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(Exact name of registrant as specified in its charter)
Federally
chartered corporation
i56-6000442
iUnited States
(State or other jurisdiction of incorporation or organization)
(I.R.S.
Employer Identification No.)
i1475 Peachtree Street, NE, iAtlanta, iGA
(Address of principal executive offices)
i30309
(Zip Code)
Registrant’s telephone number, including area code: (i404) i888-8000
_____________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
None
N/A
N/A
Securities registered pursuant to Section 12(g) of the Act:
Class
B Stock, par value $100
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes xiNo
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 xiNo
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. xiYes☐ 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). xiYes☐ No
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
iNon-accelerated
filer
x
Smaller reporting company
i☐
Emerging growth company
i☐
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 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. i☑
If
securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.i☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the
registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). i☐ Yes ☒ No
Registrant’s stock is not publicly traded and is only issued to members of the
registrant. Such stock is issued and redeemed at par value, $100 per share, subject to certain regulatory and statutory limits. As of June 30, 2023, the aggregate par value of the stock held by current and former members of the registrant was $i5,543,796,700. As of February 29, 2024, i59,108,272
total shares were outstanding, including mandatorily redeemable capital stock.
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 or 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 1A—Risk 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 shareholder’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 liquidity and minimum retained earnings target;
•the interest
rate environment in which the Bank does business;
•forward-looking accounting and financial statement effects; and
•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 or its members conducts its business; housing
prices, employment rates, and interest-rate changes;
•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 market interest rates on the Bank’s interest-rate sensitive assets and liabilities;
•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 cybersecurity risks and 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, including those that may result from the Finance Agency’s comprehensive review and analysis of the FHLBank System that began in 2022; 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.
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 U.S. government.
Cooperative. The Bank is a cooperative owned by member institutions that are required to meet certain eligibility criteria and purchase capital stock in the Bank
in order to become members of the Bank. Federally insured depository institutions, insurance companies, privately insured state-chartered credit unions, and community development financial institutions (CDFIs) with principal place of business located in the Bank’s defined geographic district and engaged in residential housing finance can be 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 795 financial institutions, comprised of 426 commercial banks, 246 credit unions, 60 insurance companies, 50 savings institutions, and 13 CDFIs as of December 31, 2023.
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, 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 to its member institutions. The Bank serves the public by providing its member institutions with a source of liquidity, thereby enhancing the availability of credit for residential mortgages and targeted community 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.
Based on the applicable regulation, the mission of the Bank is to provide to their members and housing associates financial products and services,
including but not limited to advances, that assist and enhance such members' and housing associates' financing of: (1) housing, including single-family and multi-family housing serving consumers at all income levels; and (2) community lending. As part of their mission, the FHLBanks serve as a reliable source of liquidity to their members throughout the economic cycle. The Finance Agency issued an Advisory Bulletin providing further 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;
•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 75.8 percent and 72.2 percent as of December 31, 2023 and 2022, respectively.
The Bank’s mission activities also include the Bank’s Affordable Housing Program (AHP) which provides
low to no cost funding to finance rental and for-sale housing for very low-, low-, and moderate-income households. 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. In addition to the required AHP assessment, the Bank’s board of directors may, from time to time, authorize additional voluntary housing contributions to further the Bank’s affordable housing mission. These programs will be discussed in more detail in Item 1. Business—Community Investment
Services.
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.
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 $96.6 billion and $109.6 billion as of December 31, 2023 and 2022, respectively, and advances represented 63.4 percent and 72.3 percent of total assets as of December 31, 2023 and 2022, respectively. Advances generated 71.0 percent, 69.6 percent, and 68.3 percent of total interest income for the years ended December 31, 2023, 2022, and 2021,
respectively.
Advances serve as a funding source for the Bank’s members for a variety of conforming and nonconforming mortgages. Thus, advances support 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;
•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, if a Bank makes a long-term advance (other than a Community Investment Cash Advance (CICA) advance), it must be for the purpose of enabling a member to purchase or fund new or existing residential housing finance assets. The Bank uses the proxy test authorized by Finance Agency regulations to make this determination, by confirming, in connection with each long-term advance, that the principal amount of all long-term advances currently held by the member does not exceed the total book value of residential housing finance assets held by such member.
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, thereby obtaining a security interest in eligible collateral to secure an advance prior to the time that the Bank originates or renews an advance. The Bank also 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. 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. The Bank requires delivery of cash and securities pledged to the Bank as collateral. Delivery of loan collateral is also required when pledged by insurance companies, CDFIs, and housing associates. For most commercial bank
and credit union members, delivery of loan collateral is not required. The Bank periodically works with commercial bank and credit union members to release collateral from the Bank’s lien to permit such members to pledge those assets to support borrowings, or potential borrowings, from the Federal Reserve Banks’ discount window.
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 overnight or 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.
•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.
•Callable SOFR Floater. This is an advance that provides intermediate funding at a variable rate, tied to Secured Overnight Financing Rate (SOFR) with the option to repay the
advance on specified dates with no prepayment fee. The call option may be Bermudan (quarterly) or European (one-time). The interest rate resets at periodic intervals, so pricing adjusts automatically to changing market conditions. Members can choose the advance term and rate reset period.
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 or European. 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 begins to accrue 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 6—Advances
to the Bank’s 2023 audited financial statements for further information on the distinction between par value and carrying value of outstanding advances.
(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 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):
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 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.
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 $15.6 billion and $9.0 billion of outstanding standby letters of credit as of December 31, 2023 and 2022, respectively.
Advances Par Value and Standby Letters of Credit Balance
Percent of Total Advances Par Value and Standby Letters of Credit
Truist Bank
North Carolina
$
30,201
26.82
Bank of America, National Association
North Carolina
18,184
16.15
Navy
Federal Credit Union
Virginia
7,167
6.37
BankUnited, National Association
Florida
6,015
5.34
Brighthouse Life Insurance Company
North Carolina
4,350
3.86
EverBank,
N.A.
Florida
4,085
3.63
Pentagon Federal Credit Union
Virginia
2,724
2.42
Fidelity & Guaranty Life Insurance Co.
Maryland
2,528
2.25
City
National Bank of Florida
Florida
2,188
1.94
United Bank
Virginia
2,009
1.79
Subtotal (10 largest borrowers)
79,451
70.57
Subtotal
(all other borrowers)
33,140
29.43
Total advances par value and standby letters of credit
$
112,591
100.00
Community Investment Services
The Bank’s 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 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. The Bank also funds voluntary housing programs such as the Multifamily Housing Bridge Fund (Bridge Fund). 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 of homes for households at or below 80 percent of the area median income. The funds are available to eligible parties through member financial institutions and through the following distinct products: First-time Homebuyer, Community Partners, and Community Rebuild and Restore;
•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; and
•the
board approved the Bridge Fund which was first launched in November 2023 to help close funding gaps for affordable multifamily rental housing projects caused by the steep rise in interest rates and construction costs. The Bridge Fund offers up to $500,000 per project to the Bank’s member financial institutions and their community housing partners in a competitive application process. Eligible projects for the Bridge Fund will include multifamily and mixed-use rental housing targeted to households earning up to 120 percent of the area median income. Projects must be at least fifty percent complete at the time of application and demonstrate a financing gap related to an increase in construction hard costs, such as construction materials and labor. Projects also must be located in the Bank’s district, which includes Alabama, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, and the District of Columbia.
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, 2023, 2022, and 2021. 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 $72 million, $21 million, and $15 million for the years ended December 31,
2023, 2022, and 2021, respectively.
In addition to the required AHP assessment, the Bank’s board of directors may, from time to time, authorize additional voluntary housing contributions. In 2023, the Bank’s board of directors authorized $19 million of additional voluntary housing contributions. This included $11 million in voluntary contributions to the Bank’s AHP Homeownership Set-aside program and $8 million to its new Bridge Fund. In 2022, the Bank made a $5 million voluntary housing contribution to its AHP Homeownership Set-aside Program.
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.
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 MPFProgram 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.
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, 2023.
The Bank’s MPP is independent of other FHLBanks’ mortgage loan programs. Therefore, the Bank had 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, 2023.
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 Bank maintains a portfolio of mortgage loans that were historically purchased directly from PFIs and are recorded on the balance sheet. 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, 2023, 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 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 57.5 percent and 61.9 percent of the Bank’s total investments as of December 31,
2023 and 2022, respectively, as discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Investments. Investments generated 28.9 percent, 30.1 percent, and 29.5 percent of total interest income for the years ended December 31,
2023, 2022, and 2021, 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 Bank’s MBS balance did not include any investments that were issued by the Bank’s members or an affiliate of a member as of December 31,
2023 and 2022.
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 Operations—Financial Condition—Investments.
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 $1.6 billion and $1.8 billion as of December 31, 2023 and 2022, 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 $104.0 billion and $115.9 billion as of December 31, 2023 and 2022, respectively.
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 U.S. 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. Pursuant to other arrangements to which the Bank is bound by, an FHLBank may also be required to make payment of principal or interest payments due on any consolidated obligation of any other FHLBank upon failure of such FHLBank to meet an obligation. 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 U.S. or any agency of the U.S.; 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, 2023 and 2022.
Consolidated obligations are issued with either fixed- or variable-rate coupon payment terms that may use a variety of indices, such as 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 Issue Program is to aggregate frequent smaller issues into a larger bond issue that may have greater market liquidity.
Consolidated Obligation Discount
Notes. Through the Office of Finance, the FHLBanks also issue consolidated obligation discount notes to provide short-term funds for advances to members, for the Bank’s other investments, and for the Bank’svariable-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.
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, 2023, the membership stock requirement was 0.07 percent (seven basis points) of the member’s total assets, subject to a cap of $18 million.
As of December 31, 2023, the activity-based stock requirement was the sum of the following:
•4.75 percent of
the member’s outstanding par value of advances;
•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; and
•0.10 percent (ten basis points) of members’ outstanding standby letters of credit.
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), which was set at zero as of December 31, 2023. Since the Bank did not have any multifamily residential mortgage loan assets
purchased from members or other targeted debt or equity investments outstanding, the targeted debt or equity investment stock requirement was inapplicable as of December 31, 2023.
Although applicable regulations allow the Bank to issue Class A stock, Class B stock, or both in any combination, to its members, the Bank’s capital plan allows it to issue only Class B stock.
Finance Agency regulations and the Bank’s Risk Management Policy 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:
•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
The total notional amount of the Bank’s outstanding derivatives was $111.6 billion and $81.7 billion as of December 31, 2023 and 2022, 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.
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 the U.S. government, 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.
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 authority 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, 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 their 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, they 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 their own audit of any financial statements of the Bank. The Bank was not reviewed or audited by the Comptroller General in 2023.
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 Standardsissued 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 the Bank’s strategic business objectives. In managing the Bank’s 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, 2023, the Bank had 337 full-time and two part-time employees. As of December 31, 2023, approximately 45 percent of the Bank’s workforce is female, 55 percent male, 48 percent non-minority and 52 percent minority. The Bank’s workforce is sufficiently staffed, and historically has included a number of longer-tenured employees. As of December 31, 2023, the average tenure of the Bank’s employees was 9.9 years. 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. There are no collective bargaining agreements with the Bank’s employees.
Total Rewards
The Bank seeks to attract, develop, engage, and retain a diverse group of talented employees to achieve its strategic business initiatives, enhance business performance and increase shareholder value. The Bank’s Employer of Choice strategy is supported by sponsoring a combination, of compensation of talent management, benefits 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 accidental death and dismemberment insurance, supplemental life insurance, and disability insurance;
•Learning and development programs –internal and external programs focused on coaching and
leadership development, skills development, diversity, equity and inclusion-based learning, an educational assistance program and professional certification assistance;
•Culture and Community Support – internal groups with various opportunities for participation, communication, sharing, learning, community and cultural and inclusion initiatives, community involvement including a charitable contribution matching program and volunteer hours;
•Succession planning – the Bank’s board of directors 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;
•Work/Life
balance – time away from work including time off for vacation, sick, personal, holidays, voting, jury duty and bereavement, parental and military leave and flexible work arrangements including a hybrid work model, reduced workweek and flexible schedules; and
•Wellness – onsite fitness center, employee assistance program, health coaching and interactive financial, physical and mental well-being education opportunities.
The Bank’s Performance Management program provides a framework for managing and developing employee performance including accomplishment of individual and team objectives within the Bank’s incentive compensation program. Annual ratings are based on established competencies and a consistent rating scale. The use of both a qualitative and quantitative rating scale allow managers to align
pay and discuss performance and development.
Diversity, Equity, and Inclusion Program
Diversity, equity and inclusion (DE&I) is a strategic priority for the Bank. The Bank recognizes that diversity of perspective increases capacity for innovation and creativity and that equity and inclusion allow the Bank to leverage the unique perspectives of all employees and strengthens the Bank’s retention efforts. The Bank’s DE&I officer is a member of the senior management team reporting to the president and chief executive officer acting as a liaison to the board of directors. The Bank operationalizes its commitment to DE&I through the development and execution of a three-year DE&I strategic plan that includes quantifiable metrics to measure its success. The plan is annually reviewed and approved by the board and performance is monitored
via regular reporting. DE&I is also a key component of the Bank’s incentive plan framework, which includes measures of success for each pillar of the Bank’s DE&I program. The Bank offers a range of educational opportunities and supports connection and belonging as well as personal and professional growth through the Bank’s DE&I initiatives such as employee resource groups and garners input into the program through the DE&I council, employee resource groups and DE&I ambassadors.
Corporate Social Responsibility
The Bank is committed to implementing a governance and risk management framework related to its Corporate Social Responsibility (CSR) program. The CSR program is overseen by the Bank’s CSR committee, which
is composed of representatives from various areas within the Bank. The CSR program is focused on the development of processes and reporting mechanisms to identify risks and opportunities, and measure the Bank’s impact on social, governance, and environmental issues related to the Bank’s mission, members, stakeholders, and communities. The Bank recognizes that identifying, assessing and measuring its impact on social concerns and the effectiveness of its governance structure, are conducive to the Bank’s short- and long-term success. The Bank’s CSR program continues to focus on diversity, equity and inclusion, affordable housing, community and economic development, climate risk in the Bank’s region, and strong corporate governance.
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, 2023, 2022, and 2021. 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 $72 million, $21 million, and $15 million for the years ended December 31, 2023, 2022, and 2021, 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 Supplemental Data, 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
High inflation, tightening monetary and fiscal policies, and broadening geopolitical conflicts could have a significant impact on the economy and to the Bank
In 2023, persistently high levels of inflation, tightening monetary and fiscal policies, and the ongoing geopolitical conflicts posed risks to the global economy and to the Bank, its members, and counterparties. In addition, in early 2023, a volatile and uncertain economic environment created stress in the banking industry and financial markets. Those factors, if continued, could increase certain risks faced by the Bank and adversely affect the Bank’s results of operations and financial
condition. The Bank continues to monitor the impact of these increased risks and take appropriate actions.
A prolonged downturn in the economy, including the U.S. housing market and related U.S. government monetary policies, could adversely affect the Bank’s business activities and results of operations.
The Bank’s business and results of operations are sensitive to the U.S. economy and the U.S. housing market. A prolonged period of slow growth in the U.S. economy, deterioration in general economic conditions, or a downturn in the housing market could adversely affect the Bank’s members, particularly those whose businesses are concentrated in the mortgage industry. Deterioration in the residential or commercial mortgage markets could also affect the value of collateral securing the Bank’s assets.
Unfavorable
economic and market conditions can be caused by many factors. Volatility and uncertainty in global economic and political climate can influence, among other business activities, member borrowing activity and the Bank’s lending and investments patterns. Additionally, natural disasters, pandemics, and other widespread health emergencies, terrorist attacks, cyberattacks, civil unrest, geopolitical instability, or conflicts, or other unanticipated or catastrophic events could create economic and financial disruptions and uncertainties, which could adversely impact the Bank’s business activities, ability to pay dividends, results of operations, as well as lead to operational difficulties.
The Bank’s business and results of operations are significantly affected by the monetary policies of the U.S. government and its agencies, including the Federal Reserve. The Federal Reserve Board’s policies directly and indirectly
influence interest rates on the Bank’s assets and liabilities and could adversely affect the demand for advances and consolidated obligations, as well as the financial condition and results of operations of the Bank’s members. In addition, the FHLBanks currently play a predominant role as lenders in the federal funds market; therefore, and disruption in the federal funds market or any related regulatory or policy change may adversely affect the Bank’s cash management activities, results of operations, and reputation.
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. Finance Agency, within its statutory authority, may issue regulations that impact FHLBanks securities, businesses and/or 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 debt securities, ability to conduct business or on the cost of doing business. Reform of the federal support of U.S. housing finance, additional requirements
for FHLBank membership, including capital requirements, asset composition tests and collateralization of advances, may, if implemented, directly and indirectly impact FHLBanks and other GSEs that support the U.S. housing market. Legislation and regulations affecting the Bank’s members, including related to capital, liquidity and asset requirements may also impact the extent to which they engage in business with the Bank, potentially impacting the Bank’s advances and earnings ability. Additional requirements for FHLBanks members, including capital requirements, measures that impact the valuation of the Bank issued debt securities and its collateralization, and other measures targeting Fannie Mae and Freddie Mac may, if implemented, directly and indirectly impact FHLBanks and other GSEs that support the U.S.
Changes or inconsistency 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; FHLBanks’ or member additional liquidity and capital requirements (including whether a member meets required tangible capital levels to access advances, or maintains certain asset levels in residential mortgage loans); 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.
Following a comprehensive review that began in the fall of 2022, in late 2023, the Finance Agency issued the “FHLBank System at a 100 – Focusing on the Future” report presenting its review and analysis of the FHLBank System and the actions and recommendations that it plans to pursue over a multi-year effort, in service of its vision for the FHLBank
System. The report focused on four broad themes: (1) the mission of the FHLBank System; (2) the FHLBank System as a stable and reliable source of liquidity; (3) housing and community development; and (4) FHLBank System operational efficiency, structure, and governance. Many of the recommendations from the report may be implemented by the Finance Agency through ongoing supervision, guidance or rulemaking within its existing statutory authority, while other recommendations may require legislative action or further study.
The Bank cannot predict what actions will ultimately result from the Finance Agency’s recommendations, the timing of any actions, the extent of any changes to the Bank or the FHLBank System, or the ultimate effect on the Bank or the FHLBank System in the future. Potential changes resulting from the Finance Agency’s recommendations (including changes relating to the FHLBanks’ mission, liquidity
role, membership and lending requirements, affordable housing contributions and support for community investment, or operations, structure, and governance) could increase Bank’s operational costs and expenses, result in heightened scrutiny of the Bank and its mission and activities, and impact the Bank’s business, which may affect the Bank’s financial condition, or results of operations, or the value of membership in the Bank. The extent to which the report ultimately results in changes to regulatory requirements or supervisory expectations that impact or limit the use of Bank’s advances by members or the Bank’s ability to lend to members may have a significant negative impact on the Bank’s financial condition or results of operations.
Competition for advances and refinancing risk on short-term advances could have an adverse effect on earnings.
The Bank operates in a highly competitive environment. Advances are the Bank’s primary product offering and represented 63.4 percent of the Bank’s total assets for the year ended December 31, 2023. 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 U.S. 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. Changes made by the Bank to lower pricing of its advances to compete with these alternative funding sources may decrease the
Bank’s profitability on advances, while pricing increases used to help sustain income may render the Bank less competitive. A failure by the Bank to adequately manage pricing could have a material adverse impact on the Bank’s financial condition and results of operations, including dividend yields to members.
The Bank is exposed to risks because of member concentration.
The Bank is subject to member 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 may only accept members within the Bank’s regulatory district that meet regulatory eligibility criteria, which restricts its ability to expand its membership. The Bank’s largest borrower as of December 31,
2023, was Truist Bank, which accounted for $24.7 billion, or 25.5 percent of the Bank’s total advances then outstanding. In addition, as of December 31, 2023, 10 of the Bank’s member institutions (which includes Truist Bank) collectively accounted for $70.5 billion, or 72.7 percent, of the Bank’s total advances then outstanding. The financial services industry continues to experience consolidation, which may impact 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 that displaces advance demand, or as a result of other market conditions, competition or otherwise, the Bank’s financial condition and results of operations could be negatively affected.
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 liquidity.
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. Additionally, the Finance Agency increased liquidity requirements aimed at enabling the Bank to provide advances and letters of credit for members during a sustained capital markets disruption and which therefore may require the
Bank to hold an increased amount of liquid assets, which could hinder the Bank’s ability to meet its core mission asset ratio, and could reduce the Bank’s ability to invest in higher-yielding assets and adversely impact net interest income. Refer to Item 1.Business. Overview. for further discussion of the Bank’s core mission asset ratio.
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-
The Bank relies upon derivative instruments to reduce its interest-rate risk associated with certain assets and liabilities on the Bank's balance sheet, including MBS and advances, and the Bank may be required to change its investment strategies and advance product offerings if it is not able to enter into effective derivative instruments on acceptable terms.
The Bank uses derivative instruments
to attempt to reduce its interest-rate risk. 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.
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.
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, 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.
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 or is unable to liquidate the collateral for the value assigned to it upon 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.
The Bank is jointly and severally
liable for payment of principal and interest on the consolidated obligations issued by the other FHLBanks and for jointly maintaining a minimum aggregate amount of AHP contributions
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 the FHLBanks, backed only by the collective 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 may at any time, pursuant to regulation, order an FHLBank to make principal or interest payments due on any consolidated obligation, including of another FHLBank. Pursuant to other arrangements to which the Bank is bound by, an FHLBank
may be required to make payment of principal or interest payments due on any consolidated obligation of any other FHLBank upon failure of such FHLBank to meet an obligation. Although the Bank would be entitled to reimbursement from a non-complying FHLBank, 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.
If the aggregate AHP contributions of all 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.
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, 2023, 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. On November 14, 2023, Moody’s affirmed the Aaa ratings of FHLBanks and changed the outlook on these ratings to negative from stable, reflecting the change in outlook of the sovereign credit of the U.S., the S&P rating remains 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 or changes in outlook to the U.S. sovereign credit rating 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. A potential failure by the U.S. to address its statutory debt ceiling in a timely manner and continued uncertainty relating to the debt limit, increase the possibility of potential credit-rating downgrades to the U.S. sovereign credit.
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 for the Bank, including as a
consequence of U.S. debt levels, the U.S. fiscal budget process, and 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.
The financial models and the underlying assumptions used to value financial instruments and manage risk may materially differ 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.
The Bank employs various strategies to attempt to manage the risks associated with the use of models. 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 a materially adverse financial impact for the Bank.
The Bank relies heavily upon information systems and other technology. Any disruption, failure, cybersecurity incident or threat 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, or 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. The Bank’s information systems rely on certain critical vendors to provide technology solutions. Computer systems, software, and networks can be vulnerable to failures and interruptions, including as the result of any cybersecurity threats or incidents (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. At times, there may be an increased risk of cyberattacks as a result of geopolitical conflicts. 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 cybersecurity threats or incidents.
Like many financial institutions, the Bank has seen an increase in cybersecurity risk. For the Bank, cybersecurity threats 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 preventive 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 business 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 the Bank’s 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 cybersecurity 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 cybersecurity incidents or threats 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. Refer to Item 1C. Cybersecurity for further discussion of the Bank’s cybersecurity risk management and strategy and governance.
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.
Natural disasters, including those resulting from climate change, in the Bank’s region, could adversely affect the Bank’s
operations, profitability and financial condition.
Portions of the Bank’s region or collateral locations also are subject to risks from hurricanes, tornadoes, floods, wildfires and other natural disasters. The Bank’s region includes areas designated as Special Flood Hazard Areas (SFHAs) which are deemed particularly vulnerable. Climate change contributes to the increasing unpredictability of major natural disasters, which could negatively affect the Bank’s ability to predict losses from such events.
Natural disasters 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, create imbalances on insurance such as inadequate insurance, insurance shortfalls, premium increases, may impact to 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. Natural disasters could disrupt the Bank’s operations or the operations of third parties on which the Bank relies. Steps to address the risk of more frequent or severe weather events resulting from climate change could result in a potentially disruptive transition away from carbon-intense industries and create additional transitional risks and costs that include those to adapt to new regulation to address climate change risks. Such a transition could negatively impact certain regions and regional economies, affecting the ability of borrowers in those industries or regions to pay their mortgage loans. Legal or regulatory responses to concerns about global climate change may lead to higher costs of compliance and increasing direct and indirect expenses and lending costs for the Bank’s members.
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. Like many organizations, the Bank has experienced increased competition in its recruitment and retention of employees. 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 withcompensation 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 1C. Cybersecurity.
Cybersecurity Risk Management and Strategy
The Bank has implemented processes for assessing, identifying, and managing risks from cybersecurity threats or incidents that may directly or
indirectly impact the Bank’s business strategy, results of operations, or financial condition. Please refer to Item 1A. Risk Factors for a description of cybersecurity incident and threat risk.
The Bank’s cybersecurity risk management framework for assessing, identifying, and managing risks from cybersecurity threats is designed to protect the confidentiality, integrity, and availability of the Bank’s information technology assets and data and include specific controls for the monitoring,
mitigation, and reporting on cybersecurity risk management. Those processes include information security policies, incident response and business continuity plans focusing on the Bank’s appropriate response to threats and incidents and operations and business continuance.
The Bank’s board annually reviews and approves the Bank’s risk management policies. The Bank develops mitigation plans, monitors tactical implementation, and engages in detailed gap analysis, risk assessments and monitors remediation plans to close any outstanding gaps, all of which are overseen by the Bank’s Security Governance Committee, and reported to the board. Cybersecurity risk management is integrated with the Bank’s overall risk management framework overseen by the Bank’s board. Bank policies establish administrative, technical, and physical safeguards designed to protect the security, confidentiality, and integrity of Bank information
in accordance with Finance Agency regulations and applicable laws. The Bank’s cyber incident response plan determines how cybersecurity threats and incidents are identified, classified, escalated, and reported to senior management and the board. The cyber incident response plan also stipulates management’s materiality assessment of the threat or incident for the purposes of public disclosure. The Bank’s cyber incident response plan includes third party cybersecurity incidents and threats.
The business continuity management program is designed to oversee and implement resilience, continuity, and response capabilities to safeguard employees, products and services, minimize financial losses, and minimize the impact to service to members during a disruption event, which includes the unavailability of information technology assets due to cybersecurity threats or incidents and other unintentional events like fire,
power loss, and other technical incidents such as hardware failures. The business continuity management program provides planning for the restoration of facilities, communications, information technology systems, personnel, and other components necessary for the continuity of critical Bank processes. The business continuity management policy is overseen by the board.
The Bank retains external consultants to assist in the development and monitoring processes for assessing, identifying, and managing cybersecurity incident and threat risk. The Bank engages third-party services to conduct evaluations of security controls, whether through penetration testing, independent audits or consulting on practices to address new challenges. These evaluations include testing both the design and operational effectiveness of security controls. The Bank also requires subcontractors to report on cybersecurity incidents so the
Bank can assess their impact. As part of the Bank’s vendor management process, the Bank undertakes due diligence of third-party systems with whom the Bank will interact with, including risk profiling and classification, in addition to requiring data protection covenants in its vendor agreements. The Bank’svendor risk management program includes regular reviews and oversight of all service providers in accordance with a risk profile classification. The Bank reviews vendor performance, relevant technologies utilized by vendors and promotes escalation of any unsatisfactory reviews, as part of Bank’s continuous assessment of its vendors.
