supervision. The laws and regulations to which the Bank is subject cover all key aspects of its business, and directly and indirectly affect the Bank’s product and service offerings, pricing, competitive position and strategic plan, relationship with members and third parties, capital structure, cash needs and uses, and information security. As discussed throughout this Report, such laws and regulations may have a significant effect on key drivers of the Bank’s results of operations, including, for example, the Bank’s capital and liquidity, product and service offerings, risk management, and costs of compliance.

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

The Government Corporation Control Act provides that, before a government corporation (which includes each of the FHLBanks) issues and offers obligations to the public, the Secretary of the Treasury shall prescribe (1) the form, denomination, maturity, interest rate, and conditions of the obligations; (2) the time and manner in which issued; and (3) the selling price. Under the FHLBank Act, the Secretary of the Treasury has the authority, at his or her discretion, to purchase consolidated obligations up to an aggregate principal amount of $4.0 billion. No borrowings under this authority have been outstanding since 1977.

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

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

Available Information

The Bank’s website is located at www.fhlbatl.com. The content of the Bank’s website is not incorporated by reference into this Report or in any other report or document that the Bank files with the SEC, and any references to the Bank’s website are intended to be inactive textual references only.

Human Capital Resources

The Bank’s human capital is a significant contributor to the achievement of our strategic business objectives. In managing our human capital, the Bank focuses on its workforce profile and the various programs and philosophies described below.

Workforce Profile

The Bank’s workforce is primarily comprised of corporate employees, with the Bank’s principal operations in one location. As of December 31, 2020, the Bank had 322 full-time and two part-time employees. As of December 31, 2020, approximately 46.3
18

percent of the Bank’s workforce is female, 53.7 percent male, 53.1 percent non-minority and 46.9 percent minority. The Bank’s workforce is leanly staffed, and historically has included a number of longer-tenured employees. The Bank strives to both develop talent from within the organization and supplement with external hires. The Bank believes that developing talent internally results in institutional strength and continuity and promotes loyalty and commitment in the Bank’s employee base, which furthers its success, while adding new employees contributes to new ideas, continuous improvement, and the Bank’s goals of a diverse and inclusive workforce. As of December 31, 2020, the average tenure of the Bank’s employees was 11.5 years. There are no collective bargaining agreements with the Bank’s employees.

Total Rewards

The Bank seeks to attract, develop and retain a diverse group of talented employees to achieve its strategic business initiatives, enhance business performance and increase shareholder value. The Bank supports this objective by sponsoring a combination of compensation, benefits, development, and employee wellness programs. Specifically, the Bank’s programs include:
Cash based compensation - base salary, performance based incentives, service awards, and spot bonus program;
Benefits – retirement plan benefits, health insurance coverage, flexible spending accounts, life and AD&D insurance, supplemental life insurance, and disability insurance;
Wellness – onsite fitness center, employee assistance program, health coaching and interactive education sessions;
Culture – internal groups with various opportunities for participation, communication, learning and cultural and inclusion initiatives;
Work/Life balance – Time away from work including time off for vacation, sick, personal, holidays, voting, jury duty, bereavement and volunteer opportunities, parental and military leave and flexible work arrangements including remote working options;
Development programs and training – Internal and external programs focused on leadership development, skills development, employee engagement, and the Bank’s Employer of Choice strategy; educational assistance program and professional certification assistance; and
Succession planning – the Bank’s board and leadership actively engage in succession planning, with defined plans for executive level positions and positions reporting directly to department leaders as well as identified critical roles.

The Bank’s Performance Management program provides a framework for managing and developing employee performance including accomplishment of individual and team objectives. Annual ratings are based on established competencies and a consistent rating scale and help differentiate and recognize high performers.

The Bank is committed to the health, safety and wellness of its employees. In response to the COVID-19 pandemic, the Bank has implemented significant operating environment changes, safety protocols and procedures that it determined were in the best interest of the Bank’s employees and members, and which comply with government regulations. This includes having a significant portion of the Bank’s employees work remotely, while implementing additional safety measures for employees continuing critical on-site work.

Diversity and Inclusion Program

Diversity and inclusion is a strategic business priority for the Bank. The Bank’s diversity and inclusion officer is a member of the senior management team, reports to the President and Chief Executive Officer and serves as a liaison to the board of directors. The Bank recognizes that diversity increases capacity for innovation and creativity and that inclusion allows the Bank to leverage the unique perspectives of all employees and strengthens the Bank’s retention efforts. The Bank operationalizes its commitment through the development and execution of a three-year diversity and inclusion strategic plan that includes quantifiable metrics to measure its success and it reports regularly on its performance to management and the board of directors. The Banks offers a range of opportunities for its employees to connect, and grow personally and professionally through its diversity and inclusion council and event planning groups. The Bank considers learning an important component of its diversity and inclusion strategy and regularly offers educational opportunities to its employees and evaluates inclusive behaviors as part of the Bank’s annual performance management and succession planning process. The Bank also incorporates diversity and inclusion as a key component of its incentive plan framework to ensure organizational focus and accountability.







19

Taxation/Assessments

The Bank is exempt from ordinary federal, state, and local taxation, except employment and real property taxes. However, each FHLBank must set aside 10 percent of their income subject to assessment for the AHP, or such additional prorated sums as may be required so that the aggregate annual contribution of the FHLBanks is not less than $100 million. The aggregate annual contribution of the FHLBanks exceeded $100 million for the years ended December 31, 2020, 2019, and 2018. For purposes of the AHP calculation, each FHLBank’s income subject to assessment is defined as the individual FHLBank’s net income before assessments, plus interest expense related to mandatorily redeemable capital stock. If an FHLBank experiences a net loss for a full year, the FHLBank would have no obligation to the AHP for that year since each FHLBank’s required annual AHP contribution is limited to its annual income subject to assessment. AHP assessments for the Bank were $28 million, $41 million, and $46 million for the years ended December 31, 2020, 2019, and 2018, respectively.

Item 1A. Risk Factors.

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

Business and Regulatory Risk

The COVID-19 pandemic and related developments could increase many of the risk faced by the Bank and adversely affect the Bank’s profitability and financial condition.
The impact of widespread health emergencies may adversely impact the Bank’s results of operations, such as the impact from the COVID-19 pandemic. The COVID-19 pandemic has to date caused significant economic and financial volatility both in the U.S. and around the world, and has led to a global recession. Many businesses in the Bank’s district and across the U.S. have, at times, been forced to suspend operations for an indefinite period of time in an attempt to slow the spread of the virus, and unemployment claims increased dramatically as more employers laid off workers. Ultimately, the significant slowdown in economic activity caused by the COVID-19 pandemic could further reduce demand at our member institutions, which could impact members’ demand for our products and services. It could also lead to a devaluation of our assets and/or the collateral pledged by the Bank’s members to secure advances and other extensions of credit, or increase credit losses, including as a result of increased forbearances granted by the Bank’s members, all of which could have an adverse impact on the Bank’s financial condition and results of operations. As of the date of the filing of this Report, the full effects of the COVID-19 pandemic continue to evolve and are unknowable.

The Bank’s ability to obtain funds through the issuance of consolidated obligations depends in part on prevailing conditions in the capital markets (including investor demand), such as the effects of any reduced liquidity in financial markets, which are beyond the Bank’s control. Volatility in the capital markets caused by the COVID-19 pandemic could impact demand for the Bank’s debt and the cost of the debt the Bank issues, which could impact the Bank’s liquidity and profitability. The Bank’s business and results of operations are affected by the fiscal and monetary policies of the U.S. government, foreign governments and their agencies. The Federal Reserve Board’s policies directly and indirectly influence the yield on the Bank’s interest-earning assets and the cost of its interest-bearing liabilities. In response to COVID-19, the Federal Open Market Committee (FOMC) lowered and has maintained the target range for federal funds at 0.00 percent to 0.25 percent. The outlook for 2021 and beyond is uncertain, and it is likely that the FOMC will keep interest rates low or even use negative interest rates if economic conditions warrant, each of which could affect the success of Bank’s asset and liability management activities and negatively affect the Bank’s financial condition and results of operations.

At this time, the Bank is in Phase 2 of its return to office plan, whereby approximately 75 percent of the Bank’s employees are working remotely. The Bank cannot currently predict when its full employee base will be permitted to return to work in our offices. With most of the Bank’s employees working remotely, the Bank could face operational difficulties or disruptions that could impair its ability to conduct and manage its business effectively. In addition, some, most or all of the Bank’s employees, executive management team, or board of directors could become infected with the COVID-19 virus which, depending upon the number and the severity of their cases, could similarly affect the Bank’s ability to conduct and manage its business effectively. Counterparties, vendors and other third parties upon which the Bank relies to conduct its business could be adversely impacted by the COVID-19 pandemic which could, in turn, lead to operational challenges for the Bank. These potential difficulties,
20

disruptions and challenges could increase the likelihood that the Bank’s financial condition and results of operations could be impacted.

Significant borrower defaults on loans made by the Bank’s members could occur as a result of reduced economic activity and these defaults could cause members to fail. The Bank could be adversely impacted by the reduction in business volume that would arise from the failure of one or more of the Bank’s members. Further, counterparty default, whether as a result of the operational or financial impacts of the COVID-19 pandemic, could adversely impact the Bank’s financial condition and results of operations.

The Bank participates in the Pentegra Defined Benefit Plan for Financial Institutions (Pension Plan), a tax qualified defined benefit pension plan. A prolonged negative impact on the value of stocks and other asset classes in the Pension Plan due to the COVID-19 pandemic may result in a significant reduction to pension plan asset values and increased pension liability, requiring the Bank to increase its contribution amount, which could negatively impact the Bank’s profitability.

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

The FHLBanks are GSEs, organized under the authority of the FHLBank Act, and governed by federal laws and regulations as adopted and applied by the Finance Agency. Congress may amend the FHLBank Act or amend or adopt other statutes in ways that significantly affect the rights and obligations of the FHLBanks and the manner in which the FHLBanks carry out their housing finance mission and business operations. New or modified legislation enacted by Congress or regulatory requirements applied or imposed by the Finance Agency or other financial services regulators could have a negative effect on the Bank’s ability to conduct business or on the cost of doing business. For example, from time to time, there have been several legislative efforts and policy proposals regarding reform of the federal support of U.S. housing finance, specifically targeting Fannie Mae and Freddie Mac. If implemented, these plans may also directly and indirectly impact other GSEs that support the U.S. housing market, including the FHLBanks. In addition, certain regulations affecting our members could impact the extent to which they can engage in business with the Bank.

Changes in statutory or regulatory requirements, or their application, could result in, among other things, an increase in the FHLBanks’ cost of funding and regulatory compliance; a change in membership or permissible business activities; additional liquidity and capital requirements; or a decrease in the size, scope, or nature of the FHLBanks’ lending or investment activities, any of which could negatively impact the Bank’s financial condition and results of operations.

Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of OperationsLegislative and Regulatory Developments for a discussion of recent legislative and regulatory activity that could affect the Bank.

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

We operate in a highly competitive environment. Advances are the Bank’s primary product offering and represented 56.5 percent of the Bank’s total assets for the year ended December 31, 2020. Demand for advances is affected by, among other factors, the cost and availability of other sources of liquidity for the Bank’s members, including deposits. The Bank competes with other suppliers of wholesale funding, both secured and unsecured. Such other suppliers may include the United States government, investment banks, commercial banks and, in certain circumstances, other FHLBanks with which members have a relationship through affiliates. Large institutions may also have independent access to the national and global credit markets. From time to time, these alternative funding sources may offer more favorable terms on their loans than the Bank does on its advances. Any change made by the Bank in the pricing of its advances in an effort to effectively compete with these competitive funding sources may decrease the Bank’s profitability on advances, which could have a material adverse impact on the Bank’s financial condition and results of operations, including dividend yields to members.

The prolonged low interest rate environment has resulted in a concentration of short-term advances. The Bank expects this short-term advance preference to continue during 2021. If members do not extend or renew these short-term advances as they come due, the Bank may experience a significant reduction in advances, which could have a material adverse impact on the Bank’s financial condition and results of operations. Advances due in one year or less comprised 46.1 percent of the Bank’s total advances outstanding as of December 31, 2020.

The Bank is exposed to risks because of customer concentration.

The Bank is subject to customer concentration risk as a result of the Bank’s reliance on a relatively small number of member institutions for a large portion of the Bank’s total advances and resulting interest income. The Bank’s largest borrowers as of
21

December 31, 2020, were TIAA, FSB, which accounted for $7.6 billion, or 15.0 percent, Bank of America, National Association, which accounted for $7.5 billion, or 14.8 percent, and Navy Federal Credit Union, which accounted for $6.5 billion, or 12.8 percent of the Bank’s total advances then outstanding. In addition, as of December 31, 2020, 10 of the Bank’s member institutions (including TIAA, FSB; Bank of America, National Association; and Navy Federal Credit Union) collectively accounted for $36.3 billion, or 71.6 percent, of the Bank’s total advances then outstanding. The financial services industry continues to experience consolidation, including among the Bank’s members. If one or more of the Bank’s largest borrowers ceased membership, or if the Bank were to experience a decrease in the amount of business with one or more of its largest borrowers, whether as the result of a merger or other transaction, or as a result of market conditions, competition or otherwise, the Bank’s financial condition and results of operations could be negatively affected.

Replacement of the LIBOR benchmark interest rate may have an impact on the Bank’s business, financial condition or results of operations.

On July 27, 2017, the Financial Conduct Authority, a regulator of financial services firms in the United Kingdom, announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. Although the administrator of LIBOR has more recently expressed its intention to not cease publication of U.S. LIBOR rates for some tenors until June 30, 2023, there can be no assurance that LIBOR rates, of any particular currency or tenor, will continue to be published through any particular date.

The Alternative Reference Rates Committee, which was convened by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York in order to identify best practices for alternative reference rates, identify best practices for contract robustness, develop an adoption plan, and create an implementation plan with metrics of success and a timeline, has proposed the SOFR as its recommended alternative to LIBOR. The Federal Reserve Bank of New York began publishing SOFR rates in April 2018. SOFR is intended to be a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. As noted throughout this Report, many of the Bank’s assets and liabilities were historically indexed to LIBOR. The Bank is evaluating the potential impact of and planning for the eventual replacement of the LIBOR benchmark interest rate, including the probability of SOFR as the dominant replacement. In 2020, the Bank ceased entering into LIBOR financial transactions with maturities that extend beyond 2021. The market transition away from LIBOR may continue to be complicated and present uncertainties. While market and industry participants have worked to achieve consistency in the conventions for cash products and derivatives used to hedge them, they may not always align for legacy transactions. There can be no guarantee that alternatives may or may not be developed with additional complications. The Bank is not able to predict whether SOFR will become a widely accepted benchmark in place of LIBOR, or what the impact of a possible transition to SOFR or an alternate replacement will have on the Bank’s business, financial condition, or results of operations.

An increase in the percentage of AHP contributions that the Bank is required to make could decrease the Bank’s dividends payable to its members.

If the aggregate AHP contributions of the FHLBanks were to fall below $100 million, the Finance Agency would prorate the remaining sums among the FHLBanks, subject to certain conditions, as may be required to meet the minimum $100 million annual contribution. Increasing the Bank’s AHP contribution in such a scenario would reduce the Bank’s earnings and potentially reduce the dividend paid to members.

Liquidity Risk

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

The Bank’s primary source of funds is from the sale of consolidated obligations in the capital markets, including the short-term discount note market. The Bank competes with Fannie Mae, Freddie Mac, other GSEs, and the U.S. Treasury, as well as corporate and supranational entities for funds raised through the issuance of consolidated obligations. The Bank’s ability to obtain funds through the sale of consolidated obligations depends in part on prevailing conditions in the capital markets (including investor demand), such as the effects of any reduced liquidity in financial markets, which are beyond the Bank’s control. The failure to obtain such funds on terms and conditions favorable to the Bank could adversely impact the Bank’s ability to manage its future liquidity.

22

Compliance with regulatory contingency liquidity guidance could restrict investment activities and adversely impact net interest income.
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 regulatory liquidity requirements, which are designed to provide sufficient liquidity and to protect against temporary disruptions in the capital markets that affect the FHLB System's access to funding. In 2018, the Finance Agency issued new liquidity requirements in a separate regulatory directive. These liquidity requirements have required the Bank to hold an additional amount of liquid assets, which could make it more challenging for the Bank to meets its core mission asset ratio, and could reduce the Bank’s ability to invest in higher-yielding assets and adversely impact net interest income.

Market Risk

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

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

The Bank’s businesses and results of operations are affected by the fiscal and monetary policies of the U.S. government, foreign governments and their agencies. The Federal Reserve Board’s policies directly and indirectly influence the yield on interest-earning assets and the cost of interest-bearing liabilities, which could affect the success of the Bank’s asset and liability management activities and negatively affect the Bank’s financial condition and results of operations. Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of OperationsNet Interest Income for further discussion of the Bank’s yield on assets and interest-rate spread.

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

The Bank uses a significant amount of derivative instruments to attempt to reduce its interest-rate risk and mortgage prepayment risk. The Bank determines the nature and quantity of hedging transactions based on various factors, including market conditions and the expected volume and terms of advances. As a result, the Bank's effective use of these instruments depends on the ability of the Bank to determine the appropriate hedging positions in light of the Bank's assets, liabilities, and prevailing and anticipated market conditions. In addition, the effectiveness of the Bank's hedging strategy depends upon the Bank's ability to enter into these instruments with acceptable parties, upon terms satisfactory to the Bank, and in the quantities necessary to hedge the Bank's corresponding financial instruments.

Certain changes to statutory and regulatory requirements for derivative transactions, including rules that would subject non-cleared swaps to a mandatory two-way initial margin requirement, among other things, could adversely affect the liquidity and pricing of derivative transactions entered into by the Bank, making derivative trades more costly and less attractive as risk management tools. As of June 30, 2020, the Bank ceased swapping new transactions to LIBOR in accordance with the supervisory letter issued by the Finance Agency. Many of the Bank’s legacy derivative instruments are swapped to LIBOR-based rates and indices, and there can be no assurances that ongoing efforts to transition away from LIBOR, including the market’s adoption of alternative benchmarks and new contractual terms for legacy transactions, will not adversely affect the trading market or value of derivatives.

If the Bank is unable to manage its hedging positions properly or is unable to enter into hedging instruments upon acceptable terms, the Bank may be unable to manage its interest-rate and other risks or may be required to change its investment strategies and advance product offerings, which could affect the Bank's financial condition and results of operations.
23


Prepayment or refinancing of mortgage assets could affect earnings.

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

The Bank may not be able to pay dividends or to repurchase or redeem members’ capital stock consistent with past practice.

The Bank’s board of directors may declare dividends on the Bank’s capital stock, payable to members, from the Bank’s unrestricted retained earnings and current net earnings. The Bank’s ability to pay dividends and to repurchase or redeem capital stock is subject to compliance with statutory and regulatory liquidity and capital requirements. The Bank’s financial management policy addresses regulatory guidance issued to all FHLBanks regarding retained earnings. It requires the Bank to establish a target amount of retained earnings by considering factors such as forecasted income, mark-to-market adjustments on derivatives and trading securities, market risk, operational risk, and credit risk, all of which may be influenced by events beyond the Bank’s control. The Bank’s capital plan addresses minimum regulatory capital requirements. Events such as changes in interest rates, collateral value, credit quality of members, changes to regulatory capital requirements, and any future credit losses may affect the adequacy of the Bank’s retained earnings and may require the Bank to reduce its dividends, suspend dividends altogether, or limit capital stock repurchases and redemptions to achieve and maintain the targeted amount of retained earnings or regulatory capital requirements. These actions could cause a reduction in members’ demand for advances, or make it difficult for the Bank to retain existing members or to attract new members.

During 2020, in response to monetary and fiscal stimulus related to the global pandemic associated with COVID-19, market interest rates declined significantly. The decrease in market interest rates has impacted the Bank’s income on interest-earning assets and net income. Additionally, these stimulus actions have resulted in lower demand from the Bank’s members for advances, further impacting net income. The Bank expects that the current low market interest rate environment, as well as decreased advance demand, may continue into the foreseeable future which could decrease the Bank’s future net income. As such, the amount that the Bank pays as dividends could be impacted.

Credit Risk

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

The Bank faces credit risk on advances, standby letters of credit, investments, derivatives, and mortgage loan assets. The Bank requires advances and standby letters of credit to be fully secured with collateral. The Bank evaluates the types of collateral pledged by the member and assigns a borrowing capacity to the collateral, based on the risk associated with that type of collateral. If the Bank has insufficient collateral before or after an event of payment default or failure of the member or the Bank is unable to liquidate the collateral for the value assigned to it in the event of a payment default or failure of a member, the Bank could experience a credit loss on advances or standby letters of credit, which could adversely affect its financial condition and results of operations.

The Bank assumes secured and unsecured credit risk exposure associated with securities transactions, money market transactions, supplemental mortgage insurance agreements, and derivative contracts. The Bank routinely executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. The insolvency or other inability of a significant counterparty to perform its obligations under a derivative contract or other agreement could have an adverse effect on the Bank’s financial condition and results of operations. The Bank’s credit risk may be exacerbated based on market movements that impact the value of the derivative or collateral positions, the failure of a counterparty to return collateral to the Bank, or when the collateral pledged to the Bank cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to the Bank. Any failure to properly perfect the Bank’s security interest in collateral or any disruption in the servicing of collateral in the event of a default could create credit losses for the Bank.

The Bank uses master derivative contracts that contain provisions that require the Bank to net the exposure under all transactions with a counterparty to one amount in order to calculate collateral requirements. Although the Bank attempts to monitor the creditworthiness of all counterparties, it is possible that the Bank may not be able to terminate the agreement with a foreign commercial bank before the counterparty would become subject to an insolvency proceeding.

24

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

Each of the FHLBanks relies upon the issuance of consolidated obligations as a primary source of funds. Consolidated obligations are the joint and several obligations of all of the FHLBanks, backed only by the financial resources of the FHLBanks. Accordingly, the Bank is jointly and severally liable with the other FHLBanks for the consolidated obligations issued by the FHLBanks through the Office of Finance.

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

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

As of December 31, 2020, the Bank has an issuer credit rating of Aaa/P-1 by Moody's Investors Service (Moody’s) and AA+/A-1+ by Standard and Poor's Ratings Services (S&P). The consolidated obligations of the FHLBanks (consolidated bonds and consolidated discount notes) carry credit ratings of Aaa/P-1 by Moody’s and AA+/A-1+ by S&P. All ratings are with a stable outlook. Because of the FHLBanks’ GSE status, the credit ratings of the FHLBank System and the FHLBanks are directly influenced by the sovereign credit of the U.S., which is beyond the Bank’s control. Downgrades to the U.S. sovereign credit rating and outlook would likely result in downgrades in the credit ratings and outlook on the Bank and the consolidated obligations of the FHLBanks even though the consolidated obligations are not obligations of the United States.

These ratings are subject to revision or withdrawal at any time by the rating agencies; therefore, the Bank may not be able to maintain these credit ratings. Negative ratings actions or negative guidance, including as a consequence of U.S. debt levels, the U.S. fiscal budget process, or other uncertainties may adversely affect the Bank’s cost of funds and ability to issue consolidated obligations or other financial instruments on acceptable terms, trigger additional collateral requirements under the Bank’s derivative contracts, and reduce the attractiveness of the Bank’s standby letters of credit. This could have a negative impact on the Bank’s financial condition and results of operations, including the Bank’s ability to make advances on acceptable terms, pay dividends, or redeem or repurchase capital stock.

Operational Risk

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

The Bank makes significant use of business and financial models for managing risk. For example, the Bank uses models to measure and monitor exposures to various risks, including interest rate, prepayment, and other market risks, as well as credit risk. The Bank also uses models in determining the fair value of certain financial instruments when independent price quotations are not available or reliable. The degree of judgment in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market parameters. If market quotes are not available, fair values are based on discounted cash flows using market estimates of interest rates and volatility, dealer prices or prices of similar instruments. Pricing models and their underlying assumptions are based on the Bank’s best estimates for discount rates, prepayments, market volatility, and other factors. These assumptions may have a significant effect on the reported fair values of assets and liabilities, including derivatives, the related income and expense, and the expected future behavior of assets and liabilities.