During
the period covered by this report, risks from cybersecurity incidents or threats did not have a material impact on the Bank’s strategy, results of operations, or financial condition. The Bank has experienced minor cybersecurity incidents and threats in the past, none of which have had a material effect on the Bank’s financial condition or results of operations. Cybersecurity incidents may occur in the future and any such cybersecurity incident could result in significant adverse impact to the Bank, the Bank’s members, and their customers. The Bank is prepared to assess materiality of any such cybersecurity incident from several perspectives including, but not limited to, the Bank’s ability to continue to service the Bank’s members and protect the privacy of their data entrusted to us, lost revenue, disruption of business operations, increased operating costs, litigation, and reputational harm.
Cybersecurity
Governance
The Bank’s board of directors devotes significant time and attention to data and systems protection, including cybersecurity and information security risk. The board’s Enterprise Risk and Operations Committee oversees the Bank’s information security program through setting of policies and the Bank’s risk management framework and has oversight of the cybersecurity risk management efforts which include risks from cybersecurity threats and has assigned specific controls for the mitigation, monitoring and reporting associated with those risks. The board also oversees management’s approach to staffing, and processes and practices to gauge and address cybersecurity and information security risk. The board receives reports on management of cybersecurity risk and implementation of cybersecurity risk management as well presentations and reports on cybersecurity effectiveness assessments and monitoring updates,
along with management’s recommendations regarding Bank’s information security policies.
The Bank’s Security Governance Committee is led by the chief information security officer and has a cross-functional membership comprised of representatives from the Bank’s operational risk, information security, information technology, legal, operations, and other departments that provide both specific, technical and multidisciplinary expertise to the committee. The committee has integrated oversight of the information security program, the physical security program, and is responsible for reviewing security policies and procedures, security exceptions and violations, the processes and standards to implement the policies and procedures defined in the cybersecurity risk management program, the Bank’s cyber incident response plan, the security awareness program and implementation reports, and for providing guidance and monitor
progress on major information security projects, and regulatory changes and requirements.
The Bank has a dedicated Information Security Department comprised of specialized professionals responsible for the day-to-day, hands-on management of cybersecurity risk and that handle the processes and procedures to mitigate and implement protective, proactive and reactive measures to protect the Bank against those risks, responsible for developing, documenting, and approving the Bank’s technical information security control standards, guidelines, and procedures designed to preserve the confidentiality, integrity, and availability of the Bank’s information technology assets and data under the Bank’s control.
The combined expertise of the Bank’s chief information officer and the chief information security officer in cybersecurity include graduation in Computer
Science, Certification in Risk and Information Systems Control (CRISC), Certification in Information Systems Security Professional (CISSP), and Certification in Information Systems Auditor (CISA), along with decades of experience in computer science, information and records security, business continuity, technology governance and compliance, technology risk services, cyber risk assessments, security operations monitoring and response, incident response, security strategy and architecture, awareness training, threat intelligence, identity and access management, vulnerability and penetration testing, maturity assessment, impact analysis, disaster events, recovery response, business resiliency, third party systems due diligence, deep knowledge of software systems and platforms, implementation methodologies, and various technology systems servicing internal and external customers.
The Security Governance Committee
meets regularly and receives prompt and periodic information, as needed or applicable pursuant to Bank policies and plans, from the Information Security Department which in turn provides periodic, regular and prompt reporting to senior management. Reports include topics such as threat intelligence, major cybersecurity risk areas, technologies and best practices, project development and implementation, any cybersecurity incidents or threats occurred, as well risk assessment, management and monitoring updates, as applicable and as needed.
Bank policies and processes are designed such that the board would receive prompt and periodic information from management or the Security Governance Committee on any cybersecurity or information security incident or threat that may pose significant risk to the Bank and would continue to receive regular reports on any incident or threat until its conclusion. The Bank’s Enterprise
Risk and Operations Committee also receives regular presentations and reports throughout the year on cybersecurity and information security addressing a broad range of topics, including updates on technology trends, regulatory developments, legal issues, policies and practices, information security resources and organization, the threat environment and vulnerability
assessments, and specific and ongoing efforts to prevent, detect, and respond to potential gaps, internal and external incidents and critical threats. At least quarterly, or more often, as necessary, the Enterprise Risk and Operations Committee discusses cybersecurity and information security risks with
the Bank’s chief information officer and chief information security officer.
Item 2. Properties.
The Bank owns approximately 235,514 square feet of office space at 1475 Peachtree Street, NE, Atlanta, Georgia30309. The Bank occupies approximately 220,017 square feet of this space and leases the remaining space to tenants. The Bank leases 2,993 square feet of office space located in Washington, D.C., which is shared with two other FHLBanks. The Bank also leases off-site
backup facilities for the Bank’s disaster recovery office space. The Bank’s management believes these facilities are well maintained and are adequate for the Bank’s operations.
Item 3. Legal Proceedings.
The Bank may be 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
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 29, 2024, the Bank had 797 member and non-member shareholders and 59 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, 2023, 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 activity-based stock requirements related to new advances or standby letters of credit, as applicable.
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 $11.6 billion, $11.4 billion, and $19.9 billion in standby letters of credit in 2023, 2022, and 2021, 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.
Item 6. [Reserved]
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, 2023 and 2022, and results of operations for the years ended December 31, 2023 and 2022. 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 2022 and 2021, see the Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are contained in the Bank’s 2022 Annual Report on Form 10-K, as filed with the SEC on March 10, 2023.
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 is focused on providing value to members by delivering solutions that meet their needs and the communities they serve and enhancing the availability of residential mortgage and community investment credit. 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 and the Bank’s regulatory environment are significant components 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 operations. 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.
Interest rates are also a significant factor on the Bank’s business outlook. Changes in interest rates can impact the Bank’s interest rate risk management, profitability, and return on equity (ROE). It can also impact member advance demand, as rate uncertainty can impact deposit levels at the Bank’s members.
Merger activity involving the Bank’s members can impact the Bank’s business outlook. As the financial industry continues to experience consolidation, the Bank’s membership base
may decrease, and the Bank’s 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.
The following table presents the Bank’s total assets, total liabilities, and total capital (dollars in millions). These items are discussed in more detail below.
As
of December 31,
Change
2023
2022
Amount
Percent
Total
assets
$
152,370
$
151,622
$
748
0.49
Total
liabilities
144,254
143,976
278
0.19
Total
capital
8,116
7,646
470
6.14
•Total assets increased primarily due to a $13.3 billion, or 32.5 percent, increase in total investments, partially offset by a $13.0 billion, or 11.9 percent, decrease in advances. The increase in total investments includes a $6.2 billion increase in held-to-maturity mortgage-backed securities and $7.5 billion in liquidity investments. The decrease in advances was primarily due to member demand
moderating during the latter part of 2023.
•Total liabilities increased primarily due to a $421 million, or 87.6 percent, increase in accrued interest payable, partially offset by a $253 million, or 13.9 percent, decrease in deposits.
•The increase in capital was primarily due to the increase in capital stock and retained earnings. The increase in capital stock was primarily due to increases in the membership stock requirement and in the advances activity-based stock requirement which became effective August 25, 2023. Retained earnings increased to $2.5 billion as of December 31, 2023, compared to $2.3 billion as of December 31, 2022.
Results
of Operations
The following table presents the Bank’s significant income items for the years presented and provides information regarding the changes during those years (dollars in millions). These items are discussed in more detail below.
•Increases
in net interest income and net income were primarily due to an increase in interest rates which impacted income from interest-earning assets more than the expense from interest-bearing liabilities, as well as an increase in average advance balances. The positive impact to net interest income and net income related to the higher average advance balances was offset by a corresponding increase in average consolidated obligation balances.
•Average advance balances were $125.4 billion for the year ended December 31, 2023, compared to $75.8 billion for 2022.
•Average consolidated obligation balances were $166.3 billion for the year ended December 31, 2023, compared to $106.5
billion for 2022.
The following table presents the Bank’s significant income ratios for the years presented. These items are discussed in more detail below.
For
the Years Ended December 31,
Change
2023
2022
2021
2023 vs. 2022
2022 vs. 2021
ROE
7.43
%
3.18
%
2.79
%
4.25
0.39
Average
daily SOFR
5.01
1.64
0.04
3.37
1.60
ROE spread to average daily SOFR
2.42
1.54
2.75
0.88
(1.21)
Net
yield on interest-earning assets
0.50
0.28
0.34
0.22
(0.06)
•The increase in ROE for the year ended December 31, 2023, compared to the year ended December
31, 2022, was primarily due to the increase in net income.
•The ROE spread to average daily SOFR for the years ended December 31, 2023 and 2022, was impacted by the explanation provided above related to the change in ROE, offset by an increase in average daily SOFR.
•The increase in the Bank’s net yield on interest-earnings assets for the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily due to increases in interest rates that impacted the income from interest-earning assets more than the expense from interest-bearing liabilities.
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.
Total
advances decreased by 11.9 percent as of December 31, 2023, compared to December 31, 2022 primarily due to lower member demand towards the end of 2023. A significant percentage of advances originated during 2023 and 2022 were short-term advances.
As of December 31, 2023 and 2022, 40.5 percent and 45.5 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 SOFR. As of December 31, 2023 and 2022, 64.9 percent and 34.5 percent, respectively,
of the Bank’s fixed-rate advances were swapped. SOFR-indexed and OIS-indexed advances comprised 91.3 percent and 6.24 percent, respectively of the Bank’s variable-rate advances as of December 31, 2023. 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 72.7 percent of the Bank’s total advances outstanding as of December 31, 2023. Further information regarding the Bank’s 10 largest borrowing member institutions and breakdown of their individual advance balances as of December 31, 2023 is contained in Item
1. Business—Credit Products—Advances. The Bank monitors concentration risk and believes it 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.
(1)Federal funds sold includes $190 million with BankUnited, National Association, one of the Bank’s 10 largest borrowers
as of December 31, 2022.
(2) The weighted-average yields on available-for-sale securities and held-to-maturity securities are calculated as the sum of each debt security using the period- end balances multiplied by the coupon rate adjusted by the impact of amortization and accretion of premiums and discounts, divided by the total debt securities in the applicable available-for-sale securities and held-to-maturity securities portfolio.
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, 2023, these investments
were 338 percent of the Bank’s regulatory capital. These investments exceeded the 300 percent level due to a decrease in the amount of regulatory capital that resulted from a decrease in advances as of December 31, 2023. The Bank was in compliance with this regulatory requirement at the time of its MBS purchases and is not required to sell any previously purchased MBS. However, the Bank will be precluded from purchasing additional MBS until its MBS to regulatory capital declines below 300 percent. The Bank was in compliance with this regulatory requirement as of December 31, 2022, as these investments amounted to 274 percent of the Bank’s regulatory capital. The increase in MBS as of December 31, 2023, compared to December 31, 2022, was due to the purchase of MBS during
2023.
The amount held in other investments varies 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 increase in other investments
as of December 31, 2023, compared to December 31, 2022, primarily relates to an increase in securities purchased under agreements to resell as the Bank retained additional liquidity at year-end 2023.
Mortgage
Loans Held for Portfolio
The Bank purchased fixed-rate residential mortgage loans directly from PFIs and through participation in eligible mortgage loans from other FHLBanks. The decrease in mortgage loans held for portfolio from December 31, 2022 to December 31, 2023 was primarily due to the maturity and prepayments of these assets during the year.
The following table presents the Bank’s mortgage loans outstanding by redemption terms (dollars in millions).
(1) Consists of premiums, discounts, and hedging adjustments.
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, 2023 and 2022. The following table presents the percentage of unpaid principal balance of
conventional residential mortgage loans held for portfolio for the five largest state concentrations.
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. All the Bank’s deposits are uninsured. 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.
Consolidated Obligations
The Bank funds its assets primarily through the issuance of consolidated obligation bonds and consolidated obligation
discount notes. The increase in consolidated obligations from December 31, 2022 to December 31, 2023 was primarily a result of increased liquidity needs during the year. Consolidated obligation issuances financed 92.9 percent of the $152.4 billion in total assets as of December 31, 2023, a slight decrease from the financing ratio of 93.3 percent as of December 31, 2022.
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 SOFR. As of December 31, 2023 and 2022, 92.4 percent and 91.9 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, 2023 and 2022. As of December 31, 2023 and 2022, 26.6 percent and 28.7 percent, respectively, of the Bank’s fixed-rate consolidated obligation discount notes were swapped.
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 10—Capital to
the Bank’s 2023 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;
•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.
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 reclassifications. 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 13, 2023, the Bank received notification from the Finance Agency that, based on September 30, 2023 data, the Bank meets the definition of “adequately capitalized.”
Each FHLBank is required 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, 2023, the Bank was in compliance with this ratio.
On July 27, 2023, the Bank’s board of directors approved an increase to the B1 membership stock requirement and dollar cap, and the B2 advances activity-based
stock requirement. The B1 membership stock requirement was increased from 0.05 percent to 0.07 percent of a member’s total assets and the dollar cap was increased from $15 million to $18 million. The B2 advances activity-based stock requirement was increased from 4.25 percent to 4.75 percent of the member’s outstanding par value of advances. These capital stock requirement changes were effective August 25, 2023 and resulted in an increase of $805 million in total capital stock. There were no changes to the B3 standby letters of credit activity-based stock requirement.
The Capital Agreement provides that each FHLBank will, on a quarterly basis, contribute 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 (excluding fair-value adjustments) for the calendar 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’s targets were to maintain (1) a capital-to-assets ratio of 4.50 percent to 6.00 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. The Bank believes that daily excess stock repurchases and reasonable quarterly 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. Beginning in 2021, the Bank began using SOFR as the index for its dividend spreads. 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 2023, 2022, and 2021, is contained in Note 10—Capital
to the Bank’s 2023 audited financial statements.
Results of Operations
The following is a discussion and analysis of the Bank’s results of operations for the years ended December 31, 2023 and 2022.
Net Income
The following table presents the Bank’s significant income items for the years presented and provides information regarding the changes during those years (dollars in millions).
These items are discussed in more detail below.
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 (dollars in millions):
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. Fair value gains and losses of derivatives and hedged items designated in fair value hedging relationships are also recognized in interest income or interest expense. When a hedging relationship is discontinued, the cumulative fair value adjustment on the hedged item will be amortized into interest income or expense over the remaining life of the asset or liability. The impact of hedging on net interest income were decreases of $852 million, $211 million, and $219 million during the years ended December 31, 2023,
Below are the primary factors that impacted net interest income and net income for the years ended December 31, 2023 and 2022:
•Increases in net interest income and net income were primarily due to an increase in interest rates which impacted income from interest-earning assets more than the expense from interest-bearing liabilities, as well as an increase in average advance balances. The positive impact to net interest income and net income related to the higher average advance balances was offset by a corresponding increase in average consolidated obligation balances.
•Average
advance balances were $125.4 billion for 2023, compared to $75.8 billion for 2022.
•Average consolidated obligation balances were $166.3 billion for the year ended December 31, 2023, compared to $106.5 billion for 2022.
The following tables present the change in interest income and expense due to volume or rate variance for the years ended December 31, 2023, 2022, and 2021 (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.” 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 20 basis points, 16 basis points, and 34 basis points for 2023, 2022, and 2021, respectively. The increase in interest-rate spread for 2023, compared to 2022, was primarily due to increases in interest rates that impacted the income from interest-earning assets more than the expense from interest-bearing liabilities. The overall changes in net
interest income during 2023, compared to 2022, was primarily rate related.
Average
interest-earning assets to interest-bearing liabilities
106.31
106.46
Net yield on interest-earning assets(7)
$
178,972
$
889
0.50
$
115,625
$
327
0.28
Changes
in net interest income
$
(158)
$
720
$
562
____________
(1)Includes amounts recognized for the right to reclaim cash collateral
paid under master netting agreements with derivative counterparties.
(2)Includes available-for-sale securities at amortized cost.
(3)Interest income and average yield include net prepayment fees on advances that were not material for the years ended December 31, 2023 and 2022.
(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.
(6) 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.
(7) Calculated as interest earnings divided by total-earning assets, with net interest earnings equaling the difference between total interest earned and total
Average
interest-earning assets to interest-bearing liabilities
106.46
105.55
Net yield on interest-earning assets(7)
$
115,625
$
327
0.28
$
82,179
$
281
0.34
Changes
in net interest income
$
218
$
(172)
$
46
____________
(1)Includes amounts recognized for the right to reclaim cash collateral
paid under master netting agreements with derivative counterparties.
(2)Includes trading securities at fair value and available-for-sale securities at amortized cost.
(3)Interest income and average yield include net prepayment fees on advances that were not material for the year ended December 31, 2022 and $59 million for the year ended December 31, 2021.
(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.
(6) 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.
(7) Calculated as interest earnings divided by total-earning assets, with net interest earnings equaling the difference between total interest earned and total
The following tables present the net effect of derivatives and hedging activity on the Bank’s results of operations for the years presented (dollars in millions):
Gains
on derivatives not receiving hedge accounting including net interest settlements
$
1
$
1
$
—
$
2
Net
losses on trading securities (3)
—
(1)
—
(1)
Total effect on noninterest income
$
1
$
—
$
—
$
1
____________
(1)Represents
interest income or expense on derivatives included in net interest income.
(2)Amounts in “Other” include 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.
Noninterest Income (Loss)
The following table presents
the components of noninterest income (loss) for the years presented (dollars in millions):
During 2022, the Bank received a $4 million net litigation settlement related to certain investments in London Interbank Offered Rate (LIBOR)-based financial instruments claim.
The following table presents noninterest expense and AHP assessment for the years presented (dollars in millions):
For
the Years Ended December 31,
Change
2023
2022
2021
2023 vs. 2022
2022 vs. 2021
Noninterest expense:
Compensation and benefits
$
80
$
65
$
80
$
15
$
(15)
Cost
of quarters
7
4
4
3
—
Other operating expenses
44
43
34
1
9
Total
operating expenses
131
112
118
19
(6)
Finance Agency and Office of Finance
21
18
17
3
1
Voluntary
housing contributions
19
5
—
14
5
Other
2
3
14
(1)
(11)
Total
noninterest expense
173
138
149
35
(11)
Affordable
Housing Program assessment
72
21
15
51
6
Total
noninterest expense and AHP assessment
$
245
$
159
$
164
$
86
$
(5)
The Bank records AHP assessment expense at a rate of 10 percent of income before assessment, excluding interest expense on mandatorily redeemable capital stock.
During
2023, the Bank made an $11 million voluntary housing contribution to its AHP Homeownership Set-aside Program and an $8 million voluntary housing contribution to its Multifamily Housing Bridge Fund to assist eligible borrowers purchase or rehabilitate a home through the Bank's member financial institutions, compared to a $5 million voluntary housing contribution to its AHP Homeownership Set-aside Program during 2022.
Additional Financial Data.
The following table presents additional financial data for the last five fiscal years (dollars in millions).
(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 (dollars in millions):
(3) Calculated as net income, divided by average total equity.
(4) Calculated
as net income, divided by average total assets.
(5) 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.
(6) Calculated as dividends declared during the year, divided by net income during the year.
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.
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 U.S. and are not guaranteed by either the U.S. or any government agency, but have historically received the same credit
rating as the government bond credit rating of the United States. As a result, the Bank generally has comparatively stable access to funding through a diverse investor base at relatively favorable spreads to U.S. Treasury rates. The Bank’s income and liquidity would be adversely affected if it were not able to access the capital markets at competitive rates for an extended period.
The Bank’s short-term funding is generally driven by member advance 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 recent SEC 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. 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.
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 their discretion, to purchase consolidated obligations up to an aggregate amount of $4.0 billion. No borrowings under this authority have been outstanding since 1977.
Liquidity Reserves for Deposits. Finance Agency regulations require the Bank to hold a total amount of obligations of the United States, deposits in eligible banks or trust companies, or advances with maturities not exceeding five years, in an amount not less than the amount of total member deposits. The Bank has complied with this requirement throughout 2023.
Operational Liquidity. In order to ensure
adequate operational liquidity (generally, the ready cash and borrowing capacity available to meet the Bank’s intraday needs) each day, Bank policy establishes a daily liquidity target based upon member deposit levels and current day liability maturities and asset settlements. The Bank has met this liquidity requirement throughout 2023.
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 regulatory levels, as necessary for providing unanticipated extensions of advances to members or draws on letters of credit to beneficiaries. The Bank has met this liquidity requirement as directed by the Finance Agency throughout 2023.
Summary of Cash Flows
The following table presents a summary of net cash provided by (used in) the Bank’s operating, investing, and financing activities (dollars in millions):
Net increase (decrease) in cash and due from banks
$
1
$
(738)
$
(2,026)
Two
primary drivers that can impact net operating cash flows are fluctuations in net income and net change in derivatives and hedging activities.
•The Bank recorded net income of $649 million and $184 million for the years ended December 31, 2023 and 2022, respectively.
•The Bank recorded a net negative change of $470 million in derivative and hedging activities for 2023 compared to a net positive change of $1.1 billion in derivative and hedging activities in 2022. The change in derivative and hedging activities was primarily driven by the change in interest rates.
•The Bank
recorded a positive change of $421 million and $409 million for the years ended December 31, 2023 and 2022, respectively, related to changes in accrued interest payable. The change in accrued interest payable is primarily driven by the change in interest rates.
Net cash provided by investing activities fluctuate primarily based on advances and investing activities.
•The Bank originated a total of $470.0 billion of advances and collected $483.4 billion of advances principal for 2023 compared to $381.3 billion and $315.8 billion, respectively, for the same period in 2022.
•The Bank purchased investment securities of
$10.8 billion and received proceeds from principal collected of $5.1 billion for 2023 compared to $11.2 billion and $3.4 billion, respectively, for the same period in 2022. For 2023, the Bank recorded a net change of negative $6.7 billion related to liquidity investments compared to a net change of negative $3.4 billion for the same period in 2022.
Net cash used in financing activities fluctuate primarily based on the issuance and payments for maturing and retiring consolidated obligations.
•The Bank issued $413.2 billion in consolidated obligations and paid $414.2 billion for maturing
and retiring consolidated obligations for 2023, compared to $876.4 billion and $804.6 billion, respectively, for the same period in 2022.
Anticipated Cash Expenditures
The following table presents the payment due date or expiration terms of the Bank’s significant anticipated cash expenditures as of December 31, 2023 (dollars in millions).
One
year or less
After one year through three years
After three years through five years
After five years
Total
Consolidated obligations(1)
$
111,149
$
22,320
$
8,724
$
1,101
$
143,294
Pension
and post-retirement contributions(2)
3
11
4
11
29
Total
$
111,152
$
22,331
$
8,728
$
1,112
$
143,323
____________
(1)
Does not include 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 contributions for the qualified pension plan and scheduled benefit payments for the nonqualified defined benefit plans and postretirement health benefit plan.
contractual obligations listed in the above table.
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, 2023, 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, 2023 and 2022. As of December 31, 2023, the FHLBanks had $1,204.3 billion in aggregate par value of consolidated obligations issued and outstanding, $143.3 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 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 did not deem it necessary to have an allowance for credit losses for these unfunded standby letters of credit as of December 31, 2023.
Refer to Note 15—Commitments and Contingencies to the Bank’s 2023 audited financial statements for more information about the Bank’s outstanding standby letters of credit.
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 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 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 14—Estimated Fair Values to the Bank’s 2023 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, 2023 and 2022.
The Bank uses derivatives
in its risk management program for the following purposes:
•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 may use either (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.The Bank does not apply the short-cut method to 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 gains (losses) on derivatives” on the Statements of Income.
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.
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 and Economic Recovery 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’s Review and Analysis of the Federal Home Loan Bank System. Commencing in the fall of 2022, and over a period of several months, the Finance Agency undertook a review and analysis of the FHLBank System, in part through a series of public listening sessions, regional roundtable discussions, and receipt of comments from stakeholders and the public. This review covered such areas as the FHLBanks’ mission and purpose in a changing marketplace; their organization, operational efficiency and effectiveness; their role in promoting affordable, sustainable, equitable, and resilient housing and community investment; their role in addressing the unique needs of rural and financially vulnerable communities; member products, services; collateral requirements; and membership eligibility and requirements.
On
November 7, 2023, the Finance Agency issued a written report titled “FHLBank System at a 100 – Focusing on the Future”, presenting its review and analysis of the FHLBank System and the actions and recommendations that it plans to pursue in service of its vision for the future of the FHLBank System. The report focused on four broad themes: (1) the mission of the FHLBank System; (2) the FHLBank System as a stable and reliable source of liquidity; (3) housing and community development; and (4) FHLBank System operational efficiency, structure, and governance. The Finance Agency expects its initiative to continue as a multi-year, collaborative effort with the FHLBanks, their member institutions, and other stakeholders to address the recommended actions in the report and has stated that it can implement some of the recommendations from the report through ongoing supervision, guidance, or rulemaking, as well as through
statutory changes by proposing specific requests for Congressional action.
Among other things, the Finance Agency has indicated that it plans to:
•Update and clarify its regulatory statement of the FHLBanks’ mission to explicitly incorporate its view of the core objectives of the FHLBanks’ mission, which are (1) providing stable and reliable liquidity to members, and (2) supporting housing and community development;
•Clarify the FHLBanks’ liquidity role and take steps that the Finance Agency believes will better position the FHLBanks to perform their liquidity function, including enhancing Finance Agency oversight of FHLBank credit risk evaluation of their members and establishing
protocols for large depository members to borrow from the Federal Reserve Banks’ discount window;
•Expand the FHLBanks’ housing and community development focus by requiring the establishment of mission-oriented collateral programs, re-evaluating the definition of long-term advances, exploring revisions to the Community Support Requirements, and reviewing the Affordable Housing Programs (AHP), Community Investment Programs, and Community Investment Cash Advance Programs to encourage greater use in a safe and sound manner. The Finance Agency will also recommend that Congress consider amending the FHLBank Act to at least double the statutory minimum required annual AHP contributions by the FHLBanks; and
•Review the FHLBanks’ operational efficiencies through
encouraging collaboration among the FHLBanks, evaluating the size and structure of FHLBank boards, considering the structure of FHLBank districts and composition of their membership, and studying whether realignment or consolidation are necessary for the efficiency of the FHLBank System.
The Bank is continuing to evaluate the report and is not able to predict what actions will ultimately result from the Finance Agency’s recommendations in the report, the timing of these actions, the extent of any changes to the Bank or the FHLBank System, or the ultimate effect on the Bank or the FHLBank System in the future. The Bank plans to continue to engage with the Finance Agency and other stakeholders to ensure that the FHLBank System remains well positioned to serve the Bank’s members and their communities. For a further discussion of related risks, see Item
1A. Risk Factors.
Federal Reserve Bank Term Funding Program. On March 12, 2023, in response to prevailing concerns on banks’ liquidity, the Federal Reserve announced the implementation of the Bank Term Funding Program (BTFP), as an additional source of liquidity. Eligible borrowers under the program include any U.S. federally insured depository institution or U.S. branch or agency of a foreign bank that is eligible for primary credit with the Federal Reserve. The BTFP offers up to one-year term loans to be secured by eligible collateral
owned by eligible borrowers as of March 12, 2023. Such loans can be requested until March 11, 2024. The BTFP is subject to $25 billion in credit protection by the U.S. Department of Treasury. On January 24, 2024,the Federal Reserve announced that the BTFP will cease making new loans as scheduled on March 11, 2024.