While models used by the Bank to value instruments and measure risk exposures are subject to periodic validation by the Bank’s staff and independent parties, rapid changes in market conditions could impact the value of the Bank’s instruments, as well as the Bank’s financial condition and results of operations. Models are inherently imperfect predictors of actual results because they are based on assumptions about future performance. Changes in any models or in any of the assumptions, judgments, or estimates used in the models may cause the results generated by the model to be materially different from actual results.

25

If the models are not reliable or the Bank does not use them appropriately, the Bank could make poor business decisions, including asset and liability management decisions, or other decisions, which could result in an adverse financial impact. Further, any strategies that the Bank employs to attempt to manage the risks associated with the use of models may not be effective.

The Bank relies heavily upon information systems and other technology. Any disruption or failure of the Bank’s information systems or other technology or those of critical vendors and third parties, such as the Federal Reserve Banks, could adversely impact the Bank’s business, reputation, financial condition, and results of operations.

The Bank relies heavily upon information systems and other technology to conduct and manage its business. The Bank owns some of these systems and technology, and third parties own and provide to the Bank some of those systems and technology. Computer systems, software, and networks can be vulnerable to failures and interruptions, including as the result of any cyberattacks (e.g., breaches, unauthorized access, misuse, computer viruses or other malicious code, and other events) or other breaches of technology security, that may derive from human error or malfeasance on the part of employees or third parties, other disruptions during the process of upgrading or replacing computer software or hardware, failure to implement key information technology initiatives, or accidental technological failure. These failures, interruptions, or cyberattacks could jeopardize the confidentiality or integrity of information, including personally identifiable information, result in fraudulent wire transfers, or otherwise interrupt the Bank’s ability to conduct and manage its business effectively, including, without limitation, its deposit account management, hedging activities, and advances activities. The Bank can make no assurance that it or its third-party vendors will be able to prevent, timely and adequately address, or mitigate the negative effects of any such failure, interruption, or cyberattack.

Like many financial institutions, the Bank has seen an increase in cyberattack attempts. For the Bank, these attempts have predominantly occurred through phishing, social engineering scams, and ransomware. The Bank’s operations rely on the availability and functioning of its main office and off-site backup facilities. The Bank devotes substantial resources and deploys preventative measures to secure the Bank’s systems, including firewalls, email security, and anti-virus solutions. These measures, or the Bank’s system redundancies and other continuity measures, may be ineffective or insufficient, and the Bank’s business continuity and disaster recovery planning may not be sufficient for all eventualities. A failure or interruption in our business continuity, disaster recovery or certain information systems, or a cybersecurity event, could significantly harm the Bank’s reputation, its customer relations, risk management, and profitability, and could result in financial losses, legal and regulatory sanctions, increased costs, or other harm. While the Bank maintains insurance coverage that is intended to address certain aspects of data security risks, such insurance may be insufficient to cover all losses or types of claims that may arise. As cyber threats continue to evolve, the Bank may be required to expend significant additional resources to continue to modify or enhance its layers of defense, to investigate and remediate any information security vulnerabilities, or to comply with regulatory requirements.

Additionally, the Bank relies on the Office of Finance to facilitate the issuance and servicing of its consolidated obligations. A failure or interruption of the Office of Finance's operating systems as a result of breaches of technology security or cyberattacks could disrupt the Bank’s access to funds, and could significantly harm the Bank’s reputation, its customer relations, risk management, and profitability, and could result in financial losses, legal and regulatory sanctions, increased costs, or other harm.

The Bank’s controls and procedures may fail or be circumvented, and risk management policies and procedures may be inadequate.

The Bank may fail to identify and manage risks related to a variety of aspects of its business, including operational risk, legal and compliance risk, interest-rate risk, liquidity risk, market risk, and credit risk. The Bank has adopted controls, procedures, policies, and systems to monitor and manage these risks. The Bank’s management cannot provide complete assurance that those controls, procedures, policies, and systems are adequate to identify and manage the risks inherent in the Bank’s business. In addition, because the Bank’s business continues to evolve, the Bank may fail to fully understand the implications of changes in the business, and therefore, it may fail to enhance the Bank’s risk governance framework to timely or adequately address those changes. Failed or inadequate controls and risk management practices could have an adverse effect on the Bank’s financial condition and results of operations.

26

An economic downturn or natural disaster, including those resulting from climate change, in the Bank’s region could adversely affect the Bank’s profitability and financial condition.

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

The loss of key personnel or difficulties recruiting and retaining qualified personnel, including as a result of executive compensation regulatory requirements, could adversely impact the Bank’s business and financial results.

The Bank relies on key personnel for many of its functions and has a relatively small workforce, given the size and complexity of its business. The Bank’s ability to attract and retain such personnel is important for it to conduct its operations and measure and maintain risk and financial controls. Additionally, the Bank must continue to recruit, retain and motivate a qualified and diverse pool of employees, both to maintain the Bank’s current business, including succession planning, and to execute its strategic initiatives. If the Bank is unable to recruit, retain and motivate such employees, its business and financial performance may be adversely affected.

Each FHLBank’s board of directors has the statutory authority and responsibility to select, employ and fix the compensation of its officers and employees in order to help ensure the hiring and retention of qualified staff. However, as the regulator of the FHLBanks, the Finance Agency has the authority to determine whether compensation paid to any executive officer is in its view not reasonable and comparable with compensation for employment in other similar businesses involving similar duties and responsibilities. Depending on how such authority is exercised, the Bank’s ability to hire and retain qualified executive officers could be adversely affected.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

The Bank owns approximately 235,514 square feet of office space at 1475 Peachtree Street, NE, Atlanta, Georgia 30309. The Bank occupies approximately 213,344 square feet of this space and leases the remaining space to tenants. The Bank leases an off-site backup facilities comprising approximately 9,402 square feet for the Bank’s disaster recovery center. The Bank also leases 2,993 square feet of office space located in Washington, D.C., which is shared with two other FHLBanks. The Bank’s management believes these facilities are well maintained and are adequate for the purposes for which they currently are used.


Item 3. Legal Proceedings.
The Bank is subject to various legal proceedings and actions from time to time in the ordinary course of its business. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of those matters presently known to the Bank will have a material adverse impact on the Bank’s financial condition or results of operations.
 
Item 4. Mine Safety Disclosure.

Not applicable.

PART II

27

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

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

A member may request in writing that the Bank redeem its excess capital stock at par value. Excess capital stock is FHLBank capital stock not required to be held by the member to meet its minimum stock requirement under an FHLBank’s capital plan. Any such redemption request is subject to a five-year redemption period after the Bank receives the request, subject to certain regulatory requirements and to the satisfaction of any ongoing stock investment requirements applicable to the member. In addition, any member may withdraw from membership upon five years written notice to the Bank. Subject to the member’s satisfaction of any outstanding indebtedness and other statutory requirements, the Bank redeems the member’s capital stock at par value upon withdrawal from membership. The Bank, in its discretion, may repurchase shares held by a member in excess of its required stock holdings, subject to certain limitations and thresholds in the Bank’s capital plan. The par value of all capital stock is $100 per share, and the operating threshold for daily excess capital stock repurchases is $100 thousand. As of February 28, 2021, the Bank had 828 member and non-member shareholders and 30 million shares of its capital stock outstanding (including mandatorily redeemable shares).

Finance Agency regulations prohibit any FHLBank from issuing dividends in the form of capital stock or otherwise issuing new excess capital stock if that FHLBank has excess capital stock greater than one percent of that FHLBank’s total assets or if issuing such dividends or new excess capital stock would cause that FHLBank to exceed the one percent excess capital stock limitation. As of December 31, 2020, the Bank’s excess capital stock did not exceed one percent of its total assets. Historically, the Bank has not issued dividends in the form of capital stock or issued new excess capital stock, and a member’s existing excess activity-based stock is applied to any activity-based stock requirements related to new advances.

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

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

The Bank also issues standby letters of credit in the ordinary course of its business. From time to time, the Bank provides standby letters of credit to support members’ obligations, members’ standby letters of credit, or obligations issued to support unaffiliated, third-party offerings of notes, bonds, or other securities. The Bank issued $43.0 billion, $49.6 billion, and $39.2 billion in standby letters of credit in 2020, 2019, and 2018, respectively. To the extent that these standby letters of credit are securities for purposes of the Securities Act of 1933, the issuance of the standby letter of credit by the Bank is exempt from registration pursuant to section 3(a)(2) thereof.

28

Item 6. Selected Financial Data.

The following table presents selected historical financial data of the Bank and should be read in conjunction with the Bank’s 2020 audited financial statements and related notes thereto and with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are included elsewhere in this Report. The following data, insofar as it relates to each of the years 2016 to 2020, have been derived from annual financial statements, including the statements of condition as of December 31, 2020 and 2019 and the related statements of income for the years ended December 31, 2020, 2019, and 2018 and notes thereto appearing elsewhere in this Report. The financial information presented in the following table and in the financial statements included in this Report is not necessarily indicative of the financial condition or results of operations of any other interim or annual periods (dollars in millions):
 As of or for the Years Ended December 31,
20202019201820172016
Statements of Condition (as of year end)
Total assets$92,295 $149,857 $154,476 $146,566 $138,671 
Advances52,168 97,167 108,462 102,440 99,077 
Investments (1)
36,380 50,617 44,309 40,378 36,510 
Mortgage loans held for portfolio, net218 296 360 435 523 
Allowance for credit losses on mortgage loans(1)(1)(1)(1)(1)
Interest-bearing deposits1,998 1,492 1,176 1,177 1,118 
Consolidated obligations, net:
  Discount notes (2)
25,385 52,134 66,025 50,139 41,292 
  Bonds (2)
59,379 88,503 79,114 87,523 88,647 
Total consolidated obligations, net (2)
84,764 140,637 145,139 137,662 129,939 
Mandatorily redeemable capital stock— 
Affordable Housing Program payable82 89 85 77 69 
Capital stock - putable3,078 4,988 5,486 5,154 4,955 
Retained earnings2,198 2,153 2,110 2,003 1,892 
Accumulated other comprehensive (loss) income(16)22 51 110 104 
Total capital5,260 7,163 7,647 7,267 6,951 
Statements of Income (for the year ended)
Net interest income (3)
333 535 561 157 334 
Reversal of provision for credit losses— — — — (1)
Net impairment losses recognized in earnings— (13)(3)(2)(3)
Net gains (losses) on trading securities(1)(5)(30)
Net realized gains from sale of investment securities85 — — — — 
Net (losses) gains on derivatives and hedging activities(6)(4)29 341 119 
Standby letters of credit fees19 24 25 26 28 
Other income (4)
11 (3)
Noninterest expense163 146 150 136 137 
Income before assessment283 408 462 388 309 
Affordable Housing Program assessment28 41 46 39 31 
Net income255 367 416 349 278 
Performance Ratios (%)
Return on equity (5)
3.95 5.09 5.54 4.97 4.08 
Return on assets (6)
0.19 0.25 0.27 0.25 0.20 
Net interest margin (7)
0.26 0.36 0.37 0.11 0.24 
Regulatory capital ratio (as of year end) (8)
5.72 4.77 4.92 4.88 4.94 
Equity to assets ratio (9)
4.90 4.85 4.93 4.97 4.88 
Dividend payout ratio (10)
93.86 88.25 74.12 68.40 81.08 
29

____________
(1) Investments consist of interest-bearing deposits, securities purchased under agreements to resell, federal funds sold, and securities classified as trading, available-for-sale, and held-to-maturity.
(2) The amounts presented are the Bank’s primary obligations on consolidated obligations outstanding. The par value of the other FHLBanks’ outstanding consolidated obligations for which the Bank is jointly and severally liable was as follows (in millions):
December 31, 2020$662,051 
December 31, 2019885,114 
December 31, 2018886,081 
December 31, 2017896,441 
December 31, 2016859,361 

(3) The Bank adopted new accounting guidance related to derivatives and hedging activities effective January 1, 2019. The impact of this guidance changed the presentation of net interest income as described in Note 15—Derivatives and Hedging Activities to the Bank’s audited financial statements.
(4) Other income includes service fees and other items. For the year ended December 31, 2016, amount includes a $6 million loss on litigation settlements, net.
(5) Calculated as net income, divided by average total equity.
(6) Calculated as net income, divided by average total assets.
(7) Net interest margin is net interest income as a percentage of average earning assets.
(8) Regulatory capital ratio is regulatory capital, which does not include accumulated other comprehensive (loss) income, but does include mandatorily redeemable capital stock, as a percentage of total assets as of year end.
(9) Calculated as average total equity, divided by average total assets.
(10) Calculated as dividends declared during the year, divided by net income during the year.


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

The following discussion and analysis relates to the Bank’s financial condition as of December 31, 2020 and 2019, and results of operations for the years ended December 31, 2020 and 2019. This section explains the changes in certain key items in the Bank’s financial statements from year to year, the primary factors driving those changes, the Bank’s risk management processes and results, known trends or uncertainties that the Bank believes may have a material effect on the Bank’s future performance, as well as how certain accounting principles affect the Bank’s financial statements. For a discussion on the comparison between the results of operations for the years ended 2019 and 2018, see the Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are contained in the Bank’s 2019 Annual Report on Form 10-K, as filed with the SEC on March 5, 2020.

This discussion should be read in conjunction with the Bank’s audited financial statements and related notes for the year ended December 31, 2020 included in Item 8 of this Report. Readers also should carefully review “Special Cautionary Notice Regarding Forward-looking Statements” and Item 1A, Risk Factors, for a description of the forward-looking statements in this Report and a discussion of the factors that might cause the Bank’s actual results to differ, perhaps materially, from these forward-looking statements.

Executive Summary

Recent Market Conditions

The Bank’s overall results of operations are influenced by the economy and the financial markets. In particular, market conditions impact members’ demand for advances and the Bank’s ability to maintain sufficient access to sources of funding at favorable costs. The COVID-19 pandemic impacted the financial markets throughout 2020. In light of these market conditions, the FOMC lowered and maintained the target range for federal funds of 0.00 percent to 0.25 percent, and market interest rates continued at historically low levels. Additionally, the Federal Reserve continued its emergency actions, initiated in March 2020, to help facilitate liquidity and support stability in the capital markets. In particular, the Federal Reserve has continued to increase its provision of liquidity to the repurchase agreements and U.S. Treasury markets through open market operations. Additional fiscal stimulus through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and other measures has also led to increased liquidity and deposit levels at the Bank’s member institutions. As discussed below, these actions and market conditions reduced demand for the Bank’s advances during 2020. The Bank continued to meet its funding needs through December 31, 2020.

Operating Status Update

As a financial institution, the Bank is part of the nation’s critical infrastructure, has continually operated its business, and has continued to serve as a reliable source of funding for its members. The Bank continues to operate in Phase 2 of its return to office plan, pursuant to which approximately 25 percent of the Bank’s employees are working on-site. To date, the Bank has not experienced significant operational difficulties or disruptions, however the possibility exists, which could impair the Bank’s
30

ability to conduct and manage its business effectively. To date, no member of the Bank’s executive management team has been incapacitated or unable to perform duties. The Bank’s board of directors regularly reviews the Bank’s succession plan in the event of incapacitation of any executive team member.

Financial Condition
As of December 31, 2020, total assets were $92.3 billion, a decrease of $57.6 billion, or 38.4 percent, from December 31, 2019. This decrease was primarily due to a $45.0 billion, or 46.3 percent, decrease in advances. Decreased demand for liquidity from the Bank’s members, caused by increased member deposits were the primary drivers of the decrease in advance balances.
As of December 31, 2020, total liabilities were $87.0 billion, a decrease of $55.7 billion, or 39.0 percent, from December 31, 2019. This decrease was primarily due to a $55.9 billion, or 39.7 percent, decrease in consolidated obligations. Consolidated obligations are the principal funding source used by the Bank and the decrease in funding was driven by the decrease in advance demand.
As of December 31, 2020, total capital was $5.3 billion, a decrease of $1.9 billion, or 26.6 percent, from December 31, 2019. This decrease was primarily due to a decrease in the Bank’s subclass B2 activity-based capital stock resulting from a decrease in the total outstanding advances during the year.
Results of Operations
Net interest income was $333 million for 2020, a decrease of $202 million, or 37.8 percent, from net interest income of $535 million for 2019. During 2020, market interest rates declined significantly and have remained at historically low levels and the low market interest rates impacted the Bank’s income on interest-earning assets resulting in lower net interest income. Further, the additional market liquidity from the monetary and fiscal stimulus actions resulted in lower demand from the Bank’s members for advances.
The Bank recorded net income of $255 million for 2020, a decrease of $112 million, or 30.5 percent, from net income of $367 million for 2019. The decrease in net income was primarily due to lower net interest income, as described above. In addition, during 2020 the Bank made an additional voluntary $20 million retirement plan contribution which reduced net income. The decrease in net income was partially offset by an $85 million gain from the sale of the Bank’s private-label MBS investment portfolio during the first quarter of 2020.
One way in which the Bank analyzes its performance is by comparing its annualized return on equity (ROE) to three-month average LIBOR. The Bank 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 3.95 percent for 2020, compared to 5.09 percent for 2019. The decrease in ROE was primarily due to the decrease in net income during the year. ROE spread to average three-month LIBOR was 330 basis points for 2020, compared to 276 basis points for 2019. The increase in the ROE spread to three-month average LIBOR was primarily due to a decrease in three-month average LIBOR during 2020 compared to 2019. The Bank is currently planning for the eventual replacement of the LIBOR benchmark interest rate, including the probability of SOFR as the dominant replacement. For comparative purposes, the Bank’s ROE spread to average SOFR was 359 basis points for 2020. Beginning in 2021, the Bank will begin using ROE spread to average SOFR in this analysis and cease using a LIBOR-based performance metric.
The Bank’s interest-rate spread was 22 basis points for 2020, compared to 25 basis points for 2019. The decrease in the Bank’s interest-rate spread was primarily due to the decrease in market interest rates which impacted interest income related to interest-earning assets more than the offsetting interest expense related to interest-bearing liabilities.

Business Outlook

The Bank’s business model is focused on enhancing the total value of the cooperative for its members by serving as their trusted advisor. The Bank focuses these efforts on offering readily available, competitively priced advances, a potential return on investment, support for community investment activities, and other credit and noncredit products and services. As part of the Bank’s cooperative structure, the Bank has chosen to operate with narrow margins, passing on its low funding costs to members, which causes the Bank’s profitability to be sensitive to changes in market conditions.

The state of the economy is a significant component in determining the Bank’s overall business outlook as it impacts advance demand, asset and collateral values, member financial stability, funding costs, and many other facets of the Bank’s portfolio. External factors such as liquidity levels at member institutions, fiscal and monetary policies, performance of global economies, and regulatory changes could have a significant effect either positive or negative on the Bank’s financial performance.

31

Interest rates are also a significant factor on the Bank’s business outlook. As discussed throughout this Report, the Federal Reserve lowered interest rates during 2020 to historic lows. Changes in interest rates can impact the Bank’s interest rate risk management, profitability, and ROE. It can also impact member advance demand, as rate uncertainty can impact deposit levels at the Bank’s members.

The COVID-19 pandemic has and is expected to continue to influence these external factors and the financial markets. As discussed throughout this Report, the Federal Reserve has undertaken a number of emergency actions to increase market liquidity, which along with market conditions resulting from the COVID-19 pandemic, resulted in substantially higher deposit levels at member institutions. These higher deposit levels reduced member demand for new advances and gave rise to prepayments of existing advances, resulting in a significantly lower advance balance as of December 31, 2020.The Bank expects that the current low market interest rate environment, as well as decreased advance demand, will continue into the foreseeable future, which reduced the Bank’s net income in 2020 and is expected to reduce the Bank’s net income for 2021. If the Bank experiences these lower levels of net income, the amount that the Bank pays as dividends could be impacted.

The Bank relies on access to the capital markets to meet its funding needs, and the Bank expects continued sufficient access to capital markets. Given the evolving and unknowable effect of the COVID-19 pandemic on these external factors, the Bank cannot predict the extent to which, and the duration of, the impact to the Bank’s future business performance and profitability due to the COVID-19 pandemic. A more detailed discussion of the risks to the Bank associated with the COVID-19 pandemic is discussed in Item 1ARisk Factors.

Merger activity involving the Bank’s members can impact the Bank’s business outlook. As the financial industry continues to experience consolidation, our membership base may decrease, and our advance balance and other business could increase or decrease significantly depending upon the size of the financial institutions involved in the merger. While the Bank’s balance sheet is designed to expand and contract based upon advance demand, the Bank’s business could be affected by this merger activity, including as a result of a single event, such as the loss of a member’s business due to acquisition by a non-member.

Management continues to be focused and engaged on implementing an effective transition away from LIBOR. Many of the Bank’s assets and liabilities, and its derivative transactions, were historically indexed to LIBOR. There are complexities, risks and uncertainties involved with transitioning to alternative rates, and the transition involves considerable time and resources, all of which can impact the Bank’s business outlook.

Financial Condition
The following table presents the distribution of the Bank’s total assets, liabilities, and capital by major class as of the dates indicated (dollars in millions). These items are discussed in more detail below.
 
As of December 31,
 20202019Increase (Decrease)
AmountPercent
of Total
AmountPercent
of Total
AmountPercent
Advances$52,168 56.52 $97,167 64.84 $(44,999)(46.31)
Investment securities21,966 23.80 28,181 18.81 (6,215)(22.05)
Other investments14,414 15.62 22,436 14.97 (8,022)(35.76)
Mortgage loans, net218 0.24 296 0.20 (78)(26.33)
Other assets3,529 3.82 1,777 1.18 1,752 98.63 
Total assets$92,295 100.00 $149,857 100.00 $(57,562)(38.41)
Consolidated obligations, net:
  Discount notes$25,385 29.17 $52,134 36.53 $(26,749)(51.31)
  Bonds59,379 68.22 88,503 62.02 (29,124)(32.91)
Deposits1,998 2.30 1,492 1.05 506 33.85 
Other liabilities273 0.31 565 0.40 (292)(51.53)
Total liabilities$87,035 100.00 $142,694 100.00 $(55,659)(39.01)
Capital stock$3,078 58.53 $4,988 69.63 $(1,910)(38.28)
Retained earnings2,198 41.79 2,153 30.06 45 2.06 
Accumulated other comprehensive (loss) income(16)(0.32)22 0.31 (38)(176.27)
Total capital$5,260 100.00 $7,163 100.00 $(1,903)(26.57)

32

Advances

The following table presents the Bank’s advances outstanding by year of maturity and the related weighted-average interest rate (dollars in millions):
As of December 31,
20202019
AmountWeighted-average Interest Rate (%)AmountWeighted-average Interest Rate (%)
Due in one year or less$23,326 0.48 $64,413 1.90 
Due after one year through two years3,803 1.80 7,421 2.21 
Due after two years through three years3,347 2.03 5,420 2.36 
Due after three years through four years2,643 1.93 3,382 2.72 
Due after four years through five years3,657 1.80 4,778 2.44 
Due after five years13,867 2.12 11,042 2.61 
Total par value50,643 1.30 96,456 2.09 
Deferred prepayment fees(55)(9)
Discount on AHP advances(3)(3)
Discount on EDGE (1) advances
(1)(2)
Hedging adjustments1,584 725 
Total$52,168 $97,167 
____________ 
(1) Economic Development and Growth Enhancement Program

Total advances decreased by 46.3 percent as of December 31, 2020, compared to December 31, 2019. In response to the deteriorating market conditions in early 2020, the Federal Reserve implemented a number of asset purchase programs to provide additional liquidity to the financial markets. The additional market liquidity from monetary and fiscal stimulus actions resulted in increased deposits at the Bank’s members and lower demand for the Bank’s advances. The Bank expects that advance demand will continue at reduced levels. A significant percentage of advances made during 2020 were short-term advances.
As of December 31, 2020 and 2019, 78.8 percent and 64.6 percent, respectively, of the Bank’s advances were fixed rate. However, the Bank often simultaneously entered into derivatives with the issuance of advances to convert the rates, in effect, into short-term variable interest rates, primarily based on LIBOR and SOFR. As of December 31, 2020 and 2019, 63.2 percent and 46.7 percent, respectively, of the Bank’s fixed-rate advances were swapped, and 0.38 percent and 2.03 percent, respectively, of the Bank’s variable-rate advances, which contained optionality, were swapped. The majority of the Bank’s variable-rate advances were indexed to LIBOR and SOFR. Beginning June 30, 2020, the Bank ceased issuing LIBOR-based advances and entering into LIBOR-based derivatives with maturities/termination dates beyond December 31, 2021. The Bank also offers variable-rate advances that may be tied to indices such as the federal funds rate, prime rate, or constant maturity swap rates.

The Bank’s 10 largest borrowing member institutions had 71.6 percent of the Bank’s total advances outstanding as of December 31, 2020. Further information regarding the Bank’s 10 largest borrowing member institutions and breakdown of their individual advance balances as of December 31, 2020 is contained in Item 1, Business—Credit Products—Advances. Management believes that the Bank holds sufficient collateral, on a member-specific basis, to secure the advances to all borrowers, including these 10 institutions, and the Bank does not expect to incur any credit losses on these advances.

Supplementary financial data on the Bank’s advances is set forth under Item 8, Financial Statements and Supplementary Information (Unaudited).
33

Investments

The following table presents more detailed information regarding investments held by the Bank (dollars in millions).
 
 As of December 31,Increase (Decrease)
 20202019Amount    Percent    
Investment securities:
Government-sponsored enterprises debt obligations$2,307 $4,556 $(2,249)(49.36)
U. S. Treasury obligations1,500 1,499 0.07 
State or local housing agency debt obligations— — 
Mortgage-backed securities:
    U.S. agency obligations-guaranteed residential295 89 206 232.43 
    Government-sponsored enterprises residential7,283 8,642 (1,359)(15.73)
    Government-sponsored enterprises commercial10,580 12,518 (1,938)(15.48)
    Private-label residential— 876 (876)(100.00)
   Total mortgage-backed securities18,158 22,125 (3,967)(17.93)
Total investment securities21,966 28,181 (6,215)(22.05)
Other investments:
Interest-bearing deposits (1)
1,644 3,810 (2,166)(56.85)
Securities purchased under agreements to resell9,500 8,800 700 7.95 
Federal funds sold (2)
3,270 9,826 (6,556)(66.72)
Total other investments14,414 22,436 (8,022)(35.76)
Total investments$36,380 $50,617 $(14,237)(28.13)
____________ 
(1)Interest-bearing deposits includes a $431 million and $508 million business money market account with Truist Bank one of the Bank’s 10 largest borrowers, as of December 31, 2020 and 2019, respectively.
(2) Federal funds sold includes $180 million and $100 million with BankUnited, National Association, one of the Bank’s 10 largest borrowers as of December 31, 2020 and 2019, respectively.

The decrease in total investment securities was primarily due to the maturities and prepayments that occurred during 2020 and the sale of the Bank’s private-label residential mortgage backed securities portfolio which occurred in the first quarter of 2020. The amount held in other investments will vary each day based on the Bank’s liquidity needs as a result of advances demand, the earnings rates, and the availability of high quality counterparties in the federal funds market.

The 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 December 31, 2020 and 2019, these investments were 344 percent and 309 percent of the Bank’s regulatory capital, respectively. These investments exceeded the 300 percent level due to a decrease in regulatory capital that resulted from a decrease in advances as of December 31, 2020 and 2019. The Bank was in compliance with this regulatory requirement at the time of its MBS purchases and was not required to sell any previously purchased MBS. However, the Bank is precluded from purchasing additional MBS until its MBS to regulatory capital declines below 300 percent.

Refer to Note 6—Available-for-sale Securities and Note 7—Held-to-maturity Securities to the Bank’s 2020 audited financial statements for information on securities with unrealized losses as of December 31, 2020 and 2019.

Mortgage Loans Held for Portfolio
The decrease in mortgage loans held for portfolio from December 31, 2019 to December 31, 2020 was primarily due to the maturity and prepayments of these assets during the year.
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 December 31, 2020 and 2019. The following table presents the percentage of unpaid principal balance of conventional residential mortgage loans held for portfolio for the five largest state concentrations.
 
34

As of December 31,
20202019
 Percent of TotalPercent of Total
Florida22.98 22.36 
South Carolina21.74 20.47 
Virginia10.68 11.61 
Georgia10.33 9.96 
North Carolina8.33 8.13 
All other25.94 27.47 
Total100.00 100.00 

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

Consolidated Obligations
The Bank funds its assets primarily through the issuance of consolidated obligation bonds and consolidated obligation discount notes. The decrease in consolidated obligations from December 31, 2019 to December 31, 2020 was primarily a result of the decrease in advances outstanding during the year. Consolidated obligation issuances financed 91.8 percent of the $92.3 billion in total assets as of December 31, 2020, a slight decrease from the financing ratio of 93.9 percent as of December 31, 2019.
Consolidated obligations outstanding were primarily variable rate as of December 31, 2020 and 2019. The Bank often simultaneously entered into derivatives with the issuance of fixed-rate consolidated obligation bonds to convert the interest rates, in effect, into short-term variable interest rates, primarily based on LIBOR and SOFR. As of December 31, 2020 and 2019, 23.1 percent and 83.3 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 December 31, 2020 and 2019. As of December 31, 2020 and 2019, 4.42 percent and 33.9 percent, respectively, of the Bank’s fixed-rate consolidated obligation discount notes were swapped. Beginning June 30, 2020, the Bank ceased issuing LIBOR-based consolidated obligation bonds and entering into LIBOR-based derivatives with maturities/termination dates beyond December 31, 2021.
Supplementary financial data on the Bank’s short-term borrowings is set forth under Item 8, Financial Statements and Supplementary Data—Supplementary Financial Information (Unaudited).

Deposits

The Bank offers demand and overnight deposit programs to members 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.

Capital
The FHLBank Act and Finance Agency regulations specify that each FHLBank must meet certain minimum regulatory capital standards. The Bank must maintain (1) total regulatory capital in an amount equal to at least four percent of its total assets; (2) leverage capital in an amount equal to at least five percent of its total assets; and (3) permanent capital in an amount equal to at least its regulatory risk-based capital requirement. Permanent capital is defined by the FHLBank Act and applicable regulations as the sum of paid-in capital for Class B stock and retained earnings. Mandatorily redeemable capital stock is considered capital for regulatory purposes. These regulatory capital requirements, and the Bank’s compliance with these requirements, are presented in detail in Note 12—Capital and Mandatorily Redeemable Capital Stock to the Bank’s 2020 audited 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;
35

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 December 11, 2020, the Bank received notification from the Director that, based on September 30, 2020 data, the Bank meets the definition of “adequately capitalized.”

The Finance Agency issued an Advisory Bulletin providing for each FHLBank to maintain a ratio of at least two percent of capital stock to total assets, measured on a daily average basis at month end. As of December 31, 2020, the Bank was in compliance with this ratio.

All of the FHLBanks entered into a Capital Agreement, which is intended to enhance the capital position of each FHLBank. Under the Capital Agreement, each FHLBank allocates 20 percent of its net income each quarter to a separate restricted retained earnings account until the account balance equals at least one percent of the FHLBank’s average balance of outstanding consolidated obligations for the previous quarter. Restricted retained earnings are not available to pay dividends and are presented separately on the Statements of Condition.

Under the Bank’s financial management policy, the Bank targets to maintain (1) a capital-to-assets ratio of 4.50 percent to 5.00 percent; (2) a retained earnings account balance equal to the restricted retained earnings account balance, plus extremely stressed scenario losses; and (3) unrestricted retained earnings greater than the retained earnings target. Beginning in January 2021, the targeted capital-to-asset ratio was changed to 4.50 percent to 6.00 percent. The Bank believes that daily excess stock repurchases and consistent dividends give members greater certainty of a return of their principal or the receipt of a dividend, which in turn may have a positive impact on members’ appetite for advances. The Bank seeks to pay an amount of dividends each quarter that are consistent with an attractive rate of return on capital to its member shareholders relative to an established benchmark after providing for retained earnings as discussed above. Historically, the Bank’s dividend rate has increased with increases in LIBOR, while the spread between the dividend rate and LIBOR may shrink. Conversely, the dividend rate may decrease during periods of lower LIBOR, while the spread may increase. Beginning in 2021, the Bank anticipates it will begin using SOFR as the established benchmark for which it will calculate dividends. The Bank’s ability to maintain dividends depends on the Bank’s actual performance, its ability to maintain adequate retained earnings, other factors described in Item 1A, Risk Factors, and the discretion of the Bank’s board of directors. Information about dividends paid by the Bank during 2020, 2019, and 2018, is contained in Note 12—Capital and Mandatorily Redeemable Capital Stock to the Bank’s 2020 audited financial statements.

36

Results of Operations

The following is a discussion and analysis of the Bank’s results of operations for the years ended December 31, 2020, 2019, and 2018.

Net Income
The following table presents the Bank’s significant income items for the years ended December 31, 2020, 2019, and 2018, and provides information regarding the changes during those years (dollars in millions). These items are discussed in more detail below.
Increase (Decrease)    
 For the Years Ended December 31,2020 vs. 20192019 vs. 2018
202020192018AmountPercentAmountPercent
Net interest income$333 $535 $561 $(202)(37.76)$(26)(4.79)
Noninterest income113 19 51 94 *(32)(63.17)
Noninterest expense163 146 150 17 11.64 (4)(2.58)
Affordable Housing Program assessment28 41 46 (13)(30.53)(5)(11.94)
Net income$255 $367 $416 $(112)(30.53)$(49)(11.94)
____________ 
* Not meaningful

Net Interest Income

The primary source of the Bank’s earnings is net interest income. Net interest income equals interest earned on assets (including member advances, mortgage loans, MBS held in portfolio, and other investments), less the interest expense incurred on liabilities (including 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 following table presents key components of net interest income for the years presented (in millions):
For the Years Ended December 31,
202020192018
Interest income:
   Advances$870 $2,451 $2,227 
   Investments394 1,271 1,075 
   Mortgage loans13 18 21 
Total interest income1,277 3,740 3,323 
Interest expense:
   Consolidated obligations939 3,179 2,743 
   Interest-bearing deposits26 19 
Total interest expense944 3,205 2,762 
Net interest income$333 $535 $561 

As discussed above, net interest income includes components of hedging activity. When hedging relationships qualify for hedge accounting, the interest components of the hedging derivatives will be reflected in interest income or expense. Beginning on January 1, 2019, the fair value gains and losses of derivatives and hedged items designated in fair value hedge relationships are also recognized in interest income or interest expense. Prior to January 1, 2019, the portion of fair value gains and losses of derivatives and hedged items representing hedge ineffectiveness were recorded in noninterest income. When a hedging relationship is discontinued, the cumulative fair value adjustment on the hedged item will be amortized into interest income or expense over the remaining life of the asset or liability. The impact of hedging on net interest income was a decrease of $285 million, $31 million, and $91 million during the years ended December 31, 2020, 2019, and 2018, respectively.




37




The decrease in net interest income for 2020, compared to 2019, was due to decreased advance balances, as well as lower interest rates. During 2020, market interest rates declined significantly and have remained as historically low levels and these low market interest rates further impacted the Bank’s income on interest-earning assets. As noted previously, during 2020, conditions in the financial markets have been impacted by the global pandemic associated with COVID-19. In response to these market conditions, the FOMC lowered the target range for federal funds to 0.00 percent to 0.25 percent. Additionally, the
Federal Reserve implemented a number of asset purchase programs to provide additional liquidity to the financial markets. The additional market liquidity, as well as increased deposit levels at the Bank’s members, resulted in lower demand for Bank’s advances.
38



The following table presents spreads between the average yield on total interest-earning assets and the average cost of interest-bearing liabilities for the years ended December 31, 2020, 2019, and 2018 (dollars in millions). The interest-rate spread is affected by the inclusion or exclusion of net interest income or expense associated with the Bank’s derivatives. 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 (losses) 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 22 basis points, 25 basis points, and 28 basis points for 2020, 2019, and 2018, respectively. The decrease in interest-rate spread during 2020, compared to 2019, was primarily due to the decrease in interest rate that impacted the earnings from interest-bearing assets more than the expense from interest-bearing liabilities.
 For the Years Ended December 31,
 
2020 (1)
2019 (1)
2018 (1)
 Average        
Balance
InterestYield/    
Rate
(%)
Average        
Balance
InterestYield/    
Rate
(%)
Average        
Balance
InterestYield/    
Rate
(%)
Assets
Interest-bearing deposits (2)
$3,273 $17 0.54 $4,101 $93 2.27 $4,856 $101 2.08 
Securities purchased under agreements to resell8,248 32 0.39 5,528 118 2.13 2,410 46 1.92 
Federal funds sold12,423 48 0.39 12,623 279 2.21 11,818 223 1.89 
Investment securities (3)
24,850 297 1.19 26,521 781 2.95 26,067 705 2.71 
Advances80,991 870 1.07 98,428 2,451 2.49 105,674 2,227 2.11 
Mortgage loans (4)
260 13 4.90 329 18 5.46 396 21 5.28 
Loans to other FHLBanks— 0.09 12 — 2.54 — 1.59 
Total interest-earning assets130,046 1,277 0.98 147,542 3,740 2.53 151,224 3,323 2.20 
Allowance for credit losses on mortgage loans(1)(1)(1)
Other assets1,626 1,153 1,131 
Total assets$131,671 $148,694 $152,354 
Liabilities and Capital
Interest-bearing deposits (5)
$1,982 0.23 $1,307 26 2.03 $1,067 19 1.74 
Consolidated obligations, net:
Discount notes52,397 357 0.68 59,736 1,371 2.29 60,847 1,139 1.87 
Bonds69,865 582 0.83 79,635 1,808 2.27 82,175 1,604 1.95 
Other borrowings— 2.70 — 3.51 — 4.29 
Total interest-bearing liabilities124,247 944 0.76 140,686 3,205 2.28 144,093 2,762 1.92 
Other liabilities971 799 746 
Total capital6,453 7,209 7,515 
Total liabilities and capital$131,671 $148,694 $152,354 
Net interest income and net yield on interest-earning assets$333 0.26 $535 0.36 $561 0.37 
Interest-rate spread0.22 0.25 0.28 
Average interest-earning assets to interest-bearing liabilities104.67 104.87 104.95 
____________ 
(1)For 2020 and 2019, interest amounts reported for advances and consolidated obligation bonds and discount notes include realized and unrealized gains (losses) on hedged items and derivatives in qualifying hedge relationships. Prior period interest amounts do not conform to new hedge accounting guidance adopted January 1, 2019.
(2)Includes amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative counterparties.
(3)Includes trading securities at fair value and available-for-sale securities at amortized cost.
(4)Nonperforming mortgage loans are included in average balances used to determine average rate.
(5)Includes amounts recognized for the right to return cash collateral received under master netting agreements with derivative counterparties.

39

Net interest income for the years presented was affected by changes in average balances (volume change) and changes in average rates (rate change) of interest-earning assets and interest-bearing liabilities. The following table presents the extent to which volume changes and rate changes affected the Bank’s interest income and interest expense (in millions). As presented in the table below, the overall change in net interest income during 2020, compared to 2019, was primarily due to lower interest rates.
2020 vs. 20192019 vs. 2018
 
Volume (1)
Rate (1)
Increase (Decrease)    
Volume (1)
Rate (1)
Increase (Decrease)
Increase (decrease) in interest income:
 Interest-bearing deposits$(16)$(60)$(76)$(17)$$(8)
 Securities purchased under agreements to resell40 (126)(86)66 72 
 Federal funds sold(4)(227)(231)16 40 56 
 Investment securities(46)(438)(484)13 63 76 
 Advances(376)(1,205)(1,581)(160)384 224 
Mortgage loans(3)(2)(5)(4)(3)
Total(405)(2,058)(2,463)(86)503 417 
Increase (decrease) in interest expense:
 Interest-bearing deposits10 (31)(21)
 Consolidated obligations, net:
Discount notes(151)(863)(1,014)(21)253 232 
Bonds(199)(1,027)(1,226)(51)255 204 
Total(340)(1,921)(2,261)(68)511 443 
Decrease in net interest income$(65)$(137)$(202)$(18)$(8)$(26)
____________ 
(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.
Derivatives and Hedging Activity
The following tables present the net effect of derivatives and hedging activity on the Bank’s results of operations (in millions): 
 For the Year Ended December 31, 2020
 AdvancesInvestmentsConsolidated
Obligation
Bonds
Consolidated
Obligation
Discount
Notes
Total
Net interest income:
Amortization or accretion of active hedging relationships$(56)$— $(2)$— $(58)
Net changes in fair value hedges36 — — 38 
Net interest settlements on derivatives (1)
(341)— 41 39 (261)
Other (2)
(4)— — — (4)
Total effect on net interest income$(365)$— $41 $39 $(285)
Losses on derivatives not receiving hedge accounting including net interest settlements$(2)$(4)$— $— $(6)
Net gains on trading securities (3)
— — — 
Total effect on noninterest income$(2)$(1)$— $— $(3)
____________
(1)Represents interest income or expense on derivatives included in net interest income.
(2)Amount in “Other” includes the price alignment amount on derivatives for which variation margin is characterized as daily settled contract.
(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.
40


 For the Year Ended December 31, 2019
 AdvancesInvestmentsConsolidated
Obligation
Bonds
Balance Sheet         Total
Net interest income:
Amortization or accretion of hedging activities$(28)$— $— $— $(28)
 Net changes in fair value hedges11 — (2)— 
Net interest settlements on derivatives (1)
21 — (32)— (11)
Other (2)
— — (1)— (1)
Total effect on net interest income$$— $(35)$— $(31)
Losses on derivatives not receiving hedge accounting including net interest settlements— (3)— (1)(4)
Net losses on trading securities (3)
— — — 
Total effect on noninterest income$— $— $— $(1)$(1)
____________ 
(1)Represents interest income or expense on derivatives included in net interest income.
(2)Amount in “Other” includes the price alignment amount on derivatives for which variation margin is characterized as daily settled contract.
(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.


 
For the Year Ended December 31, 2018 (1)
 AdvancesInvestmentsConsolidated
Obligation
Bonds
Consolidated
Obligation
Discount
Notes
Balance Sheet         
Other(5)
Total
Net interest income:
Amortization or accretion of hedging activities (2)
$(28)$— $(1)$— $— $— $(29)
Net interest settlements (3)
(20)— (40)(2)— — (62)
Total effect on net interest income$(48)$— $(41)$(2)$— $— $(91)
Net gains on derivatives and hedging activities:
Gains (losses) on fair value hedges$32 $— $$(1)$— $— $32 
Losses (gains) on derivatives not receiving hedge accounting including net interest settlements(1)— — — 
Price alignment amount on derivatives— — — — — (4)(4)
Total net gains (losses) on derivatives and hedging activities31 (1)(4)29 
Net losses on trading securities (4)
— (1)— — — — (1)
Total effect on noninterest income$31 $— $$(1)$$(4)$28 
____________ 
(1)Beginning in 2019, amounts reported include realized and unrealized gains (losses) on hedged items and derivatives in qualifying hedge relationships as part of net interest income. Prior period amounts do not conform to new hedge accounting guidance adopted January 1, 2019.
(2)Represents the amortization or accretion of hedging fair value adjustments for both open and closed hedge positions.
(3)Represents interest income or expense on derivatives included in net interest income.
(4)Includes only those gains or losses on trading securities or financial instruments held at fair value that have an economic derivative “assigned;” therefore, this line item may not agree to the income statement.
(5)Amount in “Other” includes the price alignment amount on derivatives for which variation margin is characterized as daily settled contract.


41

Noninterest Income (Loss)
The following table presents the components of noninterest income (loss) (dollars in millions): 
Increase (Decrease)
 For the Years Ended December 31,2020 vs. 20192019 vs. 2018
2020
2019(1)
2018(1)
AmountPercentAmountPercent
Net impairment losses recognized in earnings$— $(13)$(3)$13 100.00 $(10)(291.12)
Net gains (losses) on trading securities(1)25.94 402.12 
Net (losses) gains on derivatives and hedging activities(6)(4)29 (2)(49.13)(33)(114.53)
Net realized gains from sale of investment securities85 — — 85 — — — 
Standby letters of credit fees19 24 25 (5)(19.69)(1)(4.66)
Other11 28.34 498.69 
Total noninterest income$113 $19 $51 $94 *$(32)(63.17)
____________
(1) For 2019, amounts reported exclude realized and unrealized gains (losses) on hedged items and derivatives in qualifying hedge relationships. Prior period amounts do not conform to new hedge accounting guidance adopted January 1, 2019.
* Not meaningful.

During the first quarter of 2020, the Bank sold its entire private-label MBS portfolio. Proceeds from the sale totaled $921 million and resulted in a realized gain of $85 million.

Beginning on January 1, 2019, changes in fair value of the derivative hedging instrument and the hedged item attributable to the hedged risk for designated fair value hedges are recorded in net interest income in the same line as the earnings effect of the hedged item. Prior to January 1, 2019, for fair value hedges, any hedge ineffectiveness (which represented the amount by which the change in the fair value of the derivative differed from the change in the fair value of the hedge item) was recorded in noninterest income as net (losses) gains on derivatives and hedging activities.
Noninterest Expense and AHP Assessment
For the Years Ended December 31, Increase (Decrease)
2020201920182019 vs. 20182018 vs. 2017
Noninterest expense:
Compensation and benefits$102 $77 $93 $25 $(16)
Cost of quarters— (1)
Other operating expenses32 35 33 (3)
Total operating expenses138 116 131 22 (15)
Finance Agency and Office of Finance17 18 15 (1)
Other12 (4)
Total noninterest expense163 146 150 17 (4)
Affordable Housing Program assessment28 41 46 (13)(5)
Total noninterest expense and AHP assessment$191 $187 $196 $$(9)

The increase in total noninterest expense for 2020, compared to 2019, was primarily due to the Bank making an additional $20 million retirement plan contribution in January 2020, which was recorded in compensation and benefits expense,

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

Liquidity and Capital Resources
Liquidity is necessary to satisfy members’ borrowing needs on a timely basis, repay maturing and called consolidated obligations, and meet other obligations and operating requirements. Many members rely on the Bank as a source of standby liquidity, so the Bank attempts to be in a position to meet member funding needs on a timely basis. The Bank is required to maintain liquidity in accordance with the FHLBank Act, Finance Agency regulations, and policies established by the Bank’s management and board of directors. In addition, the Finance Agency, at times, has issued guidance and expectations to the FHLBanks related to liquidity.
42

Liquidity Reserves for Deposits. Finance Agency regulations require the Bank to hold a total amount of cash, obligations of the U.S., and advances with maturities of less than five years, in an amount not less than the amount of total member deposits. The Bank has complied with this requirement throughout 2020.
Operational Liquidity. In order to ensure adequate operational liquidity (generally, the ready cash and borrowing capacity available to meet the Bank’s intra-day needs) each day, Bank policy establishes a daily liquidity target based upon member deposit levels and current day liability maturities and asset settlements. The Bank met this liquidity requirement throughout 2020.
Additional Liquidity Guidance. The Finance Agency issued an Advisory Bulletin on FHLBank liquidity (Liquidity Guidance AB) that communicates the Finance Agency’s expectations with respect to the maintenance of sufficient liquidity to enable the Bank to provide advances and standby letters of credit for members during a sustained capital market disruption, assuming no access to capital markets and assuming renewal of all maturing advances for a period of between ten to thirty calendar days. The Finance Agency periodically issues supervisory letters that identify thresholds for measures of liquidity within the established ranges set forth in the Liquidity Guidance AB.

The Liquidity Guidance AB’s measurements of liquidity include a cash flow scenario, on a daily basis, that projects forward the number of days for which the Bank should maintain positive cash balances assuming the renewal of all maturing advances and the maintenance of a liquidity reserve for outstanding letters of credit. The measurements of liquidity also include a funding gap measurement of the difference between assets and liabilities that are scheduled to mature during a specified period, expressed as a percentage of the Bank’s total assets to reduce the liquidity risks associated with a mismatch in asset and liability maturities, including an undue reliance on short-term debt funding, which may increase debt rollover risk. The Liquidity Guidance AB permits an FHLBank to temporarily decrease its liquidity position, in a safe and sound manner, below the stated levels, as necessary for providing unanticipated extensions of advances to members or draws on letters of credit to beneficiaries.