Consumer Financial Protection Bureau (CFPB) Final Rule. On March 30, 2023, the CFPB issued a final rule requiring certain covered financial institutions to collect and report small business lending data. Small businesses are businesses with $5 million or less in gross annual revenue in the preceding fiscal year. An FHLBank will
be subject to data collection and reporting obligations if the FHLBank has originated a minimum of 100 “covered credit transactions” to small businesses in each of the two preceding calendar years. The final rule implements phased-in compliance dates, beginning on October 1, 2024, based on the number of originations the covered financial institution makes to small businesses within a specified timeframe. The Bank is assessing to which extent the obligations will be triggered for the Bank and what operational changes will be necessary for compliance. While the Bank is still analyzing the impact of the final rule, it does not believe these changes will have a material effect on its financial condition or results of operations. Under a federal court order in a related litigation, the CFPB has been enjoined from implementing and enforcing the final rule against covered financial institutions nationwide and all deadlines
for compliance with the final rule have been stayed.
Finance Agency Proposed Rule on Fair Lending, Fair Housing, and Equitable Housing Finance Plans. On April 26, 2023, the Finance Agency published a proposed rule that specifies requirements related to FHLBank compliance with fair housing and fair lending laws and prohibitions on unfair or deceptive acts or practices. The fair housing and fair lending laws would be the Fair Housing Act, the Equal Credit Opportunity Act, and those acts’ implementing regulations. Further, the proposed rule would outline the Finance Agency’s enforcement authority. The Bank is evaluating the potential impact of the proposed rule on the Bank and its operations.
Office of the Comptroller of the Currency, Federal Reserve, and Federal Deposit Insurance
Corporation Joint Proposed Rule to Revise Capital Requirements for Certain Large Banking Organizations. On September 18, 2023, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve, and the Federal Deposit Insurance Corporation published a joint notice of proposed rulemaking that would substantially revise the regulatory capital requirements applicable to certain large banking organizations and banking organizations with significant trading activity, which are generally consistent with changes to international capital standards issued by the Basel Committee on Banking Supervision, known as Basel III. These proposed rules would amend the calculation of risk-based capital requirements in an attempt to better reflect the risks of these banking organizations’ exposures; reduce the complexity of the framework; enhance the consistency of requirements across these
banking organizations; and facilitate more effective supervisory and market assessments of capital adequacy. For certain collateralized transactions, under existing capital requirements, debt securities issued by a GSE such as the FHLBanks are afforded a lower market price volatility haircut than higher risk non-GSE investment-grade securities. The proposed rules would increase the market price volatility haircuts applicable to debt securities of the GSEs (including the FHLBanks) by applying to these debt securities the same haircuts as non-GSE investment-grade securities. The Bank continues to evaluate the potential impact of the proposed rulemaking on its financial condition and results of operation. The proposed change to market price volatility haircuts applicable to debt securities of the FHLBanks may harm liquidity for FHLBank debt securities in the market, impact general demand for FHLBank debt securities, and increase the FHLBanks’ cost of funding due to potential
higher interest rates as a result of the foregoing. The proposal was open for public comment through January 16, 2024, and the FHLBank System submitted a comment letter.
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. The Bank’s robust risk management framework is designed to align risk-taking activities with the Bank’s strategies and risk appetite and to appropriately balance 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 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 2023 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 in the Bank’s business activities and provide sufficient resiliency to withstand potential stressed losses.
•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 counterparty-specific 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.
•Market Risk/Earnings - produce a competitive return on equity, 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 its operational and member liquidity needs under all reasonable economic and operational situations.
•Governance/Compliance/Legal- comply fully with all applicable laws and regulations and manage all legal risk effectively and efficiently.
•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.
•Mission/Business Model - deliver financial services and consistent access to funds in the size, cost and structure shareholders desire, helping them to manage risk and extend credit in their communities, while achieving the Bank’s affordable housing mission goals; achieve the Bank’s Diversity, Equity and Inclusion goals and meet regulatory requirements; and provide value through the consistent payment of dividends and the repurchasing of excess stock.
•Operations - deliver an employee value proposition that allows the Bank to attract, retain, engage and develop staff to meet the evolving needs of the Bank’s key stakeholders and effectively manage enterprise-wide risks. Manage the key risks associated with operational availability
and resiliency 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. Manage the key risks associated with cyber security threats.
The board and management recognize that risk and risk producing events are dynamic and ever-present. Accordingly, reporting, analyzing and mitigating risks are paramount to successful corporate governance. The board utilizes risk appetite metrics and monitoring analysis that reflect the board’s risk appetite statement and the appropriate thresholds for action and reporting.
The Risk Management Policy (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.
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 rates are impacted by various factors, including the economic environment and other aspects affecting the financial and banking industry.
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 costs on liabilities are based on different bases, such 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 gains (losses) on derivatives” with no offsetting fair-value adjustments of the hedged asset, liability, or firm commitment. Consequently, these transactions can introduce earnings volatility.
The following table presents the notional amounts of derivative financial instruments (dollars 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.
Converts the advance’s fixed rate to a variable-rate index and offsets option risk in the advance.
Fair value hedges
2,693
13,418
Non-qualifying hedges
5
—
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
1,502
333
Total
25,472
17,606
Investments
Pay
fixed, receive variable interest-rate swap
Converts the investment’s fixed rate to a variable-rate index.
To offset interest-rate swaps executed with members by executing interest-rate swaps with derivatives counterparties.
Non-qualifying hedges
22
23
Total
notional amount
$
111,647
$
81,736
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).
(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 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 unless
the advance contains explicit par value prepayment options. Bank policy establishes these prepayment fees.
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 pricing approach that is more fully described in Note
14—Estimated Fair Values to the Bank’s 2023 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 (dollars in millions).
(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.
The scenarios above
generally include numerous assumptions, including those related to changes in the balance sheet, interest rates, and prepayment trends. Such assumptions may change through time as a result of a host of factors, including changes in the balance sheet as well as the interest-rate environment. The modeling process is performed in a manner consistent with the Bank’s policies and procedures with results reviewed on an on-going basis by the Bank. While all of the above estimates are reflective of the general interest-rate sensitivity of the Bank, market conditions, the realized growth and remixing of the balance sheet, as well as the broader macroeconomic environment could all have a significant impact on the Bank’s assets, liabilities and equity.
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.
The Bank faces credit risk primarily with respect to its advances, investments, derivatives, and mortgage loan assets.
Advances
Secured advances to member financial institutions account for the largest category of Bank assets; thus, advances are a major source of the Bank’s credit risk exposure. The Bank uses a risk-focused approach to credit and collateral
underwriting. The Bank attempts to reduce credit risk on advances by monitoring the financial condition of borrowers and the quality and value of the assets that borrowers pledge as eligible collateral.
The Bank 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. The Bank assigns each borrower that is an insured depository
institution a credit risk rating from 101 to 104 by utilizing an internal model (101 being the least amount of credit risk and 104 the greatest amount of credit
risk). The Bank assigns each borrower that is an insurance company a credit risk rating from 101 to 104 by utilizing an external model. The Bank assigns each borrower that is not an insured depository institution or an insurance company (including housing associates, CDFIs, and corporate credit unions) a credit risk rating from 101 to 104 based on an internal risk matrix developed for each entity type.
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).
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, however, none of these borrowers exceeded the 30 percent credit limit as of December 31, 2023, and their total outstanding advance and standby letters of credit balance was $13.5 billion and $810 million, respectively, as of December 31, 2023.
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, 2023 and December 31, 2022. The following table presents information about the types of collateral held for the Bank’s advances (dollars in millions).
For purposes of determining each member’s LCV, the Bank estimates the current market value of all residential first mortgage loans, commercial real estate loans, home equity loans, and lines of credit pledged as collateral based on information provided by the member on its loan portfolio or on individual loans through the regular collateral reporting
process. The estimated market value is discounted to account for the (1) price volatility of loans, (2) model data uncertainty, and (3) estimated liquidation and servicing costs in the event of the member’s default. Market values, and thus LCVs, change monthly. The use of this market-based valuation methodology allows the Bank to establish its collateral discounts with greater precision and to
provide greater transparency with respect to the valuation of collateral pledged for advances and other credit products offered by the Bank.
The FHLBank Act affords any security interest granted to the
Bank by any member of the Bank, or any affiliate of any such member, priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor), other than the claims and rights of a party that (1) would be entitled to priority under otherwise applicable law; and (2) is an actual bona fide purchaser for value or is an actual secured party whose security interest is perfected in accordance with applicable state law. 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. The Bank requires delivery of cash and securities pledged to the Bank as collateral. Delivery of loan collateral is also required when pledged by insurance company, CDFI, or housing associate members. For most commercial bank and credit union members, delivery of loan collateral
is not required. The Bank periodically works with commercial bank and credit union members to release collateral from the Bank’s lien to permit such members to pledge those assets to support borrowings, or potential borrowings, from the Federal Reserve Banks’ discount window.
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, 2023 and 2022.
Investments
The Bank is subject to credit risk on investments
consisting of investment securities, interest-bearing deposits, securities purchased under agreements to resell, 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-U.S. entities, other than those issued by U.S. 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
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.
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 (dollars in millions).
(1)
Amounts do not reflect collateral; see the table under Risk Management–Credit Risk–Derivatives below for a breakdown of the credit ratings of and the Bank’s credit exposure to derivative counterparties, including net exposure after collateral.
The Bank experienced an increase in unsecured credit exposure in its investment portfolio related to non-U.S. government and non-U.S. government agency counterparties to $10.5 billion as of December 31, 2023 from $9.3 billion as of December 31, 2021. As of December 31, 2023, Northern Trust Company (United States) and Royal Bank of Canada (Canada) each presented greater than 10.0 percent and collectively represented 33.7 percent of the total unsecured credit exposure to non-U.S. government or non-U.S. government
agency counterparties.As of December 31, 2023, 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. 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.
The following table presents information on the credit ratings of the Bank’s investments held as of December 31, 2023 (dollars in millions), based on their credit ratings as of December 31, 2023. The credit ratings reflect the lowest long-term credit ratings as reported by an NRSRO.
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.
Available-for-sale Securities
Available-for-sale securities are evaluated
at the individual security level 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. In the case of U.S. obligations, they carry an explicit U.S. government guarantee and GSE securities are purchased under an assumption that the issuers’ obligation to pay principal and interest on those securities will be honored, taking into account their status as GSEs. Thus, the Bank considers the risk of nonpayment to be zero. 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 (loss). The Bank has not established an allowance for credit loss on any of its available-for-sale securities as of December 31, 2023.
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.
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, 2023 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. obligations, they carry an explicit U.S. government guarantee such that the Bank considers the risk of nonpayment to be zero, and (4) in the case of GSE securities, they are purchased under an assumption that the issuers’ obligation to pay principal and interest on those securities will be honored, taking into account their status as GSEs.
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, 2023.
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 two approved clearing agents, Morgan Stanley & Co. LLC and Goldman Sachs & Co. The Bank does not anticipate any credit losses on its cleared derivatives as of December 31, 2023.
The contractual or notional amount of derivative transactions reflects the involvement of the Bank in the various classes of financial instruments; however, the Bank’s maximum credit risk with respect to derivative transactions, is the estimated cost of replacing the derivative transactions if there is default, less the value of
any related collateral, including initial and variation margin. In determining maximum credit risk, the Bank considers accrued interest receivables and payables, as well as the netting requirements to net assets and liabilities.
The following tables present information on the credit ratings of, and the Bank’s credit exposure to, its derivative counterparties (dollars in millions). The credit ratings reflect the lowest long-term credit rating by an NRSRO.
Total derivative positions with non-member counterparties to which the Bank had credit exposure
40,815
(576)
855
279
Member
institutions (1)
11
—
—
—
Total
$
40,826
$
(576)
$
855
$
279
____________
(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.
The following table presents the Bank’s credit ratios for mortgage
loans held for portfolio, along with each component of the ratio’s calculation (dollars in millions)
Average mortgage loans held for portfolio outstanding during the year (1)
$
111
$
132
Mortgage
loans held for portfolio (1)
$
103
$
120
Nonaccrual loans (1)
$
2
$
4
Allowance for credit losses on mortgage loans held for portfolio
$
—
$
—
Net
charge-offs
$
—
$
—
Ratios (%)
Net charge-offs to average mortgage loans held for portfolio outstanding during the year
0.07
—
Allowance for credit losses to mortgage loans held for portfolio
0.02
0.02
Nonaccrual
loans to mortgage loans held for portfolio
1.98
3.66
Allowance for credit losses to nonaccrual loans
0.97
0.45
____________
(1) Represents unpaid principal balance.
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 2023 and continuing into 2024, 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.
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.
Transition of LIBOR to an Alternative Reference Rate
Pursuant to the March 5, 2021 United Kingdom's Financial Conduct Authority announcement, 1-week and 2-month U.S. dollar LIBOR ceased being provided by its administrator on December 31, 2021 and the remaining U.S. dollar LIBOR settings ceased being supported or published immediately after June
30, 2023. In keeping with the Bank’s regulator and the Alternative Reference Rates Committee's recommendations and industry developments, the Bank has selected SOFR as its preferred primary replacement rate for investments and advances. The Bank ceased accepting newly originated LIBOR-linked collateral on January 1, 2022. As of June 30, 2023, the Bank has completed transition of all outstanding LIBOR-indexed instruments to reference SOFR, with the implementation of such fall back effective either immediately following June 30, 2023, or at the beginning of the instrument’s next reset period following LIBOR cessation. The Bank has also considered the risks of any
LIBOR-linked collateral remaining as of December 31, 2023. LIBOR-linked collateral continues to fall back to appropriate replacement indices at the beginning of the next reset period following LIBOR cessation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders 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, 2023 and 2022, 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, 2023, 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, 2023, 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, 2023 and 2022,
and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 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, 2023, 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 Management’s Report on Internal Control
Over Financial Reporting appearing under Item 9A. 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. 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.
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.
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 13 and 14 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, 2023 was $112 billion, of which 96% were designated as hedging instruments, and the fair value of derivative assets and liabilities as of December 31, 2023 was $523 million and $5 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.
The Federal Home Loan Bank of Atlanta (Bank) is a federally chartered corporation and is one of i11
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 (GSEs) 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 sponsor any special purpose entities or any other types of off-balance sheet conduits.
The Federal Housing Finance Agency (Finance Agency), an independent agency in the executive branch of the U.S. government, supervises and regulates 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—iSummary of Significant Accounting Policies
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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. The most significant of these estimates include those used in conjunction with fair value estimates and derivatives and hedging activities. Actual results could differ significantly from these estimates.
iEstimated 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 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 13—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.
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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, 2023 and 2022. These investments are evaluated at least 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 ino allowance for credit losses was needed for its securities purchased under agreements to resell as of December 31, 2023 and 2022. The carrying value of securities purchased under agreements excludes accrued interest receivable that was not material as of December 31, 2023 and 2022.
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, 2023 and 2022. iNo allowance for credit losses was recorded for these assets as of December 31, 2023 and 2022. The carrying values of interest-bearing deposits and federal funds sold excludes
accrued interest receivable that was not material as of December 31, 2023 and 2022.
Investments in Debt Securities. The Bank classifies investment securities as trading, available-for-sale, or held-to-maturity at the date of acquisition. Purchases and sales of securities are recorded on a trade date basis.
The Bank classifies certain investments in debt 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 (losses) gains on investment securities” on the Statements of Income, along with gains and losses on sales of investment securities using the specific identification method. The Bank does not have any investment securities classified as trading as of December 31, 2023 and 2022.
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 (loss).
For available-for-sale securities in hedging relationships that qualify as fair value hedges, the Bank records the portion of the change in the fair value of the investment related to the risk being hedged in interest income on available-for-sale securities together with the related change in fair value of the derivative, and records the remainder of the change in the fair value of the investment in other comprehensive income (loss) as net unrealized gains (losses) on available-for-sale securities.
For
investments in debt 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 (loss).
For improvements in impaired available-for-sale securities with an allowance for credit losses, the allowance for credit losses associated with recoveries may be derecognized up to its full amount.
The Bank has not established an allowance for credit losses on its available-for-sale securities as of December 31, 2023 and 2022 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. obligations, they carry an explicit U.S. government guarantee, and (4) in the case of government-sponsored enterprise (GSE) securities, they are purchased under the assumption that the
issuers’ obligation to pay principal and interest on those securities will be honored, taking into account their status as GSEs.
Investments in debt 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 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.
The Bank’s held-to-maturity securities consist of GSE debt obligations, state or local housing agency debt obligations, and mortgage-backed securities (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 purchases securities considered investment quality. All of these securities were rated double-A, or above, by a NRSRO as of December 31, 2023 and 2022, 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, 2023 and 2022, 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. obligations, they carry an explicit U.S. government guarantee, and (4) in the case of government-sponsored enterprise (GSE) securities, they are purchased under the assumption that the issuers’ obligation to pay principal and interest on those securities will be honored, taking into account their status as GSEs.
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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 Community Investment Cash Advance program), 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 interest method. The Bank records interest on advances to interest income as earned. Accrued interest receivable is recorded separately on the Statements of Condition.
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 fair 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, 2023 and 2022.
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, 2023 and 2022. In addition, there were no modifications related to advances with borrowers experiencing financial difficulties during the year ended December 31, 2023.
Based upon the collateral held as security, the Bank’s collateral policies,
credit analysis, and the repayment history on advances, the Bank did not expect any credit losses on advances as of December 31, 2023 and 2022. Accordingly, the Bank has not recorded any allowance for credit losses on advances as of December 31, 2023 and 2022.
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 terms of the modified advance are at least as favorable to the lender as the terms offered to borrowers with similar collection risks for comparable advances and the modification to the terms of the advance is more than minor, the advance
meets the accounting criteria for 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.
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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 if it is determined that either (1) the collection of interest or principal is doubtful or (2) interest or principal is past due for 90 days or more, except when the loan is well-secured (e.g. through credit enhancement) and in the process of collection. 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 (1) none of its contractual principal and interest is due and unpaid, and the Bank expects repayment of the remaining contractual interest and principal, or (2) it otherwise becomes well secured and in the process of collection. 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.
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, but in such instance, the Bank would have recourse against the servicer for such failure. 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, 2023 and 2022.
Modified loans that were considered a troubled debt restructurings (TDR) were evaluated individually for impairment. All other conventional residential mortgage loans are evaluated collectively for impairment. The allowance for conventional residential mortgage loans is 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.
Prior to January 1, 2023, the Bank considered a TDR to have occurred when a concession that would not have been considered otherwise was granted to a borrower for economic or legal reasons related to the borrower’s financial difficulties. The Bank granted a concession when it did not expect to collect all amounts due under the original contract as a result of the restructuring. A conventional residential mortgage loan in which the borrower filed for Chapter 7 bankruptcy
and the bankruptcy court discharged the borrower’s obligation to the Bank was also considered a TDR. The amount of TDRs was not material as of December 31, 2022.
Beginning January 1, 2023, the Bank adopted, on a prospective basis, the new accounting guidance pertaining to TDRs and vintage disclosures, which discontinues recognition and measurement guidance on TDRs for entities that have adopted the measurement of credit losses on financial instruments accounting guidance. Mortgage loan modifications occurring after the date of adoption are subject to the accounting guidance pertaining to loan modifications.
The Bank only grants mortgage loan modifications to borrowers experiencing financial difficulty. If the terms of the modified loan are at least
as favorable to the lender as the terms offered to borrowers with similar collection risks for comparable loans and the modification to the terms of the loan is more than minor, the loan meets the accounting criteria for a new loan. A modification would not result in a new loan because the modified terms are not as favorable to the lender as terms for comparable loans that would be offered to similar borrowers. The write-offs of conventional mortgage loans or modifications of conventional mortgage loans to borrowers experiencing financial difficulty were not material as of December 31, 2023.
Modified loans that were considered a TDR were individually evaluated for impairment when determining the related allowance for credit losses. Credit loss was 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.
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.
i
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, 2023 and 2022.
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. 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. 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 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” 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” 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 gains (losses) on derivatives” on the Statements of Income.
The Bank discontinues hedge accounting prospectively when (1) it determines that the derivative is no longer expected to be highly 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.
i
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.
i
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. Premises, equipment,
and capital computer software cost and related depreciation and amortization expense were not material to the Bank’s financial condition and results of operations for the reported periods.
iDeposits. 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.
iConsolidated 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.
i
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, 2023 or 2022.
i
Restricted
Retained Earnings. The Joint Capital Enhancement Agreement, as amended (Capital Agreement), provides that each FHLBank will, on a quarterly basis, allocatei20 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. Additionally, the Capital Agreement provides that amounts in restricted retained earnings in excess of 150 percent of the Bank’s restricted retained earnings minimum (i.e., one percent of the Bank’s average balance of outstanding consolidated obligations calculated as of the last day of each calendar quarter) may be released from restricted retained earnings. Restricted retained earnings are not available to pay dividends and are presented separately on the Statements of Condition.
iFinance 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.
iAffordable 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 and 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.
Note 3—iRecently
Issued But Not Yet Adopted Accounting Standards
The following table provides a summary of the Financial Accounting Standards Board’s recently issued accounting standards not yet adopted by the Bank.
Accounting Standard Update (ASU)
Description
Effective Date
Effect
on Financial Statements or Other Significant Matters
Improvements to Reportable Segment Disclosures (ASU 2023-07)
This standard improves reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses and requires public entities with a single reportable segment provide all the disclosures required by the amendments in the ASU and all existing segment disclosure requirements.
The adoption of this guidance will not have an impact on the Bank's financial condition or results of operations, but may impact future financial statement disclosures.
Note
4—iCash 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 $i9 and $i8
for the years ended December 31, 2023 and 2022, respectively. There are no legal restrictions regarding the withdrawal of these funds.
(1)
Amortized cost includes adjustments made to the cost basis for accretion, amortization, and/or fair value hedge accounting adjustments, and excludes accrued interest receivable of $i11 and $i10 as of December 31, 2023 and 2022,
respectively.
/
The following table presents available-for-sale securities with gross unrealized losses. The gross unrealized losses are aggregated by the length of time that the individual securities have been in a continuous unrealized loss position.
(1)
Amortized cost includes adjustments made to the cost basis for accretion, amortization, and/or fair value hedge accounting adjustments, and excludes accrued interest receivable of $i11 and $i10 as of December 31, 2023 and 2022,
respectively.
(2) 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.
(1)
Excludes accrued interest receivable of $i72 and $i46 as of December 31, 2023 and 2022, respectively.
(2)
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.
TheBank offers 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 Secured Overnight Financing Rate (SOFR) or other specified indices.
i
Redemption Terms. The following table presents the Bank’s advances outstanding by redemption terms.
(1)
Carrying amounts exclude accrued interest receivable of $i577 and $i418 as of December 31, 2023 and 2022, 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 $i2,789 and $i14,442
as of December 31, 2023 and 2022, respectively.
Due
or callable after two years through three years
i4,053
i2,962
Due
or callable after three years through four years
i2,621
i1,163
Due
or callable after four years through five years
i7,124
i2,277
Due
or callable after five years
i4,390
i4,627
Total
par value
$
i96,948
$
i110,309
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 $i2,693 and $i1,266
as of December 31, 2023 and 2022, respectively. The following table presents advances by year of contractual maturity or, for convertible advances, next conversion date.
Advance
Concentrations. The Bank’s advances are concentrated in commercial banks, credit unions, savings institutions, and insurance companies, and further is concentrated in certain larger borrowing relationships. The concentration of the Bank’s advances to its i10 largest borrowers was $i70,499,
or i72.7 percent of total advances, and $i75,475, or i68.4
percent of total advances, as of December 31, 2023 and 2022, respectively.
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.
i
The following table presents information on mortgage loans held for portfolio by contractual maturity at the time of purchase.
Payment
status is a key credit quality indicator for conventional mortgage loans and allows the Bank to monitor the migration of past due loans. Other delinquency statistics include non-accrual loans and loans in process of foreclosure. The following tables present the payment status for conventional mortgage loans. All of the Bank’s conventional mortgage loans were originated prior to 2018.
Government-guaranteed or Insured Residential Mortgage Loans
Total
Other delinquency statistics, at recorded investment:
In process of foreclosure (1)
$
i1
$
i—
$
i1
Seriously
delinquent rate (2)
i4.01
%
i6.84
%
i4.26
%
Past
due 90 days or more and still accruing interest (3)
$
i—
$
i1
$
i1
Mortgage
loans on nonaccrual status (4)
$
i4
$
i—
$
i4
____________
(1)
Includes mortgage loans where the decision of foreclosure or similar alternative, such as a pursuit of deed-in-lieu, has been reported.
(2) Mortgage loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total mortgage loan portfolio segment.
(3) Mortgage loans insured or guaranteed by the Federal Housing Administration or the Department of Veterans Affairs.
(4) Represents mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest. As of December 31, 2023 and 2022, iinone/
of conventional mortgage loans on nonaccrual status had an associated allowance for credit losses because either these loans were either previously charged off to the expected recoverable value or the fair value of the underlying collateral, including any credit enhancements, was greater than the amortized cost of the loans.
Consolidated obligations, consisting of consolidated obligation bonds and discount notes, are the joint and several obligations of the FHLBanks and are backed only by the financial resources of the FHLBanks.
The Bank is primarily liable for its portion of consolidated obligations (i.e., those issued on its behalf) and also is jointly and severally liable with the other i10 FHLBanks for the payment of principal and interest on all consolidated obligations of each of the FHLBanks. The Finance Agency, at its discretion, may
require any FHLBank to make principal or interest payments due on any consolidated obligation, whether or not the consolidated obligation represents a primary liability of such FHLBank. Although it has never occurred, to the extent that an FHLBank makes any payment on a consolidated obligation on behalf of another FHLBank that is primarily liable for such consolidated obligation, Finance Agency regulations provide that the paying FHLBank is entitled to reimbursement from the noncomplying FHLBank for any payments made on its behalf and any other associated costs (including interest to be determined by the Finance Agency). However, if the Finance Agency determines that the noncomplying FHLBank is unable to satisfy its repayment obligations, the Finance Agency may allocate the outstanding liabilities of the noncomplying FHLBank among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding. The
Finance Agency reserves the right to allocate the outstanding liabilities for the consolidated obligations among the FHLBanks in any other manner it may determine to ensure that the FHLBanks operate in a safe and sound manner. The par value of the FHLBanks’ outstanding consolidated obligations, including consolidated obligations issued by the Bank, was $i1,204,316 and $i1,181,743
as of December 31, 2023 and 2022, respectively.
Regulations require each FHLBank to maintain, in the aggregate, unpledged qualifying assets equal to that FHLBank’s consolidated obligations outstanding. Qualifying assets are defined as cash; secured advances; obligations of or fully guaranteed by the
United States; mortgages guaranteed or insured by the U.S. or its agencies; participations, mortgages, or other securities of or issued by certain government-sponsored enterprises; and such securities as fiduciary and trust funds may invest in under the laws of the state in which the FHLBank is located. The Bank held unpledged qualifying assets of $i151,730 and $i151,236
as of December 31, 2023 and 2022, respectively, compared to a book value of $i141,572 and $i141,510
in consolidated obligations as of December 31, 2023 and 2022, respectively.
General Terms. Consolidated obligations are issued with either fixed- or variable-rate coupon payment terms and may use a variety of indices for interest-rate resets including the SOFR and others. To meet the expected specific needs of certain investors in consolidated obligations, both fixed- and variable-rate consolidated obligation bonds may contain certain features, which may result in complex coupon payment terms and call options. When such consolidated obligations are issued, the Bank generally enters into derivatives containing offsetting features that, in effect, convert the terms of the consolidated obligation bond to those of a simple variable-rate consolidated obligation bond.
These
consolidated obligations, beyond having fixed-rate or simple variable-rate coupon payment terms, may also have the following broad term regarding either principal repayment or coupon payment terms:
Optional Principal Redemption Consolidated Obligation Bonds (callable bonds) that the Bank may redeem in whole or in part at its discretion on predetermined call dates according to the terms of the consolidated obligation bond offerings.
With respect to interest payments, consolidated obligation bonds may have the following term in addition to fixed-rate and simple variable-rate payment terms:
Step-up/down Consolidated Obligation Bonds have coupons at fixed rates for specified intervals over the lives of the consolidated obligation bonds. At the
end of each specified interval, the coupon rate increases (or decreases) or steps up (or steps down). These consolidated obligation bond issues generally contain call provisions enabling the bonds to be called at the Bank’s discretion.
i
Interest-rate Payment Terms. The following table presents the Bank’s consolidated obligation bonds by interest-rate payment type.
The
following table presents the Bank’s consolidated obligation bonds outstanding, by year of contractual maturity, or for callable consolidated obligation bonds, by next call date.
Due
or callable after two years through three years
i1,776
i1,330
Due
or callable after three years through four years
i451
i587
Due
or callable after four years through five years
i1,307
i133
Due
or callable after five years
i405
i1,221
Total
par value
$
i117,053
$
i104,201
/
Consolidated
Obligation Discount Notes. Consolidated obligation discount notes are issued to raise short-term funds and have original contractual maturities of up to ione year. These consolidated obligation discount notes are issued at less than their face amounts and redeemed at par value when they mature.
Note
9—iAffordable Housing Program and Voluntary Housing Contributions
Affordable Housing Program. Annually, each FHLBank must set aside i10 percent of its 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 $i100. 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 Bank accrues this expense monthly based on its income subject to assessment. The Bank reduces the AHP liability as members use subsidies.
If the Bank experienced a net loss during a quarter but had income subject
to assessment in subsequent quarters, it would be required to contribute additional amounts to meet its calculated annual obligation based on the Bank’s year-to-date income subject to assessment. If the Bank experienced a net loss for a full year, the Bank would have no obligation to the AHP for the year since each FHLBank’s required annual AHP contribution is limited to its annual income subject to assessment. If the aggregate of i10 percent of income subject to assessment for all FHLBanks was less than $i100,
each FHLBank would be required to contribute additional amounts so that the aggregate contribution of the FHLBanks equals the required $i100. Each FHLBanks’ prorated contribution would be determined based on its income in relation to the income of all FHLBanks for the previous year. There was no shortfall in the years ended December 31, 2023, 2022, or 2021. If an FHLBank finds that its required contributions are contributing to the financial instability of that FHLBank, it may apply to the Finance Agency
for a temporary suspension of its contributions. No FHLBank made such an application in the years ended December 31, 2023, 2022, or 2021. The Bank had outstanding principal in AHP-related advances of $i8 and $i10
as of December 31, 2023 and 2022, respectively.
i
The following table presents a rollforward of the Bank’s AHP liability, including voluntary AHP non-statutory contributions:
Voluntary
Housing Contributions. In addition to the required AHP assessment, the Bank’s board of directors may, from time to time, authorize additional voluntary housing contributions. The Bank’s board of directors authorized $19 and $5 of additional voluntary housing contributions for the years ended December 31, 2023 and 2022, respectively. These additional housing contributions were reported in noninterest expense as “Voluntary housing contributions” on the Statements of Income and were allocated as follows:
Capital. The Bank is subject to the following ithree
regulatory capital requirements under its capital plan, the FHLBank Act, and Finance Agency regulations.
Risk-Based Capital. The Bank must maintain, at all times, permanent capital in an amount at least equal to the sum of its credit risk capital requirement, its market risk capital requirement, and its operational risk capital requirement, calculated in accordance with the rules and regulations of the Finance Agency. Permanent capital is defined by the FHLBank Act and regulations as the sum of retained earnings and the amounts paid-in for Class B stock.Only permanent capital satisfies the risk-based capital requirement.The Finance Agency may require the Bank to maintain a greater amount of permanent capital than is required by the risk-based capital requirement as defined.
Total
Regulatory Capital. The FHLBank Act requires the Bank to maintain total regulatory capital in an amount equal to at least ifour percent of total assets at all times. Total regulatory capital is defined as the sum of permanent capital, the amounts 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. The Bank has not issued any Class A stock, has no general allowance for losses, and has no other instruments identified in the capital plan
and approved by the Finance Agency; therefore, the Bank’s total regulatory capital is equal to its permanent capital as of December 31, 2023 and 2022. Total regulatory capital does not include accumulated other comprehensive income (loss) but does include mandatorily redeemable capital stock.
Leverage Capital. The FHLBank Act requires the Bank to maintain leverage capital in an amount equal to at least ifive percent of total assets at all times.
Leverage capital is defined as the sum of permanent capital weighted i1.5 times and all other components of total capital. Although mandatorily redeemable capital stock is not included in capital for financial reporting purposes, such outstanding stock is considered capital for determining compliance with these regulatory capital requirements.
i
The
following table presents the Bank’s compliance with the Finance Agency’s regulatory capital rules and requirements.
The
Bank’s Capital Plan provides for ithree subclasses of Class B stock, as follows:
•shares of subclass B1 capital stock are issued to meet the membership stock requirement under the capital plan;
•shares of subclass B2 capital stock are issued to meet the advances activity-based stock requirement under the capital plan; and
•shares
of subclass B3 capital stock are issued to meet the standby letters of credit activity-based stock requirement under the capital plan.
Each subclass of Class B stock is issued, redeemed, and repurchased at a par value of $100 per share. Member shares cannot be purchased or sold except between the Bank and its members at $100 per share par value. The minimum stock requirement for each member is the sum of the membership stock requirement and the activity-based stock requirements. The capital plan permits the Bank’s board of directors to set the membership and activity-based stock requirements within a range as set forth in the capital plan. Activity-based stock held by a member is that amount of subclass B2 or B3 capital stock that the member is required to own for as long as certain transactions between the Bank and the member remain outstanding. The manner in which the activity-based stock requirement is
determined under the capital plan is set forth below.
Subclass B1 capital stock. The Bank’s board of directors approved an increase to the B1 membership stock requirement and dollar cap, effective August 25, 2023. The B1 membership stock requirement was increased from i0.05
percent (five basis points) to i0.07 percent (seven basis points) of a member’s total assets and the dollar cap was increased from $i15 to $i18.
The membership stock requirement is recalculated using the member’s total assets as of the preceding calendar year-end at least annually by March 31.
Subclass B2 capital stock. The Bank’s board of directors approved an increase to the B2 activity-based stock requirement from i4.25 percent to i4.75
percent of the member’s outstanding par value of advances, effective August 25, 2023. As of December 31, 2023, the advances activity-based stock requirement was an amount of subclass B2 capital stock equal to the sum of the following:
•i4.75 percent of the member’s outstanding par value of advances; and
•i8.00
percent of any outstanding targeted debt or equity investments (such as multifamily residential mortgage loan assets) sold by the member to the Bank on or after December 17, 2004, although none of these investments were outstanding as of December 31, 2023.
The advances activity-based stock requirement also may include a percentage of any outstanding balance of acquired member assets (such as residential mortgage loan assets) although this percentage was set at izero
as of December 31, 2023 and 2022.
Subclass B3 capital stock. As of December 31, 2023 and 2022, the standby letters of credit activity-based requirement was an amount equal to i0.10 percent (10 basis points) of members’ outstanding standby letters of credit.
The FHLBank Act and Finance
Agency regulations require that the minimum stock requirement for members must be sufficient to enable the Bank to meet its minimum regulatory capital requirement. Therefore, from time to time, the Bank’s board of directors may adjust the membership stock requirement and the activity-based stock requirement within specified ranges set forth in the capital plan. Any adjustment outside the ranges would require an amendment to the capital plan and Finance Agency approval. Each member is required to comply promptly with any adjustment to the minimum stock requirement.
The FHLBank Act provides that the Bank may repurchase, at its sole discretion, any member’s capital stock investment that exceeds the required minimum amount (excess capital stock). Under certain circumstances, Finance Agency regulations limit the ability of the Bank to create member excess stock. The Bank may not pay dividends in the form of capital
stock or issue excess capital stock to any member if the Bank’s excess capital stock exceeds one percent of its total assets or if the issuance of excess capital stock would cause the Bank’s excess capital stock to exceed one percent of its total assets. As of December 31, 2023 and 2022, the Bank’s excess capital stock did not exceed one percent of its total assets.
A member may redeem its excess Class B capital stock at par value payable in cash five years after providing written notice to the Bank. The Bank, at its option, may repurchase a member’s excess capital stock before expiration of the five-year notice period. The Bank’s authority to redeem or repurchase capital stock is subject to a number of limitations.
Under Finance Agency regulations,
the Bank’s board of directors may, but is not required to, declare and pay non-cumulative dividends in cash or capital stock from unrestricted retained earnings and current earnings. All shares of capital stock share in any dividend without preference. Dividends are computed on the average daily balance of capital stock outstanding during the relevant time period. The Bank may not pay a dividend if the Bank is not in compliance with any of its regulatory capital requirements or if a payment would cause the Bank to fail to meet any of its regulatory capital requirements.
The Bank declares and pays any dividends only after net income is calculated for the preceding quarter. The following table presents the Bank’s declared and paid quarterly cash dividends in 2023, 2022, and 2021.
2023
2022
2021
Amount
Annualized
Rate (%)
Amount
Annualized Rate (%)
Amount
Annualized Rate (%)
First quarter
$
i78
i6.37
$
i22
i3.70
$
i30
i3.72
Second
quarter
i99
i6.50
i23
i3.74
i27
i3.69
Third
quarter
i127
i6.97
i33
i4.11
i23
i3.67
Fourth
quarter
i104
i7.25
i51
i5.30
i23
i3.70
Total
$
i408
i6.79
$
i129
i4.34
$
i103
i3.70
/
i
Note
11—iAccumulated Other Comprehensive Loss
i
The following table presents the components comprising accumulated other comprehensive loss.
Net
Unrealized Gains (Losses) on Available-for-sale Securities
The Bank participates in the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra Plan), a tax-qualified defined-benefit pension plan. The Pentegra Plan is treated as a multiemployer plan for accounting purposes but operates as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. As a result, certain multiemployer plan disclosures are not applicable to the Pentegra Plan. Under the Pentegra Plan, contributions
made by a participating employer may be used to provide benefits to employees of other participating employers because assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer. Also, in the event a participating employer is unable to meet its contribution requirements, the required contributions for the other participating employers could increase proportionately. The Pentegra Plan covers substantially all officers and employees of the Bank hired before March 1, 2011.
The Pentegra Plan operates on a fiscal year from July 1 through June 30. The Pentegra Plan files one Form 5500 on behalf of all employers who participate in the plan. The Employer Identification Number is i13-5645888,
and the three-digit plan number is i333. There are no collective bargaining agreements in place at the Bank.
The Pentegra Plan’s annual valuation process includes separately calculating the plan’s funded status and the funded status of each participating employer. The funded status is defined as the fair value of assets divided by the funding target (100 percent of the present value of all benefit liabilities accrued at that date). As permitted by ERISA, the Pentegra Plan accepts contributions for the prior plan year up to eight and a half months after the asset valuation date. As a result, the fair value of assets at
the valuation date (July 1) will increase by any subsequent contributions designated for the immediately preceding plan year ended June 30.
The most recent Form 5500 available for the Pentegra Plan is for the year ended June 30, 2022. The contributions made by the Bank during 2023 were not more than five percent of the total contributions for the Pentegra Plan year ended June 30, 2022, and contributions made during 2022 were not more than five percent of the total contributions for the Pentegra Plan year ended June 30, 2021.
i
The
following table presents information on the net pension costs and funded status of the Pentegra Plan.
2023
2022
2021
Net pension cost charged to compensation and benefit expense for the year ended December 31
$
i1
$
i5
$
i7
Pentegra
Plan funded status as of July 1(1) (2)
i113.64
%
i119.09
%
i130.59
%
Bank’s
funded status as of July 1
i137.29
%
i145.40
%
i157.71
%
____________
(1)
The Pentegra DB Plan’s funded status as of July 1, 2023, is preliminary and may increase because the plan’s participants were permitted to make contributions for the plan year ended June 30, 2023 through March 15, 2024. Contributions made on or before March 15, 2024, and designated for the plan year ended June 30, 2023, will be included in the final valuation as of July 1, 2023. The final funded status as of July 1, 2023, will not be available until the Form 5500 for the plan year July 1, 2023 through June
30, 2024, is filed (this Form 5500 is due to be filed no later than April 2025).
(2) The Pentegra DB Plan’s funded status as of July 1, 2022, is preliminary and may increase because the plan’s participants were permitted to make contributions for the plan year ended June 30, 2022 through March 15, 2023. Contributions made on or before March 15, 2023, and designated for the plan year ended June 30, 2022, will be included in the final valuation as of July 1, 2022. The final funded status as of July 1, 2022, will not be available until the Form 5500 for the
plan year July 1, 2022 through June 30, 2023, is filed (this Form 5500 is due to be filed no later than April 2024).
In addition to the above multiemployer pension plan, the Bank has a qualified defined contribution plan, a nonqualified define contribution plan, a nonqualified deferred compensation plan, a supplemental nonqualified defined benefit plan and a postretirement medical and life insurance plan. The financial amounts related to these plans were not material for the reported periods.
/
Note
13—iDerivatives and Hedging Activities
Nature of Business Activity
The Bank is exposed to interest-rate risk primarily from the effect of interest rate changes on its interest-earning assets and on its interest-bearing liabilities that finance these assets. To mitigate the risk of loss, the Bank has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes that it is willing to accept. In addition, the Bank monitors
the risk to its interest income, net interest margin, and average maturity of its interest-earning assets and
funding sources. The goal of the Bank’s interest-rate risk management strategies is not to eliminate interest-rate risk, but to manage it within appropriate limits.
The Bank enters into derivatives to manage the interest-rate risk exposure that is inherent in
its otherwise unhedged assets and funding sources, to achieve the Bank’s risk management objectives, and to act as an intermediary between its members and counterparties. Finance Agency regulations and the Bank’s risk management policy prohibit the trading or speculative use of these derivative instruments and limit credit risk arising from these instruments. The use of derivatives is an integral part of the Bank’s financial management strategy.
The most common ways in which the Bank uses derivatives are to:
•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 from 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
General. The Bank designates derivative instruments in the following three ways: (1) as a fair value hedge of an underlying financial instrument or a firm commitment; (2) as an intermediary transaction; or (3) as a non-qualifying hedge for purposes of asset or liability management.
The Bank reevaluates its hedging strategies from time to time and may change the hedging techniques it uses or adopt new strategies.
The Bank transacts most of its derivatives with counterparties that are large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute consolidated obligations. The Bank’s over-the-counter derivatives transactions may either be (1)
uncleared derivatives, which are executed bilaterally with a counterparty; or (2) cleared derivatives, which are cleared through a Futures Commission Merchant (clearing agent) with a Derivatives Clearing Organization (Clearinghouse).
Once a derivatives transaction has been accepted for clearing by a Clearinghouse, the derivatives transaction is novated, and the executing counterparty is replaced with the Clearinghouse as the counterparty. The Bank is not a derivatives dealer and does not trade derivatives for short-term profit.
The Bank uses derivatives when they are considered to be the most cost-effective alternative to achieve the Bank’s long-term financial and risk management objectives. Accordingly, the Bank may enter into derivatives that do not qualify for hedge accounting (non-qualifying hedges).
Types
of Derivatives
The Bank may use the following types of derivatives to reduce funding costs and to manage its exposure to interest-rate risks inherent in the normal course of business.
Interest-Rate Swaps. An interest-rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows
will be exchanged and the manner in which the cash flows will be calculated. One of the simplest forms of an interest-rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional principal amount at a predetermined fixed rate for a given period of time. In return for this promise, this party receives cash flows equivalent to the interest on the same notional principal amount at a variable rate for the same period of time. The variable rate received or paid by the Bank in most derivative transaction agreements is SOFR or the overnight indexed swap rate.
Swaptions. A swaption is an option on a swap that gives the buyer the right to enter into a specified interest-rate swap at a certain time in the future. When used as a hedge, a swaption can protect the Bank against future interest rate changes when it is planning to lend or borrow funds in the future. The Bank
may enter into both payer swaptions and receiver swaptions. A payer swaption is the option to make fixed interest payments at a later date, and a receiver swaption is the option to receive fixed interest payments at a later date.
Interest-Rate Cap and Floor Agreements. In an interest-rate cap agreement, a cash flow is generated if the price or rate of an underlying variable rises above a certain threshold (or cap) price. In an interest-rate floor agreement, a cash flow is generated if the price or rate of an underlying variable falls below a certain threshold (or floor) price. Caps may be used in conjunction with liabilities, and floors may be used in conjunction with assets. Caps and floors are designed to protect against the interest rate on a variable-rate asset or liability rising above or falling below a certain level.
Types of Hedged
Items
At inception, the Bank documents all relationships between derivatives designated as hedging instruments and hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing effectiveness. This process includes linking all derivatives that are designated as fair value hedges to (1) assets and liabilities on the Statements of Condition; or (2) firm commitments. The Bank also formally assesses (both at the hedge’s inception and at least quarterly on an ongoing basis) whether the derivatives that it uses in hedging relationships have been effective in offsetting changes in the fair value of hedged items attributable to the hedged risk and whether those derivatives may be expected to remain effective in future periods. The Bank uses regression analyses to assess the effectiveness of its hedges.
Investments.
Investment securities may be classified as trading, available-for-sale, or held-to-maturity. The interest-rate and prepayment risk associated with these investment securities are managed through a combination of debt issuance and derivatives. The Bank may manage the prepayment and interest-rate risks by funding investment securities with consolidated obligations that have call features, by hedging the prepayment risk with caps or floors, or by adjusting the duration of the securities by using derivatives to modify the cash flows of the securities. Derivatives held by the Bank that are associated with trading and held-to-maturity securities are designated as a non-qualifying hedge and derivatives held by the Bank associated with available-for-sale securities may qualify as either a fair value hedge or a cash flow hedge, or may be designated as a non-qualifying hedge.
Advances. The Bank offers a variety
of advance structures to meet members’ funding needs. These advances may have maturities of up to i30 years with variable or fixed rates and may include early termination features or options. The Bank may use derivatives to adjust the repricing and/or options characteristics of advances in order to more closely match the characteristics of the Bank’s funding liabilities. In general, whenever a member executes a fixed- or a variable-rate advance with embedded options, the Bank simultaneously will execute a derivative with terms that offset the terms and embedded options in the advance. For example, the Bank may hedge
a fixed-rate advance with an interest-rate swap in which the Bank pays a fixed-rate coupon and receives a variable-rate coupon, effectively converting the fixed-rate advance to a variable-rate advance. This type of hedge is typically treated as a fair-value hedge.
Mortgage Assets. The Bank has invested in mortgage assets. The prepayment options embedded in mortgage assets may shorten or lengthen the expected repayment of these investments, depending on changes in estimated prepayment speeds. The Bank manages the interest-rate and prepayment risk associated with mortgages through a combination of debt issuance and derivatives. The Bank issues both callable and non-callable debt to achieve cash flow patterns and liability durations similar to those expected on the mortgage loans. The Bank may use derivatives to match the expected prepayment characteristics of the mortgages.
Options
(interest-rate caps, interest-rate floors and/or options) also may be used to hedge prepayment risk on the mortgages. Many options are not identified to specific mortgages and therefore, do not receive fair-value or cash-flow hedge accounting treatment. The Bank also may purchase interest-rate caps and floors, swaptions, callable swaps, calls, and puts to minimize the
prepayment risk embedded in the mortgage loans.
Although these derivatives are valid non-qualifying hedges against the prepayment risk of the loans, they do not receive either fair-value or cash-flow hedge accounting. These derivatives are marked-to-market through earnings.
Consolidated Obligations. While consolidated obligations are the joint and several obligations of the FHLBanks, each FHLBank has consolidated obligations for which it is the primary obligor. The Bank enters into derivatives to hedge the interest-rate risk associated with its specific debt issuances in conjunction with the associated interest-rate risk on advances. The Bank manages the risk arising from changing market prices and volatility of a consolidated obligation by matching the cash inflow on the derivative with the cash outflow on the consolidated obligation. For instance, in a typical transaction, fixed-rate consolidated obligations are issued for the Bank, and the Bank
simultaneously enters into a matching derivative in which the counterparty pays fixed cash flows to the Bank designed to mirror cash outflows that the Bank pays on the consolidated obligation in timing and amount. The Bank pays a variable cash flow that closely matches the interest payments it receives on short-term or variable-rate advances. These transactions are typically treated as fair-value hedges. This intermediation between the capital and swap markets permits the Bank to raise funds at lower costs than otherwise would be available through the issuance of simple fixed-rate consolidated obligations in the capital markets.
Firm Commitments. Certain mortgage loan purchase commitments are considered derivatives. Mortgage purchase commitments are recorded on the balance sheet at fair value, with changes in fair value recognized in current-period earnings. When the mortgage purchase commitment derivative
settles, the current fair value of the commitment is included with the basis of the mortgage loan and amortized accordingly.
The Bank also may enter into a fair value hedge of a firm commitment for a forward starting advance through the use of an interest-rate swap. In this case, the swap functions as the hedging instrument for both the firm commitment and the subsequent advance. The basis movement associated with the firm commitment is recorded as a basis adjustment of the advance at the time the commitment is terminated and the advance is issued. The basis adjustment is then amortized into interest income over the life of the advance using the level-yield method.
Financial Statement Effect and Additional Financial Information
Derivative Notional Amounts. The notional amount of derivatives serves as a factor in
determining periodic interest payments or cash flows received and paid. However, the notional amount of derivatives represents neither the actual amounts exchanged nor the overall exposure of the Bank to credit and market risk; the overall risk is much smaller. The risks of derivatives can be measured meaningfully on a portfolio basis that takes into account the counterparties, the types of derivatives, the items being hedged, and any offsets between the derivatives and the items being hedged.
The following table presents the notional amount, fair value of derivative instruments, and total derivative assets and liabilities. Total derivative assets and liabilities include the effect of netting adjustments and cash collateral. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest.
Derivatives
not designated as hedging instruments:
Interest-rate swaps (1)
i69
i2
i1
i63
i3
i1
Interest-rate
caps or floors
i4,000
i—
i—
i4,000
i—
i—
Total
derivatives not designated as hedging instruments
i4,069
i2
i1
i4,063
i3
i1
Total
derivatives before netting and collateral adjustments
$
i111,647
i217
i1,604
$
i81,736
i47
i2,507
Netting
adjustments and cash collateral (2)
i306
(i1,599)
i232
(i2,482)
Derivative
assets and derivative liabilities
$
i523
$
i5
$
i279
$
i25
___________
(1)Includes
variation margin for daily settled contracts of negative $i503 and positive $i739 as of December 31, 2023 and
2022, respectively.
(2) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions, and also cash collateral and related accrued interest held or placed with the same clearing agents and/or counterparty. Cash collateral posted, including accrued interest, was $i1,921 and $i2,714
as of December 31, 2023 and 2022, respectively. Cash collateral received including accrued interest, was $i15 as of December 31, 2023. The Bank did not receive any cash collateral, including accrued interest, as of December 31, 2022.
/
i
The
following tables present the net (losses) gains on fair value hedging relationships.
Total interest income (expense) recorded in the Statements of Income
$
i306
$
(i155)
Changes
in fair value:
Hedged items (2)
$
(i905)
$
i309
Derivatives
i1,030
(i317)
Net
changes in fair value
i125
(i8)
Net
interest settlements on derivatives (1) (2)
(i331)
i113
Amortization/accretion
of active hedging relationships
(i99)
i—
Other
(i19)
i—
Total
net interest income effect from fair value hedging relationships
$
(i324)
$
i105
____________
(1)
Represents interest income/expense on derivatives in qualifying fair-value hedging relationships. Net interest settlements on derivatives that are not in qualifying fair-value hedging relationships are reported in other income.
(2) Excludes the interest income/expense of the respective hedged items.
i
The following tables present the total
basis adjustments on hedged items designated as fair value hedges and the related amortized cost of the hedged items.
Basis adjustments for active hedging relationships included in amortized cost
$
(i711)
$
i—
$
(i2,461)
$
(i10)
Basis
adjustments for discontinued hedging relationships included in amortized cost
(i4)
i—
(i6)
i—
Total
amounts of fair value hedging basis adjustments
$
(i715)
$
i—
$
(i2,467)
$
(i10)
____________
/
(1)
Includes only the portion of amortized cost representing the hedged items in active or discontinued fair value hedging relationships. Amortized cost includes fair value hedging adjustments.
Derivatives
not designated as hedging instruments:
Interest-rate swaps
$
(i3)
$
i—
$
i1
Interest-rate
caps or floors
(i1)
i—
i—
Net
interest settlements
i—
i2
i—
Net
(losses) gains on derivatives
$
(i4)
$
i2
$
i1
/
Managing
Credit Risk on Derivatives
The Bank is subject to credit risk to its derivative transactions due to the risk of nonperformance by counterparties and manages this risk through credit analysis, collateral requirements, and adherence to the requirements set forth in its policies, U.S. Commodity Futures Trading Commission regulations, and Finance Agency regulations.
For uncleared derivatives, the degree of credit risk depends on the extent to which master netting arrangements are included in such contracts to mitigate the risk. The Bank requires collateral agreements with collateral delivery thresholds on all uncleared derivatives. Additionally, collateral related to derivatives with member institutions includes collateral assigned to the Bank, as evidenced
by a written security agreement, and held by the member institution for the benefit of the Bank.
For cleared derivatives, the Clearinghouse is the Bank’s counterparty. The Clearinghouse notifies the clearing agent of the required initial and variation margin, and the clearing agent notifies the Bank. The Bank utilizes two Clearinghouses for all cleared derivative transactions, CME Clearing and LCH Ltd. At both Clearinghouses, variation margin is characterized as daily settlement payments, and initial margin is considered cash collateral. Because the Bank is required to post initial and variation margin through the clearing agent to the Clearinghouse, it exposes the Bank to institutional credit risk if the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual
counterparties, and collateral/payments is posted daily through a clearing agent for changes in the fair value of cleared derivatives. The Bank has analyzed the enforceability of offsetting rights incorporated in its cleared derivative transactions and determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable law upon an event of default, including a bankruptcy, insolvency, or similar proceeding involving the Clearinghouse or the Bank’s clearing agent, or both. Based on this analysis, the Bank presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular Clearinghouse.
The Bank presents derivative instruments and the related cash collateral that is received or pledged, plus the associated accrued interest, on a net basis by clearing agent and/or by counterparty
when it has met the netting requirements.
The following table presents the
fair value of derivative instruments meeting or not meeting netting requirements, including the related collateral received from or pledged to counterparties.