Since 2018, the Bank has increased the amount of liquid assets it holds to meet this guidance. The Bank has met this liquidity requirement as directed by the Finance Agency throughout 2020.

Sources of Liquidity. The Bank’s principal source of liquidity is consolidated obligation debt instruments. To provide additional liquidity, the Bank also may use other short-term borrowings, such as federal funds purchased, securities sold under agreements to repurchase, and loans from other FHLBanks. The Bank’s consolidated obligations are not obligations of the United States and are not guaranteed by either the United States or any government agency, but have historically received the same credit rating as the government bond credit rating of the United States. As a result, the Bank generally has comparatively stable access to funding through a diverse investor base at relatively favorable spreads to U.S. Treasury rates. The Bank’s income and liquidity would be adversely affected if it were not able to access the capital markets at competitive rates for an extended period.

As discussed elsewhere in this Report, the COVID-19 pandemic continued to impact the financial markets during 2020. The Bank maintained continual access to funding and adapted its debt issuance to meet the needs of its members throughout 2020. The Bank relies on access to the capital markets to meet its funding needs, and the Bank expects continued sufficient access to capital markets.

The Bank’s short-term funding is generally driven by member demand and is achieved through the issuance of consolidated discount notes and short-term consolidated bonds. 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 often sought the Bank’s short-term debt as an asset of choice.

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 2020 audited financial statements for more information regarding contractual maturities of certain of the Bank’s financial assets and liabilities.
Contingency plans are in place that prioritize the allocation of liquidity resources in the event of operational disruptions at the Bank or the Office of Finance. Under the FHLBank Act, the Secretary of Treasury has the authority, at his discretion, to
43

purchase consolidated obligations up to an aggregate amount of $4.0 billion. No borrowings under this authority have been outstanding since 1977.

Off-balance Sheet Commitments
The Bank’s primary off-balance sheet commitments are as follows:
the Bank’s joint and several liability for all FHLBank consolidated obligations; and
the Bank’s outstanding commitments arising from standby letters of credit.
Should an FHLBank be unable to satisfy its payment obligation under a consolidated obligation for which it is the primary obligor, any of the other FHLBanks, including the Bank, could be called upon to repay all or any part of such payment obligation, as determined or approved by the Finance Agency. As of December 31, 2020, 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 December 31, 2020 and 2019. As of December 31, 2020, the FHLBanks had $746.8 billion in aggregate par value of consolidated obligations issued and outstanding, $84.7 billion of which was attributable to the Bank. No FHLBank has ever defaulted on its principal or interest payments under any consolidated obligation, and the Bank has never been required to make payments under any consolidated obligation as a result of the failure of another FHLBank to meet its obligations.
The Bank generally requires standby letters of credit to contain language permitting the Bank, upon annual renewal dates and prior notice to the beneficiary, to choose not to renew the standby letter of credit, which effectively terminates the standby letter of credit prior to its scheduled final expiration date. Based on the creditworthiness of the member applicant and appropriate additional fees, the Bank may issue standby letters of credit that have terms of longer than one year without annual renewals or that have no stated maturity and are subject to renewal on an annual basis.
Commitments to extend credit, including standby letters of credit, are agreements to lend. The Bank issues a standby letter of credit on behalf of a member in exchange for a fee. A member may use these standby letters of credit to facilitate a financing arrangement. Management regularly reviews its standby letter of credit pricing in light of several factors, including the Bank’s potential liquidity needs related to draws on its standby letters of credit. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to have an allowance for credit losses for these unfunded standby letters of credit as of December 31, 2020.
Refer to Note 17—Commitments and Contingencies to the Bank’s 2020 audited financial statements for more information about the Bank’s outstanding standby letters of credit.

Contractual Obligations

The following table presents the payment due dates or expiration terms of the Bank’s long-term contractual obligations and commitments as of December 31, 2020 (in millions).
One year or lessAfter one year
through three years
After three years
through five years
After five yearsTotal
Consolidated obligations bonds(1)
$43,788 $11,545 $2,809 $1,190 $59,332 
Pension and post-retirement contributions(2)
23 22 11 10 66 
Operating leases— — — 
Other— — — 
Total$43,812 $11,568 $2,820 $1,200 $59,400 
____________ 
(1) Does not include discount notes and contractual interest payments related to bonds. Total is based on contractual maturities; the actual timing of payments could be impacted by factors affecting redemption.
(2) Includes future funding contribution for the qualified pension plan and scheduled benefit payments for the nonqualified defined benefit plans.

Refer to the respective footnotes in Item 8, Financial Statements and Supplementary Data for more information on each of the contractual obligations and commitments listed in the above table.

44

Critical Accounting Policies and Estimates

The preparation of the Bank’s financial statements in accordance with GAAP requires management to make a number of judgments and assumptions that affect the Bank’s reported results and disclosures. Several of the Bank’s accounting policies are inherently subject to valuation assumptions and other subjective assessments and are more critical than others to the Bank’s results. The Bank considers fair value measurements and derivatives and hedging activities to be critical accounting policies because they require management’s subjective and complex judgments about matters that are inherently uncertain. Management bases its judgments and estimates on current market conditions and industry practices, historical experience, changes in the business environment and other factors that it believes to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions and/or conditions. 

Fair Value Measurements

The Bank carries certain assets and liabilities, including investments classified as trading and available-for-sale and all derivatives, on the balance sheet at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, in an orderly transaction between market participants at the measurement date, representing an exit price.

Fair values play an important role in the valuation of certain assets, liabilities, and hedging transactions of the Bank. Fair values are based on quoted market prices or market-based prices, if such prices are available, even in situations in which trading volume may be low when compared with prior periods. If quoted market prices or market-based prices are not available, the Bank determines fair values based on valuation models that use discounted cash flows, using market estimates of interest rates and volatility.

Valuation models and their underlying assumptions are based on the best estimates of the Bank’s management with respect to:

market indices (primarily LIBOR, SOFR, and the OIS curve);

discount rates;

prepayments;

market volatility; and

other factors, including default and loss rates.

These assumptions, particularly estimates of market indices and discount rates, may have a significant effect on the reported fair values of assets and liabilities, including derivatives, and the income and expense related thereto. The use of different assumptions, as well as changes in market conditions, could result in a materially different net income and retained earnings. The assumptions used in the models are corroborated by and independently verified against market observable data where possible.

The Bank categorizes its financial instruments carried at fair value into a three-level classification in accordance with GAAP. The valuation hierarchy is based upon the transparency (observable or unobservable) of inputs to the valuation of an asset or liability as of the measurement date. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Bank’s market assumptions. The Bank utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

Refer to Note 16Estimated Fair Values to the Bank’s 2020 audited financial statements for further discussion regarding how the Bank measures financial assets and financial liabilities at fair value.

Derivatives and Hedging Activities

General

The Bank records all derivatives at fair value on the balance sheet with changes in fair value recognized in current-period earnings. The Bank designates derivatives as either fair-value hedging instruments or non-qualifying hedging instruments for which hedge accounting is not applied. The Bank has not entered into any cash-flow hedges as of December 31, 2020 and 2019. The Bank uses derivatives in its risk management program for the following purposes:

45

conversion of a fixed rate to a variable rate;

conversion of a variable rate with a fixed component to another variable rate; and

macro hedging of balance sheet risks.

To qualify for hedge accounting, the Bank documents the following concurrently with the execution of each hedging relationship:

the hedging strategy;

identification of the hedging instrument and the hedged item;

determination of the appropriate accounting designation;

the method used for the determination of effectiveness for transactions qualifying for hedge accounting; and

the method for recording ineffectiveness for hedging relationships.

The Bank also evaluates each debt issuance, advance made, and financial instrument purchased to determine whether the cash item contains embedded derivatives that meet the criteria for bifurcation. If, after evaluation, it is determined that an embedded derivative must be bifurcated, the Bank will measure the fair value of the embedded derivative.

Assessment of Hedge Effectiveness

An assessment must be made to determine the effectiveness of qualifying hedging relationships. To make such an assessment, the Bank either uses (1) the short-cut method; or (2) the long-haul method.

If the hedging instrument is a swap and meets specific criteria, the hedging relationship may qualify for the short-cut method of assessing effectiveness. The short-cut method allows for an assumption of no ineffectiveness, which means that the change in the fair value of the hedged item is assumed to be equal and offsetting to the change in fair value of the hedging instrument. For periods beginning after May 31, 2005, the Bank determined that it would no longer apply the short-cut method to new hedging relationships.

The long-haul method of effectiveness is used to assess effectiveness for hedging relationships that qualify for hedge accounting but do not meet the criteria for the use of the short-cut method. The long-haul method requires separate valuations of both the hedged item and the hedging instrument. If the hedging relationship is determined to be highly effective, the change in fair value of the hedged item related to the designated risk is recognized in earnings together and in the same income statement line item with the change in fair value of the hedging instrument. If the hedging relationship is determined not to be highly effective, hedge accounting will either not be allowed or cease at that point. The Bank performs effectiveness testing on a monthly basis and uses statistical regression analysis techniques to determine whether a long-haul hedging relationship is highly effective.

Accounting for Ineffectiveness and Hedge De-designation

The Bank accounts for any ineffectiveness for all long-haul fair-value hedges using the dollar offset method. In the case of non-qualifying hedges that do not qualify for hedge accounting, the Bank reports only the change in the fair value of the derivative. Both the net interest on the derivative and the fair value adjustments of a non-qualifying hedge are recorded in noninterest income (loss) as “Net (losses) gains on derivatives and hedging activities” on the Statements of Income. Beginning January 1, 2019, the Bank adopted new hedge accounting guidance, which, among other things, impacts the presentation of gains (losses) on derivatives and hedging activities for qualifying hedges. Changes in the fair value of a derivative that are effective as, and that are designated and qualify as, a fair-value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (including changes that reflect losses or gains on firm commitments), are recorded in net interest income in the same line as the earnings effect of the hedged item. Prior to January 1, 2019, any hedge ineffectiveness (which represented the amount by which the change in the fair value of the derivative differed from the change in the fair value of the hedged item) was recorded in noninterest income (loss) as “Net (losses) gains on derivatives and hedging activities” on the Statements of Income.

46

The Bank may discontinue hedge accounting for a hedging transaction (de-designation) if it fails effectiveness testing or for other asset-liability-management reasons. The Bank also treats modifications to hedged items as a discontinuance of a hedging relationship. When a hedging relationship is discontinued, the Bank will cease marking the hedged item to fair value and will amortize the cumulative basis adjustment resulting from hedge accounting. The Bank reports related amortization as interest income or expense over the remaining life of the associated hedged item. The associated derivative will continue to be marked to fair value through earnings until it matures or is terminated.

Recently Issued and Adopted Accounting Guidance
See Note 3Recently Issued and Adopted Accounting Guidance to the Bank’s 2020 audited financial statements for a discussion of recently issued and adopted accounting guidance.

Legislative and Regulatory Developments

The legislative and regulatory environment in which the Bank and its members operate continues to evolve as a result of regulations enacted pursuant to the Housing Act and the Dodd-Frank Act. The Bank’s business operations, funding costs, rights, obligations, and/or the environment in which the Bank carries out its housing finance and community lending mission are likely to continue to be significantly impacted by these changes. Significant regulatory actions and developments for the period covered by this report are summarized below.

Finance Agency Final Rule on FHLBank Housing Goals Amendments. On June 25, 2020, the Finance Agency published a final rule, effective August 24, 2020, amending the FHLBank housing goals regulation. Enforcement of the final rule will phase in over three years. The final rule replaces the four existing retrospective housing goals with a single prospective mortgage purchase housing goal target in which 20 percent of Acquired Member Asset (AMA) mortgages purchased in a year must be comprised of loans to low-income or very low-income families, or to families in low-income areas. The final rule also establishes a separate small member participation housing goal with a target level in which 50 percent of the members selling AMA loans in a calendar year must be small members. The final rule provides that an FHLBank may request Finance Agency approval of alternative target levels for either or both of the goals. The final rule also establishes that housing goals apply to each FHLBank that acquires any AMA mortgages during a year, eliminating the existing $2.5 billion volume threshold that previously triggered the application of housing goals for each FHLBank.

The Bank does not expect these changes to have a material effect on the Bank’s financial condition or results of operations.

Finance Agency Final Rule on Stress Testing. On March 24, 2020, the Finance Agency published a final rule, effective upon issuance, to amend its stress testing rule, consistent with section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (EGRRCPA). The final rule (i) raises the minimum threshold for entities regulated by the Finance Agency to conduct periodic stress tests from $10 billion to $250 billion or more in total consolidated assets; (ii) removes the requirements for FHLBanks to conduct stress testing; and (iii) removes the adverse scenario from the list of required scenarios. FHLBanks are currently excluded from this regulation because no FHLBank has total consolidated assets over $250 billion, but the Finance Agency reserved its discretion to require an FHLBank with total consolidated assets below the $250 billion threshold to conduct stress testing. These amendments align the Finance Agency’s stress testing rule with rules adopted by other financial institution regulators that implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) stress testing requirements, as amended by EGRRCPA.

This rule eliminates these stress testing requirements for the Bank, unless the Finance Agency exercises its discretion to require stress testing in the future.

Margin and Capital Requirements for Covered Swap Entities. On July 1, 2020, the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), the Farm Credit Administration, and the Finance Agency (collectively, Prudential Banking Regulators) jointly published a final rule, effective August 31, 2020, amending regulations that established minimum margin and capital requirements for uncleared swaps for covered swap entities under the jurisdiction of the Prudential Banking Regulators (Prudential Margin Rules). In addition to other changes, the final rule: (1) allows swaps entered into by a covered swap entity prior to an applicable compliance date to retain their legacy status and not become subject to the Prudential Margin Rules in the event that the legacy swaps are amended to replace an interbank offered rate (such as LIBOR) or other discontinued rate, or due to other technical amendments, notional reductions or portfolio compression exercises; (2) introduces a new Phase 6 compliance date for initial margin requirements for covered swap entities and their counterparties with an average daily aggregate notional amount (AANA) of uncleared swaps of at least $8 billion; and (3) clarifies that initial margin (IM) trading documentation does not need to be executed prior to the parties becoming obligated to exchange IM.

47

On the same date, the Prudential Banking Regulators published an interim final rule, effective September 1, 2020, extending the IM compliance date for Phase 6 counterparties to September 1, 2022. On November 9, 2020, the Commodity Futures Trading Commission (CFTC) published a final rule extending the IM compliance date for Phase 6 counterparties to September 1, 2022, thereby aligning with the Prudential Banking Regulators.

Further, on January 5, 2021, the CFTC published a final rule, effective February 4, 2021, that primarily amends the minimum margin and capital requirements for uncleared swaps under the jurisdiction of the CFTC (CFTC Margin Rules) by requiring covered entities to use a revised AANA calculation starting on September 1, 2022. The amendments, among other things, require entities subject to the CFTC’s jurisdiction to calculate the AANA for uncleared swaps during March, April and May of the current year, based on an average of month-end dates, as opposed to the previous requirement which required the calculation of AANA during June, July and August of the prior year, based on daily calculations. Parties would continue to be expected to exchange IM based on the AANA totals as of September 1 of the current year. These amendments align with the recommendation of the Basel Committee on Banking Supervision and Board of the International Organization of Securities Commissions. Separately, on January 25, 2021, the CFTC published a final rule, effective February 24, 2021, that amends the CFTC Margin Rules to permit, among other changes, covered swap entities to maintain separate minimum transfer amounts (MTA) for IM and variation margin for each swap counterparty, provided the combined MTA does not exceed $500,000.

The Bank does not expect these rules to have a material effect on the Bank’s financial condition or results of operations.

FDIC Brokered Deposits Restrictions. On January 22, 2021, the FDIC published a final rule, effective April 1, 2021, that amends its brokered deposits regulations that apply to less than well-capitalized insured depository institutions. The FDIC stated that the amendments are intended to modernize and clarify the FDIC’s brokered deposit regulations and they establish a new framework for analyzing the deposit broker definition, which determines whether deposits placed through deposit placement arrangements qualify as brokered deposits. These deposit placement arrangements include those between insured depository institutions and third parties, such as financial technology companies, for a variety of business purposes, including access to deposits. The amendments to the FDIC’s brokered deposit regulations, among other things, clarify what it means to be engaged in the business of facilitating the placement of deposits and expand the scope of the primary purpose exception. The rule amendments are expected to have the effect of narrowing the definition of deposit broker and excluding more deposits from treatment as brokered deposits. The amendments also establish an application and reporting process with respect to the primary purpose exception for businesses that do not meet one of several bright-line tests, and they affirm the FDIC’s position that the brokering of certificates of deposit constitutes deposit brokering.

This rule may have an effect on member demand for certain advances, but the Bank cannot predict the extent of the impact. The Bank does not expect this rule to have a material effect on the Bank’s financial condition or results of operations.

Finance Agency Advisory Bulletin 2020-01 Federal Home Loan Bank Risk Management of AMA Risk Management. On January 31, 2020, the Finance Agency released guidance on risk management of AMA. The guidance communicates the Finance Agency’s expectations with respect to an FHLBank’s funding of its members through the purchase of eligible mortgage loans and includes expectations that an FHLBank will have board-established limits on AMA portfolios and management-established thresholds to serve as monitoring tools to manage AMA-related risk exposure. The guidance provides that the board of an FHLBank should ensure that the bank serves as a liquidity source for members, and an FHLBank should ensure that its portfolio limits do not result in the FHLBank’s acquisition of mortgages from smaller members being “crowded out” by the acquisition of mortgages from larger members. The advisory bulletin contains the expectation that the board of an FHLBank should set limits on the size and growth of portfolios and on acquisitions from a single participating financial institution. In addition, the guidance provides that the board of an FHLBank should consider concentration risk in the areas of geographic area, high-balance loans, and in third-party loan originations.

The Bank does not expect this rule to have a material effect on the Bank’s financial condition or results of operations.

LIBOR Transition

Finance Agency Supervisory Letter - Planning for LIBOR Phase-Out. On September 27, 2019, the Finance Agency issued a Supervisory Letter (LIBOR Supervisory Letter) to the FHLBanks that the Finance Agency stated is designed to ensure the FHLBanks will be able to identify and prudently manage the risks associated with the termination of LIBOR in a safe and sound manner. The LIBOR Supervisory Letter provided that the FHLBanks should, by March 31, 2020, cease entering into new LIBOR referenced financial assets, liabilities, and derivatives with maturities beyond December 31, 2021 for all product types except investments. With respect to investments, the FHLBanks were required, by December 31, 2019, to stop purchasing investments that reference LIBOR and mature after December 31, 2021. These phase-out dates did not apply to collateral accepted by the FHLBanks. The LIBOR Supervisory Letter also directed the FHLBanks to update their pledged collateral
48

certification reporting requirements by March 31, 2020, in an effort to encourage members to distinguish LIBOR-linked collateral maturing after December 31, 2021.

As a result of the market volatility experienced during 2020 due in part by the COVID-19 pandemic, the Finance Agency extended the FHLBanks’ authority to enter into LIBOR-based instruments that mature after December 31, 2021 from March 31, 2020 to June 30, 2020, except for investments and option embedded products. In addition, the Finance Agency extended the requirement to update pledged collateral certification reporting requirements from March 31, 2020, to September 30, 2020.

The Bank continues to evaluate the potential impact of the LIBOR Supervisory Letter and the related subsequent guidance on the Bank’s financial condition and results of operations, but the Bank has begun changing its investment and hedging strategy and, may experience lower overall demand or increased costs for its advances, which in turn may negatively impact the future composition of the Bank’s balance sheet, capital stock levels, core mission asset ratio, net income and dividend.

LIBOR Transition – ISDA 2020 IBOR Fallbacks Protocol and Supplement to the 2006 ISDA Definitions. On October 23, 2020, the International Swaps and Derivatives Association, Inc. (ISDA), published a Supplement to the 2006 ISDA Definitions (Supplement) and the ISDA 2020 IBOR Fallbacks Protocol (Protocol). Both the Supplement and the Protocol took effect on January 25, 2021. On that date, all legacy bilateral derivative transactions subject to Protocol-covered agreements (including ISDA agreements) that incorporate certain covered ISDA definitional booklets and reference a covered Interbank Offered Rate (IBOR), including U.S. Dollar LIBOR, were effectively amended to apply the new ISDA-recommended IBOR fallbacks in the event of the relevant IBOR’s cessation. Both the Bank and its counterparty must have adhered to the Protocol in order to effectively amend legacy derivative contracts, otherwise the parties must bilaterally amend legacy covered agreements (including ISDA agreements) to address LIBOR fallbacks. The Protocol will remain open for adherence after the effective date. As of January 25, 2021, all new derivative contracts are subject to the relevant IBOR fallbacks set forth in the Supplement.

On October 21, 2020, the Finance Agency issued a Supervisory Letter to the FHLBanks that required each FHLBank to adhere to the Protocol by December 31, 2020, and to the extent necessary, to amend any bilateral agreements regarding the adoption of the Protocol by December 15, 2020.

The Bank adhered to the Protocol as of October 23, 2020, and all of the Bank’s counterparties have adhered to the Protocol. For a discussion of the potential impact of the LIBOR transition, refer to Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Transition of LIBOR to an Alternative Reference Rate and Item 1A. Risk Factors.

COVID-19 Developments

Finance Agency Supervisory Letter – Paycheck Protection Program (PPP) Loans as Collateral for FHLBank Advances. On April 23, 2020, the Finance Agency issued a Supervisory Letter (PPP Supervisory Letter) permitting the FHLBanks to accept PPP loans as collateral for advances as “Agency Securities,” given the Small Business Administration’s (SBA) 100 percent guarantee of the unpaid principal balance. On April 20, 2020, the SBA published its third interim final rule related to PPP loans, which explicitly waived certain regulatory requirements that must be satisfied before a member could pledge PPP loans to the FHLBanks as collateral. The PPP Supervisory Letter establishes a series of conditions under which the FHLBanks may accept PPP loans as collateral, which conditions focus on the financial condition of members, collateral discounts, and pledge dollar limits.

On December 27, 2020, the President signed into law an extension of the PPP until March 31, 2021. The April 23, 2020 Supervisory Letter from the Finance Agency allowing FHLBanks to accept PPP loans as collateral remains in effect.

CARES Act

The CARES Act was signed into law on March 27, 2020. The $2.2 trillion package was the largest stimulus bill in U.S. history. The CARES Act is in addition to previous relief legislation passed by Congress in March 2020. The legislation provides the following:

assistance to businesses, states, and municipalities;
creates a loan program for small businesses, non-profits and physician practices that can be forgiven through employee retention incentives;
provides the Treasury Secretary authority to make loans or loan guarantees to states, municipalities, and eligible businesses and loosens some regulations imposed through the Dodd-Frank Act;
direct payments to eligible taxpayers and their families;
expands eligibility for unemployment insurance and payment amounts; and
includes mortgage forbearance provisions and a foreclosure moratorium.
49


Funding for the PPP, which was created by the CARES Act, was increased with the enactment of subsequent laws, most recently by the Consolidated Appropriations Act, 2021, on December 27, 2020. While some provisions of the CARES Act have expired, others have been extended by regulatory and legislative action. Additional phases of the CARES Act or other COVID-19 pandemic relief legislation may be enacted by Congress. The Bank continue to evaluate the potential impact of such legislation on its business, including its continued impact to the U.S. economy; impacts to mortgages held or serviced by the Bank’s members and that the Bank accept as collateral; and the impacts on the Bank’s MPP and MPF program.

Additional COVD-19 Presidential, Legislative and Regulatory Developments. In light of the COVID-19 pandemic, President Biden (and before him, President Trump), through executive orders, governmental agencies, including the SEC, OCC, Federal Reserve, FDIC, National Credit Union Administration, CFTC and the Finance Agency, as well as state governments and agencies, have taken, and may continue to take, actions to provide various forms of relief from, and guidance regarding, the financial, operational, credit, market, and other effects of the pandemic, some of which may have a direct or indirect impact on us or the Bank’s members. Many of these actions are temporary in nature. The Bank continues to monitor these actions and guidance as they evolve and to evaluate their potential impact on the Bank.