Gross
amounts of netting adjustments and cash collateral:
Uncleared derivatives
(i190)
(i1,587)
(i19)
(i2,471)
Cleared
derivatives
i496
(i12)
i251
(i11)
Total
gross amounts of netting adjustments and cash collateral:
i306
(i1,599)
i232
(i2,482)
Net
amounts after netting adjustments and cash collateral:
Uncleared derivatives
i10
i5
i2
i25
Cleared
derivatives
i513
i—
i277
i—
Total
net amounts after netting adjustments and cash collateral
i523
i5
i279
i25
Non-cash
collateral received or pledged not offset- cannot be sold or repledged:
Uncleared derivatives
i—
i—
i—
i—
Cleared
derivatives
i—
i—
i—
i—
Total
cannot be sold or repledged
i—
i—
i—
i—
Net
unsecured amounts:
Uncleared derivatives
i10
i5
i2
i25
Cleared
derivatives
i513
i—
i277
i—
Total
net unsecured amount (1)
$
i523
$
i5
$
i279
$
i25
____________
(1)Any
non-cash over-collateralization at the Bank’s individual clearing agent and/or counterparty level is not included in the determination of the net unsecured amount. ________
(1)T
/
Note 14—iEstimated Fair Values
The
Bank records available-for-sale securities, derivative assets and liabilities, and grantor trust assets (publicly-traded mutual funds) at estimated fair value on a recurring basis. Fair value is defined under GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. In general, the transaction price will equal the exit price and therefore, represents the fair value of the asset or liability at initial recognition. In determining whether a transaction price represents the fair value of the asset or liability at initial recognition, each reporting entity is required to consider factors specific to the transaction, the asset or liability, the principal
or most advantageous market for the asset or liability, and market participants with whom the entity would transact in the market.
A fair value hierarchy is used to prioritize the inputs of valuation techniques used to measure fair value. The inputs are evaluated, and an overall level for the fair value measurement is determined. This overall level is an indication of market observability of the fair value measurement for the asset or liability and defines the level of disclosure. In order to determine the fair value or the exit price, entities must determine the unit of account, highest and best use, principal market, and market participants. These determinations allow the reporting entity to define the inputs for fair value and level of hierarchy.
Outlined below is the application of the “fair value hierarchy” to the Bank’s financial assets
and liabilities that are carried at fair value or disclosed in the notes to the financial statements.
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 - unobservable inputs for the asset or liability. Valuations are derived from techniques that use significant assumptions not observable in the market, which include pricing models, discounted cash flow models, or similar techniques. The Bank did not carry any financial assets or liabilities, measured on a recurring basis, at fair value Level 3 as of December 31, 2023 and 2022.
The
Bank utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
For financial instruments carried at fair value, the Bank reviews the fair value hierarchy classification of financial assets and liabilities on a quarterly basis. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities within the fair value hierarchy. There were no such transfers during the periods presented.
Described below are the Bank’s fair value measurement methodologies applied for financial assets and liabilities that are measured at fair value on a recurring or nonrecurring basis on the Statements of Condition
and categorized within the fair value hierarchy.
Investment securities. TheBank obtains prices from multiple designated third-party pricing vendors, when available, to estimate the fair value of its investment securities. The pricing vendors use various proprietary models to price investment securities. The inputs to those models are derived from various sources including, but not limited to, the following: benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers, and other market-related data. Since many investment securities do not trade on a daily basis, the pricing vendors use available information as applicable, such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing to determine the prices for individual securities. Each pricing vendor
has an established challenge process in place for all investment securities valuations, which facilitates resolution of potentially erroneous prices identified by the Bank.
The Bank conducts periodic reviews of its pricing vendors to confirm and further augment its understanding of the vendors’ pricing processes, methodologies, and control procedures for U.S. agency MBS.
The Bank’s valuation technique for estimating the fair value of its investment securities first requires the establishment of a “median” price for each security.
All prices that are within a specified tolerance threshold of the median price are included in the “cluster” of prices that are averaged to compute a “resultant” price. All prices that are outside
the threshold (outliers) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, and/or non-binding dealer estimates) to determine if an outlier is a better estimate of fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price rather than the resultant price. Alternatively, if the analysis does not provide evidence that an outlier (or some other price identified in the analysis) is more representative of the fair value, and the resultant price is the best estimate, then the resultant price is used as the final price. If all prices received for a security are outside the tolerance threshold level of the median price, then there is no resultant price, and the final price is determined by an evaluation of all
outlier prices as described above. In all cases, the final price is used to determine the fair value of the security.
Multiple third-party vendor prices were received for a majority of the Bank’s investment securities holdings, and the final prices for those securities were computed by averaging the prices received as of December 31, 2023 and 2022. Based on the Bank’s review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or the Bank’s additional analysis in those instances in which there were outliers or significant yield variances), the Bank believes that its final prices are representative of the prices that would have been received if the assets had been sold at the measurement date (i.e., exit prices)
and further, that the fair value measurements are classified appropriately in the fair value hierarchy.
Derivative assets and liabilities. The Bank calculates the fair values of interest-rate related derivatives using a discounted cash flow analysis which utilizes market-observable inputs. The significant assumptions used in this model are based on management’s best estimate of discount rates, market indices, and market volatility. The inputs for interest-rate related derivatives uses the SOFR swap curve for the discounting of cleared derivatives and the Overnight Index Swap curve for the discounting of collateralized derivatives.
Derivative instruments are transacted primarily in the institutional dealer market and priced with observable market assumptions at a mid-market valuation point. The Bank does not provide a credit valuation adjustment based on aggregate exposure by derivative counterparty when measuring the fair value of its derivatives. This is because the collateral provisions pertaining to the Bank’s derivatives should obviate the need to provide such a credit valuation adjustment. The fair values of the Bank’s derivatives take into consideration the effects of legally enforceable master netting agreements, where applicable, that allow the Bank to settle positive
and negative positions and offset cash collateral with the same counterparty on a net basis.
The following estimated fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank as of December 31, 2023 and 2022. Although the Bank uses its best judgment in estimating the fair values of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for a portion of the Bank’s financial instruments, in certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors and evaluation
of those factors change. Therefore, these estimated fair values are not necessarily indicative of the amounts that would be realized in current market transactions although they do reflect the Bank’s judgment of how a market participant would estimate the fair value. iThe fair value tables presented below do not represent an estimate of the overall fair value of the Bank as a going concern, which would need to take into account future business opportunities and the net profitability of assets versus liabilities.
Grantor
trust assets (included in Other assets) (1)
i29
i29
i29
i—
—
Liabilities:
Interest-bearing
deposits
i1,821
i1,821
i—
i1,821
—
Consolidated
obligations, net:
Discount notes
i39,781
i39,776
i—
i39,776
—
Bonds
i101,729
i101,240
i—
i101,240
—
Accrued
interest payable
i481
i481
i—
i481
—
Derivative
liabilities (1)
i25
i25
i—
i2,507
(i2,482)
____________
(1) Financial
instruments measured at fair value on a recurring basis.
(2) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions, and also cash collateral and related accrued interest held or placed with the same clearing agents and/or counterparty.
Note 15—iCommitments and Contingencies
Consolidated
obligations are backed only by the financial resources of the FHLBanks. At any time, the Finance Agency may require any FHLBank to make principal or interest payments due on any consolidated obligation, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation. No FHLBank has ever had to assume or pay the consolidated obligation of another FHLBank.
The par value of the other FHLBanks’ outstanding consolidated obligations for which the Bank is jointly and severally liable was $i1,061,022
and $i1,037,537 as of December 31, 2023 and 2022, respectively, exclusive of the Bank’s own outstanding consolidated obligations. None of the other FHLBanks defaulted on their consolidated obligations, the Finance Agency was not required to allocate any obligation among the FHLBanks, and no amount of the joint and several obligation was fixed as of December 31, 2023 and 2022. Accordingly,
the Bank has not recognized a liability for its joint and several obligation related to the other FHLBanks’ consolidated obligations as of December 31, 2023 and 2022.
Unsettled
consolidated obligation bonds, at par (2)
i—
i—
i—
i5,277
i—
i5,277
____________
(1)“Expire
Within One Year” includes i21 standby letters of credit for a total of $i30 and i22
standby letters of credit for a total of $i49 as of December 31, 2023 and 2022, respectively, which have no stated maturity date and are subject to renewal on an annual basis.
/
(2)Expiration is based on settlement period rather than underlying contractual maturity of consolidated obligations.
The
Bank issues standby letters of credit on behalf of its members to support certain obligations of the members to third-party beneficiaries. Standby letters of credit may be offered to assist members and non-member housing associates in facilitating residential housing finance, community lending, and asset-liability management, and to provide liquidity. In particular, members often use standby letters of credit as collateral for deposits from federal and state government agencies. Standby letters of credit are executed for members for a fee. If the Bank is required to make a payment for a beneficiary's draw, the member either reimburses the Bank for the amount drawn or, subject to the Bank's discretion, the amount drawn may be converted into a collateralized advance to the member and will require a corresponding activity-based capital stock purchase. However, standby letters of credit usually expire without being drawn upon.
The
carrying value of the guarantees related to standby letters of credit is recorded in “Other liabilities” on the Statements of Condition and amounted to $i26 and $i22 as of December 31, 2023 and 2022, respectively.
The
Bank’s operating expenses include net rental costs that were not material for the years ended December 31, 2023, 2022 and 2021. Lease agreements for Bank premises generally provide for increases in the basic rentals resulting from increases in property taxes and maintenance expenses. Such increases are not expected to have a material effect on the Bank’s results of operations.
The Bank may be 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 effect on the Bank’s financial condition or results of operations.
Note
16—iTransactions with Shareholders
The Bank is a cooperative whose member institutions own substantially all of the capital stock of the Bank. Former members and certain non-members, which own the Bank’s capital stock as a result of a merger or acquisition of a member of the Bank, own the remaining capital stock to support business transactions still carried on the Bank’s Statements of Condition. All holders of the Bank’s capital stock receive dividends on their investments as declared by the Bank’s board of directors. All advances are issued to members and eligible housing associates under the FHLBank
Act, and mortgage loans held for portfolio were purchased from members. The Bank also maintains demand deposit accounts primarily to facilitate settlement activities that are related directly to advances and mortgage loans purchased. Transactions with any member that has an officer or director who is also a director of the Bank are subject to the same Bank policies as transactions with other members.
Related Parties. In accordance with GAAP, financial statements are required to disclose material related-party transactions other than compensation arrangements, expense allowances, or other similar items that occur in the ordinary course of business. Under GAAP, related parties include owners of more than i10
percent of the voting interests of the Bank. Due to limits on member voting rights under the FHLBank Act and Finance Agency regulations, no member owned more than i10 percent of the total voting interests. Therefore, the Bank had no such related party transactions required to be disclosed for the periods presented.
i
Shareholder
Concentrations. The Bank considers shareholder concentration as members or non-members with regulatory capital stock outstanding in excess of i10 percent of the Bank’s total regulatory capital stock. The following tables present
Percent of Total Regulatory Capital Stock Outstanding
Par Value of Advances
Percent of Total Par Value of Advances
Interest-bearing Deposits
Percent of Total Interest-bearing Deposits
Truist Bank
$
i1,277
i23.67
$
i29,702
i26.93
$
i—
i—
Note
17—iTransactions with Other FHLBanks
The Bank’s activities with other FHLBanks are summarized below.
Loans to and Borrowings from Other FHLBanks. Occasionally, the Bank loans short-term funds to or borrows short-term funds from the other FHLBanks. There were no outstanding loans to or borrowings from the other FHLBanks as of December 31, 2023 and 2022. Interest income on loans to and interest expense
on borrowings from the other FHLBanks were not material during each of the years ended December 31, 2023, 2022, and 2021.
i
The following table presents the cash flow activities for loans to and borrowings from other FHLBanks.
Proceeds from short-term borrowings from other FHLBanks
$
i300
$
i4,080
$
i25
Payments
of short-term borrowings from other FHLBanks
(i300)
(i4,080)
(i25)
Net
change in borrowings from other FHLBanks
$
i—
$
i—
$
i—
Mortgage Loan Purchases of Participation Interests from Other FHLBanks. In December 2016, the Bank agreed to purchase a i90 percent participating interest in a $i100
master commitment of certain newly acquired mortgage loans from the FHLBank Indianapolis. The Bank’s outstanding balance related to these mortgage loans was $i21 and $i22
as of December 31, 2023 and 2022, respectively.
Transfer Consolidated Obligations to other FHLBanks. Occasionally,
one FHLBank may transfer to another FHLBank the consolidated obligations for which the transferring FHLBank was originally the primary obligor but upon transfer the assuming FHLBank becomes the primary obligor. The transfers of consolidated obligations between FHLBanks are at market terms and help facilitate the balance sheet management by the individual FHLBanks. The following table presents the par value of consolidated obligations transferred to other FHLBanks during the year ended December 31, 2023. The aggregate gains (losses) on these debt transfers were not material. There were no such transfers during the year ended December 31, 2022.
On January 25, 2024, the Bank’s board of directors approved a fourth quarter 2023 cash dividend at an annualized rate of i7.35 percent. The Bank paid the fourth quarter
2023 dividend on February 2, 2024 in the amount of $i117.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
The Bank’s President and Chief Executive Officer and the Bank’s Executive Vice President and Chief Financial Officer (Certifying Officers) are responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its Certifying Officers, as appropriate, to allow timely decisions regarding required disclosure.
As of December 31, 2023, the Bank’s management, with the participation of the Certifying Officers, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures. Based on that evaluation, the Certifying Officers have concluded that the Bank’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective to provide reasonable assurance that information required to be disclosed by the Bank in the reports that it files or submits
under the Exchange Act (1) is accumulated and communicated to the Bank’s management, including the Certifying Officers, as appropriate, to allow timely decisions regarding required disclosure; and (2) is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms.
In designing and evaluating the Bank’s disclosure controls and procedures, the Bank’s Certifying Officers recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Management’s Report on Internal Control Over Financial Reporting
The Bank’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Bank,
as defined in Rule 13a-15(f) under the Exchange Act. The Bank’s management assessed the effectiveness of the Bank’s internal control over financial reporting as of December 31, 2023. In making this assessment, the Bank’s management utilized the criteria set forth by COSO inInternal Control-IntegratedFramework (2013). Based upon that evaluation, management has concluded that the Bank’s internal control over financial reporting was effective as of December 31, 2023.
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. The effectiveness of the Bank’s internal control over financial reporting as of December 31, 2023, has been audited by PricewaterhouseCoopers LLP (PwC), an independent registered public accounting firm, as stated in their report which appears within.
Changes in Internal Control Over Financial Reporting
During the fourth quarter of 2023, there were no changes in the Bank’s internal control over financial reporting that have affected materially, or are reasonably likely to affect materially, the Bank’s internal control over financial reporting.
Item
9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Item 10.Directors, Executive Officers and Corporate Governance.
Directors
The FHLBank Act provides that an FHLBank’s board of directors is to comprise 13 directors, or such other number as the Director of the Finance Agency determines appropriate. For 2024, the Director has designated 14 directorships for the Bank, eight of which are member directorships and six of which are independent directorships. In 2023, the Bank’s board of directors was comprised of eight member directors and six independent directors.
All individuals serving as Bank directors must be U.S. citizens. At least a majority of the directors must be member directors and not less than two-fifths must be independent directors. Under the FHLBank Act, as amended by the Housing and Economic Recovery Act, and Finance Agency regulations, the term of office of each director is four years, subject to certain adjustments to achieve a staggered board. Any director that has been elected to three consecutive full terms is not eligible for election to directorship for any term that begins within two years of the expiration of the third term.
The board of directors does not solicit proxies, nor are member institutions permitted to solicit or use proxies in order to cast their votes in an election. The Bank prepares and delivers a ballot to each member
that was a member as of the record date.
Member Directors
Candidates for member directorships in a particular state are nominated by members in that state. FHLBank boards are not permitted to nominate or elect member directors, except for vacant member directorships. Finance Agency regulations require that:
•a member directorship be held only by an officer or director of a member institution located within the Bank’s district;
•the member institution meet all minimum capital requirements established by its regulator(s); and
•the
member institution be a member as of the record date established for the election of the member director.
The Bank is not permitted to establish additional eligibility criteria or qualifications for member directorships. With respect to member directors, under Finance Agency regulations, no director, officer, employee, attorney, or agent of the Bank (except in their personal capacity) may, directly or indirectly, support the nomination or election of a particular individual for a member directorship.
For each member director position to be filled, an eligible member in that state may cast one vote for each share of capital stock it was required to hold as of the record date, except that an eligible member’s votes for each member director position to be filled may not exceed the average number of shares of capital
stock required to be held by all of the members in that state as of the record date.
The regulations permit, but do not require, the board of directors to conduct an annual assessment of the skills and experience possessed by the members of its board of directors and to determine whether the capabilities of the board would be enhanced through the addition of individuals with particular skills and experience. The Bank may identify those qualifications and inform the members as part of its election notification process, however, the Bank may not exclude a member director candidate from the election ballot on the basis of such qualifications. In 2023, the board of directors conducted an assessment of its directors, but did not identify any particular qualifications as part of its 2023 election notification process.
Candidates for independent directorships are nominated by the Bank’s board of directors. Finance Agency regulations require that an independent directorship be held only by an individual:
•who is a bona fide resident of the Bank’s district;
•who is not a director, officer, or employee of a member institution or of any recipient of advances from the Bank; and
•who is not an officer of any FHLBank.
At least two of the independent directors must be public
interest directors. Finance Agency regulations define a public interest independent director as someone having more than four years of experience representing consumer or community interests in banking services, credit needs, housing or consumer financial protection. The other independent directors must have experience in, or knowledge of, one or more of the following areas: auditing and accounting, derivatives, financial management, organizational management, project development, risk management practices, and the law.
Any individual may submit an application form and request to be considered by the Bank to be an independent director candidate. Before nominating any individual for an independent directorship, other than for a public interest directorship, the Board must determine that the candidate’s knowledge or experience is commensurate with that needed to oversee a financial institution
with a size and complexity that is comparable to the Bank’s. Finance Agency regulations require the board to consult with the Bank’s Affordable Housing Advisory Council with respect to the independent directorship candidates. Further, the Bank must submit information about independent directorship candidates to the Finance Agency for its review prior to their nomination. After the independent director candidates are nominated by the board, the candidates are then presented to the Bank’s membership for a district-wide vote. Finance Agency regulations permit the Bank’s directors, officers, attorneys, employees, agents, and Advisory Council members to support the candidacy of the board’s candidates for independent directorships.
For independent directorships, candidates are elected on a district-wide basis, and the candidate(s) receiving the most votes is declared the winner. Candidates running unopposed
must receive at least 20 percent of the number of votes eligible to be cast. If an unopposed candidate receives less than 20 percent of eligible votes, a new election must be conducted.
Board Vacancies
When the board has a vacancy, Finance Agency regulations require the board to elect a director to fill the vacancy by a majority vote of the remaining directors.
The Bank has determined that all directors meet the regulatory eligibility requirements for directors. Because of the laws and regulations governing member directorship elections that are described above, the Bank is not in a position to know what specific factors the Bank’s member institutions may consider in selecting member director candidates or electing member directors. For the Bank’s independent
directors and the directors who hold their current directorship due to vacancy and appointment by the board, other than examining eligibility, the board considered the experience, qualifications, attributes or skills described in the biographical paragraphs provided below in determining to nominate that person as a director for the Bank. In addition, when making nominations, the board has at times considered the importance of maintaining a continuity of relevant knowledge, leadership and experience on the board and the diversity of thought, perspective, and experience the candidate would bring to the board.
The following table
presents information regarding each of the Bank’s directors, and all persons nominated or chosen to become directors, as of the date of this Report. Except as otherwise indicated, each director has been engaged in the principal occupation described below for at least five years. No director has any family relationship with any other director or executive officer of the Bank.
(4)Mr. Harvard previously served as a director from 2003-2012.
(5)Member of Audit Committee
(6)Member of Credit and Member Services Committee
(7)Member of Enterprise Risk and Operations Committee
(8)Member of Executive Committee
(9)Member of Finance Committee
(10)Member of Governance and Compensation
Committee
(11)Member of Housing and Community Investment Committee
(12)Vice chair of Executive Committee and ex officio member of all other board committees
(13)Chair of Executive Committee and ex officio member of all board committees
Chair of the board, R. Thornwell Dunlap, IIIhas served as president and chief executive officer of Countrybank since 1995 and chair of its holding company, TCB Corporation (TCB), since 2001. In his capacity as chair of TCB, Mr. Dunlap is a director of Greenwood Capital Associates,
LLC, a registered investment advisory firm, owned by TCB. He is past chair of the South Carolina Banks Association (2017 to 2018) and is a past president of the Independent Banks of South Carolina (2011 to 2012). Mr. Dunlap is the past chair of Greenwood Partnership Alliance and served on the Piedmont Technical College Foundation Board of Directors. He has served on the Ten at the Top Board of Directors since 2009 and is a founding director. Mr. Dunlap is a member and past chair of the Greenwood Rotary Club. He currently serves as chair of the Executive Committee and ex officio member of the other committees of the Bank’s board.
Vice chair of the board, Suzanne S. DeFerie has served as a member of the board of directors of First Bank, a subsidiary of First
Bancorp in Southern Pines, North Carolina (NASDAQ: FBNC) since October 1, 2017. She served as president and chief executive officer of Asheville Savings Bank, S.S.B. in Asheville, North Carolina, from 2008 and its holding company, ASB Bancorp, Inc. (NASDAQ: ASBB), from 2011 until October 1, 2017, when the bank and holding company were acquired by First Bancorp. Ms. DeFerie also serves a member of the board of directors for First Bancorp and was named audit committee chair in 2023. She formerly served as senior audit manager with Deloitte. Ms. DeFerie is a past member of the Community Depository Advisory Council of the Federal Reserve Bank of Richmond, past chair of the Asheville Area Chamber of Commerce and United Way of Asheville and Buncombe County, as well as past board member for the Economic Development Coalition of Asheville-Buncombe County, Mission Health System
and Asheville Area Habitat for Humanity. Ms. DeFerie currently serves the Asheville, NC community on the boards of the Community Betterment Foundation, ANC Health Care and the Asheville Merchants’
Fund. Ms. DeFerie is a certified public accountant. She currently serves as vice chair of the Executive Committee, vice chair of the Audit Committee, and ex officio member of the other committees of the Bank’s board.
Eduardo J. (“Eddy”) Arriola has served as executive vice president and market executive of Seacoast National Bank (Seacoast Bank) since
October 2022 when it acquired Apollo Bank. He was the founder, the chair of the board, and chief executive officer of Apollo Bank, a community bank in Miami focused on serving entrepreneurs, small businesses, family owned businesses, and professionals. Mr. Arriola acted as chair of the board and chief executive officer, until its acquisition by Seacoast Bank. He served two terms a board member of the Miami Branch of the Federal Reserve Bank of Atlanta from 2017 to 2022 and is a past board member of the Florida Bankers Association and BankServ. Mr. Arriola served as an investor and member of the board of directors of Total Bank from 2002 to 2007, and prior to founding Apollo Bank in 2010, he was involved in several entrepreneurial businesses in the technology and business service industries. He is the co-founder of Inktel, a 3,000 employee call center firm based in Miami, served as director of creative services for Avanti Case-Hoyt, a national graphic arts and printing
firm, and served as a board member for gMed, a leading firm in the medical office automation space. Mr. Arriola has been a leader in matters involving international policy and commerce. He serves as the chair of the board of the Inter-American Foundation (IAF), an independent U.S. government agency created to support grassroots development in Latin America and the Caribbean. He was appointed to the IAF board by the president and confirmed by the U.S. Senate in 2012 and has continued in the role since then. Mr. Arriola has supported many local community programs and served on the board of several organizations. He received his bachelor of arts in history from Boston College and is a graduate of the Owner/President Management Program of Harvard Business School. He is also a nearly 20-year member of the Young President’s Organization. Mr. Arriola currently serves as vice chair of the Governance and Compensation Committee of the Bank’s board.
James
M. Burkejoined Shore United Bank and Shorebanc Shares, Inc. (NASDAQ: SHBI) as a member of the board, president and chief executive officer in 2023, following its merger with The Community Financial Corporation (NASDAQ:TCFC), of which he was a member of the board since 2021. In 2005 Mr. Burke joined Community Bank of the Chesapeake where he served as executive vice president, chief risk officer becoming president of the bank in 2016 and chief executive officer of the bank and holding company The Community Financial Corporation in 2022. Prior to joining Community Bank of the Chesapeake, Mr. Burke served as executive vice president and senior loan officer of Mercantile Southern Maryland Bank. Mr. Burke has over 30 years of banking experience. Mr. Burke is the former chair of the board of directors of University of Maryland Charles Regional Medical Center, chair of the board of directors for St. Mary’s Ryken High School, former trustee for Historic
Sotterley and is active in other civic groups. In November 2023, Mr. Rucker was inducted into the affordable housing hall of fame by AHF Live. Mr. Burke is a Maryland Bankers School graduate and holds a Bachelor of Arts from High Point University. He is also a graduate of the East Carolina Advanced School of Commercial Lending and attended the Harvard Business School Program on Negotiation. Mr. Burke serves as vice chair of the Finance Committee of the Bank’s board.
Kimberly Casiano is currently a director of the Ford Motor Company (NYSE:F), where she was elected to the board of directors in 2003, and a director of Mutual of America Life Insurance Company, where she was elected to the board of directors in 2006. She is a former director of Mead Johnson Nutrition Company from 2010 to 2017 and Scotiabank of Puerto Rico from 2013 to 2019. Ms. Casiano has experience in financial, organizational,
and risk management, having served on the audit committees of Ford Motor Company, Mutual of America Life Insurance Company, Mead Johnson Nutrition Company, and Scotiabank of Puerto Rico. Ms. Casiano’s responsibilities on the audit committee at Ford Motor Company include oversight of Ford Credit, a financial entity with over $140 billion in assets. From 2010 to the present, Ms. Casiano has been a pro bono consultant to non-profits, small companies, and C-Suite executives of major corporations on environmental, social, and governance (ESG) topics, including diversity, equality, and inclusion, board governance, and business strategies, further contributing to her knowledge of organizational management. Ms. Casiano’s role as an Executive Fellow in the Harvard Business School involves teaching in both the MBA and Executive Education programs on topics such as Women in Boards, Board Preparedness, Board Dilemmas, and Board Governance. Ms. Casiano received her MBA from Harvard
Business School and her undergraduate degree from Princeton University.
Susan F. Dewey served over 24 years as chief executive officer of the Virginia Housing Development Authority (Virginia Housing) and retired on December 31, 2023. During her tenure at Virginia Housing, Ms. Dewey served on the Bank’s Affordable Housing Advisory Council, the Fannie Mae Housing Impact Advisory Committee and the National Association of Realtors Housing Opportunity Advisory Board. Ms. Dewey previously served as the State Treasurer of Virginia from 1996 to 1999, where she was responsible for all operations of the Department of Treasury and Treasury board as well as serving on numerous state authorities and boards including the Virginia Port Authority and the College Savings Authority. She served on the board of the Virginia Department
of Housing and Community Development and the National Council of State Housing Agencies (past chair and member of the Board) until she retired in December 2023. She is currently serving on the Board of
Housing Forward Virginia (past president); the Virginia Commonwealth University Real Estate Circle of Excellence (past president and Conference Committee); the William and Mary Real Estate Foundation Board (secretary); the National Housing Conference (NHC) National Advisory Council; board of VCDC; and member of the Virginia Chamber Foundation Advisory board and Virginia Chamber Board of Directors, and co-chair of the Blueprint Executive Committee on Housing. Ms. Dewey
is a certified public accountant and earned her B.B.A. and M.B.A from the College of William and Mary in Williamsburg, Virginia.
Scott C. Harvard has served as president, chief executive officer and director of First National Corporation (NASDAQ: FXNC) since 2011. He served as president, chief executive officer and director of First Bank from 2011 to 2015 and has served as chief executive officer and director of First Bank since 2015. He previously served as a director of the Bank from 2003 to 2012, serving as chair from 2007 to 2012. He also served on the Council of Federal Home Loan Banks. He is a director of Community Bankers Bank Financial Corp. and its subsidiary, Community Bankers Bank in Richmond, Virginia. Mr. Harvard served as president, chief executive officer and as a
director of Shore Bank from 1985 to 2008 and as president, chief executive officer and director of its parent, Shore Financial Corporation, from 1997 to 2008. He served as executive vice president and director of Hampton Roads Bankshares from 2008 to 2009 and as a vice president of Virginia Savings Bank from 2009 to 2011. He previously served on the board of the Virginia Association of Community Banks from 2012 to 2014 and as a member of the executive committee of the Virginia Bankers Association, serving as its chair in 2018 to 2019, and currently serves as a member of the board. He also serves as board chair of the Virginia Bankers Association Education Foundation. Mr. Harvard has served on numerous nonprofit boards over his career, including most recently the United Way of Northern Shenandoah Valley, Shenandoah Valley Westminster Canterbury and the Shenandoah Valley Westminster Canterbury Foundation, the Top of Virginia Chamber of Commerce, and Shrine Mont.Mr. Harvard currently serves as chair of the Enterprise Risk and Operations Committee of the Bank’s board.
William L. (“Chip”) Lusk, Jr. has served as chief executive officer of the IDB Global Federal Credit Union since 2016. Prior to leading IDB Global, Mr. Lusk was chief operating officer and chief financial officer for Georgia’s Own Credit Union from 2011 to 2015. From 1999 to 2011, he served as chief financial officer, executive vice president, and secretary of the board of First Security Group, Inc. (NASDQ: FSGI) and FSGBank, NA. From 1991 to 1999, he served in various roles, including vice president, controller, and director of strategic planning, for Pioneer Bancshares, Inc., an SEC registrant, and Pioneer Bank. He is currently a member of the District of Columbia Financial Literacy Council and a member of the Finastra Phoenix Client Advisory Board. Previously,
Mr. Lusk served on the DC Credit Union Foundation Board, Habitat for Humanity Board, the YoungLife Committee, the Episcopal Migration Ministries and the Rotary Club. Mr. Lusk currently serves as chair of the Audit Committee of the Bank’s board.
Kathleen C. McKinney is Senior Counsel, Public Finance, of Haynsworth Sinkler Boyd, P.A. She has been an attorney with Haynsworth Sinkler Boyd since 1995 and was previously associated with the McNair Law firm from 1981 until 1995. She served as an independent director of the FHLBanks Office of Finance Board of Directors from 2010 until 2022. Ms. McKinney assists healthcare and educational institutions in mergers, acquisitions, expansions and affiliations, with a focus on addressing legal strategies for taxable and tax-exempt debt and other financing options.
She has also been bond, issuers’, disclosure and underwriters’ counsel in revenue bond issues, resulting in $4 billion of capital investment in South Carolina in the past three years. She serves as bond counsel for many of South Carolina’s leading hospitals. Ms. McKinney also serves as bond counsel for colleges and universities, charter schools, foundations and continuing care retirement and life care projects. She served as president of the National Association of Bond Lawyers and is ranked in Chambers USA and has been elected to Super Lawyers in South Carolina. She has assisted in establishing best practices in corporate governance for public and nonprofit institutions. She is immediate past chair of Spartanburg Methodist College Board of Trustees and immediate past chair of Furman University Board of Trustees and an immediate past chair of the Woodlands at Furman and serves on the Endowment Committee of the Metropolitan Arts Council in Greenville. Ms. McKinney’s
extensive legal and regulatory experience on financing transactions as well as her experience on board of directors of the Office of Finance for 12 years in which she was a member of the audit and governance committees supported her nomination as an independent director. Ms. McKinney currently serves as chair of the Finance Committee of the Bank’s board of directors.
Brian P. McLaughlinis principal of b3advisory, LLC, a consulting firm specializing in fintech solutions and real estate project design and capitalization. Prior to this role, he served as president of Enterprise Community Development, Inc. since 2019. Enterprise Community Development is headquartered in Baltimore, MD, which is among the 10 largest nonprofit providers of affordable housing in the United States. In 2014 Mr. McLaughlin
co-founded Lantian Development, Inc, a Maryland real estate investment and development firm, where he served as founding CEO and later as chief investment officer until his departure in 2019. Across his 26-year career, Mr. McLaughlin served in various technical and leadership roles in mission driven organizations seeking to expand housing and economic opportunity, including eight years in various roles at Fannie Mae (from 2000 to 2003 and again later from 2006 to 2011). From 2003 to 2006, Mr. McLaughlin was Assistant Secretary of the Maryland Department of Housing and Community Development, where he led its division responsible for neighborhood revitalization programs and investment. He has served on the boards of Neighborhood Housing Services of Baltimore, the Fund for Educational Excellence, the Community Preservation and Development Corporation, and currently serves on the board of
Northern Virginia Affordable Housing Alliance since 2022 and the Baltimore Branch Board of the Federal Reserve Bank of Richmond since 2022.Mr. McLaughlin’s expertise in the area of affordable housing, his breadth of experience and deep understanding of the inequities in the housing market, his regulatory and credit experience, as well as his experience with government sponsored enterprises, supported his nomination as an independent and public interest director. Mr. McLaughlin currently serves as chair of the Housing and Community Investment Committee of the Bank’s board.
Edwina L. Payne is a retired Chief Information Officer. She most recently served as Executive Vice President and Chief Information
Officer for Varsity Brands retiring in 2021. She served as Senior Vice President, Technology Strategy & Enterprise Portfolio, McKesson Corporation, from 2019 to 2020, in which she was responsible for the McKesson technology strategy, enterprise portfolio management, enterprise architecture, asset management and organization effectiveness functions for McKesson IT globally. Ms. Payne has served in numerous executive information technology leadership positions, including service as Chief Information Officer of Avanos Medical from 2017 to 2019 and Chief Information Officer for Zimmer Biomet and Zimmer Inc. from 2010 to 2016. Her experience includes broad global supply chain and life sciences environments, including global IT and supply chain leadership positions at Johnson and Johnson from 2003 to 2010 and Kellogg Company from 1986 to 1998, where her roles included assignments in Brazil and Mexico. Ms. Payne also serves on the board of directors for the Task Force for
Global Health. She currently serves on the Industrial Advisory Board for Purdue University, School of Computer Technology and the Dean’s Council for Purdue University, Purdue Politechnic. In addition, she currently serves on the Marian University Technology Advisory Board, and the Inspiredu Board in Atlanta. Ms. Payne was a Georgia CIO of the Year Finalist in 2018 and 2021. Ms. Payne’s experience in audit, risk management, and information technology supported her nomination as an independent director. Ms. Payne currently serves as vice chair of the Enterprise Risk and Operations Committee of the Bank’s board.
John B. Rucker has served as managing director of Stifel, Nicolaus & Company, Incorporated (Stifel), an investment banking firm, since 2015, and manages Stifel’s affordable housing
business. Mr. Rucker was a founding partner and managing director of Merchant Capital, L.L.C., a public finance investment banking firm, from 1987 to 2015, which was acquired by Stifel in 2015. He is also a registered municipal advisor. He was a member of Fannie Mae’s Southeast Regional Housing Advisory Council and Fannie Mae’s National Housing Impact Advisory Council in 2004 and 2005. He has also served on the board of directors of the National Housing & Rehabilitation Association since 2003. Mr. Rucker served on the Bank’s Affordable Housing Advisory Council from 2012 to 2016, serving as its vice chair from 2014 to 2015 and as its chair in 2016. Mr. Rucker also serves on the board of CAHEC since 2022, an affordable housing tax-credit syndicator. Mr. Rucker’s experience in derivatives/hedging, affordable housing, large commercial banks, and information technology supported his nomination as an independent director. Mr. Rucker currently serves as the chair of the
Governance and Compensation Committee and vice chair of the Housing and Community Investment Committee of the Bank’s board.
James M. (“Jimmy”) Stubbs has served as chief executive officer and director of River Bank & Trust since its formation in 2006, and as a director of its holding company, River Financial Corporation (OTC: RVRF), since 2006. Mr. Stubbs is the past chair of the Alabama Bankers Association from June 2020 to June 2021. He currently serves as a board member for the Business Council of Alabama, the Montgomery Area Committee of 100, the Montgomery Area Committee of the Arts, the Montgomery Area Chamber of Commerce, and the YMCA of Montgomery Endowment Foundation. Mr. Stubbs is a Leadership Alabama Class of 2007 alumnus and a member of the River Region United Way’s Tocqueville Society and the Wetumpka Lions Club. He is a lifetime member of the Auburn Alumni
Association and the Alabama Cattlemen’s Association. He graduated from Auburn University with a BS degree in 1985 and obtained an executive MBA degree from Troy University in 2005. He currently serves as vice chair of the Credit and Member Services Committee of the Bank’s board.
Richard A. Whaleyhas served as president, chief executive officer, and director of Citizens Bank of Americus in Americus, Georgia, since 2001. From 1989 to 2001, he served as market manager and commercial lender for Wachovia Bank. Mr. Whaley served as chair of the Georgia Bankers Association from October 2010 to June 2012. Mr. Whaley also served as chair of the South Georgia Technical College Foundation from 2008 to 2010. He currently serves as chair of the Georgia Bankers Association Insurance Trust, Inc. and is
a veteran of the U.S. Army. Mr. Whaley served as Chair of the Council of FHLBanks in 2020. He currently serves as chair of the Credit and Member Services Committee of the Bank’s board.
The board has adopted a Code of Conduct that applies to the Bank’s principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions, in each case, who are employees of the Bank. The Code of Conduct is posted on the Who We Are - Investor Relations - Governance section
of the Bank’s Internet website at http://corp.fhlbatl.com/who-we-are/investor-relations/. Any amendments to, or waivers under, the Bank’s Code of Conduct that are required to be disclosed pursuant to the SEC’s rules will be disclosed on the Bank’s website.
Director Independence, Compensation Committee, Audit Committee, and Audit Committee Financial Expert
General
The board of directors of the
Bank is required to evaluate the independence of the directors as described under the Independent Directors heading above, and under two distinct director independence standards. First, Finance Agency regulations establish independence criteria for directors who serve as members of the Bank’s Audit Committee. Second, SEC rules require that the Bank’s board of directors apply the independence criteria of a national securities exchange or automated quotation system in assessing the independence of its directors.
As of the date of this Report, the Bank has 14 directors, eight of whom are member directors and six of whom are independent directors under Finance Agency Regulations. None of the Bank’s directors is an “inside” director. That is, none of the Bank’s directors is a Bank employee or officer. Further, as the Bank’s capital stock may only be owned by members, former members,
and certain non-members, the Bank’s directors cannot personally own stock or stock options in the Bank. However, each of the member directors is an officer or director of an institution that is a member of the Bank and that is encouraged to, and does, engage in transactions with the Bank on a regular basis.
Finance Agency Regulations Regarding Independence for Audit Committee composition
The Finance Agency’s director independence standards prohibit an individual from serving as a member of the Bank’s Audit Committee if he or she has one or more disqualifying relationships with the Bank or its management that would interfere with the exercise of that individual’s independent judgment. Disqualifying relationships considered by the board are: employment with the Bank at any time during the last five years; acceptance of compensation from
the Bank other than for service as a director; being a consultant, advisor, promoter, underwriter, or legal counsel for the Bank at any time within the last five years; and being an immediate family member of an individual who is or who has been within the past five years, a Bank executive officer. The board assesses the independence of each director under the Finance Agency’s independence standards, regardless of whether he or she serves on the Audit Committee. As of March 8, 2024, each of the Bank’s directors was independent under these criteria.
SEC Rules Regarding Independence
SEC rules require the Bank’s board of directors to adopt a standard of independence to evaluate its directors. The board has adopted the independence standards of the New York Stock Exchange (NYSE) to determine
which of its directors are independent, including members of its Governance and Compensation Committee and Audit Committee, and whether the Bank’s Audit Committee’s financial experts are independent.
After applying the NYSE independence standards, the board determined that, as of March 8, 2024, directors Casiano, Dewey, McKinney, McLaughlin, Payne, and Rucker are each an independent director. Based upon the fact that each member director is a senior official of an institution that is a member of the Bank (and thus is an equity holder in the Bank), that each such institution may routinely engage in transactions with the Bank, and that such transactions occur frequently and are encouraged, the board determined that none of the member directors presently meets the independence criteria under the NYSE independence standards.
It
is possible that under the NYSE objective criteria for independence (particularly the criterion regarding the amount of business conducted with the Bank by the director’s institution), a member director could meet the independence standard on a particular day. However, because the amount of business conducted by a member director’s institution may change frequently, and because the Bank generally desires to increase the amount of business it conducts with each member, the directors deemed it inappropriate to draw distinctions among the member directors based upon the amount of business conducted with the Bank by any director’s institution at a specific time.
The board has a Governance and Compensation Committee, composed of directors Dunlap, DeFerie, Rucker, Arriola, Harvard, McLaughlin, Payne and Whaley. As the Bank’s Governance and Compensation Committee may only recommend actions to the full board regarding governance practices and compensation and benefits programs, which the full board may approve or disapprove, the board assesses the independence of the full board under the NYSE’s standards for compensation committees. The board determined that, as of March 8, 2024, each of directors Casiano, Dewey, McKinney, McLaughlin, Payne, and Rucker was independent under the NYSE independence standards for compensation committee members, but for the reasons noted above, none of the member directors are independent under such standards.
Audit Committee
The
board has a standing Audit Committee, composed of directors Dunlap, DeFerie, Lusk, Arriola, Casiano, Dewey, McKinney and Payne. The board determined that, as of March 8, 2024, each of directors Casiano, Dewey, McKinney and Payne was independent under the NYSE independence standards for audit committee members, but, for the reasons noted above, none of the member directors serving on the Audit Committee was independent under such standards. The board also determined that each of directors Dunlap, DeFerie, Lusk, Arriola, Dewey and McKinney is an “audit committee financial expert” within the meaning of the SEC rules.
The board also assesses the independence of the Audit Committee members under Section 10A (m)(3) of the Exchange Act. As of March 8, 2024, each of the Bank’s directors
was independent under these criteria. As stated above, the board determined that each member of the Audit Committee was independent under the Finance Agency’s standards applicable to the Bank’s Audit Committee.
Board Leadership Structure and Risk Oversight
The directors are nominated and elected in accordance with applicable law and Finance Agency regulations. As required by applicable law, the chair and vice chair of the board are elected by a majority of all the directors of the Bank from among the directors of the Bank for two year terms, and since Bank officers may not serve as directors of the Bank, neither the board chair or vice chair position can be filled by the president and chief executive officer of the Bank.
The board of directors establishes
the Bank’s risk management culture, including risk tolerances and risk management philosophies, by establishing its risk management system, overseeing its risk management activities, and adopting its risk appetite and RMP. The board reviews the risk appetite report on a quarterly basis and approves any changes as appropriate. The board receives regular updates on the Bank’s key risks including an independent risk assessment. The board reviews the RMP at least annually and approves any amendments to it as appropriate. For further discussion of the risk appetite and the RMP, please see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Risk Management. The board works with management to align the Bank’s strategic activities and objectives within the parameters of the risk appetite framework
and the RMP. The board utilizes committees as an integral part of overseeing risk management, including an audit committee, a credit and member services committee, an enterprise risk and operations committee, an executive committee, a finance committee, a governance and compensation committee, and a housing and community investment committee, with the following oversight responsibilities:
•Audit Committee oversees the Bank’s financial reporting process, system of internal control, audit process, policies and procedures for assessing and monitoring implementation of the strategic plan, and the Bank’s process for monitoring compliance with laws and regulations.
•Credit and Member Services Committee oversees the Bank’s credit
and collateral policies and related programs, services, products and documentation, and the Bank’s credit and collateral risk management program, strategies, and activities.
•Enterprise Risk and Operations Committee oversees the Bank’s enterprise risk management functions, operations, information technology, cybersecurity and other related matters.
•Executive Committee exercises most of the powers of the board in the management and direction of the affairs of the Bank during the intervals between board meetings.
•Finance Committee oversees matters affecting the Bank’s financial performance, capital management and other related matters, including the Bank’s market and liquidity risk management program, strategies, and activities.
•Governance and Compensation Committee oversees the Bank’s governance practices, compensation and benefits programs, and other related matters.
•Housing and Community Investment Committee oversees the Bank’s housing and community investment policies, programs, and other relevant matters, including any other Bank products, services, and programs that may provide grants, subsidies,
or other forms of assistance to support affordable housing and community economic development for low- and moderate-income individuals and communities.
The Bank’s internal management is overseen by the president and chief executive officer and delegated to other senior managers and internal management committees. The Bank has determined that this leadership structure is the most effective means of actively engaging the board of directors in risk management oversight while utilizing Bank management to implement and maintain sound risk management practices.
Compensation Committee Interlocks and Insider Participation
The board has a Governance and Compensation Committee that recommends actions to the full board regarding governance practices and compensation and benefits
programs, which the full board of directors may approve or disapprove. None of the directors serving on the board in 2023 has at any time been an officer or employee with the Bank. None of the Bank’s executive officers served during 2023 or is serving on the board of directors or the compensation committee of any entity whose executive officers served on the Bank’s board of directors.
Executive Officers
The following table presents the names, ages, and titles of the executive officers of the Bank and all persons chosen to become executive officers as of the date of this Report. No executive officer has any family relationship with any other executive officer or director of the Bank.
Senior Vice President and Director of Community Investment Services
Kirk R. Malmberg has served as president and chief executive officer since May 28, 2021. He previously served as executive vice president and chief
operating officer from November 2019 through November 2020, overseeing the Bank’s member sales and outreach, community investment services, accounting, financial reporting, financial operations management, investment and derivatives operations, treasury and information technology. He served as executive vice president and chief financial officer from April 2011 through October 2019. From 2007 through March 2011, he served as executive vice president and chief credit officer, overseeing collateral services, credit services, community investment services and mortgage program operations. Prior to that, Mr. Malmberg served as senior vice president responsible for the Bank’s mortgage programs. He joined the Bank
in 2001 as senior vice president, asset-liability management, after having served for five years as senior vice president, treasury, at FHLBank Chicago. Mr. Malmberg earned an M.B.A. from Rice University and a B.A. from Trinity University.
Haig H. Kazazian, III has served as chief financial officer since 2019 and promoted to executive vice president effective January 1, 2022, having previously served as senior vice president and treasurer since 2013. Mr. Kazazian joined the Bank as a credit analyst in 1992 and earned promotions to manager of national accounts and product Development in 2001, First Vice President in 2005, manager of national accounts and capital markets trading in 2009, and manager of treasury analysis and national accounts sales and trading in 2011, and senior vice
president in 2014. Mr. Kazazian oversees the Bank’s business operations, accounting services, member sales, trading and education, and treasury function. He is a chartered financial analyst and earned an M.B.A. and a B.A. in economics, each from Emory University. Mr. Kazazian was an M.B.A. Fellowship Recipient.
Alp E. Can has served as chief risk officer since 2017, directing the Bank's enterprise risk management function. Since 2019, Mr. Can also oversees the Bank’s credit and collateral services and collateral risk management operations. Mr. Can has served as executive vice president effective January 1, 2020, having served as senior vice president since 2018. He is responsible for overseeing enterprise-wide risk assessment and reporting functions, credit risk, financial risk modeling, as well as model validation efforts for the Bank.
Mr. Can joined the Bank in 2005 as an asset liability analyst in the financial risk management and modeling department. He was promoted to first vice president and manager of financial risk modeling in 2013 and to director of enterprise risk management in 2014. Mr. Can earned a bachelor’s degree in economics from the University of Istanbul, and an M.S. in mathematical risk management and M.B.A.- Finance, each from Georgia State University.
Dawn Gehring was promoted to executive vice president, effective on January 1, 2024. Prior to her promotion, she had served as senior vice president, chief human resources officer since 2021, having previously served as director of human resources since 2016. Ms. Gehring is responsible for executing the Bank’s human resources strategies to include: talent acquisition, total rewards, talent management,
workforce diversity and inclusion, and human resources compliance. Ms. Gehring also leads the Bank’s staff services and property management functions, which include facilities operations, tenant leasing, security, print and mail services, and procurement. Prior to joining the Bank, Ms. Gehring served as vice president of global human resources for a multi-national service provider in the power and energy industry. In this role, she was a member of the Executive Leadership Team, and was compliance officer for the company, responsible for the strategic management of a variety of human resources functions. Ms. Gehring’s additional experience includes human resources roles in the manufacturing and consumer products industries. Ms. Gehring earned a B.A from the University of Iowa.
K. Annette Hunter was
promoted to executive vice president, effective on January 1, 2023. Prior to her promotion, she had served as senior vice president, director of business operations since November 1, 2019, and also served as senior vice president, director of accounting operations since 2006. Ms. Hunter was promoted in that role from first vice president to senior vice president in 2015. In that role, Ms. Hunter is responsible for the daily accounting operations of the derivatives, investments, consolidated obligations, advances, stock and purchased mortgage portfolios, as well as managing the operations of wires, safekeeping and shareholder support. Ms. Hunter joined the Bank in 2002 as manager of derivative and investment operations. Prior to joining the Bank, she served in various managerial accounting roles at Mirant Corporation, Louis Dreyfus Energy Corporation and Continental Hydraulic
Hose. Ms. Hunter earned a B.S. in business administration from The Ohio State University and an M.B.A. from Kennesaw State University. She is a certified public accountant.
Reginald T. O’Shields has served as chief legal and compliance officer since February 14, 2022, director of enterprise solutions in 2019 and executive vice president effective January 1, 2020, having previously served as senior vice president and general counsel since 2011 and chief compliance and ethics officer since 2018. Mr. O’Shields manages the delivery of legal services by the Bank’s legal department covering a wide variety of corporate, securities, finance, compliance and regulatory matters. In addition, he is responsible for overseeing all Bank programs related to strategic planning, corporate communications,
marketing, government and industry relations, and community investment services. Mr. O’Shields joined the Bank in 2003 as a senior attorney and earned promotions to assistant general counsel in 2005, associate general counsel in 2006 and deputy general counsel in 2007. He was named senior vice president, deputy general counsel and director of legal services in January 1, 2011. Before joining the Bank, Mr. O’Shields was in private legal practice with Sutherland, Asbill & Brennan, LLP in Atlanta, Georgia, Haynsworth Sinkler Boyd in Greenville, South Carolina, and Simpson, Thacher & Bartlett in New York, New York. Mr. O’Shields earned a J.D. from Vanderbilt University and a B.A. in economics from Furman University.
Jefrino Afonso joined the Bank as senior vice president, chief information officer on April
25, 2022. In this role, he oversees all aspects of the Bank’s information technology, including information security, infrastructure, operations, support center, telephony, software development, and enterprise architecture. Prior to joining the Bank, Mr. Afonso spent 16 years with Elavon, a division of US Bank, where he was responsible for various technology systems servicing internal and external customers. Previously, in 2005 Mr. Afonso worked as an independent mergers and acquisitions consultant for CompuCredit, a
financial services provider, and was chief information officer/executive director for Associated Hygienic Products, a paper product manufacturing
company, from 2001 to 2004. Mr. Afonso earned a B.S. in mathematics from St. Xavier’s College in Mumbai, India, and a B.S. in computer science from Loyola University in New Orleans.
Joel C. Badger has served as chief audit officer since November 29, 2019, having been promoted from first vice president to senior vice president effective January 1, 2020. He gained audit responsibility for information technology in 2014 and has served as deputy chief audit officer since 2016. In his current role, he is responsible for providing an independent audit of the Bank by evaluating the internal control system and testing for compliance with internal policies and procedures as well as with applicable laws and directives from the Finance Agency. Mr. Badger reports directly to the audit
committee of the board of directors. Mr. Badger joined the Bank in 2004 as vice president and senior financial risk auditor, was promoted to audit director of capital markets in 2006 and first vice president in 2007. Mr. Badger earned a M.B.A in finance from Georgia State University and a B.S. degree in management with concentrations in accounting and economics from the Georgia Institute of Technology. Mr. Badger is a certified public accountant, certified investments and derivatives auditor, certified internal auditor, certified information systems auditor, certified in risk and information systems control, and a certified risk management auditor. Prior to joining the Bank, Mr. Badger was with Branch Banking and Trust, Wachovia Bank, and the Federal Reserve Bank of Atlanta.
Scott M. Brennan has served as director of sales since 2014, having been promoted from first vice
president to senior vice president effective January 1, 2019. He joined the Bank in 2001 in the Bank’s member sales and trading department as a relationship manager, serving as senior relationship manager from 2006 to 2013, having been promoted from vice president to first vice president in 2014. Mr. Brennan earned a B.S. from Franklin and Marshall College.
James Canty was promoted to senior vice president, treasurer, effective January 1, 2024, having served as first vice president, treasurer since January 2021. He is responsible for directing the Bank’s funding, investment, liquidity, and interest rate risk management. Mr. Canty joined the Bank as first vice president and director of capital markets in 2014. Prior to joining the Bank, Mr. Canty was a director of Interest Rate Sales
at Citigroup in New York and the Assistant Treasurer of the Federal Home Loan Bank of Chicago. Mr. Canty earned his Bachelor of Arts in Finance and Economics from National University of Ireland, Maynooth and a Master’s in Business Administration from Saint Ambrose University, Davenport, Iowa.
Cristina M. Cowan was promoted to senior vice president, director of enterprise risk management, effective January 1, 2024, having served as first vice president, director of enterprise risk management since 2023, and director of enterprise risk governance and operations since 2019. Ms. Cowan joined the Bank in 2007 as the enterprise operational risk project manager and earned promotions to assistant vice president and enterprise operational risk manager in 2013 and vice president and manager of enterprise risk governance and operations
in 2014. She is responsible for the Bank’s enterprise risk management program and for providing oversight for many of the Bank’s governance programs including risk appetite and risk assessment. Prior to joining the Bank, Ms. Cowan was senior vice president of operational risk reporting and analysis for Citigroup in New York. Ms. Cowan earned a master’s degree in information technology from American Intercontinental University and an undergraduate degree from the University of Georgia.
Andrew S. Locker was promoted to senior vice president, general counsel, corporate secretary and director of compliance effective April 2023, having served as first vice president, general counsel and director of compliance since February 2022. Mr. Locker joined the Bank in 2004 as senior attorney and earned promotions to assistant general counsel in 2006, associate general counsel in 2009 and
deputy general counsel in 2016, before becoming director of compliance in 2018. He is responsible for leading the Bank’s legal department, which includes overseeing the Bank’s legal services, governance, and compliance functions. Prior to joining the Bank, Mr. Locker was a corporate finance attorney with Sutherland, Asbill & Brennan LLP in Atlanta. He obtained his law and undergraduate degrees from Georgetown University.
Leslie H. Schreiner was promoted to senior vice president, chief diversity, equity, and inclusion officer, effective January 1, 2023, having served as first vice president, director of diversity and inclusion, since July 2018. She is responsible for the oversight and implementation of the Bank’s diversity, equity and inclusion program. From 2016 to 2018, she served as director of strategic planning and
accounting services, responsible for the Bank’s strategic planning and budgeting process, business intelligence initiatives, as well as accounts payable, fixed assets and expense reimbursement. Ms. Schreiner joined the Bank in 2007 as director of accounting automation and technical compliance. Prior to joining the Bank, she held various senior accounting roles with Resources Global, Primis and Information America. Ms. Schreiner earned a B.A. in accounting from University of Georgia and M.B.A in Finance from Georgia State University. She is a certified public accountant, certified diversity professional and a certified diversity, equity and inclusion coach.