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

The Bank’s board of directors and management recognize that risks are inherent to the Bank’s business model and that the process of establishing a risk appetite does not imply that the Bank seeks to mitigate or eliminate all risk. By defining and managing to a specific risk appetite, the board of directors and management ensure that there is a common understanding of the Bank’s desired risk profile, which enhances strategic and tactical decisions. Additionally, the Bank aspires to (1) sustain a corporate culture of transparency, integrity, and adherence to legal and ethical obligations; and (2) achieve and exceed best practices in governance, ethics, and compliance.
The Bank’s board of directors and management have established a risk appetite statement and risk metrics for controlling and escalating actions based on the following eight continuing objectives in 2020 that represent the foundation of the Bank’s strategic and tactical planning:

Capital Adequacy - maintain adequate levels of capital components (retained earnings and capital stock) that protect against the risks inherent on the Bank’s balance sheet and provide sufficient resiliency to withstand potential stressed losses.

Market Risk/Earnings - maintain an adequate ROE spread to average three-month LIBOR, while providing attractive funding for advance products, consistent payment of dividends, reliable access to funding, and maintenance of retained earnings in excess of stressed retained earnings targets within a conservative risk management framework.

Liquidity Risk - maintain sufficient liquidity and funding sources to allow the Bank to meet expected and unexpected obligations.

Credit and Concentration Risk - avoid credit losses by managing credit and collateral risk exposures within acceptable parameters. Achieve this objective through data-driven analysis (and when appropriate, perform shareholder-specific analysis), monitoring, and verification, including new collateral policy expansions to ensure appropriate controls and that monitoring is consistent with managing existing credit and collateral risk exposures. Monitor through enhanced reporting any elevated risk concentrations, and when appropriate, manage and mitigate the increased risk.

Governance/Compliance/Legal - compliance with all applicable laws and regulations and manage other legal exposures.

Mission/Business Model - (1) deliver financial services and consistent access to affordable funds that are the size and structure shareholders desire, helping them to manage risk and extend credit in their communities, while achieving the
50

Bank’s affordable housing mission goals; and (2) provide value through the consistent payment of dividends and the repurchasing of excess stock.

Operational Risk - (1) manage the key risks associated with operational availability of critical systems and services, the integrity and security of the Bank’s information, and the alignment of technology investment with key business objectives through enterprise-wide risk management practices and governance based on industry standards; (2) deliver an employee value proposition that allows the Bank to build, retain, engage, and develop staff to meet the evolving needs of the Bank’s key stakeholders and effectively manage enterprise-wide risks; and (3) manage the key risks associated with cyber security threats.

Reputation - recognize the importance of and advance positive awareness and perception of the Bank and its mission among key external stakeholders impacting the Bank’s ability to achieve its mission.

The board and management recognize that risk and risk producing events are dynamic and constantly being presented. Accordingly, the Bank believes that reporting, analyzing, and mitigating risks are paramount to successful corporate governance.

The RMP also governs the Bank’s approach to managing the above risks. The Bank’s board of directors reviews the RMP annually and approves amendments to the RMP from time to time as necessary. To promote compliance with the RMP, the Bank has established internal management committees to provide oversight of these risks. The Bank produces a comprehensive risk assessment report on an annual basis that is reviewed by the board of directors. In addition to the established risk appetite and the RMP, the Bank is also subject to Finance Agency regulations and policies regarding risk management.

Transition of LIBOR to an Alternative Reference Rate

In July 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced that after 2021 it will no longer persuade or compel banks to submit rates for the calculation of LIBOR. In response, the Federal Reserve Board and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee to identify a set of alternative reference interest rates for possible use as market benchmarks. This committee has proposed SOFR as its recommended alternative to U.S. dollar LIBOR, and the Federal Reserve Bank of New York began publishing SOFR rates in the second quarter of 2018. SOFR is based on a broad segment of the overnight Treasury repurchase market and is intended to be a measure of the cost of borrowing cash overnight collateralized by Treasury securities.

Certain of the Bank’s assets and liabilities, and certain collateral pledged to the Bank, are indexed to LIBOR, with exposure extending past December 31, 2021. The Bank is currently evaluating and planning for the eventual replacement of the LIBOR benchmark interest rate, including the probability of SOFR as the dominant replacement. In general, the transition away from LIBOR may result in increased market risk, credit risk, operational risk and business risk for the Bank. The Bank has adopted a LIBOR transition plan, which outlines the Bank’s transition activities, including LIBOR exposure evaluation, risk management, legal, operational, systems and operations, shareholder and external communication and education, and other aspects of planning. The Bank has a LIBOR Steering Committee, which oversees the Bank’s transition away from LIBOR in accordance with the strategies and requirements put forth by senior management and regulatory guidance, providing periodic reports to the Bank’s executive management committee and board of directors.

As of December 31, 2019, the Bank ceased purchasing assets tied to LIBOR with a contractual maturity beyond December 31, 2021. In addition, beginning June 30, 2020, the Bank ceased entering into new LIBOR-based transactions involving advances, debt, derivatives, or other products with maturities beyond December 31, 2021. In preparation for this change and to help manage balance sheet exposure to LIBOR-indexed assets and liabilities with maturities beyond 2021, the Bank has begun updating its systems, participating in the issuance of SOFR-indexed consolidated bonds, issuing SOFR-linked advances, and swapping certain financial instruments to OIS and SOFR as an alternative interest rate hedging strategy for certain financial instruments. The pace of transition, however, is dependent on external factors, including market developments and demand. The Bank closely monitors and participates in industry activity related to LIBOR transition, including those of the Alternate Reference Rate Committee, the International Swaps and Derivatives Association (ISDA), and the derivative Clearinghouses. In October 2020, the Bank participated in the LCH Ltd. and CME Clearinghouses’ transition to SOFR discounting for cleared derivatives.

As part of the Bank’s risk LIBOR exposure evaluation and risk management, the Bank has developed an inventory of financial instruments impacted by the LIBOR transition and has worked to identify and update contracts that may require adding or adjusting the fallback language. The Bank has added or adjusted fallback language in advance confirmations, consolidated obligations and its credit and collateral policy to include fallback language addressing the discontinuation of LIBOR as a
51

benchmark rate. The Bank continues to monitor the market-wide efforts to address fallback language related to derivatives and cash products. On October 23, 2020, ISDA launched the Supplement to the 2006 ISDA Definitions and the ISDA 2020 IBOR Fallbacks Protocol. The supplement and the amendments made by the protocol took effect on January 25, 2021. On that date, all legacy bilateral derivative transactions subject to protocol-covered agreements (including ISDA agreements) that incorporate certain covered ISDA definitional booklets and reference covered IBORs, including US Dollar LIBOR, were amended to apply the new ISDA-recommended IBOR fallbacks in the event of the relevant IBOR’s cessation. Both the Bank and its relevant counterparty must have adhered to the protocol in order to effectively amend legacy derivative contracts, otherwise the parties must bilaterally agree to include amended legacy contracts to address LIBOR fallbacks. The Bank has adhered to the protocol and as of the date of this Report, all of the Bank’s counterparties have also adhered to the protocol, covering all of the Bank’s portfolio of LIBOR-based uncleared derivatives that terminate after December 31, 2021.

The Bank updated its pledged collateral certification reporting requirements as of September 30, 2020 so that members may distinguish LIBOR-linked collateral maturing past December 31, 2021. The Bank intends to utilize this information in connection with its LIBOR exposure evaluation and risk management.

On December 4, 2020, the administrator of LIBOR issued a consultation on its intention to continue the publication of U.S. LIBOR rates for some tenors until June 30, 2023. The Bank continues to monitor these developments and will evaluate any changes to its transition planning.

The Bank has LIBOR exposure related to advances, investment securities, consolidated obligation bonds, and derivatives. The following tables present the Bank’s LIBOR-indexed variable-rate financial instruments and interest-rate swaps with LIBOR exposure (in millions).

As of December 31, 2020
Due/Terminates before orDue/Terminates after
 on December 31, 2021December 31, 2021Total
Assets with LIBOR exposure
Advance by redemption term (principal amount) (1)
$5,349 $1,742 $7,091 
Investment securities by contractual maturity (principal amount)
   Non-mortgage-backed securities1609001,060
   Mortgage-backed securities1915,61115,630
Total investment securities17916,51116,690
LIBOR-indexed interest-rate swaps notional amount (receive leg)
   Cleared1,6478,2539,900
   Uncleared993,9304,029
Total interest-rate swaps1,74612,18313,929
Total principal/notional amount$7,274 $30,436 $37,710 
Liabilities with LIBOR exposure
Consolidated bonds by contractual maturity (principal amount)$10,575 $— $10,575 
LIBOR-indexed interest-rate swaps notional amount (pay leg)
   Cleared520263783
   Uncleared173113286
Total interest-rate swaps6933761,069
Total principal/notional amount$11,268 $376 $11,644 
____________
(1) Includes all fixed-rate advances that have cap/floor optionality and excludes convertible advances.
52

As of December 31, 2019
Due/Terminates before orDue/Terminates after
on December 31, 2021December 31, 2021Total
Assets with LIBOR exposure
Advance by redemption term (principal amount) (1)
$24,828 $2,334 $27,162 
Investment securities by contractual maturity (principal amount)
   Non-mortgage-backed securities1,312 900 2,212 
   Mortgage-backed securities20 20,631 20,651 
Total investment securities1,332 21,531 22,863 
LIBOR-indexed interest-rate swaps notional amount (receive leg)
   Cleared9,968 11,408 21,376 
   Uncleared265 4,901 5,166 
Total interest-rate swaps10,233 16,309 26,542 
Total principal/notional amount$36,393 $40,174 $76,567 
Liabilities with LIBOR exposure
Consolidated bonds by contractual maturity (principal amount)$42,820 $— $42,820 
LIBOR-indexed interest-rate swaps notional amount (pay leg)
   Cleared12,973 263 13,236 
   Uncleared11,578 1,980 13,558 
Total interest-rate swaps24,551 2,243 26,794 
Total principal/notional amount$67,371 $2,243 $69,614 
____________
(1) Includes all fixed-rate advances that have cap/floor optionality and excludes convertible advances.
In addition to LIBOR-indexed interest-rate swaps included in the above tables, the Bank has interest-rate caps and floors with LIBOR exposure. The following table presents the notional amount of caps and floors with LIBOR exposure (in millions).

As of December 31,
20202019
Terminates before or on December 31, 2021$3,000 $3,084 
Terminates after December 31, 20214,000 4,000 
Total (1)
$7,000 $7,084 

____________ 
(1) The estimated net fair value of these interest-rate caps and floors was less than $1 million as of December 31, 2020 and 2019.

Market Risk

General

The Bank is exposed to market risk because 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 its interest-earning assets and interest-bearing liabilities, the interest-rate risk component of market risk has the greatest impact on the Bank’s financial condition and results of operations.

Interest-rate risk represents the risk that the aggregate market value or estimated fair value of the Bank’s asset, liability, and derivative portfolios will decline as a result of interest-rate volatility or that net earnings will be affected significantly by interest-rate changes. Interest-rate risk can occur in a variety of forms including repricing risk, yield-curve risk, basis risk, and option risk. The Bank faces repricing risk whenever an asset and a liability reprice at different times and with different rates, resulting in interest-margin sensitivity to changes in market interest rates. Yield-curve risk reflects the possibility that changes in the shape of the yield curve may affect the market value of the Bank’s assets and liabilities differently because a liability used to fund an asset may be short-term, while the asset is long-term, or vice versa. Basis risk occurs when yields on assets and
53

costs on liabilities are based on different bases, such as LIBOR or SOFR, versus the Bank’s cost of funds. Different bases can move at different rates or in different directions, which can cause erratic changes in revenues and expenses. Option risk is presented by the optionality that is embedded in some assets and liabilities. Mortgage assets represent the primary source of option risk.

The primary goal of the Bank’s interest-rate risk measurement and management efforts is to control the above risks through prudent asset-liability management strategies so that the Bank may provide members with dividends that are consistently competitive with existing market interest rates on alternative short-term and variable-rate investments. The Bank attempts to manage interest-rate risk exposure by using appropriate funding instruments and hedging strategies. Hedging may occur at the micro level, for one or more specifically identified transactions, or at the macro level. Management evaluates the Bank’s macro hedge position and funding strategies on a daily basis and makes adjustments as necessary.

The Bank measures its potential market risk exposure in a number of ways. These include asset, liability, and equity duration analyses; and earnings forecast scenario analyses that reflect repricing gaps. The Bank establishes tolerance limits for these financial metrics and uses internal models to measure each of these risk exposures at least monthly.

Use of Derivatives

The Bank enters into derivatives to reduce the interest-rate risk exposure inherent in otherwise unhedged assets and funding positions and attempts to do so in the most cost-efficient manner. The Bank does not engage in speculative trading of these instruments. The Bank’s derivative positions may include interest-rate swaps, options, swaptions, interest-rate cap and floor agreements, and forward contracts. These derivatives are used to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve risk-management objectives. Within its risk management strategy, the Bank uses derivative financial instruments in the following two ways:

As a fair-value hedge of an underlying financial instrument or a firm commitment. For example, the Bank uses derivatives to reduce the interest-rate net sensitivity of consolidated obligations, advances, and investments by, in effect, converting them to a short-term interest rate. The Bank also uses derivatives to manage embedded options in assets and liabilities and to hedge the market value of existing assets and liabilities. The Bank’s management reevaluates its hedging strategies from time to time and may change the hedging techniques used or adopt new strategies as deemed prudent.

As an asset-liability management tool, for which hedge accounting is not applied (non-qualifying hedge). The Bank may enter into derivatives that do not qualify for hedge accounting. As a result, the Bank recognizes the change in fair value and interest income or expense of these derivatives in the “Noninterest income (loss)” section of the Statements of Income as “Net (losses) gains on derivatives and hedging activities” with no offsetting fair-value adjustments of the hedged asset, liability, or firm commitment. Consequently, these transactions can introduce earnings volatility.

54

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.
55

As of December 31,
20202019
Hedged Item / Hedging InstrumentHedging ObjectiveHedge
Accounting
Designation
Notional AmountNotional 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
$2,306 $2,382 
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
22,501 26,442 
Pay fixed with embedded features, receive variable interest-rate swap (non-callable)Reduces interest-rate sensitivity and repricing gaps by converting the advance’s fixed rate to a variable-rate index and/or offsets embedded option risk in the advance.Fair value
hedges
558 260 
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
41 43 
Pay variable with embedded features, receive variable interest-rate swap (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
— 650 
Total25,406 29,777 
Investments
Pay fixed, receive variable interest-rate swapConverts 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
1,395 14,033 
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
85 12,240 
Total1,480 26,273 
Consolidated Obligation Discount Notes
Receive fixed, pay variable interest-rate swapConverts the discount note’s fixed rate to a variable-rate index.Fair value
hedges
1,115 17,587 
Balance Sheet
Pay fixed, receive variable interest-rate swapConverts the asset or liability fixed rate to a variable-rate index.Non-qualifying
hedges
20 100 
Pay variable, receive variable interest rate swapInterest-rate swap not linked to specific assets, liabilities or forecasted transactions.Non-qualifying hedges20 — 
Interest-rate cap or floorProtects against changes in income of certain assets due to changes in interest rates.Non-qualifying hedges7,000 7,000 
Total7,040 7,100 
Intermediary Positions and Other
Pay fixed, receive variable interest-rate swap, and receive fixed, pay variable interest-rate swapTo offset interest-rate swaps executed with members by executing interest-rate swaps with derivatives counterparties.Non-qualifying
hedges
25 323 
Interest-rate cap or floorTo offset interest-rate caps or floors executed with members by executing interest-rate caps or floors with derivatives counterparties.Non-qualifying hedges— 83 
Total25 406 
Total notional amount$35,122 $81,199 
56


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.

Effective duration of equity aggregates the estimated sensitivity of market value for each of the Bank’s financial assets and liabilities to changes in interest rates. Effective duration of equity is computed by taking the market value-weighted effective duration of assets, less the market value-weighted effective duration of liabilities, and dividing the remainder by the market value of equity. Market value of equity is not indicative of the market value of the Bank as a going concern or the value of the Bank in a liquidation scenario. An effective duration gap is the measure of the difference between the estimated effective durations of portfolio assets and liabilities and summarizes the extent to which the estimated cash flows for assets and liabilities are matched, on average, over time and across interest-rate scenarios.

A positive effective duration of equity or a positive effective duration gap results when the effective duration of assets is greater than the effective duration of liabilities. A negative effective duration of equity or a negative effective duration gap results when the effective duration of assets is less than the effective duration of liabilities. A positive effective duration of equity or a positive effective duration gap generally indicates that the Bank has some exposure to interest-rate risk in a rising rate environment, and a negative effective duration of equity or a negative effective duration gap generally indicates some exposure to interest-rate risk in a declining interest-rate environment. Higher effective duration numbers, whether positive or negative, indicate greater volatility of market value of equity in response to changing interest rates.

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

The following table presents the Bank’s effective duration exposure measurements as calculated in accordance with Bank policy (in years).
As of December 31,
 20202019
 
Down 200 Basis
 Points 
(1)    
Base CaseUp 200 Basis Points    
Down 200 Basis
 Points 
(1)    
Base CaseUp 200 Basis Points    
Assets0.67 0.52 0.48 0.23 0.21 0.28 
Liabilities0.34 0.30 0.27 0.21 0.20 0.18 
Equity5.32 4.10 3.99 0.53 0.37 2.38 
Effective duration gap0.33 0.22 0.21 0.02 0.01 0.10 
___________ 
(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 “constrained shock” scenario may not represent current expectations.

The main factor that impacted the increase in the Bank’s duration of equity during 2020 was the Bank’s MBS portfolio. The Bank’s MBS portfolio is primarily floating rate, but has embedded floors which prevent the coupon payments from going negative in a negative interest rate environment. In a negative rate environment, the embedded floors would cause the variable-rate MBS to function as fixed-rate instruments. As a result, of the embedded floors and the increased possibility of negative market interest rates and the market volatility, the duration of equity increased.

The Bank uses both sophisticated computer models and an experienced professional staff to measure the amount of interest-rate risk in the balance sheet, thus allowing management to monitor the risk against policy and regulatory limits. Management regularly reviews the major assumptions and methodologies used in the Bank’s models and will make adjustments to the Bank’s assumptions and methodologies in response to rapid changes in economic conditions.

The prepayment risk in both advances and investment assets can significantly affect the Bank’s effective duration of equity and effective duration gap. Current regulations require the Bank to mitigate advance prepayment risk by establishing prepayment fees that make the Bank financially indifferent to a borrower’s decision to prepay an advance that carries a rate above current market rates unless the advance contains explicit par value prepayment options. The Bank’s prepayment fees for advances
57

without embedded options are generally based on the present value of the difference between the rate on the prepaid advance and the current rate on an advance with an identical maturity date. Prepayment fees for advances that contain embedded options are generally based on the inverse of the market value of the derivative instrument that the Bank used to hedge the advance.
The prepayment options embedded in mortgage loan and mortgage security assets may shorten or lengthen both the actual and expected cash flows when interest rates change. Current Finance Agency policies limit this source of interest-rate risk by limiting the types of MBS the Bank may own to those with defined estimated average life changes under specific interest-rate shock scenarios. These limits do not apply to mortgage loans purchased from members. The Bank typically hedges mortgage prepayment uncertainty by using callable debt as a funding source and by using interest-rate cap, floor, and swaption transactions. The Bank also uses derivatives to reduce effective duration and option risks for investment securities other than MBS. Effective duration and option risk exposures are measured on a regular basis for all investment assets under alternative rate scenarios.

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 16—Estimated Fair Values to the Bank’s 2020 audited 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 December 31,
 20202019
 
Down 200 Basis
 Points 
(1)    
Base CaseUp 200 Basis Points    
Down 200 Basis
 Points 
(1)    
Base CaseUp 200 Basis Points    
Assets$91,612 $90,868 $90,046 $149,996 $148,896 $148,146 
Liabilities85,617 85,482 84,996 142,301 141,858 141,313 
Equity5,995 5,386 5,050 7,695 7,038 6,833 
________________ 
(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 “constrained shock” scenario may not represent current expectations.

Under the Bank’s RMP, the Bank’s market value of equity must not decline by more than 15 percent, assuming an immediate, parallel, and sustained interest-rate shock of 200 basis points in either direction.

If effective duration of equity or market value of equity is approaching the boundaries of the Bank’s RMP ranges, management will initiate remedial action or review alternative strategies at the next meeting of the board of directors or appropriate committee thereof.

Liquidity Risk

Liquidity risk is the risk that the Bank will be unable to meet its obligations as they come due or meet the credit needs of its members and borrowers in a timely and cost-efficient manner. The Bank’s objective is to meet operational and member liquidity needs under all reasonable economic and operational situations. The Bank uses liquidity to absorb fluctuations in asset and liability balances and to provide an adequate reservoir of funding to support attractive and stable advance pricing. The Bank meets its liquidity needs from both asset and liability sources.

To address liquidity risk, the Bank uses cash flow scenario analysis and maturity gap analysis in compliance with regulatory requirements to confirm that the Bank has sufficient liquidity reserves, as discussed in further detail in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources above.

Credit Risk
The Bank faces credit risk primarily with respect to its advances, investments, derivatives, and mortgage loan assets.
58


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 determines credit risk rating for its members by evaluating each institution’s overall financial health, taking into account the quality of assets, earnings, and capital position. Prior to September 15, 2020, the Bank assigned each borrower that was an insured depository institution 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). The Bank assigned each borrower that was an insurance company a credit risk rating from 101 to 104 by utilizing an external model (101 being the least amount of credit risk and 104 the greatest amount of credit risk). The Bank assigned each borrower that was not an insured depository institution or an insurance company (including housing associates, community development financial institutions, and corporate credit unions), a credit risk rating from 101 to 104 based on a risk matrix developed for each entity type.
Beginning on September 15, 2020, the Bank no longer assigned each borrower that is an insured depository institution a credit risk rating from one to 10, and began assigning a credit risk rating from 101 to 104. In general, ratings of one through five in the previous rating system equates to a rating of 101 in the new ratings system, ratings of six through eight equates to a rating of 102, a rating of nine equates a rating of 103, and a rating of 10 equates to a rating of 104. The rating process for other borrowers remains unchanged.
In general, borrowers with the greatest amount of credit risk 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. Management and the board also monitor the Bank’s concentration in secured credit and standby letters of credit exposure to individual borrowers.
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 December 31, 2020
RatingNumber of BorrowersPar Value of Outstanding Advances
101298$37,713 
1023212,849 
103335 
104346 
Total336$50,643 
59

As of December 31, 2019
RatingNumber of BorrowersPar Value of Outstanding Advances
196$2,387 
26214,958 
34810,287 
49161,269 
5404,695 
6779 
7431 
8116 
9212 
10331 
Subtotal(rating from 1 to 10)35493,765 
101112,359 
1023298 
103119 
104115 
Subtotal(rating from 101 to 104)162,691 
Total370$96,456 

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 $18.2 billion and $238 million, respectively, as of December 31, 2020.

The Bank obtains collateral on advances to protect against losses, but Finance Agency regulations permit the Bank to accept only certain types of collateral. Each borrower must maintain an amount of qualifying collateral that, when discounted to the lendable collateral value (LCV), is equal to at least 100 percent of the borrower’s outstanding par value of all advances and other liabilities from the Bank. The LCV is the value that the Bank assigns to each type of qualifying collateral for purposes of determining the amount of credit that such qualifying collateral will support. For each type of qualifying collateral, the Bank discounts the market value of the qualifying collateral to calculate the LCV. The Bank regularly reevaluates the appropriate level of discounting. The Bank had rights to collateral on a borrower-by-borrower basis with an estimated value equal to or greater than its outstanding extension of credit as of December 31, 2020 and December 31, 2019. The following table presents information about the types of collateral held for the Bank’s advances (dollars in millions).
Total Par Value of Outstanding AdvancesLCV of Collateral Pledged by MembersFirst Mortgage Collateral (%)Securities Collateral (%)Other Real Estate Related Collateral (%)
As of December 31, 2020$50,643 $326,602 62.96 11.01 26.03 
As of December 31, 201996,456 348,964 66.00 8.32 25.68 
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
60

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.
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 December 31, 2020 and 2019.