William
T. Shawhas served as senior vice president, controller of the Bank since 2014, being promoted from first vice president to senior vice president effective January 1, 2019. Mr. Shaw joined the Bank in 2008 as manager of accounting policy and was subsequently promoted to director of accounting policy and financial reporting. Mr. Shaw oversees the Bank’s accounting, financial reporting, accounting policy, budgeting, and derivatives hedge accounting. Prior to joining the Bank, Mr. Shaw served as assistant controller for First Charter Corporation, Director of SEC reporting for Novelis Inc., manager of inspections with the Public Company Accounting Oversight Board, and was a manager with PricewaterhouseCoopers LLP. He received his B.S. in accounting and Master’s Degree in accountancy from Brigham Young University.
He is also a certified public accountant.
Tomeka L. Strickland has served as senior vice president, director of community investment services, since April 2023. Previously she served as first vice president and associate director of community investment services from January 2021 to April 2023, overseeing daily operations, intake, underwriting, decisioning, funding, asset management, multifamily and homeownership real estate equity portfolios, technology, and reporting. She served as interim vice president and associate director of community investment services from November 2019 to December 2021. From 2014 through 2019, she served as assistant vice president, systems and reporting manager, responsible for regulatory and governance reporting, technology projects, user acceptance testing, and records management. Prior to joining the Bank in 2001 as a systems specialist, Ms. Strickland
worked for Bank of America and NationsBank from 1993 to 2000 serving in various treasury management services and project management roles. As the community investment officer for the Bank, Ms. Strickland meets regularly with the Affordable Housing Advisory Council, member financial institutions, developers, and other community stakeholders to better understand the district’s community lending needs and to educate audiences on ways to leverage the Bank’s affordable housing and community lending products and services.
Item 11.Executive Compensation.
Compensation Discussion and Analysis
Introduction
This section describes and analyzes the Bank’s 2023 compensation program for:
•the chief executive officer;
•the chief financial officer; and
•the three other most highly-compensated executive officers who were serving as executive officers on December 31, 2023.
These executive officers are collectively referred to as the Bank’s “named executive officers.”
Executive
Vice President and Chief Financial Officer
Alp E. Can
Executive Vice President and Chief Risk Officer
K. Annette Hunter (1)
Executive Vice President and Director of Business Operations
Reginald T. O’Shields
Executive Vice President and Chief Legal and Compliance Officer
__________
(1) Ms. Hunter was promoted to executive vice president as of January
1, 2023. Previously, she served as senior vice president.
Philosophy and Objectives
The Bank’s compensation philosophy and objectives are to attract, motivate, and retain high caliber financial services executives capable of achieving strategic business initiatives, enhancing business performance and increasing member value. The Bank’s compensation program is designed to reward this performance and enhanced value and to offer competitive compensation elements that align its executives’ incentives with the interests of its members. To mitigate unnecessary or excessive risk-taking by executive management, the Bank’s incentive compensation plan contains overall Bank performance goals that are dependent on an aggregation of transactions throughout the Bank and that cannot be individually altered by executive management. The incentive compensation
plan contains quantitative components that are evaluated by the board of directors. Additionally, the board of directors maintains discretionary authority over all incentive compensation awards, giving the board of directors the flexibility to review Bank performance throughout the year and to adjust incentive compensation accordingly.
Elements of Compensation
The Bank compensates its executive officers with a combination of base salary, incentive compensation, and benefits. The Bank is unable to offer equity-related compensation because it is a cooperative, and only member financial institutions may own its capital stock. Accordingly, the Bank offers other compensation elements, such as qualified and non-qualified defined benefit and defined contribution pension plans, to motivate long-term performance and encourage retention. Because the Bank
is exempt from federal taxes, the deductibility of compensation is not relevant to compensation plan design. The elements of the Bank’s compensation program for executive officers, and the objective of each compensation element, are described below.
Base salary. Base salary is established on the basis of the ongoing duties associated with managing a particular set of functions at the Bank and provides an amount of fixed compensation. Each executive’s base salary is also used as a basis in calculating the executive’s annual incentive award opportunity, as described below.
Incentive compensation. The Bank provides an annual cash award opportunity under its Incentive Compensation Plan (ICP) to executive officers based on the achievement of quantitative goals set and evaluated by the board of directors.
To promote consistently high corporate performance on a long-term basis and enhance the retention of key senior executive officers, payment of fifty percent of any ICP granted to a named executive officer is deferred and distributed over a three-year period, together with positive or negative returns (Deferred Incentives). The named executive officers’ ICP awards and Deferred Incentives are subject to adjustment or forfeiture in certain events as described below under “2023 Weights and Awards-Incentive Compensation PlanAward Adjustment or Forfeiture.”
Benefits. The Bank provides retirement benefits to promote executive retention, and the executive officers are eligible to participate in the same benefit plans that are made available to other employees of the Bank, such as health, group
term life and long-term disability coverage. The Bank also provides limited perquisites to executive officers.
Executive Compensation Process
Board and committee consideration of executive compensation. The Bank’s board of directors establishes the Bank’s executive compensation philosophy and objectives and has final approval of any compensation decisions related to the Bank’s chief executive officer (CEO), all officers reporting directly to the CEO who are senior vice presidents or higher, and any officer determined to be a named executive officer in the prior year. The governance and compensation committee of the board of directors advises and assists the board and makes recommendations to the board relating to compensation of such officers.
The CEO reviews and recommends to the board the base salary of the officers who report directly to him and who are senior vice president and higher level officers. The CEO also approves the base salary of all other senior vice president officers (other than the chief audit officer) within an overall budget approved by the board of directors.
Use of compensation consultant. The governance and compensation committee of the board of directors selected and engaged Aon plc (Aon) to provide assistance in evaluating the Bank’s executive compensation programs for 2023. Aon reported directly to the committee and the board with respect to executive compensation.
Consideration of competitive compensation levels. The Bank’s executive compensation program
is designed to be appropriately competitive with prevailing practices in the broader financial services industry, consistent with the Bank’s business and risk profile. As part of each compensation review process for 2023, the board considered base salary, bonus compensation, total cash compensation, long-term compensation and total direct compensation at a peer group consisting of (1) the other FHLBanks and (2) commercial banks with assets over $20 billion. In addition to the other FHLBanks, the Bank believes that the other institutions included in this peer group present a breadth and level of complexity of operations that are generally comparable to the Bank. With respect to Mr. Malmberg and Mr. Kazazian, the board also considered an additional peer group of public proxy peers with assets between $10 billion and $20 billion. Generally, it is the Bank’s overall intent to provide executive officers with total direct compensation, comprised of base salary and targeted
incentive opportunities, at or above the competitive market median for comparable positions, recognizing other comparable financial institutions provide equity awards that the Bank is unable to provide. However, when setting the compensation for the Bank’s executives, the board did not target any named executive officer’s compensation to a specific quartile of such executive officer’s comparable position in the peer groups.
The Bank is exempt from SEC proxy rules and certain compensation disclosure that is required in proxy statements and accordingly does not provide member advisory “say on pay” votes regarding executive compensation.
Finance Agency oversight of executive compensation. Pursuant to the Housing and Economic Recovery Act, the Director prohibits the FHLBanks from providing to any executive officer compensation
that is not reasonable and comparable with compensation for employment in other similar businesses involving similar duties and responsibilities. FHLBanks may not transfer, disburse, or pay compensation to any executive officer, or enter into an agreement with such executive officer, without the approval of the Director. Pursuant to this authority and a Finance Agency final rule on executive compensation (12 CFR Part 1230), the FHLBanks are required to report to the Director all compensation actions relating to the president, the chief financial officer, and the three other most highly compensated officers at least 30 days in advance of any board decision with respect to those actions, and at least 60 days prior to entering into any written arrangement that provides incentive awards to any executive officer. At any time before an executive compensation action is taken, the Director may require an FHLBank to withhold any payment, transfer, or disbursement of compensation
to an executive officer, or to place such compensation in an escrow account, or prohibit the action. The Housing and Economic Recovery Act also sets rules on permissible “golden parachute” payments and authorizes the Director to prohibit the Bank from making any such payments to its officers, employees, and directors. The Director has the power to approve, disapprove, or modify the executive compensation of the FHLBanks.
In addition, Finance Agency Advisory Bulletin 2009-AB-02 established five principles for executive compensation by the FHLBanks and the Office of Finance:
•executive
compensation must be reasonable and comparable to that offered to executives in similar positions at other comparable financial institutions;
•executive incentive compensation should be consistent with sound risk management and preservation of the par value of the FHLBank’s capital stock;
•a significant percentage of an executive’s incentive-based compensation should be tied to longer-term performance and outcome indicators;
•a significant percentage of an executive’s incentive-based compensation should be deferred and made contingent upon the FHLBank’s financial performance over several years; and
•the
FHLBank’s board of directors should promote accountability and transparency in the process of setting compensation.
The Finance Agency requires that the FHLBanks maintain a risk management program to assess and manage potential risks relating to management’s performance goals, objectives, and compensation structure. The Finance Agency may prohibit or restrict a significantly undercapitalized FHLBank from taking certain actions relating to the compensation of its executives, including paying any bonus to an executive officer or increasing an executive officer’s salary, without the prior written approval of the Director. The Bank was not undercapitalized during 2023.
Compensation Decisions for 2023
Overview
The board of
directors bases its compensation decisions on both objective criteria related to the Bank’s performance and subjective criteria related to each executive’s performance. Among the various criteria the board considered in evaluating the named executive officers’ performance were:
•achievement of performance objectives for 2023 as determined by the board;
•fulfillment of the Bank’s public policy mission;
•demonstration of leadership and vision for the Bank;
•implementation and maintenance of effective business strategies and operations, legal and regulatory compliance programs, risk management
activities, and internal controls commensurate with the Bank’s size, scope, and complexity;
•establishment and maintenance of strong relationships between the Bank and its customers, members, employees,
regulators, and other stakeholders; and
•the Bank’s 2023 financial results.
As part of the compensation review process for compensation to be paid in 2023, the board engaged Aon in 2022 to provide competitive market compensation ranges for Mr. Malmberg, Mr. Can, Mr. O’Shields, Mr. Kazazian and Ms. Hunter (Aon Study). The Aon Study involved an analysis of total compensation for comparable positions at the following 87 institutions, each a commercial bank with assets over
$20 billion, as well as the other FHLBanks.
The value of retirement plans and other benefits were not specifically considered as part of the Aon study. To account for differences in the size and scope of the comparable positions included in the Aon Study, low quartile data (25th percentile), median data (50th percentile) or high quartile data (75th percentile) was selected for each of those jobs to develop a market composite comparison for each of the positions held by the applicable named executive officers. In the case of the other FHLBanks, executive to executive comparisons were made at the high quartile to account for the Bank’s size and scope. In the case of the commercial bank peers, divisional head comparisons were used to identify the jobs with the closest functional responsibilities to the applicable named executive officers, and executive comparisons were made at the median data. For purposes of the
Bank’s comparative analysis, total direct compensation within +/- 15 percent of the median market composite compensation was considered to be within the competitive market range.
The Aon Study involved an analysis of total compensation for comparable positions at the institutions listed above and the other FHLBanks. The additional peer group considered with respect to Mr. Malmberg and Mr. Kazazian, is comprised of the following 35 institutions, public proxy peers with assets between $10 billion and $20 billion:
•Axos
Financial, Inc.
•Hope Bancorp, Inc.
•Banner Corporation
•Independent Bank Group, Inc.
•Berkshire Hills Bancorp, Inc.
•International Bancshares Corporation
•Community Bank System, Inc.
•Merchants Bancorp
•Customers
Bancorp, Inc.
•NBT Bancorp Inc.
•CVB Financial Corp.
•Northwest Bancshares, Inc.
•Dime Community Bancshares, Inc.
•OceanFirst Financial Corp.
•Eagle Bancorp, Inc.
•Provident Financial Services, Inc.
•Enterprise
Financial Services Corp
•Renasant Corporation
•FB Financial Corporation
•Sandy Spring Bancorp, Inc.
•First Busey Corporation
•Silvergate Capital Corporation
•First Financial Bancorp.
•TFS Financial Corporation
•First
Financial Bankshares, Inc.
•TowneBank
•First Foundation Inc.
•Trustmark Corporation
•First Interstate BancSystem, Inc.
•Washington Federal, Inc.
•First Merchants Corporation
•WesBanco, Inc.
•Heartland
Financial USA, Inc.
•WSFS Financial Corporation
•Home Bancshares, Inc. (Conway, AR)
2023 Base Salary
In setting the base salaries of the named executive officers for 2023, the board took into consideration the results of the Aon Study, which showed that each of these executive’s base salary and targeted incentive opportunities were at or below the lower bound of the competitive market median for his or her position when compared with commercial Banks and comparable when compared with other Federal Home Loan Banks. After reviewing the Bank’s performance and the performance of each of the named
executive officers during fiscal year 2022, the board set the named executive officers’ salaries at the following amounts for 2023:
The following table presents the 2023 award opportunities, as established by the board under the ICP, expressed as a percentage of base pay earnings during the year.
2023 Award Opportunities
Percent of Base Salary (%)
Title
Threshold
Target
Maximum
President and Chief Executive Officer
50.00
75.00
100.00
Executive Vice Presidents
35.00
60.00
85.00
For
2023, the board established four incentive goals under the ICP, which correlated to the member focus, financial focus, risk management performance and diversity, equity and inclusion priorities reflected in the Bank’s strategic plan. Each of these goals is described in more detail below. Awards for executive vice presidents also included individual and team goals. The board of directors established threshold, target, and maximum performance levels for each quantitative incentive goal. Each goal’s “target” performance level is consistent with the assumptions set forth in the Bank’s annual operating budget, forecasts, and strategic plan. The “threshold” and “maximum” performance levels are designed to reward partial attainment of the goal and performance beyond the forecasted levels, respectively. Factors considered in setting the various performance levels include management’s projections concerning economic conditions, interest rates, demand for
advances products, and balance sheet structure.
The following tables provide the weights and awards for each performance target as a percentage of base salary that the board established for 2023. A description of each of the performance metrics, and the performance against such metrics in 2023, is provided following the table.
2023 Weights and Awards
President
and Chief Executive Officer
(Mr. Malmberg)
Percent of Base Salary
Goal
Weight (%)
Threshold (%)
Target (%)
Maximum (%)
Member
Focus - Member Engagement
30.00
15.00
22.50
30.00
Financial Focus - Return on Equity as a Spread to Average SOFR
The Member Focus - Member Engagement goal measured the average utilization of the Bank’s products and services by members during 2023. Performance under this measure was determined by calculating the total product utilization by members as of December 31, 2023, referred to as activity points, over the daily average number of members for each business day of 2023. The performance goals were 2.00 (threshold), 2.20 (target) and 2.55 (maximum) activity points per member. This goal was substantially the same for each named executive officer, with the exception of Mr. Can (who did not have this performance metric), and performance was determined on an overall Bank-wide basis. As of December 31, 2023, the Bank achieved a member activity
performance score of 3.107 engagement points per member. Based on 2023 performance, the board awarded the maximum level for this goal.
The Risk Management Focus - Risk Management Key Risk Indicator goal involved managing the Bank’s key risks at appropriate tolerance levels. Under this measure, the board and management defined the Bank’s key risks and the tolerance levels with respect to those risks. The Bank then scored each key risk based upon whether the Bank was satisfying the defined tolerance level. If the Bank was performing at or better than the defined tolerance level for all key risks, a risk appetite performance score of 100 was achieved. A deduction was applied to the risk appetite performance score for each key risk performing below the defined tolerance level. The amount that was deducted depended upon the extent of the underperformance. The performance
goals were 85.0 percent risk appetite performance score (threshold), 95.0 percent risk appetite performance score (target), and 100 percent risk appetite performance score (maximum). This goal was substantially the same for each named executive officer, with the exception of Mr. Can (whose overall weighting for this goal was higher, consistent with his role as Chief Risk Officer), and performance was determined on an overall Bank-wide basis. As of December 31, 2023, the Bank achieved a risk appetite performance score of 97.76 percent. Based upon that score, the board awarded between target and maximum level for this goal.
The Financial Focus - Return on Equity Spread to Average SOFR performance goal related to the Bank’s ROE amount in excess average SOFR. For ICP purposes, ROE is adjusted for additional voluntary
housing contributions. This performance measure reflects the Bank’s ability to pay quarterly dividends to its members and was established with a sliding scale so that the spread performance metrics become smaller as SOFR increases and remained subject to certain accounting adjustments which were not deemed necessary. For 2023, the performance goals were 60 basis points (threshold), 80 basis points (target), and 110 basis points (maximum). This goal was substantially the same for each named executive officer, with the exception of Mr. Can (who did not have this performance metric), and performance was determined on an overall Bank-wide basis. In 2023, the Bank’s adjusted ROE spread to average SOFR was 262 basis points. Based upon that calculation, the board awarded the maximum level for this goal.
The Diversity, Equity and Inclusion performance goal aligned with the Bank’s commitment to its diversity, equity
and inclusion program and measured the Bank’s ability to operate in accordance with its board approved diversity, equity and inclusion strategy. This performance goal utilized the eight quantitative goals contained in the Bank’s 2023 diversity, equity and inclusion operational plan. These eight goals are in the areas of workforce, supplier, capital markets and partnership. Under this measure, the performance goals required achievement of four (threshold), five (target), or seven (maximum) of the eight quantitative goals. In 2023, eight of these goals were achieved. Based on that achievement, the board awarded the maximum level for this goal.
In 2023, the board of directors did not establish individual performance goals for Mr. Malmberg. Individual goals for Mr. Kazazian focused on leadership initiatives, Mr. O’Shields focused on governance and community investment initiatives, Mr. Can focused on collateral
system strategy and credit risk management, and Ms. Hunter focused on leadership initiatives and business process efficiencies. Based upon performance in 2023, Mr. Kazazian, Mr. Can, Ms. Hunter, and Mr. O’Shields were awarded maximum level for these goals.
The
amount of incentive compensation earned by each of the named executive officers under the ICP, as shown in the “Total Calculated Award” column in the preceding table is included in the “Non-Equity Incentive Compensation Plan” column in the Summary Compensation Table below, along with interest earned in 2023 on Deferred Incentives. For the Bank’s current named executive officers, the Deferred Incentive portion will be paid, together with positive or negative returns (equal to the Bank’s return on equity for the applicable year) over three years (2025-2027) on the following schedule, subject to certain adjustment and forfeiture provisions discussed below:
Deferred Incentive Payout Schedule
Payment
Year
Payment
2025
1/3 of balance (± 1-year return)
2026
1/2 of balance (± 2-year return)
2027
Remaining balance (± 3-year return)
Incentive Compensation PlanAward Adjustment or Forfeiture. The named executive officers’ ICP awards and Deferred Incentive are subject to adjustment or forfeiture in certain events. Under the terms
of the ICP, the board of directors has reserved the right to amend, modify or terminate the ICP, in whole or in part, and to increase, decrease, terminate without penalty or payment, or otherwise modify any ICP award, at any time for any reason or no reason.
The board of directors has the authority to (i) equitably adjust ICP performance measures for a particular year under the ICP to preserve the benefits or potential benefits intended to be made available to the participants for any merger, consolidation, rights offering, separation, reorganization or liquidation or any other change in the capital structure of the Bank and (ii) adjust Earned Awards (as defined in the ICP) for both current and prior years if the board determines in good faith that the amounts of any Earned Awards were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria as defined
in the ICP. The board may, in its sole discretion, decline to adjust the terms of any outstanding Award, as defined, if it determines that such adjustment would violate applicable law or result in adverse tax consequences to the participant or to the Bank.
If as of the time any payment of the Deferred Incentive otherwise would be due, the board of directors has made a good faith determination that the Bank has not achieved certain objective financial performance threshold measures such as retained earnings (net of accumulated other comprehensive income (loss)), market value of equity/par value of capital stock, regulatory capital to assets ratio, and positive annual net income, as determined at the board’s discretion, the board may in its sole discretion elect to reduce or eliminate such payment of the Deferred Incentive.
No adjustments to ICP
performance measures or Earned Awards were made for ICP awards, nor reductions or eliminations of payments of a Deferred Incentive were made to named executive officers in 2023.
If a named executive officer’s employment with the Bank terminates for any reason prior to payment of any earned incentive compensation, all remaining payments will be forfeited, subject to certain limited exceptions if the named executive officer dies, becomes disabled, or retires, with a combination of age and years of service to the Bank totaling at least 70.
Retirement Benefits
The
named executive officers are eligible to participate in certain tax-qualified and non-qualified defined benefit, defined contribution, and deferred compensation plans. These plans are described in more detail below in the sections entitled “Executive Compensation — Pension Benefits” and “— Deferred Compensation.”
The Bank’s retirement benefit plans are a vital component of the Bank’s retention strategy for executive officers, particularly because many other competing organizations provide executive officers with economic benefits based on equity interests in the employer, oftentimes in addition to similar retirement benefits. The Bank is unable to offer equity-related compensation because it is a cooperative, and only member financial institutions may own its capital stock.
Perquisites
and Other Benefits
All named executive officers are eligible to participate in the benefit plans that are made available to all employees of the Bank including medical, dental, and vision insurance coverage, group term life and long-term disability insurance coverage, paid vacation, and sick leave. The named executive officers generally participate in these plans on the same basis and terms as all other employees.
The Bank offers the named executive officers a limited number of perquisites, including an annual physical examination, reimbursement for guest activities at certain business functions, and financial planning services. For Mr. Malmberg, the Bank also provides an automobile allowance of up to $1,500 per month. Because perquisites generally are limited, the board does not specifically consider perquisites when reviewing total compensation
for any of the named executive officers.
Employment Arrangements and Severance Benefits
Other than the specific contractual arrangements discussed below, all Bank employees are employed under an “at will” arrangement. Accordingly, an employee may resign employment at any time, and the Bank may terminate the employee’s employment at any time for any reason, with or without cause.
The board of directors may, in its discretion, provide severance benefits to an executive officer in the event of termination of their employment. In determining whether severance compensation is appropriate, the board of directors considers both the factors underlying the termination of employment and the employment history of the executive officer. The Bank does not provide a “gross up” benefit
on taxes incurred with respect to any severance.
Employment Agreement. The Bank entered into an Employment Agreement with Mr. Malmberg effective on May 28, 2021 (Employment Agreement). Under the Employment Agreement, Mr. Malmberg’s employment with the Bank may be terminated by the Bank with or without “cause,” or by Mr. Malmberg with or without “good reason,” as defined in the Employment Agreement. Unless earlier terminated by either party as provided therein, the Employment Agreement has an initial three-year term and will continue to extend automatically for subsequent one-year periods unless either party elects not to renew. Mr. Malmberg is entitled to participate in all incentive, savings, and retirement plans and programs available to senior executives of the Bank. The Employment Agreement
also provides for certain severance benefits for Mr. Malmberg separately from those under the Change in Control Severance Plan, which are discussed below under “Potential Payments upon Termination or Change in Control.” This severance arrangement was an integral and necessary component of the Bank’s strategy to recruit Mr. Malmberg to the president and CEO position.
Change in Control Severance Plan. Effective January 1, 2017, the Bank adopted an Executive Change in Control Severance Plan (Severance Plan). The purpose of the Severance Plan is to facilitate the hiring and retention of senior executives capable of executing the Bank’s strategic priorities, to ensure their continued dedication to the Bank notwithstanding the possibility of a change in control, and to provide them with certain protection and benefits in the event
of certain termination events following a defined change in control of the Bank. The board has designated Mr. Malmberg, Mr. Kazazian, Mr. Can, Ms. Hunter, and Mr. O’Shields as eligible and they participate in the Severance Plan. The Severance Plan is discussed below under “Potential Payments upon Termination or Change in Control.”
The board of directors of the Bank has reviewed and discussed the Compensation Discussion and Analysis above with management, and based on such review and discussion, the board of directors has determined that
the Compensation Discussion and Analysis above should be included in the Bank’s Annual Report on Form 10-K.
The board of directors of the Bank has primary responsibility for establishing and determining the Bank’s compensation program. Therefore, this report is submitted by all current directors who were serving during 2023.
The following table presents a summary of cash and other compensation earned by the named executive officers for the years ended December 31, 2023, 2022, and 2021. It is important to read this table, and the other tables that follow, closely and in conjunction with the Compensation Discussion and Analysis. The narratives following the tables and the footnotes accompanying each table are important parts of each table.
2023 Summary Compensation Table
Name
and Principal Position (a)
Year (b)
Salary
(c)
Bonus (d)(2)
Non-Equity Incentive Plan Compensation (e)(3)
Change in Pension Value and Nonqualified Deferred Compensation Earnings (f) (4)
Haig
H. Kazazian, III Executive Vice President and Chief Financial Officer
2023
480,000
100
418,846
740,000
30,541
1,669,487
2022
440,000
7,100
355,301
—
30,352
832,753
2021
425,000
100
298,917
—
27,725
751,742
Alp
E. Can Executive Vice President and Chief Risk Officer
2023
520,000
100
443,838
159,000
169,866
1,292,804
2022
470,000
15,100
364,965
—
111,031
961,096
2021
425,000
100
312,010
19,000
79,691
835,801
K.
Annette Hunter
Executive Vice President and Director of Business Operations (1)
2023
400,000
100
344,731
500,000
26,858
1,271,689
2022
358,938
2,100
239,219
—
23,863
624,120
2021
346,800
32,060
182,066
50,000
21,894
632,820
Reginald
O'Shields Executive Vice President and Chief Legal and Compliance Officer
2023
465,000
2,100
406,228
500,000
32,763
1,406,091
2022
440,000
100
355,126
—
32,182
827,408
2021
425,000
100
291,401
—
29,743
746,244
__________
(1)
Ms. Hunter was promoted to executive vice president, effective as of January 1, 2023.
(2) The amounts in column (d) reflect an annual $100 employee appreciation bonus provided to all employees of the Bank. The Bank provides all employees of the Bank, including the named executive officers, a tax gross-up on this bonus, which amount is included in column (g). The 2023 bonus amount includes an award payment of $2,000 for Mr. O’Shields’ for his 20 years of service pursuant to the Bank’s Service Award Program.
(3) The amounts in column (e) reflect the dollar value of all earnings for services performed during the fiscal years ended December 31, 2023, 2022, and 2021 pursuant
to awards under the ICP, even though fifty percent of the ICP awards for each year were subject to mandatory deferral and distribution over three years. As discussed in the Compensation Discussion and Analysis, payment of the 2023 non-equity incentive compensation awards was subject to a 30-day review period and receipt of non-objection by the Finance Agency. The Bank received written non-objection from the Finance Agency on February 15, 2024. The amounts in column (e) also include the dollar value of all interest during each year earned on Deferred Incentive related to ICP awards for prior fiscal years, in the following amounts for 2023: $42,281 for Mr. Malmberg, $24,258 for Mr. Kazazian, $25,085 for Mr. Can, $15,908 for Ms. Hunter, and $23,971 for Mr. O’Shields.
(4) The amounts in column (f) reflects the aggregate change in the actuarial present value
of the named executive officer’s aggregate pension benefits under the Bank’s Pension and Defined Benefit Equalization Plan (DBEP) during each fiscal year, computed as described in footnote (1) to the 2023 Pension Benefits table. For Mr. Malmberg, Mr. Kazazian, Mr. Can, Ms. Hunter, and Mr. O’Shields the aggregate actuarial present value for pension benefits under the Bank’s Pension and DBEP Plans increased by $391,594, $740,000, $159,000, $50,000, and $500,000, respectively. There were no above-market earnings on nonqualified deferred compensation during 2023. These plans are described in greater detail below under “Pension Benefits” and “Deferred Compensation.”