61

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 Nationally Recognized Statistical Rating Organization (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 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.
62

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 December 31, 2020
 
Federal Funds Sold (1)
Interest-bearing  
Deposits
(2)  
Net Derivative Exposure  Total 
Australia$970 $— $— $970 
Canada400 — — 400 
Finland250 — — 250 
France200 — — 200 
Germany970 — — 970 
Sweden300 — — 300 
United States of America180 1,644 — 1,824 
Total$3,270 $1,644 $— $4,914 
____________
(1)Federal funds sold includes $180 million with BankUnited, National Association, one of the Bank’s 10 largest borrowers as of December 31, 2020.
(2) Interest-bearing deposits include a $431 million business money market account with Truist Bank, one of the Bank’s 10 largest borrowers as of December 31, 2020.
 As of December 31, 2019
 
Federal Funds Sold (1)
Interest-bearing  
Deposits (2)  
Net Derivative Exposure (3)    
Total 
Australia$975 $— $— $975 
Austria500 — — 500 
Canada2,275 — 2,281 
Finland1,150 — — 1,150 
Germany1,250 — — 1,250 
Japan— — 
Netherlands450 — — 450 
Norway1,495 — — 1,495 
Switzerland— — 
United States of America1,731 3,810 16 5,557 
Total$9,826 $3,810 $24 $13,660 
____________ 
(1)Federal funds sold includes $100 million with BankUnited, National Association, one of the Bank’s 10 largest borrowers as of December 31, 2019.
(2)Interest-bearing deposits includes a $508 million business money market account with Truist Bank one of the Bank’s 10 largest borrowers, as of December 31, 2019.
(3) Amounts do not reflect collateral; see the table under Risk Management–Credit Risk–Derivatives below for a breakdown of the credit ratings of and the Bank’s credit exposure to derivative counterparties, including net exposure after collateral.

The Bank experienced a decrease in unsecured credit exposure in its investment portfolio related to non-U.S. government and non-U.S. government agency counterparties from $13.6 billion as of December 31, 2019 to $4.9 billion as of December 31, 2020. Australia & New Zealand Banking Group and Landesbank Baden Wuerttemberg each represented greater than 10 percent and collectively represented 39.5 percent of the total unsecured credit exposure to non-U.S. government or non-U.S. government agencies counterparties. As of December 31, 2020, total 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 typically have the highest ratings issued by S&P or Moody’s at the time of purchase. The private-label MBS purchased by the Bank originally attained their triple-A ratings through credit enhancements, which primarily consisted of the subordination of the claims of the other tranches of these securities. In addition to NRSRO ratings, the Bank considers a variety of credit quality factors when analyzing potential investments, such as collateral performance, marketability, asset class considerations, local and regional economic conditions, and the financial health of the underlying issuer.
63

The following tables present information on the credit ratings of the Bank’s investments held as of December 31, 2020 and 2019 (in millions), based on their credit ratings as of December 31, 2020 and 2019, respectively. The credit ratings reflect the lowest long-term credit ratings as reported by an NRSRO.
 
As of December 31, 2020
                   Carrying Value (1)
Investment Grade
 AAAAAABBBTotal
Investment securities:
Government-sponsored enterprises debt obligations$— $2,307 $— $— $2,307 
U.S. Treasury obligations— 1,500 — — 1,500 
State or local housing agency debt obligations— — — 
Mortgage-backed securities:
U.S. agency obligations-guaranteed residential— 295 — — 295 
Government-sponsored enterprises residential— 7,283 — — 7,283 
Government-sponsored enterprises commercial551 10,029 — — 10,580 
Total mortgage-backed securities551 17,607 — — 18,158 
Total investment securities551 21,415 — — 21,966 
Other investments:
  Interest-bearing deposits— 1,591 48 1,644 
Securities purchased under agreements to resell— 1,000 4,500 4,000 9,500 
  Federal funds sold— 650 2,440 180 3,270 
Total other investments— 1,655 8,531 4,228 14,414 
Total investments$551 $23,070 $8,531 $4,228 $36,380 
64

As of December 31, 2019
                  Carrying Value (1)
Investment GradeBelow Investment Grade
 AAAAAABBBBBBCCCCCDUnratedTotal
Investment securities:
Government-sponsored enterprises debt obligations$— $4,556 $— $— $— $— $— $— $— $— $4,556 
U.S. Treasury obligations— 1,499 — — — — — — — — 1,499 
State or local housing agency debt obligations— — — — — — — — — 
Mortgage-backed securities:
U.S. agency obligations-guaranteed residential— 89 — — — — — — — — 89 
Government-sponsored enterprises residential— 8,642 — — — — — — — — 8,642 
Government-sponsored enterprises commercial167 12,351 — — — — — — — — 12,518 
Private-label residential— 14 38 44 47 54 18 210 34 48 383 876 
Total mortgage-backed securities167 21,120 44 47 54 18 210 34 48 383 22,125 
Total investment securities167 27,176 — 44 — 47 54 18 210 34 48 383 28,181 
Other investments:
  Interest-bearing deposits— 939 2,222 649 — — — — — — 3,810 
Securities purchased under agreements to resell— 1,800 4,250 2,750 — — — — — — 8,800 
  Federal funds sold— 4,120 5,176 530 — — — — — — 9,826 
Total other investments— 6,859 11,648 3,929 — — — — — — 22,436 
Total investments$167 $34,035 $11,692 $3,976 $54 $18 $210 $34 $48 $383 $50,617 

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.

Held-to-maturity Securities

Held-to-maturity securities are evaluated quarterly for expected credit losses on a pool basis unless an individual assessment is deemed necessary because the securities do not possess similar risk characteristics. If applicable, an allowance for credit losses is recorded with a corresponding credit loss expense (or reversal of credit loss expense). The allowance for credit losses excludes uncollectible accrued interest receivable, which is measured separately. Prior to January 1, 2020, credit losses were recorded as a direct write-down of the held-to-maturity security carrying value.

The Bank evaluates its held-to-maturity securities for impairment on a collective, or pooled basis unless an individual assessment is deemed necessary because the securities do not possess similar risk characteristics. The Bank has not established an allowance for credit loss on any of its held-to-maturity securities as of December 31, 2020 because the securities: (1) were all highly-rated and/or had short remaining terms to maturity, (2) had not experienced, nor did the Bank expect, any payment
65

default on the instruments, and (3) in the case of U.S., government-sponsored enterprises, or other agency obligations, carry an implicit or explicit government guarantee such that the Bank considers the risk of nonpayment to be zero.


66

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 of these risk mitigation initiatives, the Bank does not anticipate any credit losses on its uncleared derivatives as of December 31, 2020.
Certain of the Bank’s uncleared derivative instruments contain provisions that require the Bank to post additional collateral with its counterparties if there is a deterioration in the Bank’s credit rating. If the Bank’s credit rating had been lowered from its current rating to the next lower rating, the Bank would have been required to deliver $3 million of collateral at fair value to its uncleared derivative counterparties as of December 31, 2020.
If the counterparty has an NRSRO rating, the net exposure after collateral is treated as unsecured credit, consistent with the Bank’s RMP and Finance Agency regulations. If the counterparty does not have an NRSRO rating, the Bank requires collateral for the full amount of the exposure.

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 utilized two approved Clearinghouses, CME Clearing and LCH Ltd. The Bank also monitors the clearing agents through its unsecured credit system, and the Bank subjects these clearing agents to the same limits as other bilateral derivative counterparties. The parent companies of the clearing agents are monitored through annual reviews, as well as through the Bank’s daily monitoring tools, which include reviewing equity triggers, debt triggers, and credit default swap spread triggers. In addition, exposures to the clearing agents are monitored daily on a swap counterparty report. The Bank currently has the following three approved clearing agents: Credit Suisse Securities (USA) LLC, Morgan Stanley & Co. LLC, and Goldman Sachs & Co. The Bank does not anticipate any credit losses on its cleared derivatives as of December 31, 2020.

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.
67

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 December 31, 2020
Notional AmountNet Derivatives Fair Value Before CollateralCash Collateral Pledged To (From) CounterpartyOther Collateral Pledged To (From) CounterpartyNet Credit Exposure to Counterparties
Non-member counterparties:
  Asset positions with credit exposure:
    Cleared derivatives393 — — 
  Liability positions with credit exposure:
    Double-A10 (1)— — 
     Single-A4,061 (67)70 — 
    Triple-B2,643 (120)120 — — 
    Cleared derivatives20,429 (11)395 — 384 
Total derivative positions with non-member counterparties to which the Bank had credit exposure27,536 (199)589 — 390 
Member institutions (1)
12 — (1)— 
Total$27,548 $(198)$589 $(1)$390 
____________
(1) Collateral held with respect to derivatives with member institutions when the Bank is acting as an intermediary represents the amount of eligible collateral physically held by or on behalf of the Bank or collateral assigned to the Bank, as evidenced by a written security agreement, and held by the member institution for the benefit of the Bank.
As of December 31, 2019
Notional AmountNet Derivatives Fair Value Before CollateralCash Collateral Pledged To (From) CounterpartyOther Collateral Pledged To (From) CounterpartyNet Credit Exposure to Counterparties
Non-member counterparties:
  Asset positions with credit exposure:
    Double-A$705 $$(6)$— $— 
Single-A6,798 (1)— 
    Cleared derivatives23,766 15 336 — 351 
  Liability positions with credit exposure:
     Single-A5,189 (165)169 — 
    Triple-B6,233 (18)20 — 
Cleared derivatives31,425 (1)18 — 17 
Total derivative positions with non-member counterparties to which the Bank had credit exposure74,116 (160)536 — 376 
Member institutions (1)
141 — (4)— 
Total$74,257 $(156)$536 $(4)$376 
____________
(1) Collateral held with respect to derivatives with member institutions when 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.


Mortgage Loan Programs

The Bank seeks to manage the credit risk associated with the MPP and the MPF Program by maintaining underwriting and eligibility standards and structuring possible losses into several layers to be shared with the PFIs.

Mortgage loans purchased under the MPP and MPF Program must comply with the underwriting and eligibility standards set forth in applicable MPP guidelines or MPF guidelines. In both MPP and MPF, the Bank and PFIs share the risk of losses on mortgage loans by structuring potential losses on conventional mortgage loans into layers with respect to each master commitment and in compliance with the applicable regulations governing the purchase of mortgage loans by the Bank.
68


The unpaid principal balance of mortgage loans was $219 million and $297 million as of December 31, 2020 and 2019, respectively. The allowance for credit losses on mortgage loans was $1 million as of December 31, 2020 and 2019.

Operational Risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people or systems, or from external events. Operational risk for the Bank also includes reputation and legal risks associated with business practices or market conduct that the Bank may undertake. Operational risk inherently is greatest where transaction processes include numerous processing steps, require greater subjectivity, or are non-routine. The Bank operates in a complex business environment and is subject to numerous regulatory requirements.

The Bank identifies risk through daily operational monitoring, independent reviews, and the strategic planning and risk assessment programs that both consider the operational risk ramifications of the Bank’s business strategies and environment. The Bank has established comprehensive financial and operating policies and procedures to mitigate the likelihood of loss resulting from the identified operational risks. In addition, the Bank’s Operational Risk Committee is responsible for overseeing the Bank’s risk management policies, procedures, strategies, and activities related to operational risks, including overseeing the monitoring process and review of risk assessments. This oversight also includes compliance risk and reputational risk. The Bank effects related changes in processes, information systems, lines of communication, and other internal controls as deemed appropriate in response to identified or anticipated increases in operational risk.

The board of directors has an Enterprise Risk and Operations Committee (EROC) to advise and assist the board with respect to enterprise risk management, operations, information technology, and other related matters. In addition, the Bank’s internal Enterprise Risk Committee (ERC) is responsible for the management and oversight of the Bank’s risk management programs and practices. Additionally, the Bank’s Internal Audit department, which reports directly to the Audit Committee of the Bank’s board of directors, regularly tests compliance with the policies and procedures related to managing operational risks.

Cyber-Related Risks. The efficiencies offered by information technology (IT) are necessary components of Bank operations. The IT architecture supports multiple operating systems, database structures, and virtualized servers to support business applications that are a mixture of vendor-licensed and in-house developed. Cyber-attacks are increasing globally across all business sectors and cyber attackers are finding more ways to penetrate organizations’ systems. Cybersecurity threats can result in damage to the Bank’s physical facilities, technology systems, and/or the Bank’s intangible assets. Successful attacks can have a financial, legal, and reputational impact on the Bank as well as disrupt the Bank’s ability to serve its shareholders.
The Bank’s board of directors, through EROC, oversees the major dimensions of the Bank’s information technology program including management of information systems to ensure alignment with the Bank’s strategic plan, risk management activities, and operational performance standards. In that role, EROC oversees the development, implementation and maintenance of the Bank’s information security program including recommending action to the board with respect to the Bank’s information security policy on an annual basis and reviewing reports on the effectiveness of the Bank’s information security program. The Bank’s internal ERC reviews and reports to the board on the risk exposures and risk appetites of the Bank, including those related to information technology. In addition, the Bank’s internal Information Technology Governance Committee oversees IT governance, including: IT risk management and IT operational performance, and the Bank’s internal Security Governance Committee provides independent and integrated oversight of the information security program. Each of these committees provide information and make recommendations to the board, through the Bank’s executive management committee, regarding their respective oversight authority.

Business Risk

Business risk is the risk of an adverse effect on the Bank’s profitability resulting from external factors that may occur in both the short- and the long-term. Business risk includes political, strategic, reputation, and regulatory events that are beyond the Bank’s control. In particular, during 2020 and continuing into 2021, the Bank faces business risk, which may include changes in:

the overall economy;

the financial services industry or the Bank’s competitive environment; and

legislation, regulation, or congressional scrutiny affecting the Bank or its members.
69


For discussion of the Bank’s competition for advances, see Item 1, BusinessCompetition above. For discussion of recent regulatory activity that may have a material impact on the Bank’s operations, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of OperationsLegislative and Regulatory Developments. The Bank attempts to mitigate these risks through long-term strategic planning and through continually monitoring economic indicators and the external environment.

Cyclicality and Seasonality

The Bank’s business and the demand for advances from the Bank are generally not subject to the effects of cyclical or seasonal variations, although the Bank’s advance demand may vary based upon fluctuations of its members’ consumer credit liquidity needs.

Effects of Inflation

The majority of the Bank’s assets and liabilities are, and will continue to be, monetary in nature. Although interest rates do not necessarily move in the same direction, or to the same extent, as the prices of goods and services, higher rates of inflation generally result in corresponding increases in interest rates. Inflation, coupled with increasing interest rates, generally has the following effects on the Bank:

the cost of the Bank’s funds and operating overhead increases;

the yield on variable-rate assets held by the Bank increases;

the fair value of fixed-rate investments and mortgage loans held in portfolio decreases; and

mortgage loan prepayment rates decrease and result in lower levels of mortgage loan refinance activity, which may result in the reduction of Bank advances to members as increased rates tend to slow home sales.

Conversely, lower rates of inflation or deflation have the opposite effects of the above on the Bank and its holdings.


Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

A discussion of the Bank’s market risk is contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of OperationsRisk ManagementMarket Risk.

70

Item 8. Financial Statements and Supplementary Data.



Report of Independent Registered Public Accounting Firm

To the Board of Directors of the
Federal Home Loan Bank of Atlanta

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying statements of condition of the Federal Home Loan Bank of Atlanta (the “FHLBank”) as of December 31, 2020 and 2019, and the related statements of income, of comprehensive income, of capital and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “financial statements”). We also have audited the FHLBank’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the FHLBank as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the FHLBank maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The FHLBank’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the FHLBank’s financial statements and on the FHLBank’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the FHLBank in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB and, with respect to the financial statements, in accordance with the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.











71


Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company’s financial reporting.

We did not identify any deficiencies in internal control over financial reporting that we consider to be a material weakness as defined above.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Valuation of Interest-Rate Related Derivatives and Hedged Items

As described in Notes 15 and 16 to the financial statements, the FHLBank uses derivatives to reduce funding costs and to manage its exposure to interest-rate risks, among other objectives. The total notional amount of derivatives as of December 31, 2020 was $35 billion, of which 80% were designated as hedging instruments, and the fair value of derivative assets and liabilities as of December 31, 2020 was $391 million and $11 million, respectively. The fair values of interest-rate related derivatives and hedged items are calculated using a discounted cash flow analysis, which utilizes market-observable inputs. The significant assumptions used in the model include discount rates, market indices, and market volatility.

The principal considerations for our determination that performing procedures relating to the valuation of interest-rate related derivatives and hedged items is a critical audit matter are the significant audit effort in evaluating the discount rates, market indices, and market volatility assumptions used to fair value these derivatives and hedged items, and the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included testing the effectiveness of controls relating to the valuation of interest-rate related derivatives and hedged items, including controls over the model, data and assumptions. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in developing an independent range of prices for a sample of interest-rate related derivatives and hedged items and comparison of management’s estimate to the independently developed ranges. Developing the independent range of prices involved testing the completeness and accuracy of data provided by management and independently developing the discount rates, market indices, and market volatility assumptions.


72


Other Reporting Required by Government Auditing Standards

In accordance with Government Auditing Standards, we have also issued our report dated March 4, 2021 on our tests of the entity’s compliance with certain provisions of laws, regulations, contracts and grant agreements, and other matters for the year ended December 31, 2020. The purpose of that report is to describe the scope of our compliance testing and the results of that testing, and not to provide an opinion on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity’s compliance.





Atlanta, Georgia
March 4, 2021

We have served as the FHLBank’s auditor since 1990.




73

FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CONDITION
(In millions, except par value)
 As of December 31,
20202019
Assets
Cash and due from banks$2,905 $911 
Interest-bearing deposits (including deposits with other FHLBanks of $5 as of December 31, 2020 and 2019)1,644 3,810 
Securities purchased under agreements to resell9,500 8,800 
Federal funds sold3,270 9,826 
Investment securities:
     Trading securities1,562 1,558 
Available-for-sale securities (amortized cost of $0 and $643 as of December 31, 2020 and 2019, respectively)684 
Held-to-maturity securities (fair value of $20,489 and $25,903 as of December 31, 2020 and 2019, respectively)20,404 25,939 
Total investment securities21,966 28,181 
Advances52,168 97,167 
Mortgage loans held for portfolio, net218 296 
Accrued interest receivable88 259 
Derivative assets391 380 
Other assets, net145 227 
Total assets$92,295 $149,857 
Liabilities
Interest-bearing deposits$1,998 $1,492 
Consolidated obligations, net:
Discount notes25,385 52,134 
Bonds59,379 88,503 
Total consolidated obligations, net84,764 140,637 
Mandatorily redeemable capital stock
Accrued interest payable45 212 
Affordable Housing Program payable82 89 
Derivative liabilities11 
Other liabilities135 256 
Total liabilities87,035 142,694 
Commitments and contingencies (Note 17)00
Capital
Capital stock Class B putable ($100 par value) issued and outstanding shares:
Subclass B1 issued and outstanding shares: 10 and 9 as of December 31, 2020 and 2019, respectively943 899 
Subclass B2 issued and outstanding shares: 21 and 41 as of December 31, 2020 and 2019, respectively2,135 4,089 
Total capital stock Class B putable3,078 4,988 
Retained earnings:
Restricted588 537 
Unrestricted1,610 1,616 
Total retained earnings2,198 2,153 
Accumulated other comprehensive (loss) income(16)22 
Total capital5,260 7,163 
Total liabilities and capital$92,295 $149,857 

The accompanying notes are an integral part of these financial statements.
74

FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF INCOME
(In millions)
 
 For the Years Ended December 31,
202020192018
Interest income
Advances$870 $2,451 $2,227 
Interest-bearing deposits17 93 101 
Securities purchased under agreements to resell32 118 46 
Federal funds sold48 279 223 
Trading securities10 25 
Available-for-sale securities85 101 
Held-to-maturity securities284 671 603 
Mortgage loans13 18 21 
Total interest income1,277 3,740 3,323 
Interest expense
Consolidated obligations:
 Discount notes357 1,371 1,139 
 Bonds582 1,808 1,604 
Interest-bearing deposits26 19 
Total interest expense944 3,205 2,762 
Net interest income333 535 561 
Noninterest income (loss)
Net impairment losses recognized in earnings(13)(3)
Net gains (losses) on trading securities(1)
Net realized gains from sale of available-for-sale securities82 
Net realized gains from sale of held-to-maturity securities
Net (losses) gains on derivatives and hedging activities(6)(4)29 
Standby letters of credit fees19 24 25 
Other11 
Total noninterest income113 19 51 
Noninterest expense
Compensation and benefits102 77 93 
Other operating expenses36 39 38 
Finance Agency10 10 
Office of Finance
Other12 
Total noninterest expense163 146 150 
Income before assessment283 408 462 
Affordable Housing Program assessment28 41 46 
Net income$255 $367 $416 

The accompanying notes are an integral part of these financial statements.
75

FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
 
 For the Years Ended December 31,
202020192018
Net income$255 $367 $416 
Other comprehensive loss:
   Reclassification of unrealized gains related to the sale of available-for-sale securities(41)
Net noncredit portion of other-than-temporary impairment losses on available-for sale securities(31)(62)
   Pension and postretirement benefits
Total other comprehensive loss(38)(29)(59)
Total comprehensive income$217 $338 $357 

The accompanying notes are an integral part of these financial statements.
76

FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CAPITAL
(In millions)
 
 Capital Stock Class B PutableRetained EarningsAccumulated
Other
Comprehensive
(Loss) Income
Total Capital
 Shares        Par ValueRestrictedUnrestrictedTotal
Balance, December 31, 201752 $5,154 $380 $1,623 $2,003 $110 $7,267 
Issuance of capital stock110 11,074 — — — — 11,074 
Repurchase/redemption of capital stock(107)(10,705)— — — — (10,705)
Net shares reclassified to mandatorily redeemable capital stock(37)— — — — (37)
Comprehensive income (loss)— — 83 333 416 (59)357 
Cash dividends on capital stock— — — (309)(309)— (309)
Balance, December 31, 201855 5,486 463 1,647 2,110 51 7,647 
Issuance of capital stock91 9,087 — — — — 9,087 
Repurchase/redemption of capital stock(96)(9,564)— — — — (9,564)
Net shares reclassified to mandatorily redeemable capital stock(21)— — — — (21)
Comprehensive income (loss)— — 74 293 367 (29)338 
Cash dividends on capital stock— — (324)(324)— (324)
Balance, December 31, 201950 4,988 537 1,616 2,153 22 7,163 
Issuance of capital stock51 5,078 — — — — 5,078 
Repurchase/redemption of capital stock(70)(6,966)— — — — (6,966)
Net shares reclassified to mandatorily redeemable capital stock(22)— — — — (22)
Comprehensive income (loss)— — 51 204 255 (38)217 
Partial recovery of prior capital distribution to Financing Corporation— — — 29 29 — 29 
Cash dividends on capital stock— — (239)(239)— (239)
Balance, December 31, 202031 $3,078 $588 $1,610 $2,198 $(16)$5,260 

The accompanying notes are an integral part of these financial statements.
77

FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CASH FLOWS
(In millions)
 For the Years Ended December 31,
202020192018
Operating activities
Net income$255 $367 $416 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization(118)(149)111 
  Net change in derivative and hedging activities(482)(456)66 
  Net change in fair value adjustment on trading securities(4)(3)
  Net impairment losses recognized in earnings13 
Net realized gains from sale of available-for-sale securities(82)
 Net realized gains from sale of held-to-maturity securities(3)
Net change in:
  Accrued interest receivable171 36 (87)
  Other assets83 (29)11 
  Affordable Housing Program payable(8)
  Accrued interest payable(166)62 
  Other liabilities(87)10 (11)
  Total adjustments(696)(567)163 
Net cash (used in) provided by operating activities(441)(200)579 
Investing activities
Net change in:
  Interest-bearing deposits1,831 2,860 (4,531)
  Securities purchased under agreements to resell(700)(5,050)(1,250)
  Federal funds sold6,556 (848)402 
  Loans to other FHLBanks500 (300)
Trading securities:
  Purchases of long-term(1,499)
Available-for-sale securities:
  Proceeds from sale of available-for-sale securities726 
  Proceeds from principal collected188 236 
Held-to-maturity securities:
  Proceeds from sale of held-to-maturity securities195 00
  Proceeds from principal collected11,583 9,062 6,760 
  Purchases of long-term(6,280)(11,087)(5,479)
Advances:
  Proceeds from principal collected241,287 363,655 415,626 
  Made(195,421)(351,691)(421,793)
Mortgage loans:
  Proceeds from principal collected78 63 73 
Proceeds from sale of foreclosed assets
Purchases of premises, equipment, and software(7)(4)(5)
Net cash provided by (used in) investing activities59,849 6,151 (10,258)
78

FEDERAL HOME LOAN BANK OF ATLANTA
STATEMENTS OF CASH FLOWS—(Continued)
(In millions)
For the Years Ended December 31,
202020192018
Financing activities
Net change in interest-bearing deposits480 332 (26)
Net payments on derivatives containing a financing element(5)(3)(5)
Proceeds from issuance of consolidated obligations:
 Discount notes387,299 845,332 1,022,569 
 Bonds70,127 115,627 68,281 
Payments for debt issuance costs(8)(10)(12)
Payments for maturing and retiring consolidated obligations:
 Discount notes(413,915)(859,116)(1,006,848)
 Bonds(99,271)(106,415)(76,625)
Proceeds from issuance of capital stock5,078 9,087 11,074 
Payments for repurchase/redemption of capital stock(6,966)(9,564)(10,705)
Payments for repurchase/redemption of mandatorily redeemable capital stock(23)(21)(37)
Partial recovery of prior capital distribution to Financing Corporation29 
Cash dividends paid(239)(324)(309)
Net cash (used in) provided by financing activities(57,414)(5,075)7,357 
Net increase (decrease) in cash and due from banks1,994 876 (2,322)
Cash and due from banks at beginning of the year911 35 2,357 
Cash and due from banks at end of the year$2,905 $911 $35 
Supplemental disclosures of cash flow information:
 Cash paid for:
Interest$1,233 $3,294 $2,529 
Affordable Housing Program assessments, net$35 $37 $38 
 Noncash investing and financing activities:
Net shares reclassified to mandatorily redeemable capital stock$22 $21 $37 
Held-to-maturity securities acquired with accrued liabilities$$35 $
Transfers of mortgage loans to real estate owned$$$

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

 



















79

FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
Note 1—Nature of Operations

The Federal Home Loan Bank of Atlanta (Bank) is a federally chartered corporation and is one of 11 district Federal Home Loan Banks (FHLBanks). Each FHLBank operates as a separate entity within a defined geographic district and has its own management, employees, and board of directors. The Bank’s defined geographic district includes Alabama, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, and the District of Columbia. The FHLBanks are government-sponsored enterprises that were organized under the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act), to serve the public by enhancing the availability of credit for residential mortgages and targeted community developments. The primary function of the Bank is to provide readily available, competitively priced funding to its member institutions.

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 are entitled to receive dividends on their capital stock, to the extent declared by the Bank’s board of directors.

Federally-insured depository institutions, insurance companies, privately-insured state-chartered credit unions, and community development financial institutions that are located in the Bank’s defined geographic district and engaged in residential housing finance are eligible to apply for membership. All members must purchase and hold capital stock of the Bank. A member’s stock requirement is based on the amount of its total assets, as well as the amount of certain of its business activities with the Bank. Housing associates (including state and local housing authorities) that meet certain statutory criteria may also borrow from the Bank. While they are eligible to borrow, housing associates are not members of the Bank and are not allowed to hold capital stock. The Bank does not have any special purpose entities or any other types of off-balance sheet conduits.

The Federal Housing Finance Agency (Finance Agency) is the independent federal regulator of the FHLBanks and is responsible for ensuring that the FHLBanks (1) operate in a safe and sound manner, including that they maintain adequate capital and internal controls; (2) foster liquid, efficient, competitive, and resilient national housing finance markets through their operations and activities; (3) comply with applicable laws and regulations; and (4) carry out their housing finance mission through authorized activities that are consistent with the public interest. The Finance Agency also establishes policies and regulations covering the operations of the FHLBanks.

The Federal Home Loan Banks Office of Finance (Office of Finance), a joint office of the FHLBanks, facilitates the issuance and servicing of the FHLBanks’ debt instruments, known as consolidated obligations, and prepares the combined quarterly and annual financial reports of the FHLBanks. As provided by the FHLBank Act and applicable regulations, the Bank’s consolidated obligations are backed only by the financial resources of the FHLBanks. Consolidated obligations are the primary source of funds for the Bank in addition to deposits, other borrowings, and capital stock issued to members. The Bank primarily uses these funds to provide advances to members. The Bank also provides members and non-members with correspondent banking services, such as safekeeping, wire transfer, and cash management services.

Note 2—Summary of Significant Accounting Policies

Use of Estimates. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP) requires the Bank’s management to make subjective assumptions and estimates, which are based upon the information then available to the Bank and are inherently uncertain and subject to change. These assumptions and estimates may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Actual results could differ significantly from these estimates.

Estimated Fair Values. The estimated fair value amounts, recorded on the Statements of Condition and in the note disclosures for the periods presented, have been determined by the Bank using available market and other pertinent information and reflect the Bank’s best judgment of appropriate valuation methods. Although the Bank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any valuation technique. Therefore, these fair values may not be indicative of the amounts that would have been realized in market transactions at the reporting dates.

Financial Instruments Meeting Netting Requirements. The Bank has certain financial instruments, including derivative instruments and securities purchased under agreements to resell, that are subject to offset under master netting agreements or by operation of law. The Bank has elected to offset its derivative asset and liability positions, as well as cash collateral received or
80

FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
pledged, when it has the legal right of offset under these master agreements. The Bank does not have any offsetting liabilities related to its securities purchased under agreements to resell for the periods presented.

The net exposure for these financial instruments can change on a daily basis; therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested, and the time when this collateral is received or pledged. There may be a delay for excess collateral to be returned. For derivative instruments, any excess cash collateral received or pledged is recognized as a derivative liability or derivative asset based on the terms of the individual master agreement between the Bank and its derivative counterparty. Additional information regarding these agreements is provided in Note 15—Derivatives and Hedging Activities. 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.

Adoption of Measurement of Credit Losses on Financial Instruments Accounting Guidance. Beginning on January 1, 2020, the Bank adopted, on a modified retrospective basis, new accounting guidance pertaining to the measurement of credit losses on financial instruments that requires a financial asset or group of financial assets measured at amortized cost to be presented at the net amount expected to be collected. The new guidance also requires credit losses relating to these financial instruments, as well as available-for-sale securities, to be recorded through the allowance for credit losses. Key changes as compared to prior accounting guidance are detailed below. Consistent with the modified retrospective method of adoption, the prior period has not been revised to conform to the new basis of accounting. Key changes to the accounting policies are detailed within this note.

Interest-bearing Deposits, Securities Purchased under Agreements to Resell, and Federal Funds Sold. Interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold provide short-term liquidity and are carried at amortized cost. Interest on interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold is accrued as earned and recorded in interest income on the Statements of Income. Accrued interest receivable is recorded separately on the Statements of Condition. These investments are generally transacted with counterparties that have received a credit rating of triple-B or greater (investment grade) by a nationally recognized statistical rating organization (NRSRO) including the following: Standard and Poor’s (S&P), Moody’s Investors Service (Moody’s), and Fitch Ratings. All of these investments were with counterparties rated investment grade as of December 31, 2020. These investments are evaluated quarterly for expected credit losses. If applicable, an allowance for credit losses is recorded with a corresponding credit loss expense (or reversal of credit loss expense).

The Bank uses the collateral maintenance provision practical expedient to evaluate potential credit losses related to securities purchased under agreements to resell. Consequently, a credit loss would be recognized if there is a collateral shortfall which the Bank does not believe the counterparty will replenish in accordance with its contractual terms. The credit loss would be limited to the difference between the fair value of the collateral and the investment’s amortized cost. Securities purchased under agreements to resell are short-term and are structured such that they are evaluated regularly to determine if the market value of the underlying securities decreases below the market value required as collateral (i.e., subject to collateral maintenance provisions). If so, the counterparty must place an equivalent amount of additional securities as collateral or remit an equivalent amount of cash, generally by the next business day. Based upon the collateral held as security and collateral maintenance provisions with its counterparties, the Bank determined that 0 allowance for credit losses was needed for its securities purchased under agreements to resell as of December 31, 2020 and 2019. The carrying value of securities purchased under agreements excludes accrued interest receivable that was not material as of December 31, 2020 and 2019.

Federal funds sold are unsecured loans that are generally transacted on an overnight term. All investments in interest-bearing deposits and federal funds sold were repaid or expected to be repaid according to the contractual terms as of December 31, 2020 and 2019. NaN allowance for credit losses was recorded for these assets as of December 31, 2020 and 2019. The carrying values of interest-bearing deposits excludes accrued interest receivable that was not material as of December 31, 2020 and 2019. The carrying values of federal funds sold excludes accrued interest receivable that was not material as of December 31, 2020 and $10 as of December 31, 2019.

Investment Securities. Investment securities that the Bank has both the ability and intent to hold to maturity are classified as held-to-maturity and carried at amortized cost, which is original cost net of periodic principal repayments and amortization of premiums and accretion of discounts. Accrued interest receivable is recorded separately on the Statements of Condition. Amortization of premiums and accretion of discounts are computed using the contractual level-yield method (contractual interest method), adjusted for actual prepayments. The contractual interest method recognizes the income effects of premiums and discounts over the contractual life of the securities based on the actual behavior of the underlying assets, including
81

FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
adjustments for actual prepayment activities, and reflects the contractual terms of the securities without regard to changes in estimated prepayments based on assumptions about future borrower behavior.

Held-to-maturity securities are evaluated quarterly for expected credit losses on a pool basis unless an individual assessment is deemed necessary because the securities do not possess similar risk characteristics. If applicable, an allowance for credit losses is recorded with a corresponding credit loss expense (or reversal of credit loss expense). The allowance for credit losses excludes uncollectible accrued interest receivable, which is measured separately. Prior to January 1, 2020, credit losses were recorded as a direct write-down of the held-to-maturity security carrying value.

The Bank’s held-to-maturity securities consist of U.S. agency obligations, government-sponsored enterprise debt obligations, state or local housing agency debt obligations, and MBS issued by the Government National Mortgage Association (Ginnie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Federal National Mortgage Association (Fannie Mae) that are backed by single-family or multifamily mortgage loans. The Bank only purchase securities considered investment quality. All of these investments were rated double-A, or above, by a NRSRO as of December 31, 2020, based on the lowest long-term credit rating for each security.

The Bank has not established an allowance for credit loss on any of its held-to-maturity securities as of December 31, 2020 because the securities: (1) were all highly-rated and/or had short remaining terms to maturity, (2) had not experienced, nor did the Bank expect, any payment default on the instruments, and (3) in the case of U.S., government-sponsored enterprises, or other agency obligations, carry an implicit or explicit government guarantee such that the Bank considers the risk of nonpayment to be zero.

The Bank classifies certain investment securities acquired for purposes of liquidity and asset-liability management as trading investments and carries these securities at their estimated fair value. The Bank does not participate in speculative trading practices in these investments and generally holds them until maturity, except to the extent management deems necessary to manage the Bank’s liquidity position. The Bank records changes in the fair value of these investments in noninterest income (loss) as “Net gains (losses) on trading securities” on the Statements of Income, along with gains and losses on sales of investment securities using the specific identification method.

The Bank classifies certain securities that are not held-to-maturity or trading as available-for-sale and carries these securities at their estimated fair value. The Bank records changes in the fair value of these investments in other comprehensive income.

For securities classified as available-for-sale, the Bank evaluates an individual security for impairment on a quarterly basis by comparing the security’s fair value to its amortized cost. Accrued interest receivable is recorded separately on the Statements of Condition. Impairment exists when the fair value of the investment is less than its amortized cost (i.e., in an unrealized loss position). In assessing whether a credit loss exists on an impaired security, the Bank considers whether there would be a shortfall in receiving all cash flows contractually due. When a shortfall is considered possible, the Bank compares the present value of cash flows to be collected from the security with the amortized cost basis of the security. If the present value of cash flows is less than amortized cost, an allowance for credit losses is recorded with a corresponding adjustment to the provision (reversal) for credit losses. The allowance is limited by the amount of the unrealized loss. The allowance for credit losses excludes uncollectible accrued interest receivable, which is measured separately. If management intends to sell an impaired security classified as available-for-sale, or more likely than not will be required to sell the security before expected recovery of its amortized cost basis, any allowance for credit losses is written off and the amortized cost basis is written down to the security’s fair value at the reporting date with any incremental impairment reported in earnings. If management does not intend to sell an impaired security classified as available-for-sale and it is not more likely than not that management will be required to sell the debt security, then the credit portion of the difference is recognized as an allowance for credit losses and any remaining difference between the security’s fair value and amortized cost is recorded as net unrealized gains (losses) on available-for-sale securities within other comprehensive income.

For improvements in cash flows of available-for-sale securities, interest income follows the recognition pattern pursuant to the
impairment guidance in effect prior to January 1, 2020 and recoveries of amounts previously written off are recorded when
received. For improvements in impaired available-for-sale securities with an allowance for credit losses recognized after the adoption of the new guidance, the allowance for credit losses associated with recoveries may be derecognized up to its full amount. Effective January 1, 2020, the net noncredit portion of other-than-temporary impairment gains (losses) on available-for-sale securities was reclassified to net unrealized gains (losses) on available-for-sale securities within other comprehensive income.

82

FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
Other-than-temporary Impairment of Investment Securities. Beginning January 1, 2020, the Bank adopted new accounting guidance pertaining to the measurement of credit losses on financial instruments. Prior to January 1, 2020, the Bank evaluated its individual available-for-sale and held-to-maturity securities in unrealized loss positions for other-than-temporary impairment on a quarterly basis. A security was considered impaired when its fair value was less than its amortized cost. The Bank considered an other-than-temporary impairment to have occurred under any of the following circumstances:

the Bank had an intent to sell the impaired debt security;

if, based on available evidence, the Bank believed it was more likely than not that it would be required to sell the impaired debt security before the recovery of its amortized cost basis; or

the Bank did not expect to recover the entire amortized cost basis of the impaired debt security.

If either of the first two conditions above was met, the Bank recognizes an other-than-temporary impairment loss in earnings equal to the entire difference between the security’s amortized cost basis and its fair value as of the Statements of Condition date.

For securities in an unrealized loss position that meet neither of the first two conditions, the Bank performed a cash flow analysis to determine if it would recover the entire amortized cost basis of each of these securities. The present value of the cash flows expected to be collected was compared to the amortized cost basis of the debt security to determine whether a credit loss exists. If there was a credit loss (the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security), the carrying value of the debt security was adjusted to its fair value. However, rather than recognizing the entire difference between the amortized cost basis and fair value in earnings, only the amount of the impairment representing the credit loss (i.e., the credit component) was recognized in earnings, while the amount related to all other factors (i.e., the non-credit component) was recognized in other comprehensive income. The credit loss on a debt security was limited to the amount of that security’s unrealized losses.

For subsequent accounting of an other-than-temporarily impaired security, the Bank recorded an additional other-than-temporary impairment if the present value of cash flows expected to be collected was less than the amortized cost of the security. The total amount of this additional other-than-temporary impairment (both credit and non-credit component, if any) was determined as the difference between the security’s amortized cost, less the amount of other-than-temporary impairment recognized in other comprehensive income prior to the determination of this additional other-than-temporary impairment, and its fair value. Any additional credit loss was limited to that security’s unrealized losses or the difference between the security’s amortized cost and its fair value as of the Statements of Condition date. This additional credit loss, up to the amount in accumulated other comprehensive income related to the security, was reclassified out of accumulated other comprehensive income and recognized in earnings. Any credit loss in excess of the related other comprehensive income was recorded as additional total other-than-temporary impairment loss and recognized in earnings.

For debt securities classified as available-for-sale, the Bank did not accrete the other-than-temporary impairment recognized in accumulated other comprehensive income to the carrying value. Rather, subsequent related increases and decreases (if not an other-than-temporary impairment) in the fair value of available-for-sale securities were netted against the non-credit component of other-than-temporary impairment recognized previously in accumulated other comprehensive income.

Upon subsequent evaluation of a debt security where there is no additional other-than-temporary impairment, the Bank adjusted the accretable yield on a prospective basis if there was a significant increase in the security’s expected cash flows. As of the impairment measurement date, a new accretable yield was calculated for the impaired investment security. This adjusted yield was then used to calculate the interest income recognized over the remaining life of the security so as to match the amount and timing of future cash flows expected to be collected. Subsequent significant increases in estimated cash flows change the accretable yield on a prospective basis.

Advances. The Bank reports advances (secured loans to members, former members, or housing associates) at amortized cost. Amortized cost is original cost net of periodic principal repayments and amortization of premiums and accretion of discounts (including discounts related to the Affordable Housing Program (AHP) and Economic Development and Growth Enhancement Program (EDGE)), net deferred fees or costs, and fair value hedge adjustments. The Bank accretes the discounts on advances and amortizes the recognized unearned commitment fees and hedging adjustments to interest income using the contractual
83

FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
interest method. The Bank records interest on advances to interest income as earned. Accrued interest receivable is recorded separately on the Statements of Condition.

In accordance with the new accounting guidance pertaining to the measurement of credit losses on financial instruments, advances are evaluated quarterly for expected credit losses. If applicable, an allowance for credit losses is recorded with a corresponding credit loss expense (or reversal of credit loss expense).

The Bank manages its credit exposure to advances through an integrated approach that includes (1) establishing a credit limit for each borrower; (2) an ongoing review of each borrower’s financial condition; and (3) collateral and lending policies to limit risk of loss, while balancing each borrower’s needs for a reliable source of funding. In addition, the Bank lends to financial institutions within its district and housing associates in accordance with federal statutes and Finance Agency regulations. Specifically, the Bank complies with the FHLBank Act, which requires the Bank to obtain sufficient collateral to fully secure advances. The estimated value of the collateral required to secure each borrower’s advances is calculated by applying discounts to the fair value or unpaid principal balance of the collateral, as applicable. The Bank accepts certain investment securities, residential mortgage loans, deposits, and other real estate related assets as collateral. The Bank’s capital stock owned by its member borrower is also pledged as additional collateral. Collateral arrangements may vary depending upon borrower credit quality, financial condition and performance, borrowing capacity, and the Bank’s overall credit exposure to the borrower. The Bank can call for additional or substitute collateral to protect its security interest. The Bank believes that these policies effectively manage credit risk from advances.

Based upon the financial condition of the borrower, the Bank either allows a borrower to retain physical possession of the collateral pledged to it or requires the borrower to specifically assign the collateral to or place the collateral in physical possession of the Bank or its safekeeping agent. The Bank requires its borrowers to execute an advances and security agreement that establishes the Bank’s security interest in all collateral pledged by the borrower to the Bank. The Bank perfects its security interest in all pledged collateral. The FHLBank Act affords any security interest granted to the Bank by a borrower priority over the claims or rights of any other party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor), except for claims or rights of a third 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 state law.

Using a risk-based approach and taking into consideration each borrower’s financial strength, the Bank considers the types and amounts of pledged collateral to be the primary indicator of credit quality on its advances. The Bank had rights to collateral on a borrower-by-borrower basis with an estimated value equal to or greater than its outstanding extensions of credit as of December 31, 2020 and 2019.

The Bank continues to evaluate and make changes to its collateral policies, as necessary, based on current market conditions. No advance was past due, on nonaccrual status, or considered impaired as of December 31, 2020 and 2019. In addition, there were no troubled debt restructurings (TDRs) related to advances as of December 31, 2020 and 2019.

Based upon the collateral held as security, the Bank’s collateral policies, credit analysis, and the repayment history on advances, the Bank did not anticipate any credit losses on advances as of December 31, 2020 and 2019. Accordingly, the Bank has not recorded any allowance for credit losses on advances as of December 31, 2020 and 2019.

Prepayment Fees. The Bank charges a borrower a prepayment fee when the borrower prepays certain advances before the original maturity date. The Bank records prepayment fees, net of basis adjustments related to hedging activities included in the carrying value of the advance as part of the advances line item in the interest income section of the Statements of Income. In cases in which there is a prepayment of an existing advance and a contemporaneous funding of a new advance, the Bank evaluates whether the new advance meets the accounting criteria to qualify as a modification of an existing advance or whether it constitutes a new advance. If the new advance qualifies as a modification of the existing advance, the hedging basis adjustments and the net prepayment fee on the prepaid advance are recorded in the carrying value of the modified advance and amortized over the life of the modified advance using the contractual interest method. This amortization is recorded in advance interest income. If the Bank determines that the transaction does not qualify as a modification of an existing advance, it is treated as an advance termination with subsequent funding of a new advance, and the Bank records the net fees as prepayment fees on advances, which is included in the advances line item in the interest income section of the Statements of Income.

84

FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
Mortgage Loans Held for Portfolio. The Bank classifies mortgage loans that it has the intent and ability to hold for the foreseeable future, or until maturity or payoff, as held for portfolio. These mortgage loans are reported at amortized cost, which is original cost, net of periodic principal repayments and amortization of premiums and accretion of discounts, fair value hedge adjustments on loans initially classified as mortgage loan commitments, and direct write-downs. Accrued interest receivable is recorded separately on the Statements of Condition. The Bank performs at least quarterly an assessment of its mortgage loans held for portfolio to estimate expected credit losses. If applicable, an allowance for credit losses is recorded with a corresponding credit loss expense (or reversal of credit loss expense).

The Bank defers and amortizes premiums and accretes discounts (1) paid to and received by the participating financial institutions (PFIs), and (2) mark-to-market basis adjustments on loans initially classified as mortgage loan commitments, as interest income using the contractual interest method.

A mortgage loan is considered past due when the principal or interest payment is not received in accordance with the contractual terms of the loan. The Bank places a conventional mortgage loan on nonaccrual status when the collection of the contractual principal or interest from the borrower is 90 days or more past due. When a mortgage loan is placed on nonaccrual status, accrued but uncollected interest is reversed against interest income. The Bank records cash payments received on nonaccrual loans as interest income and as a reduction of principal as specified in the contractual agreement. A loan on nonaccrual status may be restored to accrual status when the contractual principal and interest are less than 90 days past due. A government-guaranteed or -insured loan is not placed on nonaccrual status when the collection of the contractual principal or interest is 90 days or more past due because of (1) the U.S. government guarantee or insurance on the loan, and (2) the contractual obligation of the loan servicer to repurchase the loan when certain criteria are met.

A mortgage loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the mortgage loan agreement. Interest income is recognized in the same manner as nonaccrual loans.

Finance Agency regulations require that mortgage loans held in the Bank’s portfolios be credit enhanced. For conventional mortgage loans, PFIs retain a portion of the credit risk on the loans they sell to the Bank by providing credit enhancement either through a direct liability to pay credit losses up to a specified amount or through a contractual obligation to provide supplemental mortgage insurance. PFIs are paid a credit enhancement fee (CE Fee) for assuming credit risk, and in some instances, all or a portion of the CE Fee may be performance based. CE Fees are paid monthly based on the remaining unpaid principal balance of the loans in a master commitment. CE Fees are recorded as an offset to mortgage loan interest income. To the extent that the Bank experiences losses in a master commitment, it may be able to recapture CE Fees paid to the PFI to offset these losses.

At least quarterly, the Bank performs an assessment of its mortgage loans held for portfolio to estimate expected credit losses. The Bank measures expected credit losses on mortgage loans on a collective basis, pooling loans with similar risk characteristics. If a mortgage loan no longer shares risk characteristics with other loans, it is removed from the pool and evaluated for expected credit losses on an individual basis. When developing the allowance for credit losses, the Bank measures the estimated loss over the remaining life of a mortgage loan, which also considers how the Bank’s credit enhancements mitigate credit losses. If a loan was purchased at a discount, the discount does not offset the allowance for credit losses. The allowance excludes uncollectible accrued interest receivable, as the Bank writes off accrued interest receivable by reversing interest income if a mortgage loan is placed on nonaccrual status.