(1)
Perquisites are valued at the actual amounts paid by the Bank, and the value of each perquisite for each executive was less than $25,000. The Bank paid premiums for each named executive officer for the Bank’s Business Travel Accidental Death and Dismemberment Policy. The Bank provided Mr. Malmberg a $1,500 per month car allowance. The Bank provided Mr. Malmberg, Mr. Kazazian, Mr. Can, Ms. Hunter, and Mr. O’Shields reimbursement for certain activities at business functions. The Bank provided Mr. Malmberg, Mr. Kazazian and Mr. O’Shields reimbursement for guest activities at certain business functions. The Bank provided Ms. Hunter, and Mr. O’Shields matching contributions in the Bank’s charitable giving program.
(2) The tax gross-up amounts represent withholding taxes on the employee appreciation bonus provided to all employees of the Bank and on the award to Mr. O’Shields issued
under the Bank’s Service Award Program.
Awards of Incentive Compensation in 2023
The following table provides information concerning each grant of an award to a named executive officer in 2023 under the ICP.
2023 Grants of Plan-Based Awards
Estimated Future Payouts Under Non-Equity Incentive Plan
Awards
(1) Columns (b-d) reflect threshold, target, and maximum payment opportunities under the Bank’s ICP for the fiscal year ended December 31, 2023. The actual amounts earned pursuant to the ICP during 2023 are reported under column (e) of the 2023 Summary Compensation Table. Fifty percent of the actual amount earned is subject to mandatory deferral. For information on these awards, see “Compensation Discussion and Analysis. Incentive Compensation.”
Retirement
Benefits
Pension Benefits
The 2023 Pension Benefits table below provides information with respect to the Pentegra Plan, which is the Bank’s tax-qualified pension plan (Pension Plan), and the Bank’s non-qualified Defined Benefit Equalization Plan (DBEP). The table shows the actuarial present value of accumulated benefits as of December 31, 2023, for each of the named executive officers and the number of years of service credited to each named executive under each plan.
The pension benefits payable under the Pension Plan are based on a pre-established defined benefit formula that provides for an annual retirement allowance and a retirement death benefit. A participant’s benefit in the plan vests upon completion of five years of service with the Bank, and the payout amount depends on the date of the participant’s retirement, as described below.
For participants hired on or before July 1, 2005, the Pension Plan generally provides an annual retirement allowance equal to 2.50 percent of the participant’s highest consecutive three-year average compensation for each year of credited service under the plan (not
to exceed 30 years). Average compensation is defined as base salary and annual short-term incentive compensation.
For these participants, the standard retirement age is 65, with reduced early retirement benefits available at age 45. If the participant continues to work for the Bank until the sum of the participant’s age and years of service with the Bank equals at least 70, the annual benefit payable following retirement is reduced by 1.50 percent for each year that retirement precedes normal retirement age. If the participant terminates employment before the participant’s age and years of service with the Bank total 70, the annual benefit payable following retirement is reduced by six percent for each year between age 64 and 60, by four percent for each year between age 59 and 55, and by three percent for each year between age 54 and 45, in each case, that retirement precedes normal retirement age. For these
participants, lump sum payments are available beginning at age 50.
Mr. Kazazian, Mr. Can, Mr. O’Shields and Ms. Hunter participate in the Pension Plan on these terms because they were hired before July 1, 2005. Each of them has attained eligibility for immediate early retirement. Mr. Malmberg also participates in the Pension Plan on these terms and at a level consistent with his original date of hire. (Mr. Malmberg received a distribution from the Pension Plan following his retirement in 2020; but he re-entered the Pension Plan when he was appointed CEO in 2021.)
For participants
hired between July 1, 2005, and February 28, 2011, the Pension Plan generally provides an annual retirement allowance equal to 1.50 percent of the participant’s highest consecutive five-year average compensation for each year of credited service under the plan (not to exceed 30 years). Average compensation is defined as base salary only. For these participants, the standard retirement age is 65, with reduced early retirement benefits available at age 55. If the participant terminates employment before reaching age 65, the annual benefit payable following retirement is reduced by six percent for each year between age 65 and 60, and by four percent for each year between age 60 and 55, in each case, that retirement precedes normal retirement age. These payments are not available for the named executive officers.
The Pension Plan was closed to new participants effective March 1, 2011.
DBEP
Payments under the Pension Plan may be limited due to federal tax code limitations. The DBEP exists to restore those benefits that executives otherwise would forfeit due to these limitations. The DBEP operates using the same benefit formula and retirement eligibility provisions as described above under the Pension Plan. Because the DBEP is a non-qualified plan, the benefits received from this plan do not receive the same tax treatment and funding protection as the Pension Plan. Mr. Kazazian, Mr. O’Shields and Ms. Hunter participate in the DBEP. (Mr. Malmberg did not re-enter
participation in the DBEP upon his appointment as CEO in 2021.)
Death Benefits
Death benefits, which do not vary based on date of hire, also are available under the Pension Plan and the DBEP. If an employee dies while in active service, their beneficiary is entitled to a lump sum amount equal to the commuted value of 120 monthly retirement payments. If a former employee dies while in retirement, having elected the normal form of retirement benefits, their beneficiary also is entitled to a lump sum amount equal to the commuted value of 120 monthly retirement payments less payments received before the former employee died.
(1)
The “Present Value of Accumulated Benefit” is the present value of the annual pension benefit that was earned as of December 31, 2023, assuming retirement at age 65. Benefits under the Pension Plan were calculated using a 4.83 percent discount rate; a 4.75 percent discount rate was used to calculate benefits under the DBEP.
(2) Mr. Malmberg did not re-enter participation in the DBEP upon his appointment as CEO in 2021.
Deferred Compensation
Each named executive officer of the Bank is eligible to participate in the Bank’s non-qualified, elective deferred compensation plan (DCP). Additionally, each named executive officer is also eligible to participate in the Bank’s consolidated
non-qualified Benefit Equalization Plan (BEP). The BEP includes both a defined benefit component (DBEP) described above, and defined contribution component (DCBEP) described below. Directors are eligible to participate in the DCP but are not eligible to participate in the BEP.
The DCP permits a participant to defer all or a portion of their compensation, including base salary and awards under the ICP, and to select the method of determining the earnings on such deferred compensation, based on a range of mutual fund options designed to mirror the Bank’s 401(k) Plan. DCP participants also may select an interest crediting rate based on the Bank’s return on equity. Distributions from the DCP may be made either in a specific year, whether or not a participant’s employment has ended, or at a time that begins at or after the participant’s retirement or separation. Participants may elect to receive either a lump
sum distribution or annual installment payments over periods ranging from two to five years. The Bank does not match contributions to the DCP.
Named executive officers are permitted to defer up to 40.0 percent of salary under the Bank’s 401(k) Plan and the DCBEP. The Bank matches the amount contributed by a participant up to six percent of base salary.
The DCBEP, like the 401(k) Plan, is self-directed and provides participants with a range of mutual fund options through the Vanguard Group. Participants earn a market rate of return based on the mutual funds selected. Distributions from the DCBEP begin when a participant’s employment has ended. Participants may elect to receive either a lump sum distribution or annual installment payments over periods ranging from two to five years. These plans are designed to encourage additional voluntary savings
and to offer a valuable financial planning tool. All Bank contributions to the DCBEP are subject to a two-year vesting period.
•provide that any executive hired or promoted to the level of senior vice president or higher after January 1, 2018 (“eligible executives”), will not be eligible to receive the defined benefit feature of the BEP;
•provide senior vice presidents hired or promoted after January 1, 2018 with a contribution equivalent to 10.0 percent of base pay offset by contributions to the 401(k)
Plan; and
•provide senior vice presidents hired or promoted after January 1, 2018 with a contribution equivalent to 10.0 percent of incentive compensation.
The board amended the BEP, effective April 1, 2021, to:
•define a new category of executives as eligible participants: those who were hired or promoted to chief
executive officer on or after April 1, 2021 and regardless of participation in the Bank’s qualified pension plan but who are not eligible to accrue benefits under the Bank's non-qualified defined benefit equalization plan;
•provide eligible executives with a contribution equivalent to 20 percent of base pay offset by contributions to the 401(k) Plan; and
•provide eligible executives with a contribution equivalent to 20.0 percent of any bonuses paid in the current year.
The board further amended the BEP, effective July 2, 2022 to:
•define
a new category of executives as eligible participants: those who occupy the chief risk officer role as of July 1, 2022 and regardless of participation in the Bank’s qualified pension plan but who are not eligible to accrue benefits under the Bank's non-qualified defined benefit equalization plan;
•provide eligible executives with a contribution equivalent to 20.0 percent of base pay offset by contributions to the 401(k) Plan; and
•provide eligible executives with a contribution equivalent to 20.0 percent of any bonuses paid in the current year.
As of February 1, 2023, the BEP has been amended and restated to
streamline administration of the plan and the eligibility for participation in the DCBEP, the DBEP, and other benefits applicable to the DCBEP. The amended and restated BEP has not changed the benefits awarded to the named executive officers nor the eligibility criteria applying to them.
The following table presents compensation earned and deferred in 2023, and earnings on, or distributions of, such amounts. In accordance with SEC rules, the amounts shown in the table do not include any amounts in respect of the 401(k) Plan.
2023 Nonqualified Deferred Compensation
Name (a)
Executive
Contributions in Last Fiscal Year (b) (1)
(1)
Amounts under column (b), if any, are included in salary reported for 2023 in column (c) of the 2023 Summary Compensation Table.
(2) Amounts under column (c), if any, are included in all other compensation amounts reported for 2023 in column (g) of the 2023 Summary Compensation Table.
(3) Amounts under column (d), if any, reflect actual market returns for mutual funds selected by participants and earnings on the Bank’s return on equity fund over 120% applicable long term federal rate.
(4) To the extent that a participant was a named executive officer in prior years, executive and Bank contributions included in the “Aggregate Balance at Last Fiscal Year End” column have been reported as compensation in the Summary Compensation Table for the applicable year.
Potential Payments upon Termination or Change in Control
Malmberg Employment Agreement
Mr. Malmberg’s Employment Agreement provides that upon the Bank’s termination of his employment for any reason other than “cause,” or upon Mr. Malmberg’s termination of his employment for “good reason,” the Bank will pay a total of one year’s base salary in effect at the date of termination in a lump sum within 30 days after Mr. Malmberg executes and delivers a general release of claims to the Bank, plus an amount equal to the amount that would have been payable pursuant to Mr. Malmberg’s incentive compensation award for the year in which the date of termination occurs, prorated based upon the number of days Mr. Malmberg was employed that year. The incentive compensation award is based on the Bank’s
actual performance for the year in which termination occurs and is payable at the time such incentive compensation awards are paid to other senior executives. In addition, Mr. Malmberg is entitled to receive certain healthcare replacement costs and other amounts required to be paid or provided under any other Bank plan, program, policy or practice or contract or agreement.
Under Mr. Malmberg’s Employment Agreement, “cause” is defined to include:
•Mr. Malmberg’s failure to perform substantially his duties;
•his engagement in illegal conduct or gross misconduct injurious to the Bank;
•a
written request from the Finance Agency or any other regulatory agency or body requesting that the Bank terminate his employment;
•crimes involving a felony, fraud or other dishonest acts;
•certain other notices from or actions by the Finance Agency;
•his breach of fiduciary duty or breach of certain covenants in the Employment Agreement;
•his refusal to comply with a lawful directive from the Chair of the board of directors or from the board of directors; or
•his material breach of the
Employment Agreement.
The Employment Agreement defines “good reason” to include:
•a material diminution in Mr. Malmberg’s base salary or in his authority;
•the Bank requiring Mr. Malmberg to be based at any office or location other than in Atlanta, Georgia; or
•a material breach of the Employment Agreement by the Bank.
The
following table presents information about potential payments to Mr. Malmberg under his Employment Agreement in the event his employment had terminated on December 31, 2023 and a change in control of the Bank had not occurred. He is not entitled to any gross-up payments on taxes incurred with respect to any severance, whether under Section 280G of the tax code or otherwise.
Potential
Payments upon Termination
Termination
Severance
Medical, Dental, and Vision Insurance Benefits
Pension Benefit Enhancements
Other
Perquisites
Total
2023 ICP Award
Deferred Incentive for Prior Periods
Salary
Resignation without Good Reason
$
—
$
—
$
—
$
—
$
—
$
—
$
—
Involuntary
Termination For Cause
—
—
—
—
—
—
—
Involuntary Termination Without Cause
942,300
230,298
975,000
48,648
—
—
2,196,246
Resignation
For Good Reason
942,300
230,298
975,000
48,648
—
—
2,196,246
The other named executive officers are entitled to receive amounts earned during their terms of employment, regardless of the manner in which their employment terminated, on
the same terms generally applicable to all employees of the Bank. These amounts include:
•Severance, if and as determined at the sole discretion of the board.
•Amounts accrued and vested through the Bank’s Pension Plan and the DBEP (the Bank’s qualified and non-qualified defined benefit plans).
•Up to three months of incremental service under the Bank’s Pension Plan may be granted, in the sole discretion of the board, if an employee is provided with severance pay.
•Amounts accrued and vested through the 401(k) Plan and the DCBEP (the Bank’s qualified and non-qualified defined contribution
plans) and amounts contributed and associated earnings under the Bank’s DCP.
•Accrued vacation and applicable retiree medical benefits and applicable retiree life insurance.
In the event of the death or disability of an employee, including a named executive officer, in conjunction with the benefits above, the employee or their beneficiary may receive benefits under the Bank’s disability plan or payments under the Bank’s life insurance plan, as appropriate. Named executive officers also are entitled to receive death benefit payments under the Pension Plan and the Excess Plan, as described under “Retirement Benefits—Death Benefits.”
Change in Control Severance Plan
Effective January
1, 2017, the Bank adopted an Executive Change in Control Severance Plan (Severance Plan).
Overview of the Severance Plan
The Severance Plan provides certain protection and benefits in the event of a Qualifying Termination(as defined below) following a Change in Control (as defined below). The Severance Plan applies to employees or officers who are designated by the Bank’s board of directors as participants. The Bank’s board has designated Mr. Malmberg, Mr. Kazazian, Mr. Can, Mr. O’Shields and Ms. Hunter as participants in the Severance Plan.
Qualifying Termination
“Qualifying Termination” means any separation, termination or other discontinuation of the employment relationship between the Bank and a participant, (A) by the Bank, other than for“cause” (as defined in the Severance Plan); or (B) by the participant, for “good reason” (as defined in the Severance Plan), but does not include a termination resulting from the participant’s death or disability.
•the participant’s failure to perform substantially their duties;
•the participant’s engagement in illegal conduct or willful misconduct
injurious to the Bank;
•the participant’s material violation of law or regulation or of the Bank’s written policies or guidelines;
•a written request from the Finance Agency requesting that the Bank terminate the participant’s employment;
•crimes involving a felony, fraud or other dishonest acts;
•certain other notices from or actions by the Finance Agency;
•the participant’s breach of fiduciary duty or breach of certain covenants in the Severance Plan; and
•the
participant’s refusal to comply with a lawful directive from the CEO or the board of directors.
The Severance Plan defines “good reason” to include:
•a material diminution in the participant’s base salary or in their duties or authority;
•the Bank requiring the participant to be based at any office or location other than in Atlanta, Georgia; or
•a material breach of the Severance Plan by the Bank.
Under the terms of the Severance Plan, if there is a Qualifying Termination during the period beginning on the earliest
of the date a definitive agreement or order for a Change in Control has been entered, or the effective date of a Change of Control as prescribed by the Finance Agency, and ending, in all cases, twenty-four (24) months following the effective date of the Change in Control, the participant becomes entitled to certain severance payments and benefits.
These payments and benefits include the following:
•The CEO would receive a cash payment equal to 2.5 times their annual base salary amount.
•An executive vice president would receive a cash payment equal to 1.75 times their annual base salary amount.
•Participants would receive a lump sum cash payment equal to the amount
that would have been payable pursuant to the participant’s incentive compensation award for the year in which the date of a Qualifying Termination occurs, prorated based on the number of days the participant was employed that year.
•Participants would receive a lump sum cash payment for outplacement assistance in the amount of $7,500.
In addition, the CEO would receive a cash payment equivalent to 24 months of health continuation coverage, and executive vice presidents would receive a cash payment equivalent to 18 months of health continuation coverage.
The Severance Plan defines a “Change in Control” as:
•the merger, reorganization, or consolidation of the Bank with or
into, or acquisition of the Bank by, another Federal Home Loan Bank or other entity;
•the sale or transfer of all or substantially all of the business or assets of the Bank to another Federal Home Loan Bank or other entity; or
•a change in the composition of the Bank’s board that causes the combined number of member directors from the jurisdictions of Alabama, the District of Columbia, Florida, Georgia, Maryland, North Carolina, South Carolina and Virginia to cease to constitute a majority of the Bank’s directors; or
The payments described above are payable in a lump sum within sixty (60) days following the participant’s employment termination date, except the prorated incentive compensation award, which is payable at the time such incentive compensation awards are paid to other senior executives. All payments and benefits are conditioned on the executive having delivered an irrevocable general release of claims against the Bank before payment occurs. In addition, all payments and benefits remain subject to the Bank’s compliance with any applicable statutory and regulatory requirements relating to the payment of amounts under the Severance Plan.The Severance Plan requires that an individual execute a participation agreement to become
a participant in the Severance Plan. Each Mr. Malmberg, Mr. Kazazian, Mr. Can, Mr. O’Shields, and Ms. Hunter have executed a participation agreement to become participants in the Severance Plan.
The following table presents information about potential payments under the Severance Plan in the event that a Change in Control had occurred and their employment had terminated due to a Qualifying Termination on December 31, 2023. None of the participants would be entitled to any gross-up payments on taxes incurred with respect to any severance, whether under Section 280G of the tax code or otherwise.
Potential
Payments upon Qualified Termination Following a Change in Control(1)
(1) Qualifying Termination means a termination without cause or a resignation for good reason. In order to receive severance under the Severance Plan, a Qualifying Termination must occur within 24 months following the effective date of a Change in Control. Ms. Hunter became a participant effective
January 1, 2023.
CEO Pay Ratio Disclosure Rule
The following is a reasonable estimate, prepared under applicable SEC rules, of the ratio of the annual total compensation of the Bank’s president and CEO, Mr. Malmberg, to the median of the annual total compensation of the Bank’s other employees. The Bank identified the median employee in 2022 by examining the 2022 base pay for all 317 individuals, excluding the CEO, who were employed by the Bank on December 1, 2022 (annualized for any permanent full- or part-time employees that were not employed by the Bank for all of 2022). For 2023, the Bank determined to use the same median employee in its pay ratio calculation because there has not been a change in the Bank’s population or employee compensation arrangements
that it believes would significantly impact the pay ratio disclosure. The Bank calculated the annual total compensation for such employee using the same methodology the Bank uses for its named executive officers as set forth in the 2023 Summary Compensation Table included earlier in this Executive Compensation section of the Report. For the year ended December 31, 2023, the Bank’s median employee total annual compensation was $208,890, the CEO’s total annual compensation was $2,664,499; and the ratio of CEO to median employee compensation was 12.76 to 1.
Under the SEC’s rules and guidance, there are numerous ways to determine the median employee for purposes of calculating the pay ratio, and companies may differ in the methods they use, including the employee population sampled, the elements of pay and benefits used, any assumptions made and the use of statistical sampling.
In addition, no two companies have identical employee populations or compensation programs, and pay, benefits and retirement plans differ by country even within the same company. As such, the Bank’s pay ratio may not be comparable to the pay ratio reported by other companies.
The FHLBank Act provides that each FHLBank may pay its directors reasonable compensation for the time required of them, and their necessary expenses, in the performance of their duties, subject to approval by the Director. In accordance with the FHLBank Act, the Bank has adopted
a policy governing the compensation and travel expense reimbursement provided to its directors. Under this policy, directors receive fees paid for attendance at each meeting of the board of directors and meeting of a committee of the board of directors, as further described below. These fees are subject to the annual caps established under the policy. Directors do not receive separate retainers.
Directors are reimbursed for reasonable Bank-related travel expenses in accordance with Bank policy.
During 2023, directors received fees for attendance at each board and committee meeting as described below. The following table presents the annual compensation limits applied.
2023 Annual Director Compensation Limits
Title
Amount
Chair
of the Board
$
150,000
Vice Chair of the Board
135,000
Chair of the Audit Committee
130,000
Other Committee Chair (excluding Audit and Executive)
125,000
All Other Directors
115,000
Under
the 2023 Directors’ Compensation Policy, each director had an opportunity to receive a payment of approximately one-seventh of that director’s annual cap for attendance at no less than 75.0 percent of the board meeting and meetings of each committee of the board on which the director serves during each interim period. The first interim period began on December 12, 2022 and ended January 26, 2023 (the last day of the first scheduled in-person board meeting for 2023). Each successive interim period began on the calendar day immediately following a scheduled board meeting through and including the day of the next scheduled board meeting, with the seventh interim period ending on December 10, 2023 after the seventh scheduled in-person board meeting. Under the policy, after the end of the seventh interim period and before the
seventh payment was made, the governance and compensation committee of the board reviews the cumulative attendance and performance of each director during the year and, in consultation with the chair of the board, may recommended to the board a reduction, elimination or increase in the final payment opportunity for each director, provided that no increase may exceed the applicable annual compensation cap. No such adjustment was made for 2023.
The following table presents the cash and other compensation earned or paid by the Bank to the members of the board of directors for all services in all capacities during 2023.
2023
Director Compensation
Name
Fees Earned or Paid in Cash
Change in Pension Value and Nonqualified Deferred Compensation Earnings
(1) Directors are eligible to participate in the Bank’s DCP. Directors Arriola, Dunlap, Rucker, and Whaley elected to defer compensation for 2023. The amounts in column (c) represent “above market” earnings on deferred amounts.
* Director perquisites include premiums paid by the Bank for each director for the Bank’s Business Travel Accidental Death and Dismemberment Policy, certain
activities at business functions, and matching contributions under the Bank’s charitable giving program. For each director, the aggregate amount of such perquisites was less than $10,000.
In January 2024, the board of directors approved the 2024 Directors’ Compensation Policy which determined new annual compensation limits applicable as of January 1, 2024.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The Bank is a cooperative whose members own substantially all of the outstanding capital stock of the Bank and elect the directors of the Bank. The voting right of members is generally limited to the election of the Bank’s board of directors. A member is eligible to vote for the number of open member director seats in the state in which its principal place of business is located, and all members are eligible to vote for the number of open independent director seats. Membership is voluntary, and a member must give notice of its intent to withdraw from membership. A member that withdraws from membership may not acquire shares of any FHLBank before the end of the five-year period beginning on the date of the completion of its divestiture of Bank stock.
The
Bank does not offer any compensation plan under which equity securities of the Bank are authorized for issuance. The following table presents the ownership of the Bank’s capital stock, which is concentrated within the financial services industry and is stratified across various institution types (in millions).
The
following table presents information about those members that are beneficial owners of more than five percent of the Bank’s outstanding capital stock as of February 29, 2024.
Additionally,
member directors, which comprise a majority of the board of directors of the Bank, are officers or directors of member institutions that own the Bank’s capital stock. The following table presents these institutions as of February 29, 2024.
Item 13.Certain Relationships and Related Transactions, and Director Independence.
Because the Bank is a cooperative, capital stock ownership is a prerequisite for a member to transact any business with the Bank. The Bank’s member directors are officers or directors of member institutions. All directors and any member that holds five percent or more of the Bank’s voting securities are classified as related parties under SEC regulations. In the ordinary course of its business, the Bank may transact business with each of the members that has an officer or director serving as a director of the Bank and members that hold five percent or more of the Bank’s voting securities. All such transactions:
•have been made in
the ordinary course of the Bank’s business;
•have been made subject to the same Bank policies as transactions with the Bank’s members generally; and
•in the opinion of management, do not involve more than the normal risk of collection or present other unfavorable features.
The Bank has adopted a written related person transaction policy, which requires the Governance and Compensation Committee of the board of directors to review and, if appropriate, to approve certain transactions between the Bank and any related person (as defined by applicable SEC regulations). Pursuant to the policy, the committee will review any transaction the Bank would be required to disclose in filings with the SEC in which the Bank is or will be a participant and the amount involved exceeds $120,000,
and in which any related person had, has, or will have a direct or indirect material interest. The Bank has exemptive relief, pursuant to an SEC no-action letter and by law, from disclosing related person transactions that arise in the ordinary course of the Bank’s business. The committee may approve those transactions that are in, or are not inconsistent with, the best interests of the Bank and its shareholders.
In addition, the Bank has a written Code of Conduct applicable to all employees and a Code of Conduct and Ethics for Directors as well as other written policies and procedures that also may apply to or prohibit certain related person transactions.
(1) Audit fees and expenses for the years ended December 31, 2023 and 2022 were for professional services rendered by PwC in connection with the Bank’s annual audits and quarterly reviews of the Bank’s financial
statements.
(2) Audit-related fees and expenses for the years ended December 31, 2023 and 2022 were for certain FHLBank System assurance and related services, as well as fees related to PwC’s participation at conferences. Audit-related fees for the year ended December 31, 2022 also includes costs related to the Bank’s implementation of a new Human Resource and Finance system.
(3) All other fees for the year ended December 31, 2023 and 2022 relate to the annual license for PwC’s accounting research software and disclosure checklist. All other fees for the year ended December
31, 2022 also includes fees incurred related to pre-implementation work related to a new Human Resource and Finance system.
The Bank paid additional fees to PwC in the form of assessments paid to the Office of Finance. The Bank is assessed its proportionate share of the costs of operating the Office of Finance, which includes the expenses associated with the annual audits of the combined financial statements of the FHLBanks. These assessments, which totaled $78,067 and $67,785 in 2023 and 2022, respectively, are not included in the table above.
The Bank is exempt from ordinary federal, state, and local taxation, except employment and real property taxes. No tax-related fees were paid to PwC during the years ended December 31, 2023 and 2022.
The Audit Committee of the board of directors has adopted the Audit Committee Pre-Approval Policy (Pre-Approval Policy). In accordance with the Pre-Approval Policy and applicable law, the Audit Committee pre-approves audit services, audit-related services, tax services, and non-audit services to be provided by the Bank’s independent registered public accounting firm. The term of any pre-approval is 12 months from the date of pre-approval unless the Audit Committee specifically provides otherwise. On an annual basis, the Audit Committee reviews the list of specific services and projected fees for services to be provided for the next 12 months and pre-approves services as the Audit Committee deems necessary. Under the Pre-Approval Policy, the Audit Committee has granted pre-approval authority to the chair and the vice chair of the Audit Committee, subject to limitation as set forth in the Pre-Approval Policy.
The chair or the vice chair must report any pre-approval decisions to the Audit Committee at its next regularly scheduled meeting. New services that have not been pre-approved by the Audit Committee that are in excess of the pre-approval fee level established by the Audit Committee must be presented to the entire Audit Committee for pre-approval. For the years ended December 31, 2023 and 2022, 100 percent of the audit fees, audit-related fees, and all other fees were pre-approved by the Audit Committee.
Item 15.Exhibits and Financial Statement Schedules.
(a) Financial Statements. The following financial statements of the Federal Home Loan Bank of Atlanta, set forth in Item 8 above, are filed as part of this Report.
Report of Independent Registered Public Accounting Firm (PCAOB ID i238
)
XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. +
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Name: Kirk R. Malmberg Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
*Ms. Casiano joined the board of directors effective January 1, 2024 and Ms. Dewey joined the Board on January 15, 2024. Given the short period between
their election and the date of this report, these directors were not asked to sign this report.
149
Dates Referenced Herein and Documents Incorporated by Reference