The Bank invested in government-guaranteed or -insured fixed-rate mortgage loans secured by one-to-four family residential properties. Government-guaranteed or -insured mortgage loans are mortgage loans guaranteed or insured by the Department of Veterans Affairs or the Federal Housing Administration. The servicer provides and maintains insurance or a guarantee from the applicable government agency. The servicer is responsible for compliance with all government agency requirements and for obtaining the benefit of the applicable insurance or guarantee with respect to defaulted government-guaranteed or -insured mortgage loans. Any losses incurred on these loans that are not recovered from the issuer or the guarantor are absorbed by the servicers. Therefore, the Bank only has credit risk for these loans if the servicer fails to pay for losses not covered by insurance or guarantees. Based on the Bank’s assessment of its servicers and the collateral backing these loans, the Bank did not establish an allowance for credit losses for its government-guaranteed or -insured mortgage loan portfolio as of December 31, 2020 and 2019.

Modified loans that are considered a TDR are evaluated individually for impairment. All other conventional residential mortgage loans are evaluated collectively for impairment. The allowance for conventional residential mortgage loans is
85

FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
determined by an analysis (performed at least quarterly) that includes segregating the portfolio into various aging groups. For loans that are 60 days or less past due, the Bank calculates a loss severity, default rate, and the expected loss based on individual loan characteristics. For loans that are more than 60 days past due, the allowance is determined using an automated valuation model.

Modified loans that are considered a TDR are individually evaluated for impairment when determining the related allowance for credit losses. Credit loss is measured by factoring in expected cash shortfalls (i.e., loss severity rate) incurred as of the reporting date, as well as the economic loss attributable to delaying the original contractual principal and interest due dates.

On March 27, 2020, the Coronavirus, Aid, Relief, and Economic Security Act (the CARES Act) providing optional, temporary relief from accounting for certain loan modifications as TDRs was signed into law. Under the CARES Act, TDR relief is available to banks for loan modifications related to the adverse effects of Coronavirus Disease 2019 (COVID-19) (COVID-related modifications) granted to borrowers that are current as of December 31, 2019. TDR relief applies to COVID-related modifications made from March 1, 2020, until the earlier of December 31, 2020, or 60 days following the termination of the national emergency declared by the President of the United States on March 13, 2020. On December 27, 2020, the Consolidated Appropriations Act, 2021, was signed into law, extending the applicable period to the earlier of January 1, 2022, or 60 days following the termination of the national emergency declared on March 13, 2020. The Bank has elected to apply the TDR relief provided by the CARES Act.

As such, all COVID-related modifications meeting the provisions of the CARES Act will be excluded from TDR classification and accounting. COVID-related modifications that do not meet the provisions of the CARES Act will continue to be assessed for TDR classification. Refer to Note 9Mortgage Loans Held for Portfolio for additional information.

A charge-off is recorded if it is estimated that the amortized cost and any applicable accrued interest in the loan will not be recovered. The Bank evaluates whether to record a charge-off on a conventional residential mortgage loan upon the occurrence of a confirming event. Once a loan is 180 days delinquent, the Bank classifies as a loss and charges off the portion of outstanding conventional residential mortgage loan balances in excess of the fair value of the underlying property, less costs to sell and adjusted for any available credit enhancements.

Real estate owned (REO) includes assets that have been received in satisfaction of debt through foreclosures. REO is initially recorded at fair value, less estimated selling costs and is subsequently carried at the lower of that amount or current fair value, less estimated selling costs. The Bank recognizes a charge-off to the allowance for credit losses if the fair value of the REO, less estimated selling costs is less than the recorded investment in the loan at the date of transfer from loans to REO. Any subsequent realized gains, realized or unrealized losses, and carrying costs are included in noninterest income (loss) on the Statements of Income. REO is recorded in “Other assets” on the Statements of Condition and was not material as of December 31, 2020 and 2019.

Derivatives and Hedging Activities. All derivatives are recognized on the Statements of Condition at their fair values and are reported as either derivative assets or derivative liabilities, net of cash collateral and accrued interest received from or pledged to clearing agents and/or counterparties. The fair values of derivatives are netted by the clearing agent and/or counterparty when the netting requirements have been met. If these netted amounts are positive, they are classified as an asset and, if negative, they are classified as a liability. Cash flows associated with a derivative are reflected as cash flows from operating activities on the Statements of Cash Flows unless the derivative meets the criteria to be a financing derivative.

Derivatives not used for intermediary purposes are designated as either (1) a hedge of the fair value of (a) a recognized asset or liability or (b) an unrecognized firm commitment (a fair-value hedge); or (2) a non-qualifying hedge of an asset or liability for asset-liability management purposes. Beginning January 1, 2019, the Bank adopted new hedge accounting guidance, which, among other things, impacts the presentation of gains (losses) on derivatives and hedging activities for qualifying hedges. Changes in the fair value of a derivative that are effective as, and that are designated and qualify as, a fair-value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (including changes that reflect losses or gains on firm commitments), are recorded in net interest income in the same line as the earnings effect of the hedged item. Prior to January 1, 2019, any hedge ineffectiveness (which represented the amount by which the change in the fair value of the derivative differed from the change in the fair value of the hedged item) was recorded in noninterest income (loss) as “Net (losses) gains on derivatives and hedging activities” on the Statements of Income. A non-qualifying hedge is a derivative hedging specific or non-specific underlying assets, liabilities, or firm commitments that is an acceptable hedging strategy under the Bank’s risk management program and Finance Agency regulatory requirements, but it does not qualify or
86

FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
was not designated for fair value or cash flow hedge accounting. A non-qualifying hedge introduces the potential for earnings variability because only the change in fair value of the derivative is recorded and is not offset by corresponding changes in the fair value of the non-qualifying hedged asset, liability, or firm commitment, unless such asset, liability, or firm commitment is required to be accounted for at fair value through earnings. Both the net interest on the derivative and the fair value adjustments of a non-qualifying hedge are recorded in noninterest income (loss) as “Net (losses) gains on derivatives and hedging activities” on the Statements of Income.

The derivatives used in intermediary activities do not qualify for hedge accounting treatment and are separately marked-to-market through earnings. These amounts are recorded in noninterest income (loss) as “Net (losses) gains on derivatives and hedging activities” on the Statements of Income. The net result of the accounting for these derivatives does not significantly impact the Bank’s results of operations.

The net settlement of interest receivables and payables related to derivatives designated as fair-value hedges are recognized as adjustments to the interest income or interest expense of the designated hedged item. The net settlement of interest receivables and payables related to intermediated derivatives for members and other non-qualifying hedges are recognized in noninterest income (loss) as “Net (losses) gains on derivatives and hedging activities” on the Statements of Income.

The Bank discontinues hedge accounting prospectively when (1) it determines that the derivative is no longer expected to be effective in offsetting changes in the fair value of a hedged risk, including hedged items such as firm commitments; (2) the derivative and/or the hedged item expires or is sold, terminated, or exercised; (3) a hedged firm commitment no longer meets the definition of a firm commitment; or (4) the bank determines that designating the derivative as a hedging instrument is no longer appropriate.

When hedge accounting is discontinued due to the Bank’s determination that a derivative no longer qualifies as an effective fair-value hedge of an existing hedged item, or when the bank decides to cease the specific hedging activity, the Bank will either (1) terminate the derivative, or (2) continue to carry the derivative on the Statements of Condition at its fair value, cease to adjust the hedged asset or liability for changes in fair value, and amortize the cumulative basis adjustment on the hedged item into earnings over the remaining life of the hedged item using the level-yield method. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Bank will carry the derivative at its fair value on the Statements of Condition, recognizing changes in the fair value of the derivative in current-period earnings.

The Bank may issue debt, make advances, or purchase financial instruments in which a derivative instrument may be “embedded.” Upon execution of these transactions, the Bank assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the advance, debt, or purchased financial instruments (i.e., the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract; and (2) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as a stand-alone derivative instrument pursuant to a non-qualifying hedge. However, if the entire contract (the host contract and the embedded derivative) is to be measured at fair value, with changes in fair value reported in current-period earnings (e.g., an investment security classified as “trading”), or if the Bank could not identify and measure reliably the embedded derivative for purposes of separating that derivative from its host contract, the entire contract would be carried on the Statements of Condition at fair value, and no portion of the contract could be designated as a hedging instrument.

Premises, Equipment, and Software. Premises, equipment, and the cost of purchased software and certain costs incurred in developing computer software for internal use are recorded in “Other assets” on the Statements of Condition. The Bank records these items at cost, less accumulated depreciation or amortization. The Bank computes depreciation and amortization using the straight-line method over the estimated useful lives of assets. The estimated useful lives in years are generally as follows: automobiles and computer hardware—three; capitalized computer software cost—three; office equipment—eight; office furniture and building improvements—10; and building—40. The Bank amortizes leasehold improvements using the straight-line method over the shorter of the estimated useful life of the improvement or the remaining term of the lease. The Bank capitalizes improvements and expenses ordinary maintenance and repairs when incurred.

87

FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
The following tables present information on premises, equipment, and capitalized computer software cost.
As of December 31,
 2020201920202019
Premises and EquipmentComputer Software Cost
Gross carrying amount$93 $92 $69 $64 
Accumulated depreciation or amortization(78)(76)(57)(55)
Net carrying amount$15 $16 $12 $
For the Years Ended December 31,
 202020192018
Premises and equipment depreciation expense$$$
Software amortization expense
Deposits. The Bank offers demand and overnight deposits for members and qualifying non-members. A member that services mortgage loans may deposit funds in the Bank that were collected in connection with the mortgage loans, pending disbursement of such funds to the owners of the mortgage loans. The Bank records these items in “Interest-bearing deposits” on the Statements of Condition. The Bank pays interest on demand and overnight deposits based on a daily interest rate.

Consolidated Obligations. The Bank records consolidated obligations at amortized cost. Additionally, the Bank pays concessions to dealers in connection with the issuance of certain consolidated obligations. The Office of Finance prorates the concessions to the Bank based upon the percentage of the debt issued that is assumed by the Bank. The Bank records concessions paid on consolidated obligations as a direct deduction from their carrying amounts, consistent with the presentation of discounts on consolidated obligations. The Bank accretes discounts and amortizes premiums, as well as concessions and hedging basis adjustments on consolidated obligations, to interest expense using the contractual interest method over the contractual term of the corresponding consolidated obligation.

Mandatorily Redeemable Capital Stock. The Bank reclassifies stock that is subject to redemption from capital to a liability after a member submits a written redemption request, gives notice of intent to withdraw from membership, or attains non-member status through a merger or acquisition, charter termination, or involuntary termination from membership since the member’s shares will then meet the definition of a mandatorily redeemable financial instrument. Member shares meeting this definition are reclassified to a liability at fair value. Dividends declared on shares classified as a liability are accrued at the expected dividend rate and recorded as interest expense on the Statements of Income. The repurchase or redemption of these mandatorily redeemable financial instruments is recorded as cash outflows in the financing activities section of the Statements of Cash Flows.

If a member cancels its written notice of redemption or notice of withdrawal, the Bank will reclassify mandatorily redeemable capital stock from a liability to capital. After the reclassification, dividends on the capital stock no longer will be classified as interest expense.

Off-Balance Sheet Credit Exposures. The Bank evaluates its off-balance sheet credit exposure on a quarterly basis for expected credit losses. If deemed necessary, an allowance for expected credit losses on these off-balance sheet exposures is recorded in other liabilities with a corresponding credit loss expense (or reversal of credit loss expense).

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. 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 as of December 31, 2020 or 2019.

88

FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
Restricted Retained Earnings. The Joint Capital Enhancement Agreement, as amended (Capital Agreement), provides that each FHLBank will, on a quarterly basis, allocate 20 percent of its net income to a separate restricted retained earnings account until the balance of that account, calculated as of the last day of each calendar quarter, equals at least one percent of that FHLBank’s average balance of outstanding consolidated obligations for the calendar quarter. Restricted retained earnings are not available to pay dividends and are presented separately on the Statement of Condition.

Finance Agency and Office of Finance Expenses. The Finance Agency allocates the FHLBanks’ portion of its expenses and working capital fund among the FHLBanks based on the ratio between each FHLBank’s minimum required regulatory capital and the aggregate minimum required regulatory capital of every FHLBank. Each FHLBank’s proportionate share of the Office of Finance’s operating and capital expenditures is calculated using a formula that is (1) two-thirds based upon each FHLBank’s share of total consolidated obligations outstanding, and (2) one-third based upon an equal pro rata allocation.

Affordable Housing Program. The FHLBank Act requires each FHLBank to establish and fund an AHP that provides subsidies to members to assist in the purchase, construction, or rehabilitation of housing for very low-to-moderate-income households. The Bank charges the required funding for AHP against earnings and establishes a corresponding liability. The Bank issues AHP advances at interest rates below the customary interest rate for non-subsidized advances. A discount on the AHP advance and charge against the AHP liability is recorded for the present value of the variation in the cash flow caused by the difference in the interest rate between the AHP advance rate and the Bank’s related cost of funds for comparable maturity funding. As an alternative, the Bank has the authority to make the AHP subsidy available to members as a grant. The discount on AHP advances is accreted to interest income on advances using the contractual interest method over the life of the advance.
89

FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

Note 3—Recently Issued and Adopted Accounting Guidance

The following table provides a summary of accounting guidance issued by the Financial Accounting Standards Board which may impact the Bank’s financial statements.

Accounting Standard Update (ASU)DescriptionEffective DateEffect on Financial Statements or Other Significant Matters
Disclosure Framework–Changes to the Disclosure Requirements for Fair Value Measurement
(ASU 2018-13)
This guidance amends the disclosure requirements on fair value measurements.January 1, 2020The adoption of this guidance did not have an 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, 2020The adoption of this guidance did not have an impact on the Bank’s financial condition or results of operations.
Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04), as amended by ASU 2021-01This guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.      March 12, 2020 through December 31, 2022The Bank expects it may apply certain of the expedients and exceptions provided in the guidance; however, the Bank is still evaluating this guidance and has yet to apply any of its provisions. Therefore, the full impact of adopting this guidance on the Bank’s financial condition and results of operations has not yet been determined. During the fourth quarter of 2020. the Bank elected optional expedients available under ASU 2021-01 specific to discounting transition on a retrospective basis, which did not have a material impact.
Disclosure Framework–Changes to the Disclosure Requirements for Defined Benefit Plans
(ASU 2018-14)
This guidance amends the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.December 31, 2020

The adoption of this guidance did not have an impact on the Bank’s financial condition or results of operations.

Note 4—Cash and Due from Banks

The Bank maintains a collected cash balance with a commercial bank, which is a member, in return for certain services, and the average collected cash balance was $11 and $8 for the years ended December 31, 2020 and 2019, respectively. There are no legal restrictions regarding the withdrawal of these funds.
90

FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
Note 5—Trading Securities
Major Security Types. The following table presents trading securities.
 
As of December 31,
20202019
U.S. Treasury obligations$1,500 $1,499 
Government-sponsored enterprises debt obligations62 59 
Total$1,562 $1,558 
The following table presents net gains (losses) on trading securities.
 
 For the Years Ended December 31,
202020192018
Net gains (losses) on trading securities held at year end$$$(1)

Note 6—Available-for-sale Securities

During 2020, the Bank sold all of its available-for-sale private-label mortgage-backed securities (MBS). Proceeds from the sale of the available-for-sale private-label MBS totaled $726 which resulted in a net realized gain of $82 determined by the specific identification method. There were no sales during 2019 and 2018.

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 December 31, 2020$$$$$
As of December 31, 2019$643 $(1)$42 $$684 
____________ 
(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 Months12 Months or MoreTotal
   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 December 31, 2020$$$$$$
As of December 31, 2019$14 $$$(1)$17 $(1)

91

FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
Interest-rate Payment Terms. The following table presents interest-rate payment terms for investment securities classified as available-for-sale.
As of December 31,
20202019
Variable-rate$$617 
Fixed-rate26 
Total amortized cost$$643 
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 December 31, 2020$$$$$
As of December 31, 2019$456 $$31 $$487 
____________ 
(1) Amounts represent the non-credit portion of an other-than-temporary impairment during the life of the security.

Note 7—Held-to-maturity Securities

During 2020, for strategic, economic and operational reasons, the Bank sold all of its held-to-maturity private-label MBS. The amortized cost of the held-to-maturity private-label MBS sold was $192. Proceeds from the sale of the held-to-maturity private-label MBS totaled $195, which resulted in a net realized gain of $3 determined by the specific identification method. For each of the held-to-maturity securities which were sold, the Bank had previously collected at least 85 percent of the principal outstanding at the time of acquisition due to prepayments or scheduled prepayments over the term of the security. As such, the sales were considered maturities for purposes of security classification. There were no sales of held-to-maturity securities during 2019 and 2018.
Major Security Types. The following table presents held-to-maturity securities.
 
As of December 31,
 20202019
 
Amortized
Cost (1)
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Amortized
Cost (1)
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
State or local housing agency debt obligations$$$$$$$$
Government-sponsored enterprises debt obligations2,245 2,251 4,497 4,504 
Mortgage-backed securities:
U.S. agency obligations-guaranteed residential295 297 89 89 
Government-sponsored enterprises residential7,283 62 (6)7,339 8,642 20 (29)8,633 
Government-sponsored enterprises commercial10,580 31 (10)10,601 12,518 (34)12,484 
Private-label residential192 (1)192 
Total$20,404 $101 $(16)$20,489 $25,939 $28 $(64)$25,903 
 ____________
(1) Excludes accrued interest receivable of $9 and $27 as of December 31, 2020 and 2019, respectively.
92

FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
As required prior to the adoption of new accounting guidance for the measurement of credit losses on financial instruments, the following table presents 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 had been in a continuous unrealized loss position.
 As of December 31, 2019
 Less than 12 Months12 Months or MoreTotal
 Number of
Positions
Estimated
Fair  Value
Gross
Unrealized
Losses
Number of
Positions
Estimated
Fair  Value
Gross
Unrealized
Losses
Number of
Positions
Estimated
Fair  Value
Gross
Unrealized
Losses
Government-sponsored enterprises debt obligations$380 $$$$380 $
Mortgage-backed securities:
Government-sponsored enterprises residential96 2,504 (4)54 2,336 (25)150 4,840 (29)
Government-sponsored enterprises commercial45 7,993 (13)50 3,976 (21)95 11,969 (34)
Private-label residential15 62 19 65 (1)34 127 (1)
Total161 $10,939 $(17)123 $6,377 $(47)284 $17,316 $(64)

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 December 31,
 20202019
 
Amortized
Cost (1)
Estimated
Fair Value
Amortized
Cost (1)
Estimated
Fair Value
Non-mortgage-backed securities:
Due in one year or less$245 $245 $1,202 $1,203 
Due after one year through five years1,740 1,742 3,035 3,037 
Due after five years through 10 years201 204 201 204 
Due after 10 years60 61 60 61 
Total non-mortgage-backed securities2,246 2,252 4,498 4,505 
Mortgage-backed securities18,158 18,237 21,441 21,398 
Total$20,404 $20,489 $25,939 $25,903 
 ____________
(1) Excludes accrued interest receivable of $9 and $27 as of December 31, 2020 and 2019, respectively.
93

FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
Interest-rate Payment Terms. The following table presents interest-rate payment terms for investment securities classified as held-to-maturity.
As of December 31,
20202019
Non-mortgage-backed securities:
   Fixed-rate$1,101 $2,151 
   Variable-rate1,145 2,347 
Total non-mortgage-backed securities2,246 4,498 
Mortgage-backed securities:
   Fixed-rate2,526 1,177 
   Variable-rate15,632 20,264 
Total mortgage-backed securities18,158 21,441 
Total amortized cost (1)
$20,404 $25,939 
 ____________
(1) Excludes accrued interest receivable of $9 and $27 as of December 31, 2020 and 2019, respectively.
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 December 31, 2020$$$$
As of December 31, 2019$65 $$$65 

94

FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
Note 8—Advances

The Bank offer a wide range of fixed- and variable-rate advance products with different maturities, interest rates, payment characteristics, and optionality. Fixed-rate advances generally have maturities ranging from one day to 30 years. Variable-rate advances generally have maturities ranging from less than 30 days to 20 years, where the interest rates reset periodically at a fixed spread to London Inter-Bank Offered Rate (LIBOR), Secured Overnight Financing Rate (SOFR) or other specified indices.

Redemption Terms. The following table presents the Bank’s advances outstanding by redemption terms.
 
As of December 31,
20202019
Due in one year or less$23,326 $64,413 
Due after one year through two years3,803 7,421 
Due after two years through three years3,347 5,420 
Due after three years through four years2,643 3,382 
Due after four years through five years3,657 4,778 
Due after five years13,867 11,042 
Total par value50,643 96,456 
Deferred prepayment fees(55)(9)
Discount on AHP advances(3)(3)
Discount on EDGE advances(1)(2)
Hedging adjustments1,584 725 
Total (1)
$52,168 $97,167 
___________
(1) Carrying amounts exclude accrued interest receivable of $77 and $214 as of December 31, 2020 and 2019, respectively.

The Bank offers callable advances to members that may be prepaid on prescribed dates (call dates) without incurring prepayment or termination fees. The Bank also offers prepayable advances, which are variable-rate advances that may be contractually prepaid by the borrower on specified dates without incurring prepayment or termination fees. Other advances may be prepaid only by paying a fee to the Bank, so the Bank is financially indifferent to the prepayment of the advance. The Bank had callable and prepayable advances outstanding of $1,800 and $4,693 as of December 31, 2020 and 2019, respectively.

The following table presents advances by year of contractual maturity or next call date for callable advances.
As of December 31,
20202019
Due or callable in one year or less$25,106 $67,939 
Due or callable after one year through two years3,768 6,451 
Due or callable after two years through three years3,027 4,613 
Due or callable after three years through four years2,383 3,067 
Due or callable after four years through five years3,637 4,517 
Due or callable after five years12,722 9,869 
Total par value$50,643 $96,456 

Convertible advances offered by the Bank allow the Bank to convert the fixed-rate advance to a variable-rate advance at the current market rate on certain specified dates. The Bank had convertible advances outstanding of $5,316 and $4,261 as of December 31, 2020 and 2019, respectively. The following table presents advances by year of contractual maturity or, for convertible advances, next conversion date.
95

FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
 
As of December 31,
20202019
Due or convertible in one year or less$28,258 $68,520 
Due or convertible after one year through two years4,142 7,437 
Due or convertible after two years through three years3,321 5,319 
Due or convertible after three years through four years2,612 3,342 
Due or convertible after four years through five years3,620 4,529 
Due or convertible after five years8,690 7,309 
Total par value$50,643 $96,456 

Interest-rate Payment Terms. The following table presents interest-rate payment terms for advances.
 
As of December 31,
20202019
Fixed-rate:
 Due in one year or less$15,304 $36,366 
 Due after one year24,620 25,985 
Total fixed-rate39,924 62,351 
Variable-rate:
 Due in one year or less8,022 28,047 
 Due after one year2,697 6,058 
Total variable-rate10,719 34,105 
Total par value$50,643 $96,456 

Advance Concentrations. The Bank’s advances are 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 $36,259 and $71,769 as of December 31, 2020 and 2019, respectively. This concentration represented 71.6 percent and 74.4 percent of the total par value of advances outstanding as of December 31, 2020 and 2019, respectively.
For information related to the Bank’s credit risk on advances and allowance for credit losses, see Note 2Summary of Significant Accounting Policies.

Note 9—Mortgage Loans Held for Portfolio

The Bank purchased fixed-rate residential mortgage loans directly from PFIs, who service and credit enhance the residential mortgage loans that they sold to the Bank. The Bank ceased purchasing these loans directly from PFIs in 2008. The Bank may also acquire fixed-rate residential mortgage loans through participation in eligible mortgage loans purchased from other FHLBanks.
96

FEDERAL HOME LOAN BANK OF ATLANTA
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

The following table presents information on mortgage loans held for portfolio by contractual maturity at the time of purchase.
As of December 31,
20202019
Medium-term (15 years or less)$$